3 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.22
4 How Price Ceilings Affect Market Outcomes Two outcomes are possible when the government imposes a price ceiling:The price ceiling is not binding (無約束力) if set above the equilibrium price.The price ceiling is binding if set below the equilibrium price, leading to a shortage.55
5 Figure 1 A Market with a Price Ceiling (a) A Price Ceiling That Is Not BindingPrice ofIce-CreamConeSupplyDemand$4Priceceiling3100EquilibriumpriceThe market clears at $3 and the price ceiling is ineffective.Quantity ofIce-CreamEquilibriumquantityCones
6 Figure 1 A Market with a Price Ceiling (b) A Price Ceiling That Is BindingPrice ofIce-CreamConeSupplyDemandEquilibriumprice$32Priceceiling75125ShortageQuantity ofIce-CreamQuantitysuppliedQuantitydemandedCones
7 How Price Ceilings Affect Market Outcomes Effects of Price CeilingsA binding price ceiling createsShortages because QD > QS.Example: Gasoline shortage of the 1970sNonprice rationingExamples: Long lines, discrimination by sellers1114
8 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.
9 Figure 2 The Market for Gasoline with a Price Ceiling (a) The Price Ceiling on Gasoline Is Not BindingPrice ofGasolineDemandSupply,S11. Initially,the priceceilingis notbinding . . .Price ceilingP1Q1Quantity ofGasoline
10 Figure 2 The Market for Gasoline with a Price Ceiling (b) The Price Ceiling on Gasoline Is BindingPrice ofS2Gasolinebut whensupply falls . . .DemandS1P2QSQDPrice ceilingresultingin ashortage.the priceceiling becomesbinding . . .P1Q1Quantity ofGasoline
11 Price Restrictions The maximum legal price that can be charged Price CeilingsThe maximum legal price that can be chargedExamples:Gasoline prices in the 1970sHousing in New York CityProposed restrictions on ATM feesPrice FloorsThe minimum legal price that can be charged.Minimum wageAgricultural price supports
12 Full Economic Price PF = Pc + (PF - PC) The dollar amount paid to a firm under a price ceiling, plus the nonpecuniary price.PF = Pc + (PF - PC)PF = full economic pricePC = price ceilingPF - PC = nonpecuniary price
13 An Example from the 1970s Opportunity cost: $5/hr Ceiling price of gasoline - $13 hours in line to buy 15 gallons of gasolineOpportunity cost: $5/hrTotal value of time spent in line: 3 $5 = $15Non-pecuniary price per gallon: $15/15=$1Full economic price of a gallon of gasoline: $1+$1=2
14 Housing Markets and Rent Ceilings 價格上限 The 1906 earthquake in San Francisco left 200,000 people—more than half the city—homeless.By the time the San Francisco Chronicle started publishing again, a month after the earthquake, there was not a single mention of a housing shortage.The classified advertisements listed many more houses and flats for rent than the advertisements for houses and flats wanted.How did the market achieve this outcome?
15 Housing Markets and Rent Ceilings The Market Response to a Decrease in SupplyFigure 6.1 shows the San Francisco housing market before the earthquake.The quantity of housing was 100,000 units and the rent was $16 a month at the intersection of D and SS.Time and the elasticity of supply. Get the students to recall the different influences on the supply elasticity of the firm from Chapter 4 and remind them how the luxury of time allows sellers to fully respond to changes in their environment.Explain why it is likely that supply is perfectly elastic in the long run for many goods and services.
16 Housing Markets and Rent Ceilings The earthquake decreased the supply of housing and the supply curve shifted leftward to SSA.The rent increased to $20 a month and the quantity decreased to 72,000 units.
17 Housing Markets and Rent Ceilings Long-Run AdjustmentsThe long-run supply of housing is perfectly elastic at $16 a month.With the rent above $16 a month, new houses and apartments are built.
18 Housing Markets and Rent Ceilings 供給的減少使租金上漲,吸引新的供給而新增加的供給使租金下降The quantity of housing increases and the rent falls to the pre-earthquake levels (other things remaining the same).
