fv8 - gov intervention

AP Microeconomics Unit 2 – Supply and Demand: The Effects of Government Intervention in Markets

Page 1: Introduction to Government Intervention

  • Definition of Markets

    • Markets are structures that connect sellers and buyers.

  • Role of Government

    • The government influences markets through:

      • Price controls (ceilings and floors)

      • Excise taxes (per-unit taxes)

Page 2: Price Controls

Price Ceilings

  • Definition: A maximum price set by the government.

  • Example: Rent control.

  • Effectiveness: Only effective if set below the equilibrium price.

    • Leads to:

      • Shortage: Lower quantity supplied and higher quantity demanded.

Price Floors

  • Definition: A minimum price set by the government.

  • Example: Minimum wage.

  • Effectiveness: Only effective if set above the equilibrium price.

    • Leads to:

      • Surplus: Higher quantity supplied than demanded, potentially reducing market efficiency.

Page 3: Non-Effective Price Controls

  • Understanding Effectiveness: Price controls are ineffective if they do not exclude the equilibrium price.

  • Importance for Exams: Recognizing non-effective price controls is crucial for AP exam questions.

Page 4: Excise Taxes and Tax Incidence

Taxation Overview

  • Types of Taxes:

    • Excise Tax: A per-unit tax on production.

    • Lump-Sum Tax: A fixed tax amount, independent of quantity produced.

Graphing Excise Taxes

  • Impact on Supply Curve: Excise taxes shift the supply curve to the left, increasing production costs.

  • Components of Tax Burden:

    • Consumer surplus (CS)

    • Producer surplus (PS)

    • Tax revenue (rectangle B+D)

    • Deadweight loss (triangle C+F)

Page 5: Understanding Tax Incidence

  • Tax Burden Distribution: Both consumers and producers share the tax burden.

  • Elasticity Impact: The distribution of tax burden depends on the elasticity of demand and supply.

Page 6: Elasticity and Tax Incidence

  • Key Concepts:

    • Elastic Demand: Producers bear more tax burden.

    • Inelastic Demand: Consumers bear more tax burden.

  • Acronym for Remembering: EPIC

    • Elastic demand → Producers bear burden.

    • Inelastic demand → Consumers bear burden.

Page 7: Key Terms to Review

  • Consumer Surplus: Difference between what consumers are willing to pay and what they actually pay.

  • Deadweight Loss: Loss of economic efficiency when equilibrium is not achieved.

  • Elasticity of Demand and Supply: Measures responsiveness of quantity demanded or supplied to price changes.

Page 8: Additional Key Terms

  • Excise Taxes: Specific taxes on certain goods to discourage consumption and generate revenue.

  • Government Intervention: Actions taken by the government to regulate or correct market outcomes.

  • Lump-Sum Tax: Fixed tax amount that does not vary with economic behavior.

  • Minimum Wage: Lowest legal salary set by the government to ensure a basic standard of living.

Page 9: Market Dynamics

  • Producer Surplus: Difference between what producers are willing to accept and what they receive.

  • Shortage: Occurs when demand exceeds supply at a given price.

  • Surplus: Occurs when supply exceeds demand at a given price.

  • Tax Incidence: Analysis of who bears the burden of a tax and how it affects economic welfare.