Microeconomics Chapter 6 Notes

 

The above Figure will not work because the price ceiling is above the equilibrium price. Price celings above the equilbrium price is not binding and it will have to effect on market outcome

A price ceiling below the Equ price is binding and will affect the market outcome by causing a shortage of the goods or service

In the long, supply and demand are price-elastic

The cruves are flatter

 

The over time the shortage that results from a binding price ceiling is larger

Shortage gets bigger

With a shortage, sellers must ration the goods among buyers

 

2 rationing mechanisms

• Waiting lists, first come first served

• Preference to certain types of buyers

 

Rationing mechanisms are often unfair and inefficient

 

 

A price ceiling causes a DWL and a transfer of welfare from producers to consumers

Equilibrium without price ceiling

CS= 1+2+3

PS=4+5+6

TS=1+2+3+4+5+6

 

 

Equilibrium with a price ceiling

 

CS= 1+2+5

PS= 6

TS= 1+2+5+6

 

DWL = 3+4

Taxes

 

A ax redeuces the equilibrium quantity of the taxed good, increases the price consumer pay and reduces the price that sellers receive.

 

The tax can be ad valorem tax - a percent of the goods sold or per unit tax- a fixed dollar amount for each unit sold

Taxes on buyers will shift the after-tax demand curve down by the amount of the tax

Taxes on sellers will shift the supply curve up by the amount of tax

A tax on buyers means buyers pay more, which causes their demand to fall

• The fall in demand hurts sellers, forcing them to reduce their price

A taxon sellers is like a cost increase , and sellers pass along part ofthat increase to buyers in the form of higher prices

 

The equivalnce of taxes on buyers and taxeson sellers meansthat we can ignore whether the tax is imposed on buyers or seller

• All that matters is the size of the tax

 

Tax as a wedge between the price buyers pay and the price sellers receive

• On a supply-demand curve this wedge is a vertical line segment between the pre tax dem and supplycurves

• The size of the wedge=the amount of the tax

 

Taxes rasise the price buyers pay, lower the price sellers get, transfers surplus from consumers and producers to government and create DWL

Employee Insurance

 

• A federal program that provides temp final assitiance to unemployed canadian who have lose their job.

Subsidies

 

• Eqiulibrium output rises

• The price buers pay falls

• The price sellersrecieve rises

• The difference between Ps and Pb is the amount of the subsidy