19 Housing Markets and Rent Ceilings A Regulated Housing MarketA price ceiling 價格上限 is a regulation that makes it illegal to charge a price higher than a specified level.When a price ceiling is applied to a housing market it is called a rent ceiling.房租上限If the rent ceiling is set above the equilibrium rent, it has no effect. The market works as if there were no ceiling.But if the rent ceiling is set below the equilibrium rent, it has powerful effects.
20 Housing Markets and Rent Ceilings the effects of a rent ceiling that is set below the equilibrium rent.The equilibrium rent is $20 a month.A rent ceiling is set at $16 a month.So the equilibrium rent is in the illegal region.
21 Housing Markets and Rent Ceilings At the rent ceiling, the quantity of housing demanded exceeds the quantity supplied and there is a housing shortage.價格上限造成供不應求（短缺）Explain that because landlords can’t be forced to supply a greater quantity than they wish, the quantity of housing supplied at the rent ceiling is less than the quantity that would be supplied in an unregulated market.
22 Housing Markets and Rent Ceilings With a housing shortage, people are willing to pay $24 a month.Because the legal price cannot eliminate the shortage, other mechanisms operate:search activity搜尋行為(與成本)增加black markets 黑市
23 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)RentalPrice ofApartmentSupplyDemandControlled rentShortageQuantity ofApartments
24 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)RentalPrice ofApartmentSupplyDemandControlled rentShortageQuantity ofApartments
25 Housing Markets and Rent Ceilings Search ActivityThe time spent looking for someone with whom to do business is called search activity.When a price is regulated and there is a shortage, search activity increases.Search activity is costly and the opportunity cost of housing equals its rent (regulated) plus the opportunity cost of the search activity (unregulated).Because the quantity of housing is less than the quantity in an unregulated market, the opportunity cost of housing exceeds the unregulated rent.
26 Housing Markets and Rent Ceilings Black MarketsA black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed.A shortage of housing creates a black market in housing.Illegal arrangements are made between renters and landlords at rents above the rent ceiling—and generally above what the rent would have been in an unregulated market.
27 Housing Markets and Rent Ceilings Inefficiency of Rent CeilingsA rent ceiling leads to an inefficient use of resources.The quantity of rental housing is less than the efficient quantity and there is a deadweight loss, 無謂的損失A rent ceiling is also, usually, unfair.It does not generally benefit the poor.Rather, it hurts the mobile newcomers and favors the less mobile, established residents.
28 Impact of a Price FloorPriceQuantitySDP*Q*SurplusPFQdQS
29 Comparative Static Analysis How do the equilibrium price and quantity change when a determinant of supply and/or demand change?
30 The Labor Market and the Minimum Wage New, labor-saving technologies become available every year, which mainly replace low-skilled labor.Does the persistent decrease in the demand for low-skilled labor depress the wage rates of these workers?The immediate effect of these technological advances is a decrease in the demand for low-skilled labor, a fall in the wage rate, and a decrease in the quantity of labor supplied.Figure 6.4 on the next slide illustrates this immediate effect.Labor is work that households supply and firms demand. You might be surprised to find that quite a few students think that the demand for labor is the demand by a household for a job and the supply of labor is the supply of jobs by firms. Of course, they get into a big mess with this mirror image view of the labor market. Try to avoid this all-too-common mistake by being very explicit that labor is work. Households supply it and firms demand it. Sure, firms provide jobs and people want jobs to earn an income. But it is labor, not jobs, that is supplied and demanded in the labor market.
31 The Labor Market and the Minimum Wage A decrease in the demand for low-skilled labor is shown by a leftward shift of the demand curve.A new labor market equilibrium arises at a lower wage rate and a smaller quantity of labor employed.低技術勞工的需求減少,使均衡工資下降Time and the elasticity of labor supply. It is easy to get the students to see that the supply of labor can adjust more in the long run than in the short run. This fact is central to understanding why technological change doesn’t bring a permanent fall in the wage rates of low-skilled labor and why it does bring a transitory (but possibly lengthy) fall.
32 The Labor Market and the Minimum Wage In the long run, people get trained to do higher-skilled jobs.The supply of low-skilled labor decreases, which is shown by a leftward shift of the short-run supply curve.當勞工技能提昇,離開低階市場,供給減少,回到原來工資水準 例如 家事服務 居家看護
33 The Labor Market and the Minimum Wage If long-run supply is perfectly elastic, the equilibrium wage rate returns to its initial level (other things remaining the same).
