Download Chapter 6: Supply, Demand, and Government

Chapter 6: Supply, Demand, and Government Policies
Ch. 6: Supply, Demand, and Government Policies
Chapter 6: Supply, Demand, and Government Policies
Government policies that alter the private market outcome
Price controls:
Price ceiling: a legal maximum on the price of a good or service.
(Rent control in New York City)
Price floor: a legal minimum on the price of a good or service.
(State and federal minimum wages)
Chapter 6: Supply, Demand, and Government Policies
Government policies that alter the private market outcome
Taxes:
The government can make buyers or sellers pay a specific amount
on each unit.
The effect of price controls and taxes can be shown using our
supply and demand framework.
How much do cigarettes really cost?
Chapter 6: Supply, Demand, and Government Policies
Supply and demand for pizza in Greenville.
Chapter 6: Supply, Demand, and Government Policies
A binding price ceiling, $8, on pizza in Greenville.
Chapter 6: Supply, Demand, and Government Policies
A non-binding price ceiling on pizza in Greenville.
Chapter 6: Supply, Demand, and Government Policies
A non-binding price ceiling on pizza in Greenville.
Chapter 6: Supply, Demand, and Government Policies
Price controls only cause market distortions if they are binding.
A price ceiling is binding if it is set below the market price, while a
price floor is binding if it is set above the market price.
Price controls can cause distortions because the price may not not
ensure that the consumer with the highest valuation of an item will
necessarily receive that item.
How much are you willing to pay
for a 1 pound Rib eye steak?
Chapter 6: Supply, Demand, and Government Policies
How do price controls (price floors and price ceilings) affect the
market for labor?
Market supply and demand for labor
Wage / hour
$12
Demand for labor
Supply for labor
$10
$8
$6
Equilibrium without
price controls
900 workers are employed
and earn $6 per hour
$4
$2
0
0
300
600
900
1200
Quantity of workers
1500
1800
Chapter 6: Supply, Demand, and Government Policies
How do price controls (price floors and price ceilings) affect the
market for labor?
Market supply and demand for labor
Wage / hour
$12
Demand for labor
Supply of labor
A “minimum wage” serves
as a price floor in the
market for labor.
Min. wage $10
$8
$6
Equilibrium
without price
controls
At a price of $10/hour,
1500 workers are willing to
supply their labor but only 300
jobs are available at that price.
$4
What is unemployment?
$2
0
0
300
600
900
1200
Quantity of workers
1500
1800
Chapter 6: Supply, Demand, and Government Policies
How do price controls (price floors and price ceilings) affect the
market for labor?
Market supply and demand for labor
Wage / hour
1200 unemployed
workers
$12
Demand for labor
Supply of labor
unemployment
Min. wage $10
A “minimum wage” serves
as a price floor in the
market for labor.
$8
$6
Equilibrium
without price
controls
At a price of $10/hour,
1500 workers are willing to
supply their labor but only 300
jobs are available at that price.
$4
What is unemployment?
$2
0
0
300
600
900
1200
Quantity of workers
1500
1800
Chapter 6: Supply, Demand, and Government Policies
Governments must provide public goods such as national defense
and schools that markets do not provide (or under provide) and
must generate revenue to pay for them... taxes can generate this
revenue.
Chapter 6: Supply, Demand, and Government Policies
A tax may come in the form of a per-unit fee for all goods or
services purchased... what happens if the buyer must incur this
tax?
Price of
cigarettes $12
A tax on cigarettes in the United States:
Taxing the buyer of cigarettes
Demand
Supply
$9
$6
$1 tax on buyers
Buyers were paying $6 for cigarettes
and demanded 1000 packs.
$5
0
0
500
1000
Quantity of cigarettes
demanded
2000
Chapter 6: Supply, Demand, and Government Policies
A tax may come in the form of a per-unit fee for all goods or
services purchased... what happens if the buyer must incur this
tax?
New
Demand
Price of
cigarettes $12
Demand
A tax on cigarettes in the United States:
Taxing the buyer of cigarettes
Supply
$9
$6
$1 tax on buyers
They now pay an additional $1 per
pack… the market price would have
to be $5 for them to still demand
1000 packs… their demand curve
shifts left.
$5
0
Buyers were paying $6 for cigarettes
and demanded 1000 packs.
0
500
1000
Quantity of cigarettes
demanded
2000
Chapter 6: Supply, Demand, and Government Policies
A tax may come in the form of a per-unit fee for all goods or
services purchased... what happens if the buyer must incur this
tax?
New
Demand
Price of
cigarettes $12
Demand
A tax on cigarettes in the United States:
Taxing the buyer of cigarettes
Supply
$9
$6
$1 tax on buyers
$5.50
$5
Once demand adjusts, the new
equilibrium price is $5.50.. Buyers
pay $6.50 after the tax ($.50 more
than before the tax) and suppliers
receive $5.50 after the tax ($.50 less
than before the tax)!
Buyers and sellers share the burden
of the tax!
0
0
500
1000
Quantity of cigarettes
demanded
2000
Chapter 6: Supply, Demand, and Government Policies
A tax may come in the form of a per-unit fee for all goods or
services purchased... what happens if the seller must incur this
tax?
Price of
cigarettes $12
A tax on cigarettes in the United States:
Taxing the seller of cigarettes
Demand
Supply
$1 tax on sellers
$7
$6
Sellers were receiving $6 for
cigarettes and supplied 1000 packs.
$5
0
0
500
1000
Quantity of cigarettes
demanded
2000
Chapter 6: Supply, Demand, and Government Policies
A tax may come in the form of a per-unit fee for all goods or
services purchased... what happens if the seller must incur this
tax?
Price of
cigarettes $12
A tax on cigarettes in the United States:
Taxing the seller of cigarettes
Demand
New Supply
Supply
$7
$6
$1 tax on sellers
They now receive $1 less per pack…
the market price would have to be
$7 for them to still supply 1000
packs… their supply curve shifts left.
$5
0
Sellers were receiving $6 for
cigarettes and supplied 1000 packs.
0
500
1000
Quantity of cigarettes
demanded
2000
Chapter 6: Supply, Demand, and Government Policies
A tax may come in the form of a per-unit fee for all goods or
services purchased... what happens if the seller must incur this
tax?
Price of
cigarettes $12
A tax on cigarettes in the United States:
Taxing the seller of cigarettes
Demand
New Supply
Supply
$7
$6.50
$6
$1 tax on sellers
$5
Once demand adjusts, the new
equilibrium price is $5.50.. Buyers
pay $6.50 after the tax ($.50 more
than before the tax) and suppliers
receive $5.50 after the tax ($.50 less
than before the tax)!
Buyers and sellers share the burden
of the tax!
0
0
500
1000
Quantity of cigarettes
demanded
2000
Chapter 6: Supply, Demand, and Government Policies
Regardless of who the government taxes, the buyers and
sellers will share the burden of that tax! Why?
ˆ Taxing the buyers causes their demand curve to adjust (shift
left) to a point that splits the tax.
ˆ Taxing the suppliers causes their supply curve to adjust (shift
left) to a point that splits the tax.