SlideShare ist ein Scribd-Unternehmen logo
1 von 28
1
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
2
Supply, demand, and government
• In a free, unregulated market system, market forces
establish equilibrium prices and quantities
• The market equilibrium may be efficient, but it may
not leave everyone satisfied
• Those who consider themselves to be losing from the
market outcomes will ask for government to intervene
in the market
• The government intervention in the markets may take
several ways, depending on the circumstances
• We will look at two different cases of direct
government involvement in markets:
– Price controls
– Taxes levied on goods and services
3
Price controls
• Price control: government sets an upper or lower limit
(or both) to the price of good or service
• Price controls are often used in many countries
• Price controls are enacted by governments because
there is a demand for them from some sections of the
public
• Who, either as buyers or sellers feel that the existing
market price is unfair to them
• We will distinguish between two types of controls
• 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
4
Price ceilings
• Price ceilings limit the maximum price that sellers can
charge to their customers
• In other words, market price can be lower but can not
be higher than the price fixed by government
• Two outcomes are possible when the government
imposes a price ceiling
• The price ceiling is not binding if it is set above the
equilibrium price
• It will have no impact on the market
• The price ceiling is binding if it is set below the
equilibrium price
• It will lead to shortages in the market as demand
exceeds supply at that price
A price ceiling that is not binding
$4
3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
100
Equilibrium
quantity
Price
ceiling
Equilibrium
price
Demand
Supply
A price ceiling that is binding
$3
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
2
Demand
Supply
Price
ceiling
Shortage
75
Quantity
supplied
125
Quantity
demanded
Equilibrium
price
7
Effects of price ceilings
• A price ceiling prevents the price to rise further even if
demand is high
• A binding price ceiling creates shortages because QD
> QS.
• Example: there was a margarine shortage in Turkey
during 1978-79 crisis because the price was fixed too
low to cover the costs of producers
• Shortages result in non-price rationing such as long
lines in front of the shops, discrimination by sellers
and as a rule the formation of a “black market”
• In Turkey there was a black market for dollars before
1980s because the government had fixed the
exchange rate below the market equilibrium rate
8
(a) The Price Ceiling on Gasoline Is Not Binding
Quantity of
Gasoline
0
Price of
Gasoline
(b) The Price Ceiling on Gasoline Is Binding
P 2
P 1
Quantity of
Gasoline
0
Price of
Gasoline
Q 1
Q D
Demand
S 1
S 2
Price ceiling
Q S
4. ...
resulting
in a
shortage.
3. ...the price
ceiling becomes
binding...
2. ...but when
supply falls...
1. Initially,
the price
ceiling
is not
binding... Price ceiling
P 1
Q 1
Demand
Supply, S 1
Price ceiling on gasoline
A fall in supply turns an unbinding price ceiling
into a binding ceiling and causes shortages of
gasoline
9
(a) Rent Control in the Short Run
(supply and demand are inelastic)
(b) Rent Control in the Long Run
(supply and demand are elastic)
Quantity of
Apartments
0
Supply
Controlled rent
Shortage
Rental
Price of
Apartment
0
Rental
Price of
Apartment
Quantity of
Apartments
Demand
Supply
Controlled rent
Shortage
Demand
Rent control: short and long run
Controling rents cause bigger shortages in the
long run because new construction becomes
unattractive, reducing long run supply
10
Price floors
• Price floors set the minimum price that buyers must
pay for a product
• Market price can be higher but not below the price set
by the government
• When the government imposes a price floor, again
two outcomes are possible
• The price floor is not binding if it is set below the
equilibrium price
• It has no effect on the market
• The price floor is binding if it is set above the
equilibrium price
• It leads to a surplus because demand is less than
supply at that price
11
A price floor that is not binding
$3
2
Quantity of
Ice-Cream
Cones
0
Price of
Ice-Cream
Cone
100
Equilibrium
quantity
Price
floor
Equilibrium
price
Demand
Supply
12
A price floor that is binding
$4
Quantity of
Ice Cream
Cones
0
Price of
Ice Cream
Cones
3
Demand
Supply
Price floor
80
Quantity
demanded
120
Quantity
Supplied
Equilibrium
price
Surplus
13
Effects of a price floor
• A price floor prevents price to fall even if demand is
very low
• When the market price hits the floor, it can fall no
further, and the market price equals the floor price
• A binding price floor causes a surplus of supply over
demand because at that price
