Supply,Demand and
Government Policies
Chapter 6
Importance of
Supply-Demand Analysis
A little knowledge goes a long way:
Price Control,Taxation and other policies.
Market welfare,Normative Analysis
International Trade
Externality (Market Failure)
Market Power (Market Failure)
Other markets,Financial Market,Labor Market.
Macroeconomics
Supply,Demand and
Government Policies
In a free,unregulated market system,
market forces establish equilibrium prices
and exchange quantities.
While equilibrium conditions may be
efficient,it may be true that not everyone
is satisfied,
One of the roles of economists is to use
their theories to assist in the development
of policies.
Price Control…
Are usually enacted when policymakers
believe the market price is unfair to buyers
or sellers,
Result in government-created price
ceilings and floors,
Price Ceilings & Price Floors
Price Ceiling
A legally established maximum price at
which a good can be sold,
Price Floor
A legally established minimum price at
which a good can be sold.
Price Ceilings
Two outcomes are possible when the
government imposes a price ceiling:
The price ceiling is not binding if set above
the equilibrium price,
The price ceiling is binding if set below the
equilibrium price,leading to a shortage,
A Price Ceiling That Is Not Binding...
$4
3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
Price
ceiling
Equilibrium
price
100
Equilibrium
quantity
A Price Ceiling That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
2
Demand
Supply
Equilibrium
price
Price
ceiling
Shortage
125
Quantity
demanded
75
Quantity
supplied
Effects of Price Ceilings
A binding price ceiling creates,.,
…shortages because Q D > QS.
– Example,Gasoline shortage of the 1970s
… nonprice rationing
– Examples,Long lines,Discrimination by
sellers
Lines at the Gas Pump
In 1973 OPEC raised the price of
crude oil in world markets,Because
crude oil is the major input used to
make gasoline,the higher oil prices
reduced the supply of gasoline.
What was responsible for the
long gas lines?
Economists blame government
regulations that limited the price oil
companies could charge for gasoline.
The Price Ceiling on Gasoline
Is Binding...
P1
Quantity of
Gasoline0
Price of
Gasoline
Q1
Demand
S1
Price
ceiling
S2 2,…but when
supply falls...
P2
3,…the price
ceiling becomes
binding...4,…resulting in
a shortage.
Rent Control
Rent controls are ceilings placed on the
rents that landlords may charge their
tenants.
The goal of rent control policy is to help
the poor by making housing more
affordable.
One economist called rent control,the
best way to destroy a city,other than
bombing.”
Rent Control in the Short Run...
Quantity of
Apartments0
Rental
Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Supply and
demand for
apartments are
relatively
inelastic
Rent Control in the Long Run...
Quantity of
Apartments0
Rental
Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Because the supply
and demand for
apartments are
more elastic...
…rent control
causes a large
shortage
Price Floors
When the government imposes a price
floor,two outcomes are possible.
The price floor is not binding if set below
the equilibrium price.
The price floor is binding if set above the
equilibrium price,leading to a surplus,
A Price Floor That Is Not Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
100
Equilibrium
quantity
Equilibrium
price
Demand
Supply
Price
floor2
A Price Floor That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Equilibrium
price
Demand
Supply
Price floor$4
120
Quantity
supplied
80
Quantity
demanded
Surplus
Effects of a Price Floor
A price floor prevents supply and demand
from moving toward the equilibrium price
and quantity.
When the market price hits the floor,it can
fall no further,and the market price equals
the floor price,
Effects of a Price Floor
A binding price floor causes,,,
…a surplus because Q S >QD,
…nonprice rationing is an alternative
mechanism for rationing the good,using
discrimination criteria.
Examples,The minimum wage,
Agricultural price supports
The Minimum Wage
An important example of a price floor is
the minimum wage,
Minimum wage laws dictate the lowest
price possible for labor that any employer
may pay.
The Minimum Wage
Quantity of
Labor
0
Wage
Equilibrium
wage
Labor
demand
Labor
supply
A Free Labor Market
Equilibrium
employment
Minimum
wage
The Minimum Wage
Quantity of
Labor
0
Wage
Labor
demand
Labor
supply
Quantity
supplied
Quantity
demanded
Labor surplus
(unemployment)
A Labor Market with a
Minimum Wage
Taxes
Governments levy taxes to raise revenue
for public projects,
Tax incidence is the study of who bears
the burden of a tax,
Taxes result in a change in market
equilibrium.
Buyers pay more and sellers receive less,
regardless of whom the tax is levied on,
What are some potential
Impacts of taxes
Taxes discourage market activity.
When a good is taxed,the quantity sold is
smaller,
Buyers and sellers share the tax burden.
Impact of a 50￠ Tax Levied on
Buyers...
3.00
Quantity of
Ice-Cream Cones0
Price of
Ice-Cream
Cone
100
D1
Supply,S1
A tax on buyers
shifts the demand
curve downward
by the size of
the tax ($0.50).
