WHAT’S NEW IN THE SIXTH EDITION:
There is a new In the News feature on “Should Unpaid Internships Be Allowed?”
LEARNING OBJECTIVES:
By the end of this chapter, students should understand:
the effects of government policies that place a ceiling on prices.
the effects of government policies that put a floor under prices.七夕词语
how a tax on a good affects the price of the good and the quantity sold.
的字笔顺 that taxes levied on llers and taxes levied on buyers are equivalent.
how the burden of a tax is split between buyers and llers.
CONTEXT AND PURPOSE:
史宾格犬Chapter 6 is the third chapter in a three-chapter quence that deals with supply and demand and how markets work. Chapter 4 developed the model of supply and demand. Chapter 5 added precision to the model of supply and demand by developing the concept of elasticity—the nsitivity of the quantity supplied and quantity demanded to changes in economic conditions. Chapter 6 address the impact of government policies on competitive markets using the tools of supply and demand that you learned in Chapters 4 and 5.
The purpo of Chapter 6 is to consider two types of government policies—price controls and taxes. Price controls t the maximum or minimum price at which a good can be sold while a tax creates a wedge between what the buyer pays and what the ller receives. The policies can be analyzed within the model of supply and demand. We will find that government policies sometimes produce unintended conquences.
KEY POINTS:
∙ A price ceiling is a legal maximum on the price of a good or rvice. An example is rent control. If the price ceiling is below the equilibrium price, so the price ceiling is binding, the quantity demanded exceeds the quantity supplied. Becau of the resulting shortage, llers must in some way ration the good or rvice among buyers.
∙ A price floor is a legal minimum on the price of a good or rvice. An example is the minimum wage. If the price floor is above the equilibrium price, so the price floor is binding, the quantity supplied exceeds the quantity demanded. Becau of the resulting surplus, buyers’ demands for the good or rvice must be rationed in some way among llers.
∙ When the government levies a tax on a good, the equilibrium quantity of the good falls; that is, a tax on a market shrinks the size of the market.
∙ A tax on a good places a wedge between the price paid by buyers and the price received by llers. When the market moves to the new equilibrium, buyers pay more for the good and llers receive less for it. In this n, buyers and llers share the tax burden. The incidence of a tax (that is, the division of the tax burden) does not depend on whether the tax is levied on buyers or llers.
∙ The incidence of a tax depends on the price elasticities of supply and demand. Most of the burden falls on the side of the market that is less elastic becau that side of the market can respond less easily to the tax by changing the quantity bought or sold.
CHAPTER OUTLINE:
I. Controls on Prices
A. Definition of price ceiling: a legal maximum on the price at which a good can be sold.
B. Definition of price floor地表火: a legal minimum on the price at which a good can be sold.
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C. How Price Ceilings Affect Market Outcomes
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1. There are two possible outcomes if a price ceiling is put into place in a market.
a. If the price ceiling is higher than or equal to the equilibrium price, it is not binding and has no effect on the price or quantity sold.
b. If the price ceiling is lower than the equilibrium price, the ceiling is a binding constraint and a shortage is created.
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2. If a shortage for a product occurs (and price cannot adjust to eliminate it), a method for rationing the good must develop.
3. Not all buyers benefit from a price ceiling becau some will be unable to purcha the product.
4. Ca Study: Lines at the Gas Pump
a. In 1973, OPEC raid the price of crude oil, which led to a reduction in the supply of gasoline.
b. The federal government put a price ceiling into place and this created large shortages.
c. Motorists were forced to spend large amounts of time in line at the gas pump (which is how the gas was rationed).
d. Eventually, the government realized its mistake and repealed the price ceiling.
ALTERNATIVE CLASSROOM EXAMPLE:
Ask students about the rental market in their town. Draw a supply-and-demand graph for two-bedroom apartments asking students what they believe the equilibrium rental rate is. Then suggest that the city council is accusing landlords of taking advantage of students and thus places a price ceiling below the equilibrium price. Make sure that students can e that a shortage of apartments would result. Ask students to identify the winners and lors of this government policy.
