Government Regulation

What do you think is the market price for renting an apartment in Plainfield? What happens to the quantity of demand and supply after the price change? List four outcomes that would most likely occur if the price was set there Think like an economist!

Price Ceiling Maximum price that can be legally charged for a good or service It’s called “binding” if the ceiling price is set below market equilibrium It’s “not binding” if it’s set above market equilibrium

Rent Control (Price ceiling) Allows people to live in neighborhoods they could not afford Causes a shortage of apartments Causes bad quality apartments Property value in surrounding area’s can decline Causes deadweight loss!

What do you think the average wage is for a cashier at a Plainfield Target? What happens to the quantity of demand and supply after the wage change? List four outcomes that would most likely occur if the price was set there Think like an economist!

Price Floors Minimum price that is set that must be paid for a good or service It is called “binding” if the floor price is set above market equilibrium It’s “not binding” if it’s set below market equilibrium

Minimum Wage (price floor) Minimum price that an employer can pay a worker for an hour of labor Increases worker’s income Can cause a surplus of workers Younger people may not be hired for low skilled jobs Many, many, many more outcomes

National & Illinois Minimum Wage Is that enough or even needed?

TAXES! Why do I tax all the time?

How Taxes Affect Market Outcomes Market not efficient Total surplus not maximized When a good is taxed, the quantity sold is smaller. Buyers and sellers share the tax burden. 22 30

Tax incidence When the burden of a tax is shared among participants in a market

If there is a sales tax on buying these candy worms, it’s not just the kid with worms who feels the burden of the tax

CANDY WORM MARKET Price Qd Qs $1 50 10 $2 40 20 $3 30 $4 $5

Let’s say there is a $0.50 tax on buying candy worms 3 questions must be answered to figure out the tax incidence Question 1: Does the tax affect the supply curve or the demand curve? Question 2: Which way does the curve shift? Question 3: How does the shift affect equilibrium?

What happens if there is a $0.50 tax on the buyer? D1 Q

Your turn

3 questions must be answered to figure out the tax incidence Assume the government wants to reduce the amount of sugar Americans are consuming. So, they enforce a excise tax of $1.00 for every candy worm produced. 3 questions must be answered to figure out the tax incidence Question 1: Does the tax affect the supply curve or the demand curve? Question 2: Which way does the curve shift? Question 3: How does the shift affect equilibrium?

What happens if there is a $1.00 tax on the seller? D1 Q

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. 29 39

How the Burden of a Tax Is Divided (a) Elastic Supply, Inelastic Demand Price 1. When supply is more elastic than demand . . . Demand Price buyers pay Tax 2. . . . the incidence of the tax falls more heavily on consumers . . . Supply Price without tax 3. . . . than on producers. Price sellers receive Quantity

How the Burden of a Tax Is Divided (b) Inelastic Supply, Elastic Demand Price 1. When demand is more elastic than supply . . . Demand Price buyers pay Supply Tax 3. . . . than on consumers. Price without tax 2. . . . the incidence of the tax falls more heavily on producers . . . Price sellers receive Quantity

Your turn…again

Luxury Tax

Luxury Tax In 1990, Congress adopted a new luxury tax on items that only the rich could afford. The goal of this tax is to raise revenue from those who could easily afford to pay Answer this question: Does the price incidence truly affect buyers more? Write a short answer and provide a supply and demand curve to further explain your answer.

Market Efficiency vs. Efficiency Loss

Market Efficient Basics Total surplus consumer surplus + producer surplus So, when do you think a market is most efficient…? When total surplus is maximized!

Measuring surplus on a graph Consumer surplus The area below the demand curve and above the price Producer surplus The area above the supply curve and below the price

Consumer and Producer Surplus in the Market Equilibrium Price A C B D E Consumer surplus Demand Supply Total Surplus Can you label: Consumer surplus - Producer surplus Total surplus Equilibrium price quantity Producer surplus Quantity

Efficiency Loss Also known as deadweight loss or welfare loss Total surplus is NOT maximized Resources and products are underutilized Many causes Government Regulations Externalities Monopoly pricing

We are not talking about us! UTILITY We are not talking about us!

Market Efficiency Basics What do you think happens to the utility of this good after you consume more and more of it? Utility The amount of satisfaction or benefits one gets out of consuming a good.

Market Efficiency Basics Diminishing marginal utility There will be a decline in utility with each additional unit consumed Holy pizza! My utility from each slice of pizza really started to decline….think I’ll just order a small pizza next time.

Market Efficiency Basics Utility maximization rule Maximize your marginal utility with each dollar you spend You do this by weighing your marginal utility per dollar spent $1 Slice of Pizza Total Utility Marginal Utility 1 100 2 220 120 3 350 130 4 450 5 490 40 6 491