QS > QD.
• Agricultural support prices are typical examples
• When set above market levels, they result in large
unsold stocks (tobacco?)
• Minimum wage laws also set price floors for wages
• Binding minimum wages prevent wages to go down
and therefore cause unemployment
14
(a) A Free Labor Market
Quantity of
Labor
0
Wage
Equilibrium
employment
(b) A Labor Market with a Binding Minimum Wage
Quantity of
Labor
0
Wage
Quantity
demanded
Quantity
supplied
Labor
supply
Labor
demand
Minimum
wage
Labor surplus
(unemployment)
Equilibrium
wage
Labor
demand
Labor
supply
Minumum wage law and employment
Minimum wage legislation increases both the real
wage of employed and the number of unemployed
15
Taxes: impact
• Taxes levied on goods and services are called indirect
taxes
• The amount of tax fixed by the government is added to
the price and paid everytime the good is sold
• Taxes discourage market activity
• When a good is taxed, the quantity sold is smaller
• Buyers and sellers share the tax burden
• 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
Impact of a 50¢ tax on buyers
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
100
D1
Supply, S1
Impact of a 50¢ tax on buyers
$3.30
3.00
2.80
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
Price
sellers
receive
100
90
Equilibrium
with tax
Equilibrium without tax
Price
buyers
pay
D1
D2
Supply, S1
Impact of a 50¢ tax on sellers
3.00
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
100
S1
Demand, D1
Impact of a 50¢ tax on sellers
$3.30
3.00
2.80
Quantity of
Ice-Cream Cones
0
Price of
Ice-Cream
Cone
Price
without
tax
Price
sellers
receive
100
90
Equilibrium
with tax
Equilibrium without tax
Tax ($0.50)
Price
buyers
pay
S1
S2
Demand, D1
A tax on sellers
shifts the supply
curve upward by
the amount of
the tax ($0.50).
20
The incidence of tax
• Tax incidence tries to establish who pays the tax in the
end?
• In other words, in what proportions is the burden of the
tax divided between buyers and sellers?
• Alternatively, how do the effects of taxes on sellers
compare to those levied on buyers?
• This is an opportunity for us to see how the measure
of elasticity can be used in economics
• Because the answers to these questions depends on
the elasticity of demand and the elasticity of supply.
• We shall show that the burden of a tax falls more
heavily on the side of the market that is less elastic
21
Elasticity and tax incidence
• Elasticity enters the picture because total revenue in
the market depends on the price elasticity of demand
and price elasticity of supply
• We can distinguish among three major cases
– If demand is inelastic while supply is elastic, then a
larger share of the tax will fall on the buyers
– If demand is elastic while supply is inelestic, then a
larger share of the tax will fall on the sellers
– If demand and supply are unit elastic, buyers and
seller will share the tax burden equally
• The government is able to target correctly those whom
it wishes to pay the tax when the price elasticities of
demand and supply are known
22
Elastic supply, inelastic demand
Quantity
0
Price
Demand
Supply
Price without tax
23
Elastic supply, inelastic demand
Quantity
0
Price
Demand
Supply
Tax
2. ...the
incidence of the
tax falls more
heavily on
consumers...
1. When supply is more
elastic than demand...
3. ...than on
producers.
Price sellers receive
Price buyers pay
Price without tax
24
Inelastic supply, elastic demand
Quantity
0
Price
Demand
Supply
Price without tax
25
Inelastic supply, elastic demand
Price without tax
Quantity
0
Price
Demand
Supply
Tax
Price sellers receive
Price buyers pay
2. ...the
incidence of
the tax falls more
heavily on producers...
3. ...than on consumers.
1. When demand is more
elastic than supply...
26
Taxing luxuries or necessities?
• There is always a demand from the public to tax
luxuries but not necessities
• Taxing goods that are considered luxuries is popular
both with the public and governments
• Unfortunately luxury goods usually have high price
elasticity of demand (bigger than 1)
• Therefore taxes reduce the consumption of luxuries
• Tax revenue is much lower than expected
• In turn, necessities have low price elasticity of demand
(smaller than 1)
• And yield high tax revenues to the government
27
28
Conclusion
• The economy is governed by two kinds of laws:
– The laws of supply and demand.
– The laws enacted by government
• Prices can be controled by ceilings or floors
• Price ceilings cause shortages and black market
• Price floors result in surpluses and unsold stoks held
by the government
• Taxes raise revenue to the government
• Taxes create new price equilibriums in which buyers
and sellers share the tax
• The incidence of the tax depends on the price
elasticity of demand and supply
• Necessities are taxed to get more revenue

