Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,*,Supply,Demand,and Government Policies,E,conomics,P R I N C I P L E S O F,N.Gregory Mankiw,Premium PowerPoint Slides by Ron Cronovich,6,Supply,Demand,and Governmen,In this chapter,look for the answers to these questions:,What are price ceilings and price floors?What are some examples of each?,How do price ceilings and price floors affect market outcomes?,How do taxes affect market outcomes?How do the effects depend on whether the tax is imposed on buyers or sellers?,What is the incidence of a tax?What determines the incidence?,1,1,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,In this chapter,look for the,Government Policies That Alter the Private Market Outcome,Price controls,Price ceiling,:a legal maximum on the price of a good or service,Example:rent control,Price floor,:a legal minimum on the price of a good or service,Example:minimum wage,Taxes,The govt can make buyers or sellers pay a specific amount on each unit bought/sold.,We will use the supply/demand model to see how each policy affects the market outcome(the price buyers pay,the price sellers receive,and eqm quantity).,2,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,Government Policies That Alter,EXAMPLE 1:,The Market for Apartments,Eqm w/o price controls,P,Q,D,S,Rental price of apts,$800,300,Quantity of apartments,3,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,EXAMPLE 1:The Market for Apa,How Price Ceilings Affect Market Outcomes,A price ceiling above the eqm price is,not binding,has no effect on the market outcome.,P,Q,D,S,$800,300,Price ceiling,$1000,4,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,How Price Ceilings Affect Mark,How Price Ceilings Affect Market Outcomes,The eqm price($800)is above the ceiling and therefore illegal.,The ceiling is a,binding constraint,on the price,causes a shortage.,P,Q,D,S,$800,Price ceiling,$500,250,400,shortage,5,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,How Price Ceilings Affect Mark,How Price Ceilings Affect Market Outcomes,In the long run,supply and demand are more price-elastic.,So,the shortage is larger.,P,Q,D,S,$800,150,Price ceiling,$500,450,shortage,6,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,How Price Ceilings Affect Mark,Shortages and Rationing,With a shortage,sellers must ration the goods among buyers.,Some rationing mechanisms:(1)Long lines(2)Discrimination according to sellers biases,These mechanisms are often unfair,and inefficient:the goods do not necessarily go to the buyers who value them most highly.,In contrast,when prices are not controlled,the rationing mechanism is efficient(the goods go to the buyers that value them most highly)and impersonal(and thus fair).,7,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,Shortages and RationingWith a,EXAMPLE 2:,The Market for Unskilled Labor,Eqm w/o price controls,W,L,D,S,Wage paid to unskilled workers,$4,500,Quantity of unskilled workers,8,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,EXAMPLE 2:The Market for Uns,How Price Floors Affect Market Outcomes,W,L,D,S,$4,500,Price floor,$3,A price floor below the eqm price is,not binding,has no effect on the market outcome.,9,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,How Price Floors Affect Market,How Price Floors Affect Market Outcomes,W,L,D,S,$4,Price floor,$5,The eqm wage($4)is below the floor and therefore illegal.,The floor is a,binding constraint,on the wage,causes a surplus(,i.e.,unemployment).,400,550,labor surplus,10,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,How Price Floors Affect Market,Min wage laws do not affect highly skilled workers.,They do affect teen workers.,Studies:A 10%increase in the min wage raises teen unemployment by 1-3%.,The Minimum Wage,W,L,D,S,$4,Min.wage,$5,400,550,unemp-loyment,11,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,Min wage laws do not affect,A C T I V E L E A R N I N G,1,Price controls,Q,P,S,0,The market for hotel rooms,D,Determine effects of:,A,.,$90 price ceiling,B,.,$90 price floor,C.,$120 price floor,12,12,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,A C T I V E L E A R N I N G,A C T I V E L E A R N I N G,1,A.$90 price ceiling,Q,P,S,0,The market for hotel rooms,D,The price falls to$90.,Buyers demand 120 rooms,sellers supply 90,leaving a shortage.,shortage,=30,Price ceiling,13,13,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,A C T I V E L E A R N I N G,A C T I V E L E A R N I N G,1,B.$90 price floor,Q,P,S,0,The market for hotel rooms,D,Eqm price is above the floor,so floor is not binding.,P,=$100,Q,=100 rooms.,Price floor,14,14,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,A C T I V E L E A R N I N G,A C T I V E L E A R N I N G,1,C.$120 price floor,Q,P,S,0,The market for hotel rooms,D,The price rises to$120.,Buyers demand 60 rooms,sellers supply 120,causing a surplus.,surplus,=60,Price floor,15,15,SUPPLY,DEMAND,AND GOVERNMENT POLICIES,A C T I V E L E A R N I N G,Evaluating Price Controls,Recall one of the Ten Principles from Chapter 1:,Markets are usually a good way to organize economic activity.,Prices are the signals that guide the al