4/11/2013 Babasabpatilfreepptmba.com
Supply, Demand,
and Government
Policies
Supply, Demand, and Government
Policies
• In a free, unregulated market system, market
forces establish equilibrium prices...
CONTROLS ON PRICES
• Are usually enacted when policymakers
believe the market price is unfair to buyers or
sellers.
• Resu...
CONTROLS ON PRICES
• Price Ceiling
– A legal maximum on the price at which a good can
be sold.
• Price Floor
– A legal min...
How Price Ceilings Affect Market Outcomes
• Two outcomes are possible when the
government imposes a price ceiling:
– The p...
Figure 1 A Market with a Price Ceiling
(a) A Price Ceiling That Is Not Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-...
Figure 1 A Market with a Price Ceiling
(b) A Price Ceiling That Is Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Crea...
How Price Ceilings Affect Market Outcomes
• Effects of Price Ceilings
• A binding price ceiling creates
– shortages becaus...
CASE STUDY: Lines at the Gas Pump
• In 1973, OPEC raised the price of crude oil
in world markets. Crude oil is the major
i...
Figure 2 The Market for Gasoline with a Price Ceiling
(a) The Price Ceiling on Gasoline Is Not Binding
Quantity of
Gasolin...
Figure 2 The Market for Gasoline with a Price Ceiling
(b) The Price Ceiling on Gasoline Is Binding
Quantity of
Gasoline
0
...
CASE STUDY: Rent Control in the Short Run and Long
Run
• Rent controls are ceilings placed on the rents
that landlords may...
Figure 3 Rent Control in the Short Run and in the Long Run
(a) Rent Control in the Short Run
(supply and demand are inelas...
Figure 3 Rent Control in the Short Run and in the Long Run
(b) Rent Control in the Long Run
(supply and demand are elastic...
How Price Floors Affect Market Outcomes
• When the government imposes a price floor,
two outcomes are possible.
• The pric...
Figure 4 A Market with a Price Floor
(a) A Price Floor That Is Not Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Crea...
Figure 4 A Market with a Price Floor
(b) A Price Floor That Is Binding
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Co...
How Price Floors Affect Market Outcomes
• A price floor prevents supply and demand from
moving toward the equilibrium pric...
How Price Floors Affect Market Outcomes
• A binding price floor causes . . .
– a surplus because QS > QD.
– nonprice ratio...
The Minimum Wage
• An important example of a price floor is the
minimum wage. Minimum wage laws dictate
the lowest price p...
Figure 5 How the Minimum Wage Affects the Labor Market
Quantity of
Labor
Wage
0
Labor
demand
Labor
Supply
Equilibrium
empl...
Figure 5 How the Minimum Wage Affects the Labor Market
Copyright©2003 Southwestern/Thomson Learning
Quantity of
Labor
Wage...
TAXES
• Governments levy taxes to raise revenue for
public projects.
4/11/2013 Babasabpatilfreepptmba.com
How Taxes on Buyers (and Sellers) Affect Market
Outcomes
• Taxes discourage market activity.
• When a good is taxed, the
q...
Elasticity and Tax Incidence
• Tax incidence is the manner in which the
burden of a tax is shared among participants
in a ...
Elasticity and Tax Incidence
• Tax incidence is the study of who bears the
burden of a tax.
• Taxes result in a change in ...
Figure 6 A Tax on Buyers
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
Price
without
tax
Price
sellers
receive
Equ...
Elasticity and Tax Incidence
• What was the impact of tax?
– Taxes discourage market activity.
– When a good is taxed, the...
Figure 7 A Tax on Sellers
2.80
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
Price
without
tax
Price
sellers
recei...
Figure 8 A Payroll Tax
Quantity
of Labor
0
Wage
Labor demand
Labor supply
Tax wedge
Wage workers
receive
Wage firms pay
Wa...
Elasticity and Tax Incidence
• In what proportions is the burden of the tax
divided?
• How do the effects of taxes on sell...
Figure 9 How the Burden of a Tax Is Divided
Quantity0
Price
Demand
Supply
Tax
Price sellers
receive
Price buyers pay
(a) E...
Figure 9 How the Burden of a Tax Is Divided
Quantity0
Price
Demand
Supply
Tax
Price sellers
receive
Price buyers pay
(b) I...
ELASTICITY AND TAX INCIDENCE
So, how is the burden of the tax divided?
• The burden of a tax falls more
heavily on the sid...
Summary
• Price controls include price ceilings and price
floors.
• A price ceiling is a legal maximum on the
price of a g...
Summary
• Taxes are used to raise revenue for public
purposes.
• When the government levies a tax on a good,
the equilibri...
Summary
• The incidence of a tax refers to who bears the
burden of a tax.
• The incidence of a tax does not depend on
whet...
Upcoming SlideShare
Loading in...5
×

Supply demand and government policies ppt OF MBA

527
-1

Published on

Supply demand and government policies ppt OF MBA

0 Comments
1 Like
Statistics
Notes
  • Be the first to comment

No Downloads
Views
Total Views
527
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
Downloads
30
Comments
0
Likes
1
Embeds 0
No embeds

