Chapter 6: Supply, Demand, and Government Policies

price ceiling

legislated maximum for the price of a good

price floor

legislated minimum for the price of a good

when is the price ceiling binding/nonbinding?

binding when price ceiling < equilibrium

nonbinding when price ceiling > equilibrium

what does a binding price ceiling cause

shortage

when is a floor binding/nonbinding?

binding when price floor > eq

nonbinding when price floor < eq

what does a binding price floor cause

surplus

do price controls help the people they aim to help?

yes, sometimes but they can also hurt people and there are other ways to help people instead of controlling prices i.e. wage and housing subsidies

tax incidence

the study of how the burden of a tax is distributed among the various people in the economy

2 lessons about taxes

taxes discourage market activity (when a good is taxed, the quant sold is smaller in the new equilibrium)

buyers and sellers share the tax burden (buyers pay more and sellers receive less)

**if both are same elasticity, then they share the burden equally

rule for which side tax burden falls on

tax burden falls more heavily on the side of the market that is less elastic (steeper line)