4) CH6 Supply, Demand and Government Policies

Question 1

What can happen when the marhet is at the Equilirbium, for some people?

Answer 1

They may not be satisfied.

Question 2

What is one of the role of the economists?

Answer 2

Using their theories to assist the developpment of policies.

Question 3

What do policymakers when they think the market price is unfair to buyers or sellers?

Answer 3

They control the price.

Question 4

What type can be the control on prices?

Answer 4

• Ceiling: A legal maximum at which a good can be sold.
• Floors: A legal minimum at which the good can be sold.

Question 5

What are the 2 possible outcomes when the government imposes a price ceiling?

Answer 5

• This price is not binding (set above the E)
• This price is binding (set below the E) => Shortage

Case study: Rent control

Question 6

What are the 2 possible outcome for a price floor?

Answer 6

• The price floor is not binding (set below the E)
• The price floor is binding (set above the E) => surplus

Case study: The minimum wage.

Question 7

How taxes on sellers affect market outcomes?

Answer 7

• Taxes discourage market activity
• When a good is taxed, the Q sold is smaller
• Who support the burden? Buyers? Sellers?

Question 8

What is the taxe incidence?

What is the result of a taxe?

Answer 8

Manner in which the burden of a tax is shared among participants in a market.

Change in the market E.

Question 9

What is the effect for a tax on the sellers?

Answer 9

The p is going up and the Q S is going down.

Question 10

What is the effect of a taxe on the buyers?

Answer 10

The p is going down and the Q D too.

Question 11

What is the impact of tax?

Answer 11

• It discourages market activity
• When a good is taxed, the Q sold is smaller
• Buyers and sellers share the tax burden.

Question 12

In what proportion is teh burden divided?

Answer 12

It depends on the price elasticity of supply.

• If inelastic: The consumer pays more
• If elastic: the producer pays more.

=> It falls more on the side of the market that is the less price elastic.

Question 13

Summary 1:

Answer 13

• •Price controls include price ceilings and price floors.
• • A price ceiling is a legal maximum on the price of a good or service. An example is rent control.
• •A price floor is a legal minimum on the price of a good or a service. An example is the minimum wage.
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Question 14

Summary 2:

Answer 14

• Taxes are used to raise revenue for public purposes.
• When the government levies a tax on a good, the equilibrium quantity of the good falls.
• A tax on a good places a wedge between the price paid by buyers and the price received by sellers.

Question 15

Summary 3:

Answer 15

• The incidence of a tax refers to who bears the burden of a tax.
• The incidence of the tax depends on the price elasticities of supply and demand.
• The burden tends to fall on the side of the market that is less price elastic.
• The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.