the ceiling

ProblemsandApplications

riceceilingof$40perticketisbelowtheequilibriumprice,thenquantity

demandedexceedsquantitysupplied,sothere’icy

decreasthenumberofpeoplewhoattendclassicalmusicconcerts,sincesupplyis

lowerbecauofthelowerprice.

ositionofabindingpricefloorinthecheemarketisshowninFigure

bnceofthepricefloor,thepricewouldbeP1andthequantity

efloortatPf,whichisgreaterthanP1,thequantity

demandedisQ2,whilequantitysuppliedisQ3,sothereisasurplusofcheein

theamountQ3-Q2.

mers’complaintthattheirtotalrevenuehasdeclinediscorrectif

asticdemand,thepercentagedeclineinquantity

wouldexceedthepercentageriinprice,sototalrevenuewoulddecline.

overnmentpurchasallthesurpluscheeatthepricefloor,

erswouldproducequantityQ3

ofchee,

consumerswouldbuyonlyquantityQ2ofchee,sotheyareinthesame

erslobecautheywouldbefinancingthe

purchaofthesurpluscheethroughhighertaxes.

Figure6-3

ilibriumpriceoffrisbeesis$8andtheequilibriumquantityis6million

frisbees.

ricefloorof$10,thenewmarketpriceis$10sincethepriceflooris

price,only2millionfrisbeesaresold,sincethat’sthe

quantitydemanded.

e’sapriceceilingof$9,ithasnoeffect,sincethemarketequilibrium

priceis$8,quilibriumpriceis$8andthe

equilibriumquantityis6millionfrisbees.

ilibriumprice

cepaidbyconsumersisthe

sameasthepricereceivedbyproducers.

Figure6-4

Figure6-5

etaxisimpod,itdrivesawedgeof$2betweensupplyanddemand,

cepaidbyconsumersisP2,whiletheprice

receivedbyproducersisP2-$ntityofbeersolddeclinestoQ2.

ngthepayrolltaxpaidbyfirmsandusingpartoftheextrarevenuetoreduce

thepayrolltaxpaidbyworkerswouldnotmakeworkersbetteroffbecauthedivision

oftheburdenofataxdependsonsupplyanddemand,notwhomustpaythetax.

Sincethetaxwedgewouldbelarger,it’slikelythatbothfirmsandworkers,whoshare

theburdenofanytax,wouldbeworoff.

overnmentimposa$500taxonluxurycars,thepricepaidbyconsumerswill

rilessthan$500,denofanytaxissharedbybothproducers

andconsumersthepricepaidbyconsumersrisandthepricereceivedbyproducers

falls,y

exceptionswouldbeifthesupplycurvewereperfectlyelasticorthedemandcurve

wereperfectlyinelastic,inwhichcaconsumerswouldbearthefullburdenofthetax

andthepricepaidbyconsumerswouldribyexactly$500.

n’tmatterwhetherthetaxisimpodonproducersorconsumersthe

tax,asshowninFigure6-6,thedemand

axisimpodonproducers,the

supplycurveshiftsupbytheamountofthetax(50cents)e

equilibriumquantityisQ2,thepricepaidbyconsumersisP2,andtheprice

received(aftertaxesarepaid)axis

insteadimpodonconsumers,thedemandcurveshiftsdownbytheamount

ofthetax(50cents)nwardshiftinthedemandcurve(when

thetaxisimpodonconsumers)ixactlythesamemagnitudeasthe

again,theequilibriumquantityisQ2,thepricepaidbyconsumersisP2

(includingthetaxpaidtothegovernment),andthepricereceivedby

producersisP2-50cents.

Figure6-6

Figure6-7

eelasticisthedemandcurve,themoreeffectivethistaxwillbein

relasticityofdemand

meansthatquantityfallsmoreinrespontotheriinthepriceofgasoline.

curveD1reprentsanelastic

demandcurve,hesametax

wedgebetweendemandandsupplyrequiresagreaterreductioninquantity

withdemandcurveD1thanfordemandcurveD2.

sumersofgasolinearehurtbythetaxbecautheygetlessgasoline

atahigherprice.

owerquantity

ofgasolinebeingproduced,ower

pricereceivedbyproducers,wagesofworkersmightdecline.

bnceofthe

minimumwage,themarketwagewouldbew1andQ1workerswouldbe

eminimumwage(wm)impodabovew1,themarket

wageiswm,thenumberofemployedworkersisQ2,andthenumberof

agepaymentstoworkersare

shownastheareaofrectangleABCD,whichequalswmtimesQ2.

eof

elasticityofsupplydoesn’tmatter,becauthere’sasurplusoflabor.

e

oftheriinunemploymentdependsonboththeelasticitiesofsupplyand

sticityofdemanddeterminesthequantityoflabor

demanded,theelasticityofsupplydeterminesthequantityoflaborsupplied,

andthedifferencebetweenthequantitysuppliedanddemandedoflaboristhe

amountofunemployment.

emandforunskilledlaborwereinelastic,theriintheminimumwage

elastic

demand,thepercentagedeclineinemploymentwouldbelessthanthe

percentageincreainthewage,r,

ifthedemandforunskilledlaborwereelastic,totalwagepaymentswould

decline,sincethenthepercentagedeclineinemploymentwouldexceedthe

percentageincreainthewage.

Figure6-8

Figure6-9

reducesthe

ultisariinthepricebuyerspayfor

gunsfromP1toP2,andadeclineinthequantityofgunsfromQ1toQ2.

Figure6-10

reducesthe

ultisariinthepricebuyerspayfor

gunsfromP1toP2,andadeclineinthequantityofgunsfromQ1toQ2.

reain

pricefromP1toPfleadstoadeclineinthequantityofgunsfromQ1toQ2.

Thereixcesssupplyinthemarketforguns,sincethequantitysupplied(Q3)

exceedsthequantitydemanded(Q2)atthepricePf.

Figure6-11

Figure6-12

onammunition

reducesthedemandforgunsfromD1toD2,becauammunitionandgunsare

ultisadeclineinthepriceofgunsfromP1toP2,anda

declineinthequantityofgunsfromQ1toQ2.

msaimedatmakingthepublicawareofthedangersofsmokingreduce

thedemandforcigarettes,showninFigure6-13asashiftfromdemandcurve

cesupportprogramincreasthepriceoftobacco,whichis

ult,thesupplyofcigarettesshiftsto

theleft,ectofbothprogramsistoreducethequantity

ofcigaretteconsumptionfromQ1toQ2.

Figure6-13

binedeffectofthetwoprogramsonthepriceofcigarettesis

cationcampaignreducesdemandforcigarettes,which

accopricesupportsraithecostof

productionofcigarettes,whichtendstoincreatheprice.

ationofcigarettesfurtherreducescigaretteconsumption,sinceit

ninthefigure,thequantityfallsto

Q3.

ectofa50centperconesubsidyistoshiftthedemandcurveupby50

centsateachquantity,sinceateachquantityaconsumer’swillingnesstopay

ectsofsuchasubsidyareshowninFigure6-14.

Beforethesubsidy,hesubsidy,thepricereceivedby

llersisPSandtheeffectivepricepaidbyconsumersisPD,whichequalsPS

thesubsidy,thequantityofconessoldisQ1;afterthe

subsidythequantityincreastoQ2.

Figure6-14

eofthesubsidy,consumersarebetteroff,sincetheyconsumemoreat

ersarealsobetteroff,sincetheyllmoreatahigher

ernmentlos,sinceithastopayforthesubsidy.