D2
3.00
Quantity of
Ice-Cream Cones0
Price of
Ice-Cream
Cone
10090
$3.30
Price
buyers
pay
D1
D2
Equilibrium
with tax
Supply,S1
Equilibrium without tax
Impact of a 50￠ Tax Levied on
Buyers...
2.80
Price
sellers
receive
Price
without
tax
Tax ($0.50)
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
10090
S1
S2
Demand,D1
Impact of a 50￠ Tax on Sellers...
Price
without
tax
2.80
Price
sellers
receive
$3.30
Price
buyers
pay
Equilibrium without tax
A tax on sellers
shifts the supply
curve upward by
the amount of the
tax ($0.50).Tax ($0.50)
Equilibrium
with tax
A Payroll Tax
Quantity of
Labor
0
Wage
Wage
without tax
Labor
demand
Labor
supply
Tax wedge
Wage firms
pay
Wage workers
receive
The Incidence of Tax
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.
Elastic Supply,Inelastic Demand
Quantity0
Price
Demand
Supply
Tax
1,When supply is more
elastic than demand...
2.,..the
incidence of the
tax falls more
heavily on
consumers...
3.,..than on
producers.
Price without tax
Price buyers pay
Price sellers receive
Inelastic Supply,Elastic Demand
Quantity0
Price
Demand
Supply
Price without tax
Tax
1,When demand is more
elastic than supply...
2.,..the
incidence of
the tax falls more
heavily on producers...
3.,..than on consumers.
Price buyers pay
Price sellers receive
So,how is the burden of the tax
divided?
The burden of a tax
falls more heavily
on the side of the
market that is less
elastic.
Summary
Price controls include price ceilings and
price floors.
A price ceiling is a legal maximum on the
price of a good or service,An example is
rent control.
A price floor is a legal minimum on the
price of a good or a service,An example
is the minimum wage.
Summary
Taxes are used to raise revenue for public
purposes.
When the government levies a tax on a
good,the equilibrium quantity of the good
falls.
A tax on a good places a wedge between
the price paid by buyers and the price
received by sellers.
Summary
The incidence of a tax refers to who bears
the burden of a tax.
The incidence of a tax does not depend on
whether the tax is levied on buyers or
sellers.
The incidence of the tax depends on the
price elasticities of supply and demand.
Exercise #6
Problems and Applications
– #2,#6,#8,#11
经济学可以更有趣
为什么 1978年美国解除航空业的价格管制后空姐的外貌普遍降低了？
1980年代，为什么大多数航空公司都呼吁政府进行价格管制？
Government Policies
Chapter 6
Importance of
Supply-Demand Analysis
A little knowledge goes a long way:
Price Control,Taxation and other policies.
Market welfare,Normative Analysis
International Trade
Externality (Market Failure)
Market Power (Market Failure)
Other markets,Financial Market,Labor Market.
Macroeconomics
Supply,Demand and
Government Policies
In a free,unregulated market system,
market forces establish equilibrium prices
and exchange quantities.
While equilibrium conditions may be
efficient,it may be true that not everyone
is satisfied,
One of the roles of economists is to use
their theories to assist in the development
of policies.
Price Control…
Are usually enacted when policymakers
believe the market price is unfair to buyers
or sellers,
Result in government-created price
ceilings and floors,
Price Ceilings & Price Floors
Price Ceiling
A legally established maximum price at
which a good can be sold,
Price Floor
A legally established minimum price at
which a good can be sold.
Price Ceilings
Two outcomes are possible when the
government imposes a price ceiling:
The price ceiling is not binding if set above
the equilibrium price,
The price ceiling is binding if set below the
equilibrium price,leading to a shortage,
A Price Ceiling That Is Not Binding...
$4
3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Demand
Supply
Price
ceiling
Equilibrium
price
100
Equilibrium
quantity
A Price Ceiling That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
2
Demand
Supply
Equilibrium
price
Price
ceiling
Shortage
125
Quantity
demanded
75
Quantity
supplied
Effects of Price Ceilings
A binding price ceiling creates,.,
…shortages because Q D > QS.
– Example,Gasoline shortage of the 1970s
… nonprice rationing
– Examples,Long lines,Discrimination by
sellers
Lines at the Gas Pump
In 1973 OPEC raised the price of
crude oil in world markets,Because
crude oil is the major input used to
make gasoline,the higher oil prices
reduced the supply of gasoline.
What was responsible for the
long gas lines?
Economists blame government
regulations that limited the price oil
companies could charge for gasoline.
The Price Ceiling on Gasoline
Is Binding...
P1
Quantity of
Gasoline0
Price of
Gasoline
Q1
Demand
S1
Price
ceiling
S2 2,…but when
supply falls...
P2
3,…the price
ceiling becomes
binding...4,…resulting in
a shortage.
Rent Control
Rent controls are ceilings placed on the
rents that landlords may charge their
tenants.
The goal of rent control policy is to help
the poor by making housing more
affordable.
One economist called rent control,the
best way to destroy a city,other than
bombing.”
Rent Control in the Short Run...
