Transcript Individual Markets:
Unit 2: Supply, Demand, and Consumer Choice
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REMEMBER THE STEPS!
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Government Involvement
#1-Price Controls: Floors and Ceilings #2-Import Quotas #3-Subsidies #4-Excise Taxes
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#1-PRICE CONTROLS
Who likes the idea of having a price ceiling on gas so prices will never go over $1 per gallon?
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Price Ceiling Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
P Gasoline S $5 Does this policy help
To have an effect,
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a price ceiling must be
3 Result: BLACK MARKETS
below equilibrium
2 Price Ceiling Shortage 1 (Qd>Qs) D o 10 20 30 40 50 60 70 80 Q
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Price Floor Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
P Corn $ S Surplus
To have an effect,
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a price floor must be
3 Price Floor Does this
above equilibrium
2 policy help corn 1 producers?
D o 10 20 30 40 50 60 70 80 Q
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Practice Questions 1. Which of the following will occur if a legal price floor is placed on a good below its free market equilibrium?
A. Surpluses will develop B. Shortages will develop C. Underground markets will develop D. The equilibrium price will remain the same E. The quantity sold will increase 2. Which of the following statements about price control is true?
A. A price ceiling causes a shortage if the ceiling price is above the equilibrium price B. A price floor causes a surplus if the price floor is below the equilibrium price C. Price ceilings and price floors result in a misallocation of resources D. Price floors above equilibrium cause a shortage
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Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and producers surplus P
S
CS P c PS Q e D Q
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Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and producers surplus P
S
CS Price FLOOR P c PS
DEADWEIGHT LOSS The Lost CS and PS.
INEFFICIENT!
Q floor Q e D Q
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Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and producers surplus P
S
CS P c PS Q e D Q
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Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and producers surplus P
S
P c Price CEILING CS PS Q ceiling Q e
DEADWEIGHT LOSS The Lost CS and PS.
INEFFICIENT!
D Q
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#2 Import Quotas
A quota is a limit on number of imports. The government sets the maximum amount that can come into the country.
Purpose:
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To protect domestic producers from a cheaper world price.
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To prevent domestic unemployment
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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 This graphs show the domestic world price (P W ) 6. If the government sets a quota on imports of supply and demand for grain. The letters represent area.
Q 4 - Q 2, what happens to CS and PS?
#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:
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Agriculture (to prevent famine)
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Pharmaceutical Companies
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Environmentally Safe Vehicles
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FAFSA
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Result of Subsidies to Corn Producers Price of Corn S S Subsidy P e P 1 Price Down Quantity Up Everyone Wins, Right?
o Q e Q 1 D Q Quantity of Corn
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#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:
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Cigarettes “sin tax”
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Alcohol “sin tax”
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Tariffs on imported goods
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Environmentally Unsafe Products
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Etc.
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$5 $4 $3 $2 $1 Supply Schedule P Qs 140 120 100 80 60
Excise Taxes
P $5 Government sets a $2 per unit tax on Cigarettes S 4 3 2 1 D o 40 60 80 100 120 140 Q
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Supply Schedule P $5 $7 $4 $6 $3 $5 $2 $4 $1 $3 Qs 140 120 100 80 60
Excise Taxes
P $5 Government sets a $2 per unit tax on Cigarettes S 4 3 2 1 D o 40 60 80 100 120 140 Q
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Excise Taxes
S Tax Supply Schedule P $5 $7 $4 $6 $3 $5 $2 $4 $1 $3 Qs 140 120 100 80 60 P $5 4 3 2 1 S Tax is the vertical distance between supply curves o 40 60 80 100 120 140 D Q
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