CN_intromicro_ch6

CN_intromicro_ch6 - 1 Chapter 6 Government Intervention...

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Unformatted text preview: 1 Chapter 6 Government Intervention Price Floor- The minimum price a firm is allowed to charge for a good. Effect of a Price Floor When a binding price floor is imposed by the government it forces firms to charge a higher price than that determined by equilibrium. Since consumers are forced to pay a higher price there is a decrease in the quantity demanded. Likewise, this higher price induces firms to increase their quantity supplied, creating an excess supply (or surplus). Under normal circumstances the price would lower to achieve equilibrium, but due to governmental policy this is prevented. Instead, firms noticing that inventories are increasing decide to decrease the quantity supplied to eliminate the surplus. Price Ceiling- The maximum price a firm is allowed to change for a good. Effect of Price Ceiling 2 When a binding price ceiling is imposed by the government it forces firms to charge a lower price than the equilibrium price. Since firms receive a lower price they decide to reduce the quantity supplied. Facing a lower price consumers increase their quantity demanded, result- ing in an excess demand (or shortage). Ordinarily the price of the product would increase to achieve equilibrium, but because of the price ceiling this mechanism is not permitted by firms. Overall, the market experiences a decrease in the amount available. Due to this excess demand there are a number of consumers willing to pay a higher price to receive the product yet are unable to obtain it. In this case, there is an incentive for those who were able to purchase the product from the firm to sell it at a higher price. This is called a black market. The black market price will be high enough to decrease Quantity demanded so that it will equal Quantity supplied. While a price ceiling creates an incentive for a black market to form there are some situations where it can not. Minimum Wage Legislation Fair Labor Standards Act of 1938 Established federal minimum wage at $0.25 an hour. Increased or expanded coverage to additional workers 25 times. Last change effective September 1, 1997 raised the minimum wage from $4.75 to $5.15 an hour. Each state may set its minimum wage higher than the federal minimum currently the New York State minimum wage is $6.75 per hour. It will increase to $7.15 per hour as of January 1, 2007 3 Taxes In the previous discussion of equilibrium the price paid by consumers to purchase a prod- uct was equal to the price received by firms. When taxes are imposed the price paid by the individual consumer ( P P ) is greater than that received by the selling firm ( P R ). The relationship between the price paid and that received is: P P = P R + T (1) where T is the per unit tax levied on consumers....
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This note was uploaded on 10/14/2010 for the course DDF 1124-445 taught by Professor Gorthermclays during the Spring '10 term at Florida College.

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CN_intromicro_ch6 - 1 Chapter 6 Government Intervention...

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