Guided Reading Notes

Chapter 6: Supply, Demand, and Government Policies (pp. 109-130)

THE POLICY ROLE OF ECONOMISTS

6.1 CONTROLS ON PRICES

Price ceiling: a legal maximum on the price at which a good can be sold

Price floor: a legal minimum on the price at which a good can be sold

6-1(a) How Price Ceilings Affect Market Outcomes

When price ceilings are set ABOVE equilibrium: not binding and has no effect on market

When price ceilings are set BELOW equilibrium: has binding constraint and results in shortage of
quantity demanded

Price ceilings are intended to benefit buyers. Do all buyers benefit when price ceilings are in
place? Why or why not? They don’t all benefit because some buyers pay a lower price and wait
in line while other cannot get any of the good at all

What are some responses to shortages?

Rationing goods, which results in long lines or sellers rationing due to personal biases

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 6-1(b) How Price Floors Affect Market Outcomes

When price floors are set BELOW equilibrium: not binding and has no effect on market

When price floors are set ABOVE equilibrium: binding and results in a surplus in the market

A surplus of labor is known as unemployment .

Minimum wage is binding for which part of the labor force more than any other? Why?
Teenagers because they are least skilled/experienced and accept lower wages or no pay at all for
internships

6-1(c) Evaluating Price Controls

Why do economists often oppose price floors and price ceilings in favor of allowing the market
to work freely? One of the ten principles of economics is that markets are usually a good way
to organize economic activity, so economists believe that prices are the result of a ton of
businesses and consumer decisions that lie behind the supply and demand curve. When
policymakers set prices, it hinders the normal market activity.

What other ways to economists recommend helping those in need besides price floors and
price ceilings? Government can make housing more affordable and introduce rent and
wage subsidies

What are some of the problems with subsidies?

Cost government money and require higher taxes
6.2 TAXES

Guiding question: When the government levies a tax on a good, who actually bears the burden?
Buyers or sellers? Both because it is distributed between those making up the economy

Tax incidence: the way the burden of a tax is shared among participants in a market

6-2(a) How Taxes on Sellers Affect Market Outcomes

When a tax is levied, follow 3 steps for analysis:

1. Decide whether law affects supply curve

or demand curve

2. decide which way curve shifts

3. examine how shift affects equilibrium price and quantity

Two generalizations/implications of levying a tax on sellers:

 Sellers get higher price from buyers than they previously did
 Keep less profit after paying tax so also worse off like buyers

6-2(b) How Taxes on Buyers Affect Market Outcomes

Generalization/implication of levying a tax on buyers: same as when it is levied on sellers, only

difference is the buyer sends the money to the government this time

Although lawmakers try to legislate the true burden of a tax, what two factors actually
determine the incidence of a tax? Price elasticity of supply and price elasticity of
demand

6-2(c) Elasticity and Tax Incidence

A tax burden falls more heavily on the side of the market that is inelastic.