Académique Documents
Professionnel Documents
Culture Documents
Government Policies
Chapter 6
Price Controls...
Are
Price Floor
Price Ceilings
Two outcomes are possible when the
government imposes a price ceiling:
The price ceiling is not binding if set above
the equilibrium price.
The price ceiling is binding if set below the
equilibrium price, leading to a shortage.
Supply
Price
ceiling
$4
3
Equilibrium
price
Demand
0
100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
Supply
Equilibrium
price
$3
2
Price
ceiling
Shortage
Demand
0
75
125
Quantity of
Ice-Cream
Quantity Quantity
Cones
supplied demanded
1970s
nonprice rationing
Examples:
by sellers
Supply
Price
ceiling
$4
P1
Demand
0
Q1
Quantity of
Gasoline
Price of
Gasoline
2. but
when
supply
falls...
S1
P2
Price
ceiling
P1
3. the price
ceiling
becomes
binding...
4. resulting
in a
shortage.
Demand
0
Q1
Quantity of
Gasoline
Rent Control
Rent
Supply and
demand for
apartments
are relatively
inelastic
Supply
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
Because the
supply and
demand for
apartments are
more elastic...
Supply
rent control
causes a
large
shortage
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
Price Floors
When the government imposes a
price floor, two outcomes are
possible.
Supply
Equilibriu
m
price
$3
Price
floor
Demand
0
Quantity of
Equilibrium Ice-Cream
Cones
quantity
100
Supply
Surplus
$4
Price floor
$3
Equilibriu
m
price
Demand
0
80
120
Quantity Quantity
demanded supplied
Quantity of
Ice-Cream
Cones
A Free Labor
Market
Labor
supply
Equilibriu
m
wage
Labor
demand
0
Equilibrium
employmen
t
Quantity of
Labor
Labor
supply
Minimum
wage
Labor
demand
0
Quantity
demanded
Quantity
supplied
Quantity of
Labor
Taxes
Governments levy taxes to
raise revenue for public
projects.
market activity.
When a good is taxed,
the quantity sold is
smaller.
Buyers and sellers
share the tax burden.
Taxes
Tax
Supply, S1
3.00
A tax on buyers
shifts the demand
curve downward
by the size of
the tax ($0.50).
D1
D
2
100
Quantity of
Ice-Cream Cones
Price
buyers
pay
Price
without
tax
$3.30
3.00
2.80
Price
sellers
receive
Supply, S1
Equilibrium without tax
Tax
($0.50)
Equilibrium
with tax
D1
D2
0
90 100
Quantity of
Ice-Cream Cones
market activity.
When a good is taxed,
the quantity sold is
smaller.
Buyers and sellers
share the tax burden.
A tax on
sellers shifts
S2
the supply
curve upward
S1
by the
amount of the
tax ($0.50).
Equilibrium without tax
Equilibrium
with tax
$3.30
3.00 Tax
2.80 ($0.50)
Price
sellers
receiv
e
Demand, D1
90 100
Quantity of
Ice-Cream Cones
A Payroll Tax
Wage
Labor
supply
Wage
firms pay
Wage Tax wedge
without
tax
Wage
workers
receive
Labor
demand
Quantity of
Labor
2. ...the
incidence of th
tax falls more
heavily on
consumers...
3. ...than on Demand
producers.
0
Quantity
Price
Supply
3. ...than on consume
Tax
Demand
2. ...the
incidence of
the tax falls more
heavily on producers...
Quantity
Summary
Price
Summary
Taxes
Summary
The
Graphical
Review
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Supply
Price
ceiling
$4
3
Equilibrium
price
Demand
0
100
Equilibrium
quantity
Quantity of
Ice-Cream
Cones
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Supply
Equilibrium
price
$3
2
Price
ceiling
Shortage
Demand
0
75
125
Quantity of
Ice-Cream
Quantity Quantity
Cones
supplied demanded
Supply
Price
ceiling
$4
P1
Demand
0
Q1
Quantity of
Gasoline
Price of
Gasoline
2. but
when
supply
falls...
S1
P2
Price
ceiling
P1
3. the price
ceiling
becomes
binding...
4. resulting
in a
shortage.
Demand
0
Q1
Quantity of
Gasoline
Supply and
demand for
apartments
are relatively
inelastic
Supply
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
Because the
supply and
demand for
apartments are
more elastic...
Supply
rent control
causes a
large
shortage
Controlled rent
Shortage
Demand
0
Quantity of
Apartments
Supply
Equilibriu
m
price
$3
Price
floor
Demand
0
Quantity of
Equilibrium Ice-Cream
Cones
quantity
100
Harcourt, Inc. items and derived items copyright 2001 by Harcourt, Inc.
Supply
Surplus
$4
Price floor
$3
Equilibriu
m
price
Demand
0
80
120
Quantity Quantity
demanded supplied
Quantity of
Ice-Cream
Cones
A Free Labor
Market
Labor
supply
Equilibriu
m
wage
Labor
demand
0
Equilibrium
employmen
t
Quantity of
Labor
Labor
supply
Minimum
wage
Labor
demand
0
Quantity
demanded
Quantity
supplied
Quantity of
Labor
Supply, S1
3.00
A tax on buyers
shifts the demand
curve downward
by the size of
the tax ($0.50).
D1
D
2
100
Quantity of
Ice-Cream Cones
Price
buyers
pay
Price
without
tax
$3.30
3.00
2.80
Price
sellers
receive
Supply, S1
Equilibrium without tax
Tax
($0.50)
Equilibrium
with tax
D1
D2
0
90 100
Quantity of
Ice-Cream Cones
A tax on
sellers shifts
S2
the supply
curve upward
S1
by the
amount of the
tax ($0.50).
Equilibrium without tax
Equilibrium
with tax
$3.30
3.00 Tax
2.80 ($0.50)
Price
sellers
receiv
e
Demand, D1
90 100
Quantity of
Ice-Cream Cones
A Payroll Tax
Wage
Labor
supply
Wage
firms pay
Wage Tax wedge
without
tax
Wage
workers
receive
Labor
demand
Quantity of
Labor
2. ...the
incidence of th
tax falls more
heavily on
consumers...
3. ...than on Demand
producers.
0
Quantity
Price
Supply
3. ...than on consume
Tax
Demand
2. ...the
incidence of
the tax falls more
heavily on producers...
Quantity