gov't intervention through price controls and taxes

1. PART I: REVIEW

3. Economics is the study of how individuals allocate their scarce resources efficiently in order to satisfy their unlimited needs and wants. Ultimate goal of a: consumer maximize utility producer maximize profit

5. SUPPLY, DEMAND, AND GOVERNMENT POLICIES small big is the study of how people make decisions and how these decisions interact. is the study of the nation’s economy as a whole. ECONOMICS MICROECONOMICS MACROECONOMICS

6. SUPPLY, DEMAND, AND GOVERNMENT POLICIES MICROECONOMICS MACROECONOMICS 1. Should I go to college or get a job? 1.How many people are employed in the economy as a whole this year? 2. What determines the salary that Citibank offers to a new college graduate? 2.What determines the overall salary levels paid to workers in a given year? 3. What determines the cost to a college of offering a new course? 3.What determines the overall level of prices in the economy as a whole? 4. What government policies should be adopted to make it easier for low- income students to afford college? 4. What government policies should be adopted to promote employment and growth in the economy as a whole? 5. What determines the number of iPhones exported to France? 5. What determines the overall trade in goods, services, and financial assets between the United States and the rest of the world?

7. Supply and Demand Together Equilibrium : P has reached the level where quantity supplied equals quantity demanded 0 P Q D S

8. Equilibrium price: the price that equates quantity supplied with quantity demanded 0 D S P Q P Q D Q S $0 24 0 1 21 5 2 18 10 3 15 15 4 12 20 5 9 25 6 6 30

9. Equilibrium quantity: the quantity supplied and quantity demanded at the equilibrium price 0 D S P Q P Q D Q S $0 24 0 1 21 5 2 18 10 3 15 15 4 12 20 5 9 25 6 6 30

10. Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded Surplus Example: If P = $5, then Q D = 9 lattes and Q S = 25 lattes resulting in a surplus of 16 lattes 0 P Q D S

11. Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded Facing a surplus, sellers try to increase sales by cutting price. This causes Q D to rise … which reduces the surplus. and Q S to fall… 0 P Q D S Surplus

12. Surplus (a.k.a. excess supply): when quantity supplied is greater than quantity demanded Facing a surplus, sellers try to increase sales by cutting price. This causes Q D to rise and Q S to fall. Surplus Prices continue to fall until market reaches equilibrium. 0 P Q D S

13. Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied Example: If P = $1, then Q D = 21 lattes and Q S = 5 lattes resulting in a shortage of 16 lattes Shortage 0 P Q D S

14. Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied Facing a shortage, sellers raise the price, causing Q D to fall … which reduces the shortage. and Q S to rise, 0 P Q D S Shortage

15. Shortage (a.k.a. excess demand): when quantity demanded is greater than quantity supplied Facing a shortage, sellers raise the price, causing Q D to fall and Q S to rise. Shortage Prices continue to rise until market reaches equilibrium. 0 P Q D S

17. SUPPLY, DEMAND, AND GOVERNMENT POLICIES

18. Supply, Demand, and Government Policies 6 E conomics P R I N C I P L E S O F N. Gregory Mankiw Premium PowerPoint Slides by Ron Cronovich

35. A Tax on Buyers SUPPLY, DEMAND, AND GOVERNMENT POLICIES Effects of a $1.50 per unit tax on buyers New eq’m: Q = 450 Sellers receive P S = $9.50 Buyers pay P B = $11.00 Difference between them = $1.50 = tax S 1 D 1 $10.00 500 P Q D 2 $11.00 P B = $9.50 P S = Tax 450

37. A Tax on Sellers SUPPLY, DEMAND, AND GOVERNMENT POLICIES Effects of a $1.50 per unit tax on sellers The tax effectively raises sellers’ costs by $1.50 per pizza. Sellers will supply 500 pizzas only if P rises to $11.50, to compensate for this cost increase. Hence, a tax on sellers shifts the S curve up by the amount of the tax. S 1 P Q D 1 $10.00 500 S 2 $11.50 Tax

38. A Tax on Sellers SUPPLY, DEMAND, AND GOVERNMENT POLICIES Effects of a $1.50 per unit tax on sellers New eq’m: Q = 450 Buyers pay P B = $11.00 Sellers receive P S = $9.50 Difference between them = $1.50 = tax S 1 P Q D 1 $10.00 500 S 2 450 $11.00 P B = $9.50 P S = Tax

40. A C T I V E L E A R N I N G 2 Effects of a tax Suppose govt imposes a tax on buyers of $30 per room. Find new Q , P B , P S , and incidence of tax. Q P S 0 The market for hotel rooms D