No notes for slide

Supply demand and government policies ppt OF MBA

  1. 1. 4/11/2013 Babasabpatilfreepptmba.com Supply, Demand, and Government Policies
  2. 2. Supply, Demand, and Government Policies • In a free, unregulated market system, market forces establish equilibrium prices and exchange quantities. • While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. • One of the roles of economists is to use their theories to assist in the development of policies. 4/11/2013 Babasabpatilfreepptmba.com
  3. 3. CONTROLS ON PRICES • Are usually enacted when policymakers believe the market price is unfair to buyers or sellers. • Result in government-created price ceilings and floors. 4/11/2013 Babasabpatilfreepptmba.com
  4. 4. 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. 4/11/2013 Babasabpatilfreepptmba.com
  5. 5. How Price Ceilings Affect Market Outcomes • 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. 4/11/2013 Babasabpatilfreepptmba.com
  6. 6. Figure 1 A Market with a Price Ceiling (a) A Price Ceiling That Is Not Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium quantity $4 Price ceiling Equilibrium price Demand Supply 3 100 4/11/2013 Babasabpatilfreepptmba.com
  7. 7. Figure 1 A Market with a Price Ceiling (b) A Price Ceiling That Is Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply 2 Price ceilingShortage 75 Quantity supplied 125 Quantity demanded Equilibrium price $3 4/11/2013 Babasabpatilfreepptmba.com
  8. 8. How Price Ceilings Affect Market Outcomes • Effects of Price Ceilings • A binding price ceiling creates – shortages because QD > QS. • Example: Gasoline shortage of the 1970s – nonprice rationing • Examples: Long lines, discrimination by sellers 4/11/2013 Babasabpatilfreepptmba.com
  9. 9. CASE STUDY: Lines at the Gas Pump • In 1973, OPEC raised the price of crude oil in world markets. Crude oil is the major input in gasoline, so the higher oil prices reduced the supply of gasoline. • What was responsible for the long gas lines? • Economists blame government regulations that limited the price oil companies could charge for gasoline. 4/11/2013 Babasabpatilfreepptmba.com
  10. 10. Figure 2 The Market for Gasoline with a Price Ceiling (a) The Price Ceiling on Gasoline Is Not Binding Quantity of Gasoline 0 Price of Gasoline 1. Initially, the price ceiling is not binding . . . Price ceiling Demand Supply, S1 P1 Q1 4/11/2013 Babasabpatilfreepptmba.com
  11. 11. Figure 2 The Market for Gasoline with a Price Ceiling (b) The Price Ceiling on Gasoline Is Binding Quantity of Gasoline 0 Price of Gasoline Demand S1 S2 Price ceiling QS 4. . . . resulting in a shortage. 3. . . . the price ceiling becomes binding . . . 2. . . . but when supply falls . . . P2 QD P1 Q1 4/11/2013 Babasabpatilfreepptmba.com
  12. 12. CASE STUDY: Rent Control in the Short Run and Long Run • Rent controls are ceilings placed on the rents that landlords may charge their tenants. • The goal of rent control policy is to help the poor by making housing more affordable. • One economist called rent control “the best way to destroy a city, other than bombing.” 4/11/2013 Babasabpatilfreepptmba.com
  13. 13. Figure 3 Rent Control in the Short Run and in the Long Run (a) Rent Control in the Short Run (supply and demand are inelastic) Quantity of Apartments 0 Supply Controlled rent Rental Price of Apartment Demand Shortage 4/11/2013 Babasabpatilfreepptmba.com
  14. 14. Figure 3 Rent Control in the Short Run and in the Long Run (b) Rent Control in the Long Run (supply and demand are elastic) 0 Rental Price of Apartment Quantity of Apartments Demand Supply Controlled rent Shortage 4/11/2013 Babasabpatilfreepptmba.com
  15. 15. How Price Floors Affect Market Outcomes • When the government imposes a price floor, two outcomes are possible. • The price floor is not binding if set below the equilibrium price. • The price floor is binding if set above the equilibrium price, leading to a surplus. 4/11/2013 Babasabpatilfreepptmba.com
  16. 16. Figure 4 A Market with a Price Floor (a) A Price Floor That Is Not Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Equilibrium quantity 2 Price floor Equilibrium price Demand Supply $3 100 4/11/2013 Babasabpatilfreepptmba.com
  17. 17. Figure 4 A Market with a Price Floor (b) A Price Floor That Is Binding Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Demand Supply $4 Price floor 80 Quantity demanded 120 Quantity supplied Equilibrium price Surplus 3 4/11/2013 Babasabpatilfreepptmba.com
  18. 18. How Price Floors Affect Market Outcomes • A price floor prevents supply and demand from moving toward the equilibrium price and quantity. • When the market price hits the floor, it can fall no further, and the market price equals the floor price. 4/11/2013 Babasabpatilfreepptmba.com
