S&D and Government Policies

Price Floors and Price Ceilings

Market economy - an economy with:
- Private ownership of businesses and productive resources (such as natural
resources, and economic capital) individuals own them
Private ownership: individuals own productive resources/businesses and not the
government
- Economic decisions, such as pricing and what to produce, are determined by
supply and demand factors
[Other names: Free Markets, Capitalist Economy, Laisez faire economy...]
Free market: economic decisions such as pricing and what to produce, how much, is
determined by supply and demand factors (market forces) and price signals

Price controls:
- Price ceiling: legal maximum on the price at which a product can be sold (protects
buyers)
VD: rent-control laws
+ If the price ceiling is greater than the equilibrium price, the price ceiling is
nonbìnding
+ If the price ceiling is lower than the equilibrium price, the price floor is binding
and causes a shortage
- Price floor: legal minimum on the price at which a product can be sold (protects
sellers)
VD: minimum wage laws
+ If the price floor is lower than the equilibrium, the price floor is nonbinding
+ If the price floor is greater than the equilibrium, the price floor is binding and
causes a surplus
Not binding: has no effect on the market outcome

Shortages and Rationing: Because of shortage, sellers must ration the goods among
buyers
- Some rationing mechanisms:
+ Long lines
+ Discrimination according to sellers’ biases
=> Are often unfair and inefficient because the goods do not necessarily go to the
buyers who value them most highly

Evaluating Price Controls: Governments can sometimes improve market outcomes

- Governments want to use price controls :
+ to fix the unfair market outcome
+ to help the poor
- Often hurt those they are trying to help
- Other ways of helping people:
+ Rent subsidies (monetary payments)
+ Wage subsidies (monetary payments)
Tax incidence
Taxes: government can make buyers or sellers pay a specific amount on each unit
Tax incidence: how the cost of a tax is shared among participants in a market
- The more elastic side of the market will pay a smaller share of a tax (smaller burden)
- The less elastic (more inelastic) side of the market will pay a greater share of a tax
(greater burden)

How to find a tax incidence in the diagram:

VD1:

Đề cho tax on buyers => làm cái D curve dịch xuống một khoảng 10 - 1.5= 8.5$ tại vì khi có
tax, nếu giá tiền vẫn như cũ sẽ khiến buyers không muốn mua một lượng quantity như cũ
với giá mới được nên phải giảm giá tiền xuống cộng cộng thêm tiền thuế nữa là vừa.
Việc dịch chuyển D curve xuống như vậy làm cái equilibrium price thay đổi: từ 10$ còn 9.5$.
Và cái 9.5$ đó cũng sẽ là giá mà sellers bán luôn, muốn tìm giá buyers phải trả thì lấy 9.5$
cộng thêm 1.5$ thuế đề cho ra 11$

Lấy giá equilibrium cũ là 10$ làm điểm chính, kẻ một đường ở đó thì sẽ ra đường số tiền
thuế mà sellers và buyers phải trả cho từng người. Ở ví dụ này thì buyers phải trả thêm 1$
tiền thuế (trả thêm là do so với equilibrium cũ thì số tiền phải trả cao hơn nên gọi là trả thêm
- 11$ > 10$), còn sellers nhận được ít hơn 0.5$ (ít hơn do so với equilibrium cũ thì số tiền
hiện tại nhỏ hơn - 9.5$ < 10$)
VD2:

Đề cho tax on sellers => làm cái S curve dịch lên một khoảng 10 - 1.5= 8.5$ tại vì khi có tax,
nếu giá tiền vẫn như cũ sẽ khiến seller không muốn sản xuất một lượng quantity như cũ với
giá mới được nên phải tăng giá tiền lên trừ thêm tiền thuế nữa là vừa.
Việc dịch chuyển S curve lên như vậy làm cái equilibrium price thay đổi: từ 10$ thành 11$.
Và cái 11$ đó cũng sẽ là giá mà buyers mua luôn, muốn tìm giá sellers bán thì lấy 11$ trừ
thêm 1.5$ thuế đề cho ra 9.5$

Và bùm! Bất ngờ chưa bà già, hai đáp án y chang lun: buyers phải trả thêm 1$ tiền thuế ,
còn sellers nhận được ít hơn 0.5$.
The burden of a tax:
- When demand is more elastic than supply, demanders pay a smaller share of the tax,
and suppliers pay a larger share of the tax.
- When supply is more elastic than demand, demanders pay a larger share of the tax,
and suppliers pay a smaller share of the tax.

Elasticity = Escape:
- Elastic demand: demanders have good substitutes for the taxed good and so can
escape the tax
- Elastic supply: the resources used to produce the taxed good can easily be moved
to other industries so they can escape the tax
- If the demanders and the suppliers are both elastic, someone must pay the tax so
the burden is determined by the relative elasticities - which side has it easier to
escape the tax and that side will pay less of the tax

Tax Revenue and Deadweight Loss

Deadweight loss: the value of the economic surplus which is lost when a market is not
allowed to adjust to its equilibrium
 - Principle: market economies are usually a good way to organize economic activity
because prices in a free market change to balance supply and demand
- Types of market failers: Monopoly, externalities, public and common goods
Productive resources (factors of production): the resources used to produce goods and
services (products) including
- Labor/ human resources: human workers (staff, employees, entrepreneurs)
- Land/ natural resources: include all natural resources but not people (wood, water,
oil, …)
- Physical capital: artificial physical product resources which can be used repeatedly
in production (factories, computers, machinery office,...)
Command economy - an economy where:
- The government greatly controls the economy, markets, businesses, and or
productive resources
- The government determines when, where, who, and how much is produced
- The allocation of productive
- Governments want to use price controls :
+ to fix the unfair market outcome
+ to help the poor
+ but often hurt those they are trying to help
- Other ways of helping people:
+ Rent subsidies (monetary payments)
+ Wage subsidies (monetary payments)
- Principle: command economies are usually an ineffective way to organize economic
activity
Taxes: governments can make buyers or sellers pay a specific amount for each unit
VD: VAT