1. 12. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. A) direct, inverse B) inverse, direct C) inverse, inverse D) direct, direct E) strong, weak 13. A leftward shift of a supply curve might be caused by: A)an improvement in the relevant technique of production. B)a decline in the prices of needed inputs (resources). C)an increase in consumer incomes. D)some firms leaving a market.

2. 14. Which of the following statements is correct? A)If demand increases and supply decreases, equilibrium price will fall. B)If the demand and the supply both fall at the same time, quantity will be indeterminate C)If demand decreases and supply increases, equilibrium price will rise. D) If supply increases and demand decreases, equilibrium price will fall. E) If supply falls and demand remains constant, equilibrium price will fall.

3. 15. At price $20, there would be a SURPLUS of… A)100B) 150 C) 200D) 50 E) 0 16. What would be the effect of a price floor at $60 A) It would ineffective D) A shortage of 100 B) A shortage of 50 E) A surplus of 100 C) Quantity demanded would increase

4. 17. Which of the following statements is correct? A)If demand increases and supply decreases, equilibrium price will fall. B)If the demand and the supply both fall at the same time, quantity will be indeterminate C)If demand decreases and supply increases, equilibrium price will rise. D) If supply increases and demand decreases, equilibrium price will fall. E) If supply falls and demand remains constant, equilibrium price will fall. 18. If Buyer’s Max=$300, Seller’s Min=$150, & Price=$350 then A) consumer’s surplus is 50 B) consumer’s surplus is 100 C) producer’s surplus is 200 D) producer’s surplus is 50 E) there would be no exchange

5. Government Intervention Basic Economic Concepts #6

6. Government Involvement #1-Price Controls: Floors and Ceilings #2-Import Quotas #3-Subsidies #4-Excise Taxes 6

7. #1-PRICE CONTROLS Who likes the idea of having a price ceiling on gas so prices will never go over $1 per gallon? 7

8. Q o $5 4 3 2 1 P 10 20 30 40 50 60 70 80 8 D S Shortage (Qd>Qs) Maximum legal price a seller can charge for a product. Goal: Make affordable by keeping price from reaching Eq. Gasoline Does this policy help consumers? Result: BLACK MARKETS Price Ceiling To have an effect, a price ceiling must be below equilibrium

9. Q o $4321$4321 P 10 20 30 40 50 60 70 80 9 D S Surplus (Qd<Qs) Minimum legal price a seller can sell a product. Goal: Keep price high by keeping price from falling to Eq. Corn Does this policy help corn producers? Price Floor To have an effect, a price floor must be above equilibrium

10. Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Q P D S PcPc QeQe CS PS 10

11. Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Price FLOOR Q P D S PcPc QeQe Q floor DEADWEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS PS 11

12. Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Q P D S PcPc QeQe CS PS 12

13. Are Price Controls Good or Bad? To be “efficient” a market must maximize consumers and producers surplus Price CEILING Q P D S PcPc QeQe Q ceiling DEADWEIGHT LOSS The Lost CS and PS. INEFFICIENT! CS PS 13

14. #2 Import Quotas A quota is a limit on number of imports. The government sets the maximum amount that can come in the country. Purpose: To protect domestic producers from a cheaper world price. To prevent domestic unemployment 14

15. International Trade and Quotas Identify the following: 1.CS with no trade 2.PS with no trade 3.CS if we trade at world price (P W ) 4.PS if we trade at world price (P W ) 5.Amount we import at world price (P W ) 6.If the government sets a quota on imports of Q 4 - Q 2, what happens to CS and PS? This graphs show the domestic supply and demand for grain. The letters represent area. H TLI HIJKLMNRS T Q5-Q1 CS smaller PS bigger

16. #3 Subsidies The government just gives producers money. The goal is for them to make more of the goods that the government thinks are important. Ex: Agriculture (to prevent famine) Pharmaceutical Companies Environmentally Safe Vehicles FAFSA 16

17. Result of Subsidies to Corn Producers Q o Price of Corn Quantity of Corn 17 S S Subsidy Price Down Quantity Up Everyone Wins, Right? PePe P1P1 QeQe Q1Q1 D

18. 18

19. #4 Excise Taxes Excise Tax = A per unit tax on producers For every unit made, the producer must pay $ NOT a Lump Sum (one time only)Tax The goal is for them to make less of the goods that the government deems dangerous or unwanted. Ex: Cigarettes “sin tax” Alcohol “sin tax” Tariffs on imported goods Environmentally Unsafe Products Etc. 19

20. Excise Taxes Q o $5 4 3 2 1 P 20 Supply Schedule PQs $5140 $4120 $3100 $280 $160 D S 40 60 80 100 120 140 Government sets a $2 per unit tax on Cigarettes

21. Excise Taxes Q o $5 4 3 2 1 P 21 Supply Schedule PQs $5 $7140 $4 $6120 $3 $5100 $2 $480 $1 $360 D S 40 60 80 100 120 140 Government sets a $2 per unit tax on Cigarettes

22. Excise Taxes Q o $5 4 3 2 1 P 22 Supply Schedule PQs $5 $7140 $4 $6120 $3 $5100 $2 $480 $1 $360 D S 40 60 80 100 120 140 Tax is the vertical distance between supply curves S Tax

23. FRQ #2