Ch6 - Chapter 6: Supply, Demand and Government Policies In...

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Chapter 6: Supply, Demand and Government Policies
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/S YsNX nsLUYPW± QTTp qTW YsP LSX\PWX YT YsPXP VZPXYNTSX) 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?
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SUPPLY± DEM,ND± ,ND GOVERNMENT POLICIES 5WN[LYP 3LWpPY ±ZYnTRP Price controls 5WNnP nPNQNSr : a legal maximum on the price of a good or service Example% rent control 5WNnP qQTTW : a legal minimum on the price of a good or service Example% minimum wage Taxes The govt can make buyers or sellers pay a specific amount on each unit bought/sold. We will use the supply/demand model to see how each policy affects the market outcome (the price buyers pay, the price sellers receive, and eq’m quantity).
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SUPPLY± DEM,ND± ,ND GOVERNMENT POLICIES Eq’m w/o price controls P Q D S Rental price of apts $800 300 Quantity of apartments
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SUPPLY± DEM,ND± ,ND GOVERNMENT POLICIES A price ceiling above the eq’m price is STY MNSONSR has no effect on the market outcome. P Q D S $800 300 Price ceiling $1000
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SUPPLY± DEM,ND± ,ND GOVERNMENT POLICIES The eq’m price ($800) is above the ceiling and therefore illegal. The ceiling is a MNSONSR nTSXYWLNSY on the price, causes a shortage. P Q D S $800 Price ceiling $500 250 400 shortage
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SUPPLY± DEM,ND± ,ND GOVERNMENT POLICIES In the long run, supply and demand are more price-elastic. So, the shortage is larger. P Q D S $800 150 Price ceiling $500 450 shortage
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SUPPLY± DEM,ND± ,ND GOVERNMENT POLICIES 8STWYLRPX LsO 7LYNTsNsR With a shortage, sellers must ration the goods among buyers. Some rationing mechanisms: (1) Long lines
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Ch6 - Chapter 6: Supply, Demand and Government Policies In...

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