34 The Labor Market and the Minimum Wage A price floor 價格下限 is a regulation that makes it illegal to trade at a price lower than a specified level.When a price floor is applied to labor markets, it is called a minimum wage.最低工資If the minimum wage is set below the equilibrium wage rate, it has no effect. The market works as if there were no minimum wage.If the minimum wage is set above the equilibrium wage rate, it has powerful effects.
35 The Labor Market and the Minimum Wage If the minimum wage is set above the equilibrium wage rate, the quantity of labor supplied by workers exceeds the quantity demanded by employers. There is a surplus of labor.Because employers cannot be forced to hire a greater quantity than they wish, the quantity of labor hired at the minimum wage is less than the quantity that would be hired in an unregulated labor market.Because the legal wage rate cannot eliminate the surplus, the minimum wage creates unemployment.
36 The Labor Market and the Minimum Wage The equilibrium wage rate is $4 an hour.The minimum wage rate is set at $5 an hour.So the equilibrium wage rate is in the illegal region.
37 The Labor Market and the Minimum Wage The quantity of labor employed is the quantity demanded.The quantity of labor supplied exceeds the quantity demanded.Unemployment失業is the gap between the quantity demanded and the quantity supplied.
38 The Labor Market and the Minimum Wage The Minimum Wage in PracticeThe United States has passed the Fair Standards Labor Act, which currently sets the minimum wage at $5.15 per hour.This minimum wage has historically fluctuated between 35 percent and 50 percent of the average wage of production workers.Most economists believe that minimum wage laws increase the unemployment rate of low-skilled younger workers.最低工資反而可能增加低階勞工的失業Talk about the study of wage and employment data by David Card and Alan Krueger (Myth and Measurement: The New Economics of the Minimum Wage Law, Princeton: Princeton University Press, 1995), which suggests that minimum wage laws do not cause unemployment.Note that other economists disagree and claim that ceteris paribus conditions were violated regarding:the timing of hiring decisionsregional differences
39 Consumer Surplus (消費者剩餘): The value consumers get from a good but do not have to pay for.
40 I got a great deal! That company offers a lot of bang for the buck! Dell provides good value.Total value greatly exceeds total amount paid.Consumer surplus is large.
41 I got a lousy deal! That car dealer drives a hard bargain! I almost decided not to buy it!They tried to squeeze the very last cent from me!Total amount paid is close to total value.Consumer surplus is low.
42 Consumer Surplus: The Discrete Case PriceQuantityD108642Consumer Surplus:The value received but notpaid for
43 Consumer Surplus: The Continuous Case Price $ConsumerSurplusValueof 4 units10864Total Cost of 4 units2DQuantity
44 Producer Surplus (生產者剩餘): The amount producers receive in excess of the amount necessary to induce them to produce the good.PriceS0P*Producer SurplusQ*Quantity
45 Market EquilibriumBalancing supply and demandQxS = QxdSteady-state
47 Taxes 稅 Who Pays a Sales Tax? Demand and supply analysis shows how the buyer and the seller share the payment of a tax.Buyers respond to the price with the tax, because that is the price they must pay.Sellers respond to the price without the tax, because that is the price they receive.The tax is a wedge between the price paid and price received, which changes the incentives faced by buyers and sellers.
48 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.2230
49 Taxes the effects of a sales tax on CD players. The equilibrium price with no tax is $100.A tax of $10 per CD player is introduced.The curve S + tax shows the new supply curve.
50 TaxesThe vertical distance between the original supply curve and the supply curve with the tax is equal to the amount of the sales tax.Buyers would have to pay $110 to induce firms to offer the original quantity for sale.
51 Taxes The tax changes the equilibrium price and quantity. The quantity decreases.The price paid by the buyer rises to $105 and the price received by the seller falls to $95.
52 Taxes The government collects a tax revenue on the decreased quantity. The buyer and the seller share the tax payment.In this example, they share it equally.But it doesn’t always turn out that way.
53 TaxesThe division of the tax between the buyer and the seller depends on the elasticities of demand and supply.Tax Division and Elasticity of DemandTo see the effect of the elasticity of demand on the division of the tax payment, we look at two extreme cases.Perfectly inelastic demand: the buyer pays the entire tax.Perfectly elastic demand: the seller pays the entire tax.The more inelastic the demand, the larger is the buyers’ share of the tax.
