Microeconomics: Chapter 6

Intervention

• changes distribution of surplus (efficiency maximizes total surplus)

• Encourages and discourages consumption

• Corrects market failures

Price control

A regulation that sets a maximum or minimum legal price for a particular good when the market shifts

• prevents market from reaching a new equilibrium

Price ceiling

A maximum legal price that a good can be sold at to ensure people can afford basic necessities

How does a price ceiling impact quantity demanded and supplied?

• the lower the price the higher the quantity demanded and lower the quantity supplied

• If its below the equilibrium price it creates a shortage

Welfare effects

These are changes in the economic well-being of market participants

EX: deadweight loss

Non binding price ceilings

If the ceiling is set ABOVE the equilibrium price bc its not restricting buyers and sellers behavior

Price floor

A minimum legal price at which a good can be sold to guarantee a minimum income in risky businesses

EX: farming/agricultural goods

How does a price floor impact quantity demanded and supplied?

• When the price floor is ABOVE the equilibrium price it causes a surplus

Non binding price floor

If the price ceiling is BELOW the equilibrium

How do taxes impact sellers?

• Supply decreases

• Demand stays constant

• Equilibrium price rises

• Quantity demanded falls

How do taxes impact buyers?

• supply stays constant

• Demand decreases

• Equilibrium price and quantity fall

Tax wedge

Price paid by buyers - price paid by sellers = tax

Government tax revenue

Tax x Quantity post tax

Tax incidence

The relative tax burden on buyers and sellers

Subsidy

A requirement that the government pays an extra amount to producers or consumers of a good

What are the impacts of subsidies on sellers?

• Supply increases

• Demand stays constant

• Equilibrium price decrease

• Quantity demanded increases

How do subsidies affect buyers?

• supply stays constant

• Demand increases

• Equilibrium price and quantity increases

Formula for how much the government pays

subsidy amount x new equilibrium quantity