Unit 2.7: Government intervention Diagrams

Question 1

Using an supply and demand diagram, explain how a price ceiling affects property rent

Answer 1

(12)
- Quantity supplied decreases from Q* to Qs
(law of supply)

• Quantity demanded increases from Q* to Qd
  (law of demand)
• Quantity demanded Qd > Quantity supplied Qs
  This creates an excess demand of Qd – Qs .
• At the price ceiling Pc, there is a market disequilibrium.

Question 2

Using an supply and demand diagram, explain how a price floor affects the rice market

Answer 2

(24)
- Quantity demanded decreases from Q* to Qd

• Quantity supplied increases from Q* to Qs
• Quantity supplied Qs > Quantity demanded Qd.
• This creates an excess supply of Qs – Qd .
• At the price floor Pf, there is a market disequilibrium

Question 3

Using an supply and demand diagram, explain how a price floor affects the rice market if the government bought excess supply

Answer 3

(25)
- Quantity demanded decreases from Q* to Qd

• Quantity supplied increases from Q* to Qs
• Quantity supplied Qs > Quantity demanded Qd.
• This creates an excess supply of Qs – Qd .
• At the price floor Pf, there is a market disequilibrium
• The government may buy the excess supply, causing the demand curve for the product to shift to the right to the new demand curve.

Question 4

Using a supply and demand diagram, explain how an imposition of a indirect specific tax per pint of beer affects the beer market

Answer 4

(49)
- The tax is an additional cost for beer producers,
so the supply of beer decreases.

• Supply will shift upwards by $0.50 from S to S+tax
• The price of beer increases from P* to Pt.
• The quantity of beer demanded decreases
  from Q* to Qt.
• Government receive tax revenue at Pr

Question 5

Using a supply and demand diagram, explain how a subsidy on vaccines affects the vaccine market

Answer 5

(72)
- The supply curve shifts downwards by the amount of the subsidy.

• The equilibrium price falls from P1 to P2.
• The equilibrium quantity increases from Q1 to Q2.
• The price paid by consumers falls from P1 to P2.
• The price received by producers increases from P1 to P3.