Creates a situation of excess supply ie q s q d at

Info icon This preview shows pages 40–46. Sign up to view the full content.

View Full Document Right Arrow Icon
creates a situation of excess supply, i.e., Q S > Q D at price P F . In the absence of any government intervention, equilibrium is at price P E and quantity Q E . P S P F P E Q Q D Q E Q S
Image of page 40

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
© Gustavo Indart Slide 41 Price Ceiling A price ceiling has no effect when it is set above the equilibrium price A price ceiling is effective only when it is set below the equilibrium price If a ceiling floor is set below the equilibrium price, the quantity traded is determined by the quantity supplied Therefore, effective price ceilings lead to situations of excess demand An effective price ceiling creates the conditions for the development of a black market
Image of page 41
© Gustavo Indart Slide 42 Effect of a Price Ceiling D E A B In the absence of any government intervention, equilibrium is at price P E and quantity Q E . P S An effective price ceiling creates a situation of excess demand, i.e., Q D > Q S at price P C . P E P C Q S Q E Q Q D
Image of page 42

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
© Gustavo Indart Slide 43 Introduction of Subsidies and/or Indirect Taxes The government can also introduce a subsidy or an indirect tax to affect the market equilibrium A subsidy or indirect tax could be imposed either on producers or on consumers ¾ An indirect tax is a tax on production or consumption ¾ A direct tax is a tax on income The outcome is exactly the same whether a subsidy or tax is imposed on producers or consumers
Image of page 43
© Gustavo Indart Slide 44 Subsidy or Tax on Producers A subsidy reduces the costs of production, thus allowing firms to demand a lower minimum price for each unit of output ¾ A subsidy to producers shifts the supply curve down to the right, causing the price to fall and the quantity transacted of the commodity to increase A tax increases the costs of production, thus causing firms to demand a higher minimum price for each unit of output ¾ A tax shifts the supply curve up to the left, causing the price to increase and the quantity transacted of the commodity to fall
Image of page 44

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
© Gustavo Indart Slide 45 A Subsidy on Producers or Consumers P Q D Q 1 P 1 S’ Q 2 Initially, equilibrium is at price P 1 and quantity Q 1 . A subsidy on consumers shifts the demand curve up. Consumers pay a price P 2 , producers receive a price P 3 , and quantity transacted is Q 2 . A subsidy on producers shifts the supply curve down. Consumers pay a price P 2 , producers receive a price P 3 , and quantity transacted is Q 2 . A B P 2 C P 3 S D’
Image of page 45
© Gustavo Indart Slide 46 A Tax on Producers or Consumers P Q D Q 1 P 1 S’ Q 2 Initially, equilibrium is at price P 1 and quantity Q 1 . A tax on consumers shifts the demand curve down. Consumers pay a price P 2 , producers receive a price P 3 , and quantity transacted is Q 2 . A tax on producers shifts the supply curve up. Consumers pay a price P 2 , producers receive a price P 3 , and quantity transacted is Q 2 . A B P 2 C P 3 S D’
Image of page 46
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern