1. Government Regulation

2. 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!

3. 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

6. 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!

7. 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!

8. 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

11. 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

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

13. TAXES!
Why do I tax all the time?

14. 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

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

16. 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

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

19. 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?

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

21. Your turn

22. 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?

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

24. 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

25. 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
the
incidence of the
tax falls more
heavily on
consumers . . .
Supply
Price without tax
than
on producers.
Price sellers
receive
Quantity

26. 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
than on
consumers.
Price without tax
the
incidence of
the tax falls
more heavily
on producers . . .
Price sellers
receive
Quantity

27. Your turn…again

28. Luxury Tax

36. 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.

37. Market Efficiency vs. Efficiency Loss

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

39. 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

40. 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

41. 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

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

44. 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.

45. 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.

46. 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