54 TaxesIn this figure, demand is perfectly inelastic—the demand curve is vertical.需求沒有彈性時,需求綫是垂直的,消費者負擔所有稅賦When a tax is imposed on this good, the buyer pays the entire tax.
55 TaxesIn this figure, demand is perfectly elastic—the demand curve is horizontal.When a tax is imposed on this good, the seller pays the entire tax.需求非常有彈性時,需求綫是水平的,供給者負擔所有稅賦
56 Taxes Tax Division and Elasticity of Supply To see the effect of the elasticity of supply on the division of the tax payment, we again look at two extreme cases.Perfectly inelastic supply: the seller pays the entire tax.Perfectly elastic supply: the buyer pays the entire tax.The more elastic the supply, the larger is the buyers’ share of the tax.
57 TaxesIn this figure, supply is perfectly inelastic—the supply curve is vertical.When a tax is imposed on this good, the seller pays the entire tax.供給沒有彈性時,供給綫是垂直的,供給者負擔所有稅賦
58 TaxesIn this figure, supply is perfectly elastic—the supply curve is horizontal.When a tax is imposed on this good, the buyer pays the entire tax.供給非常有彈性時,供給綫是水平的,消費者負擔所有稅賦
59 Taxes Sales Taxes in Practice Taxes usually are levied on goods and services with an inelastic demand.The quantity purchased does not decrease by much after the tax is imposed.The government collects relatively larger tax receipts.Taxes and the inelasticity of “sinful” acts. If students understand the basics of taxes, they will become more informed citizen-voters. Raise a number of provocative issues related to taxation to evoke student interest in understanding why some goods are taxed and others are not.Taxing the consumer surplus of smokers—“Once, Twice Three times a levy.” Provoke the students’ interest in tax policy by showing them how cigarette smokers are “taxed” at least three times for their habit:Many believe that smoking is considered to be one of the most addictive, legally available products in the market without a doctor’s prescription. The government recognizes demand for cigarettes is highly inelastic and places a hefty sales tax on each pack of cigarettes. Strike one.Many state governments have sued the major tobacco companies for compensation for past and future health care costs arising from the smoking-related illnesses of its citizens. Tobacco companies have recently settled these suits by paying hundreds of billions of dollars in penalties. Students should see that inelastic demand for cigarettes allows tobacco producers to pass on most of these costs to the smoker. (This could explain why the settlement has done little in the long run to depress the stock prices and dividends from these major tobacco companies, relative to the whole market.) Strike two.Due to the increased health risk of smoking, the average smoker dies at a much earlier age than the average non-smoker. This means that smokers can expect to receive little, if any, return on all the social security taxes they’ve been paying in throughout their lives. (That is, assuming any of us will get anything back for our social security taxes!) Strike three!
60 Taxes Taxes and Efficiency Except in the extreme cases of perfectly inelastic demand or supply when the quantity remains the same, imposing a tax creates inefficiency.Figure 6.9 shows the inefficiency created by a $10 tax on CD players.
61 TaxesWith no tax, the market is efficient and the sum of consumer surplus and producer surplus is maximized.A tax shifts the supply curve, decreases the equilibrium quantity, raises the price to the buyer, and lowers the price to the seller.
62 TaxesThe tax revenue takes part of the consumer surplus and producer surplus.The decreased quantity creates a deadweight loss.無謂的損失
63 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.2939
64 Figure 9 How the Burden of a Tax Is Divided (a) Elastic Supply, Inelastic DemandPrice1. When supply is more elasticthan demand . . .DemandPrice buyers payTaxtheincidence of thetax falls moreheavily onconsumers . . .SupplyPrice without taxthanon producers.Price sellersreceiveQuantity
65 Figure 9 How the Burden of a Tax Is Divided (b) Inelastic Supply, Elastic DemandPrice1. When demand is more elasticthan supply . . .DemandPrice buyers paySupplyTaxthan onconsumers.Price without taxtheincidence ofthe tax fallsmore heavilyon producers . . .Price sellersreceiveQuantity
68 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.3041
69 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.
70 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.
71 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.
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