chapter 6 vocabulary

chapter 6 vocabulary - price ceiling A legal maximum on the...

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price ceiling A legal maximum on the price at which a good can be sold. price floor A legal minimum on the price at which a good can be sold. tax incidence The manner in which the burden of a tax is shared among participants in a market. Chapter Recap: Summary o 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. o 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 in some way be rationed among sellers. o When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a market shrinks the size of the market. o A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the good and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or sellers. o The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic because that side of the market can respond less easily to the tax by changing the quantity bought or sold. Chapter Recap: Questions for Review 1. Give an example of a price ceiling and an example of a price floor. 2. Which causes a shortage of a good–a price ceiling or a price floor? Justify your answer with a graph. 3. What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium? 4. Explain why economists usually oppose controls on prices. 5. Suppose the government removes a tax on buyers of a good and levies a tax of the same size on sellers of the good. How does this change in tax policy affect the price that buyers pay sellers for this
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good, the amount buyers are out of pocket including the tax, the amount sellers receive net of the tax, and the quantity of the good sold? 6.
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This note was uploaded on 07/14/2011 for the course ECO 1001 taught by Professor Barcia during the Spring '08 term at CUNY Baruch.

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chapter 6 vocabulary - price ceiling A legal maximum on the...

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