  19. 19. How Price Floors Affect Market Outcomes • A binding price floor causes . . . – a surplus because QS > QD. – nonprice rationing is an alternative mechanism for rationing the good, using discrimination criteria. • Examples: The minimum wage, agricultural price supports 4/11/2013 Babasabpatilfreepptmba.com
  20. 20. The Minimum Wage • An important example of a price floor is the minimum wage. Minimum wage laws dictate the lowest price possible for labor that any employer may pay. 4/11/2013 Babasabpatilfreepptmba.com
  21. 21. Figure 5 How the Minimum Wage Affects the Labor Market Quantity of Labor Wage 0 Labor demand Labor Supply Equilibrium employment Equilibrium wage 4/11/2013 Babasabpatilfreepptmba.com
  22. 22. Figure 5 How the Minimum Wage Affects the Labor Market Copyright©2003 Southwestern/Thomson Learning Quantity of Labor Wage 0 Labor SupplyLabor surplus (unemployment) Labor demand Minimum wage Quantity demanded Quantity supplied 4/11/2013 Babasabpatilfreepptmba.com
  23. 23. TAXES • Governments levy taxes to raise revenue for public projects. 4/11/2013 Babasabpatilfreepptmba.com
  24. 24. How Taxes on Buyers (and Sellers) Affect Market Outcomes • Taxes discourage market activity. • When a good is taxed, the quantity sold is smaller. • Buyers and sellers share the tax burden. 4/11/2013 Babasabpatilfreepptmba.com
  25. 25. Elasticity and Tax Incidence • Tax incidence is the manner in which the burden of a tax is shared among participants in a market. 4/11/2013 Babasabpatilfreepptmba.com
  26. 26. Elasticity and Tax Incidence • Tax incidence is the study of who bears the burden of a tax. • Taxes result in a change in market equilibrium. • Buyers pay more and sellers receive less, regardless of whom the tax is levied on. 4/11/2013 Babasabpatilfreepptmba.com
  27. 27. Figure 6 A Tax on Buyers Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Price without tax Price sellers receive Equilibrium without tax Tax ($0.50) Price buyers pay D1 D2 Supply, S1 A tax on buyers shifts the demand curve downward by the size of the tax ($0.50). $3.30 90 Equilibrium with tax 2.80 3.00 100 4/11/2013 Babasabpatilfreepptmba.com
  28. 28. Elasticity and Tax Incidence • What was the impact of tax? – Taxes discourage market activity. – When a good is taxed, the quantity sold is smaller. – Buyers and sellers share the tax burden. 4/11/2013 Babasabpatilfreepptmba.com
  29. 29. Figure 7 A Tax on Sellers 2.80 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Price without tax Price sellers receive Equilibrium with tax Equilibrium without tax Tax ($0.50) Price buyers pay S1 S2 Demand, D1 A tax on sellers shifts the supply curve upward by the amount of the tax ($0.50). 3.00 100 $3.30 90 4/11/2013 Babasabpatilfreepptmba.com
  30. 30. Figure 8 A Payroll Tax Quantity of Labor 0 Wage Labor demand Labor supply Tax wedge Wage workers receive Wage firms pay Wage without tax 4/11/2013 Babasabpatilfreepptmba.com
  31. 31. Elasticity and Tax Incidence • In what proportions is the burden of the tax divided? • How do the effects of taxes on sellers compare to those levied on buyers? • The answers to these questions depend on the elasticity of demand and the elasticity of supply. 4/11/2013 Babasabpatilfreepptmba.com
  32. 32. Figure 9 How the Burden of a Tax Is Divided Quantity0 Price Demand Supply Tax Price sellers receive Price buyers pay (a) Elastic Supply, Inelastic Demand 2. . . . the incidence of the tax falls more heavily on consumers . . . 1. When supply is more elastic than demand . . . Price without tax 3. . . . than on producers. 4/11/2013 Babasabpatilfreepptmba.com
  33. 33. Figure 9 How the Burden of a Tax Is Divided Quantity0 Price Demand Supply Tax Price sellers receive Price buyers pay (b) Inelastic Supply, Elastic Demand 3. . . . than on consumers. 1. When demand is more elastic than supply . . . Price without tax 2. . . . the incidence of the tax falls more heavily on producers . . . 4/11/2013 Babasabpatilfreepptmba.com
  34. 34. ELASTICITY AND TAX INCIDENCE So, how is the burden of the tax divided? • The burden of a tax falls more heavily on the side of the market that is less elastic. 4/11/2013 Babasabpatilfreepptmba.com
  35. 35. Summary • 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. 4/11/2013 Babasabpatilfreepptmba.com
  36. 36. Summary • 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. 4/11/2013 Babasabpatilfreepptmba.com
  37. 37. Summary • The incidence of a tax refers to who bears the burden of a tax. • The incidence of a tax does not depend on whether the tax is levied on buyers or sellers. • 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 elastic. 4/11/2013 Babasabpatilfreepptmba.com
  1. A particular slide catching your eye?

    Clipping is a handy way to collect important slides you want to go back to later.

×