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STD Chapter 6-Hira PDF
STD Chapter 6-Hira PDF
MICROECONOMICS
1
In this chapter, look for the answers to
these questions:
▪ What are price ceilings and price floors?
What are some examples of each?
▪ How do price ceilings and price floors affect
market outcomes?
▪ How do taxes affect market outcomes?
How does the outcome depend on whether
the tax is imposed on buyers or sellers?
▪ What is the incidence of a tax?
What determines the incidence?
CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 2
Government Policies That Alter the
Private Market Outcome
▪ Price controls
• Price ceiling: a legal maximum on the price
of a good or service. Example: rent control.
• Price floor: a legal minimum on the price of
a good or service. Example: minimum wage.
▪ Taxes
• The govt can make buyers or sellers pay a
specific amount on each unit bought/sold.
Rental P S
price of
apts
$800
D
Q
300
Quantity of
apartments
CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 4
How Price Ceilings Affect Market Outcomes
A price ceiling P S
above the Price
eq’m price is $1000
ceiling
not binding –
it has no effect $800
on the market
outcome.
D
Q
300
Wage W S
paid to
unskilled
workers
$4
D
L
500
Quantity of
unskilled workers
CHAPTER 6 SUPPLY, DEMAND, AND GOVERNMENT POLICIES 8
How Price Floors Affect Market Outcomes
A price floor W S
below the
eq’m price is
not binding –
it has no effect $4
on the market Price
outcome. $3
floor
D
L
500
Eq’m
w/o tax P
S1
$10.00
D1
Q
500
What matters P
is this: S1
PB = $11.00
Tax
A tax drives
$10.00
a wedge
PS = $9.50
between the
price buyers
D1
pay and the
price sellers
Q
receive. 430 500
P In this case,
buyers bear
Buyers’ share PB S most of the
of tax burden burden of
Tax
Price if no tax the tax.
Sellers’ share PS
of tax burden
D
Q
P In this case,
S
sellers bear
Buyers’ share most of the
of tax burden PB
burden of
Price if no tax the tax.
Tax
Sellers’ share
of tax burden PS
D
Tax Hence,
companies
Sellers’ share
that build
of tax burden PS
D yachts pay
most of
Q the tax.