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Supply, Demand Supply, Demand and Government and Government
PoliciesPolicies
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT:0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.
Supply, Demand, and Government Supply, Demand, and Government PoliciesPolicies
In a free, unregulated market system, In a free, unregulated market system, market forces establish equilibrium market forces establish equilibrium prices andprices and exchange quantities.exchange quantities.
One of the things government can do One of the things government can do is to set price controls when the is to set price controls when the market price is seen as unfair to market price is seen as unfair to either buyers or sellers.either buyers or sellers.
Price Ceilings & Price FloorsPrice Ceilings & Price Floors
Price CeilingPrice Ceiling A legally established A legally established maximummaximum price at price at
which a good can be sold.which a good can be sold. (Rent Controls) (Rent Controls)
Price FloorPrice Floor A legally established A legally established minimumminimum price at price at
which a good can be sold. (Price Supports which a good can be sold. (Price Supports for Agriculture)for Agriculture)
Price CeilingsPrice Ceilings
Two outcomes are possible when the Two outcomes are possible when the government imposes a price government imposes a price ceiling:ceiling:
The price ceiling The price ceiling is notis not binding if set binding if set aboveabove the equilibrium price.the equilibrium price.
The price ceiling The price ceiling isis binding if set binding if set belowbelow the the equilibrium price, leading to a shortage.equilibrium price, leading to a shortage.
Binding means that there is an economic Binding means that there is an economic impact.impact.
A Price Ceiling That Is Binding...A Price Ceiling That Is Binding...
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
2
Demand
Supply
Equilibriumprice
Priceceiling
Shortage
125Quantity
demanded
75Quantitysupplied
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
A Price Ceiling That Is Not Binding...A Price Ceiling That Is Not Binding...
$4
3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
Demand
Supply
Priceceiling
Equilibriumprice
100Equilibrium
quantity
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Effects of Price CeilingsEffects of Price Ceilings
A binding price ceiling A binding price ceiling creates ...creates ...
shortages becauseshortages because QQDD > Q > QSS.. Example: Gasoline shortage of the Example: Gasoline shortage of the
1970s1970s nonprice rationingnonprice rationing
Examples: Long lines, Examples: Long lines, Discrimination by sellersDiscrimination by sellers
The Price Ceiling on Gasoline Is Not The Price Ceiling on Gasoline Is Not Binding...Binding...
$4
P1
Quantity ofGasoline
0
Price ofGasoline
Q1
Demand
Supply
Priceceiling
1. Initially, the price ceiling is not binding...
The Price Ceiling on Gasoline Is The Price Ceiling on Gasoline Is Binding...Binding...
P1
Quantity ofGasoline
0
Price ofGasoline
Q1
Demand
S1
Priceceiling
S2 2. …but when supply falls...
P2
3. …the price ceiling becomes binding...
4. …resulting in a shortage.
Rent ControlRent Control
Rent controls are ceilings placed Rent controls are ceilings placed on the rents that landlords may on the rents that landlords may charge their tenants.charge their tenants.
Rent control can make housing Rent control can make housing more affordable.more affordable.
With a price ceiling, you cannot go With a price ceiling, you cannot go above the ceiling.above the ceiling.
But what about the landlords?But what about the landlords?
Rent Control in the Short Run...Rent Control in the Short Run...
Quantity ofApartments
0
Rental Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Supply and demand for apartments
are relatively inelastic-Why is the supply
curve vertical?
Rent Control in the Long Run...Rent Control in the Long Run...
Quantity ofApartments
0
Rental Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Because the supply and demand for
apartments are more elastic...
What happens in the long run?
…rent control causes a
large shortage
Price FloorsPrice Floors
When the government imposes When the government imposes a price floor, two outcomes a price floor, two outcomes are possible.are possible.
The price floor The price floor is notis not binding if set binding if set belowbelow the equilibrium price. the equilibrium price.
The price floor The price floor isis binding if set binding if set aboveabove the equilibrium price, leading the equilibrium price, leading to ato a surplus.surplus.
Think of price floors as not being able Think of price floors as not being able to go below the floor.to go below the floor.
A Price Floor That Is Not Binding...A Price Floor That Is Not Binding...