Quantity of
Apartments0
Rental
Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Supply and
demand for
apartments are
relatively
inelastic
Rent Control in the Long Run...
Quantity of
Apartments0
Rental
Price of
Apartment
Demand
Supply
Controlled rent
Shortage
Because the supply
and demand for
apartments are
more elastic...
…rent control
causes a large
shortage
Price Floors
When the government imposes a price
floor,two outcomes are possible.
The price floor is not binding if set below
the equilibrium price.
The price floor is binding if set above the
equilibrium price,leading to a surplus,
A Price Floor That Is Not Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
100
Equilibrium
quantity
Equilibrium
price
Demand
Supply
Price
floor2
A Price Floor That Is Binding...
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
Equilibrium
price
Demand
Supply
Price floor$4
120
Quantity
supplied
80
Quantity
demanded
Surplus
Effects of a Price Floor
A price floor prevents supply and demand
from moving toward the equilibrium price
and quantity.
When the market price hits the floor,it can
fall no further,and the market price equals
the floor price,
Effects of a Price Floor
A binding price floor causes,,,
…a surplus because Q S >QD,
…nonprice rationing is an alternative
mechanism for rationing the good,using
discrimination criteria.
Examples,The minimum wage,
Agricultural price supports
The Minimum Wage
An important example of a price floor is
the minimum wage,
Minimum wage laws dictate the lowest
price possible for labor that any employer
may pay.
The Minimum Wage
Quantity of
Labor
0
Wage
Equilibrium
wage
Labor
demand
Labor
supply
A Free Labor Market
Equilibrium
employment
Minimum
wage
The Minimum Wage
Quantity of
Labor
0
Wage
Labor
demand
Labor
supply
Quantity
supplied
Quantity
demanded
Labor surplus
(unemployment)
A Labor Market with a
Minimum Wage
Taxes
Governments levy taxes to raise revenue
for public projects,
Tax incidence is the study of who bears
the burden of a tax,
Taxes result in a change in market
equilibrium.
Buyers pay more and sellers receive less,
regardless of whom the tax is levied on,
What are some potential
Impacts of taxes
Taxes discourage market activity.
When a good is taxed,the quantity sold is
smaller,
Buyers and sellers share the tax burden.
Impact of a 50￠ Tax Levied on
Buyers...
3.00
Quantity of
Ice-Cream Cones0
Price of
Ice-Cream
Cone
100
D1
Supply,S1
A tax on buyers
shifts the demand
curve downward
by the size of
the tax ($0.50).
D2
3.00
Quantity of
Ice-Cream Cones0
Price of
Ice-Cream
Cone
10090
$3.30
Price
buyers
pay
D1
D2
Equilibrium
with tax
Supply,S1
Equilibrium without tax
Impact of a 50￠ Tax Levied on
Buyers...
2.80
Price
sellers
receive
Price
without
tax
Tax ($0.50)
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
10090
S1
S2
Demand,D1
Impact of a 50￠ Tax on Sellers...
Price
without
tax
2.80
Price
sellers
receive
$3.30
Price
buyers
pay
Equilibrium without tax
A tax on sellers
shifts the supply
curve upward by
the amount of the
tax ($0.50).Tax ($0.50)
Equilibrium
with tax
A Payroll Tax
Quantity of
Labor
0
Wage
Wage
without tax
Labor
demand
Labor
supply
Tax wedge
Wage firms
pay
Wage workers
receive
The Incidence of Tax
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.
Elastic Supply,Inelastic Demand
Quantity0
Price
Demand
Supply
Tax
1,When supply is more
elastic than demand...
2.,..the
incidence of the
tax falls more
heavily on
consumers...
3.,..than on
producers.
Price without tax
Price buyers pay
Price sellers receive
Inelastic Supply,Elastic Demand
Quantity0
Price
Demand
Supply
Price without tax
Tax
1,When demand is more
elastic than supply...
2.,..the
incidence of
the tax falls more
heavily on producers...
3.,..than on consumers.
Price buyers pay
Price sellers receive
So,how is the burden of the tax
divided?
The burden of a tax
falls more heavily
on the side of the
market that is less
elastic.
Summary
Price controls include price ceilings and
price floors.
A price ceiling is a legal maximum on the
price of a good or service,An example is
rent control.
A price floor is a legal minimum on the
price of a good or a service,An example
is the minimum wage.
Summary
Taxes are used to raise revenue for public
purposes.
When the government levies a tax on a
good,the equilibrium quantity of the good
falls.
A tax on a good places a wedge between
the price paid by buyers and the price
received by sellers.
Summary
The incidence of a tax refers to who bears
the burden of a tax.
The incidence of a tax does not depend on
whether the tax is levied on buyers or
sellers.
The incidence of the tax depends on the
price elasticities of supply and demand.
Exercise #6
Problems and Applications
– #2,#6,#8,#11
经济学可以更有趣
为什么 1978年美国解除航空业的价格管制后空姐的外貌普遍降低了？
1980年代，为什么大多数航空公司都呼吁政府进行价格管制？
