Effect on the market outcomes 1 Not binding set above the equilibrium price has

Effect on the market outcomes 1 not binding set above

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Effect on the market outcomes 1. Not binding- set above the equilibrium price & has no effect on the price or quantity sold 2. Binding constraint- set below the equilibrium price= shortage a. Sellers must ration the scarce goods i. Rationing mechanisms- long lines & discrimination according to sellers’ bias b. Price floor- legal minimum on the price at which a good can be sold (ex. minimum wage laws) i. Effect on the market outcomes 1. Not binding- set below the equilibrium price & has no effect on the market 2. Binding constraint- set above the equilibrium price= surplus a. Some sellers are unable to sell what they want II. Evaluating price controls a. Markets are usually a good way to organize economic activity i. Economists oppose price ceilings & price floors bc prices are not the outcome of some haphazard process but have the crucial job of balancing supply & demand b. Govts can sometimes improve the market outcomes i. They want to use price control bc of unfair market outcome & aim to help the poor but often end up hurting the poor III. Taxes- to raise revenue for public purposes & influence market outcomes a. Govt uses taxes to raise revenue for public projects (ex. roads, schools, & national defense) b. Tax incidence- manner in which the burden of a tax is shared among participants in a market c. Taxes on SELLERS effect on the market outcomes i. Immediate impact on suppliers- shift to the left in the supply curve ii. Higher equilibrium price & lower equilibrium quantity
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Microeconomics Final Exam Study Sheet iii. Reduces the size of the market---discourage market activity iv. Buyers & sellers share the burden of the tax 1. Buyers pay more (worse off) & sellers receive less (worse off) d. Taxes on BUYERS effect on the market outcomes i. Initial impact on the demand- shifts to the left ii. Lower equilibrium price & quantity iii. Same as the last 2 for the sellers e. Taxes levied on sellers & buyers are equivalent i. Wedge between the price that buyers pay & the price that sellers receive f. Tax burden- falls more heavily on the side of the market that is less elastic i. Small elasticity of demand- buyers do not have good alternatives to consuming this good ii. Small elasticity of supply- sellers do not have good alternatives to producing this good Chapter 7 Consumers, Producers, & the Efficiency of Markets (15% of exam) I. Consumer surplus (buyers)- amount a buyer is willing to pay for a good minus amount the buyer actually pay----Willingness to pay minus price paid (closely related to the demand curve) a. Measures the benefit buyers receive from participating in a market b. Welfare economics- study of how the allocation of resources affects the economic well being i. Benefits that buyers & sellers receive from engaging in market transactions ii. How society can make these benefits as large as possible iii. In any market, the equilibrium of supply & demand maximizes the total benefits received by all buyers & sellers combined c. Willingness to pay- maximum amount that a buyer will pay for a good (how much that buyer values the good) d.
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