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Chapter 6 Powerpoint - Slides

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Principles Of Economics I: Microeconomics (ECO 110)

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Dennis Mankiw Principles of Microeconomics

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Seventh Edition Macroeconomics N. Gregory Mankiw CHAPTER 6 Supply, Demand, and Government Policies 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. Wojciech Gerson Principles of In this chapter, look for the answers to these questions What are price ceilings and price floors? What are some examples of each? How do price ceilings and price floors affect market outcomes? How do taxes affect market outcomes? How do the effects depend on whether the tax is imposed on buyers or sellers? What is the incidence of a tax? What determines the incidence? 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. EXAMPLE 1: The Market for Apartments P Rental price of apts S price controls D 300 Q Quantity of apts 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. 3 How Price Ceilings Affect Market Outcomes A price ceiling above the price is not has no effect on the market outcome. P S Price ceiling D 300 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. Q 4 How Price Ceilings Affect Market Outcomes In the long run, supply and demand are more So, the shortage is larger. P S Price ceiling shortage 150 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. 450 D Q 6 Shortages and Rationing With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms: (1) Long lines (2) Discrimination according to biases These mechanisms are often unfair, and inefficient: the goods do not necessarily go to the buyers who value them most highly. In contrast, when prices are not controlled, the rationing mechanism is efficient (the goods go to the buyers that value them most highly) and impersonal (and thus fair). 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. 7 How Price Floors Affect Market Outcomes A price floor below the price is not binding has no effect on the market outcome. W S Price floor D 500 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. L 9 How Price Floors Affect Market Outcomes The wage W is below the floor and therefore illegal. The floor is a binding constraint on the wage, causes a surplus (i., unemployment). labor surplus S Price floor D 400 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. 550 L 10 ACTIVE LEARNING Price controls 1 P 140 Determine effects of: A. price ceiling The market for hotel rooms 130 S 120 110 100 90 B. price floor 80 C. price floor 60 D 70 50 40 0 Q 50 60 70 80 90 100 110 120 130 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. ACTIVE LEARNING 1 A. price ceiling The price falls to Buyers demand 120 rooms, sellers supply 90, leaving a shortage. P 140 The market for hotel rooms S 130 120 110 100 90 Price ceiling 80 70 D shortage 30 60 50 40 0 Q 50 60 70 80 90 100 110 120 130 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. ACTIVE LEARNING 1 C. price floor The price rises to Buyers demand 60 rooms, sellers supply 120, causing a surplus. P 140 130 The market for hotel rooms surplus 60 120 110 S Price floor 100 90 80 D 70 60 50 40 0 Q 50 60 70 80 90 100 110 120 130 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. Evaluating Price Controls Recall one of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity. Prices are the signals that guide the allocation of resources. This allocation is altered when policymakers restrict prices. Price controls often intended to help the poor, but often hurt more than help. 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. 16 EXAMPLE 3: The Market for Pizza tax P S1 D1 500 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. Q 18 A Tax on Buyers Hence, a tax on buyers The price buyers pay shifts D curve down is nowthe higher than the amount ofP. the tax. the market price Effects of a per unit tax on buyers P P would have to fall to make buyers willing to buy same Q as before. E., if P falls from to buyers still willing to purchase 500 pizzas. 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a website for classroom use. S1 Tax D1 D2 500 Q 19

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