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Supply,Demand,and
GovernmentPoliciesEconomicsPRINCIPLESOFN.GregoryMankiwPremiumPowerPointSlides
byRonCronovich6
Inthischapter,
lookfortheanswerstothesequestions:Whatarepriceceilingsandpricefloors?
Whataresomeexamplesofeach?Howdopriceceilingsandpricefloorsaffectmarketes?Howdotaxesaffectmarketes?
Howdotheeffectsdependonwhether
thetaxisimposedonbuyersorsellers?Whatistheincidenceofatax?
Whatdeterminestheincidence?1
SUPPLY,DEMAND,ANDGOVERNMENTPOLICIES2GovernmentPoliciesThatAlterthe
PrivateMarketePricecontrolsPriceceiling:alegalmaximumontheprice
ofagoodorserviceExample:rentcontrolPricefloor:alegalminimumonthepriceof
agoodorserviceExample:minimumwageTaxesThegovtcanmakebuyersorsellerspayaspecificamountoneachunitbought/sold.Wewillusethesupply/demandmodeltosee
howeachpolicyaffectsthemarkete
(thepricebuyerspay,thepricesellersreceive,andeq’mquantity).
SUPPLY,DEMAND,ANDGOVERNMENTPOLICIES3EXAMPLE1:TheMarketforApartmentsEq’mw/o
pricecontrolsPQDSRentalpriceofapts$800300Quantityofapartments
SUPPLY,DEMAND,ANDGOVERNMENTPOLICIES4HowPriceCeilingsAffectMarketesApriceceiling
abovethe
eq’mpriceis
notbinding–
hasnoeffect
onthemarkete.PQDS$800300Price
ceiling$1000
SUPPLY,DEMAND,ANDGOVERNMENTPOLICIES5HowPriceCeilingsAffectMarketesTheeq’mprice($800)isabovetheceilingandthereforeillegal.Theceiling
isabindingconstraint
ontheprice,causesashortage.PQDS$800Price
ceiling$500250400shortage
SUPPLY,DEMAND,ANDGOVERNMENTPOLICIES6HowPriceCeilingsAffectMarketesInthelongrun,supplyanddemand
aremore
price-elastic.So,theshortage
islarger.PQDS$800150Price
ceiling$500450shortage
SUPPLY,DEMAND,ANDGOVERNMENTPOLICIES7ShortagesandRationingWithashortage,sellersmustrationthegoodsamongbuyers.Somerationingmechan
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