CHAPTER 6 - CHAPTER 6 Supply Demand and Government Policies...

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CHAPTER 6 Supply, Demand, and Government Policies LEARNING OBJECTIVES: By the end of this chapter, students should understand: Ø the effects of government policies that place a ceiling on prices. Ø the effects of government policies that put a floor under prices. Ø how a tax on a good affects the price of the good and the quantity sold. Ø that taxes levied on buyers and taxes levied on sellers are equivalent. Ø how the burden of a tax is split between buyers and sellers. CONTEXT AND PURPOSE: Chapter 6 is the third chapter in a three-chapter sequence that deals with supply and demand and how markets work. Chapter 4 developed the model of supply and demand. Chapter 5 added precision to the model of supply and demand by developing the concept of elasticity—the sensitivity of the quantity supplied and quantity demanded to changes in economic conditions. Chapter 6 addresses the impact of government policies on competitive markets using the tools of supply and demand that you learned in Chapters 4 and 5.
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The purpose of Chapter 6 is to consider two types of government policies—price controls and taxes. Price controls set the maximum or minimum price at which a good can be sold while a tax creates a wedge between what the buyer pays and what the seller receives. These policies can be analyzed within the model of supply and demand. We will find that government policies sometimes produce unintended consequences.
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KEY POINTS: 1. A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price, the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers. 2. A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price floor is above the equilibrium price, the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, buyers’ demands for the good or service must be rationed in some way
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CHAPTER 6 - CHAPTER 6 Supply Demand and Government Policies...

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