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
100Equilibrium
quantity
Equilibrium
price
Demand
Supply
Pricefloor2
A Price Floor That Is Binding...A Price Floor That Is Binding...
$3
Quantity ofIce-Cream
Cones
0
Price ofIce-Cream
Cone
Equilibrium
price
Demand
Supply
Price floor$4
120Quantitysupplied
80Quantity
demanded
Surplus
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Effects of a Price FloorEffects of a Price Floor
A binding price floor causes . . .A binding price floor causes . . . a surplusa surplus becausebecause QQSS >Q >QDD.. nonprice rationingnonprice rationing is an is an alternative mechanism for alternative mechanism for rationing the good, using rationing the good, using discrimination criteria.discrimination criteria.
Examples: The minimum wage, Examples: The minimum wage, Agricultural price supports Agricultural price supports State Minimum WagesState Minimum Wages
The Minimum WageThe Minimum Wage
Quantity ofLabor
0
Wage
Equilibrium
wage
Labor demand
Labor supply
A Free Labor Market
Equilibriumemploymen
t
Minimumwage
The Minimum WageThe Minimum Wage
Quantity ofLabor
0
Wage
Labor demand
Labor supply
Quantitysupplied
Quantitydemanded
Labor surplus(unemployment)
A Labor Market with a Minimum Wage
What are some potential impacts What are some potential impacts of taxes?of taxes?
Taxes are used to raise Taxes are used to raise money for the money for the government.government.
Taxes discourage market Taxes discourage market activity.activity.
When a good is taxed, When a good is taxed, the quantity sold is the quantity sold is smaller. smaller.
Buyers and sellers share Buyers and sellers share the tax burden.the tax burden.
But who bears the But who bears the burden-tax incidence.burden-tax incidence.
3.00
Quantity ofIce-Cream Cones
0
Price ofIce-Cream
Cone
10090
$3.30
Pricebuyers
pay
D1
D2
Equilibriumwith tax
Supply, S1
Equilibrium without tax
Impact of a 50¢ Tax Levied on Impact of a 50¢ Tax Levied on Buyers...Buyers...
2.80
Pricesellersreceive
Copyright © 2001 by Harcourt, Inc. All rights reserved
Pricewithout
tax
Tax ($0.50)
3.00
Quantity ofIce-Cream Cones
0
Price ofIce-Cream
Cone
10090
S1
S2
Demand, D1
Impact of a 50¢ Tax on Sellers...Impact of a 50¢ Tax on Sellers...
Price without tax
2.80
Price sellers receiv
e
$3.30
Price buyers
pay
Equilibrium without tax
Copyright © 2001 by Harcourt, Inc. All rights reserved
A tax on sellers shifts the supply
curve upward by the
amount of the tax ($0.50).
Tax ($0.50)
Equilibriumwith tax
The Incidence of TaxThe Incidence of Tax
In what proportions is the burden of In what proportions is the burden of the tax divided?the tax divided?
How do the effects of taxes on How do the effects of taxes on sellers compare to those levied on sellers compare to those levied on buyers?buyers?
The answers to these questions depend on the elasticity of demand
and the elasticity of supply.
Elastic Supply, Inelastic Demand...Elastic Supply, Inelastic Demand...
Quantity0
Price
Demand
Supply
Tax
1. When supply is moreelastic than demand...
2. ...theincidence of thetax falls moreheavily onconsumers...
3. ...than onproducers.
Price without tax
Price buyers pay
Price sellers receive
Inelastic Supply, Elastic Demand...Inelastic Supply, Elastic Demand...
Quantity0
Price
Demand
Supply
Price without tax
Tax
1. When demand is moreelastic than supply...
2. ...theincidence of the tax falls more heavily on producers...
3. ...than on consumers.
Price buyers pay
Price sellers receive
JOIN KHALID AZIZJOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS,
B.COM.B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4
ICAP MODULE B, B.COM, BBA, MBA & PIPFA.ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP
MODULE D, BBA, MBA & PIPFA.MODULE D, BBA, MBA & PIPFA.
CONTACT:CONTACT:0322-33857520322-3385752R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA,
KARACHI, PAKISTAN.KARACHI, PAKISTAN.