Weitere ähnliche Inhalte

Ähnlich wie Demand, supply and government policies nnn.pptx

Introduction to economics
Introduction to economicsIntroduction to economics
Introduction to economicsmusanaseer1
 
4. Government Policies.pptx
4. Government Policies.pptx4. Government Policies.pptx
4. Government Policies.pptxtrew4
 
demand and supply.pptx
demand and supply.pptxdemand and supply.pptx
demand and supply.pptxlisha210
 
Supply, Demand, and Government Policies
Supply, Demand, and Government PoliciesSupply, Demand, and Government Policies
Supply, Demand, and Government PoliciesChris Thomas
 
Indirect taxes, subsidies and price controls
Indirect taxes, subsidies and price controlsIndirect taxes, subsidies and price controls
Indirect taxes, subsidies and price controlsSuresh Madhavan
 
supply,demand, and government policies
supply,demand, and government policiessupply,demand, and government policies
supply,demand, and government policiesitmamul akwan
 
Monday Lecture 2 Choices 2022.pdf
Monday Lecture 2 Choices 2022.pdfMonday Lecture 2 Choices 2022.pdf
Monday Lecture 2 Choices 2022.pdfLaiZhou1
 
price ceiling and flooring and taxes
price ceiling and flooring and taxesprice ceiling and flooring and taxes
price ceiling and flooring and taxesDISHARAO15
 
thecostsoftaxation-150228122134-conversion-gate01.pdf
thecostsoftaxation-150228122134-conversion-gate01.pdfthecostsoftaxation-150228122134-conversion-gate01.pdf
thecostsoftaxation-150228122134-conversion-gate01.pdfchhornqw
 
Applications of Demand & Supply Elasticity.pptx
Applications of Demand & Supply Elasticity.pptxApplications of Demand & Supply Elasticity.pptx
Applications of Demand & Supply Elasticity.pptxAkashdeepMukherjee2
 
Chapter 6 presentation
Chapter 6 presentationChapter 6 presentation
Chapter 6 presentationkrobinette
 
3. Principles of economics- Market supply and demand.ppt
3. Principles of economics- Market supply and demand.ppt3. Principles of economics- Market supply and demand.ppt
3. Principles of economics- Market supply and demand.pptBlackMoon54
 
Week 3 markets in action
Week 3 markets in actionWeek 3 markets in action
Week 3 markets in actionAli Madridista
 
Prinecomi lectureppt ch06
Prinecomi lectureppt ch06Prinecomi lectureppt ch06
Prinecomi lectureppt ch06rsvanwassenhove
 
3. Unit-Three.ppt
3. Unit-Three.ppt3. Unit-Three.ppt
3. Unit-Three.pptObsa2
 
Chapter 4. (1).pptx
Chapter 4. (1).pptxChapter 4. (1).pptx
Chapter 4. (1).pptxcabirhacin
 

Ähnlich wie Demand, supply and government policies nnn.pptx (20)

Introduction to economics
Introduction to economicsIntroduction to economics
Introduction to economics
 
Supply demand
Supply demandSupply demand
Supply demand
 
4. Government Policies.pptx
4. Government Policies.pptx4. Government Policies.pptx
4. Government Policies.pptx
 
demand and supply.pptx
demand and supply.pptxdemand and supply.pptx
demand and supply.pptx
 
Supply, Demand, and Government Policies
Supply, Demand, and Government PoliciesSupply, Demand, and Government Policies
Supply, Demand, and Government Policies
 
Indirect taxes, subsidies and price controls
Indirect taxes, subsidies and price controlsIndirect taxes, subsidies and price controls
Indirect taxes, subsidies and price controls
 
Supply and demand
Supply and demandSupply and demand
Supply and demand
 
supply,demand, and government policies
supply,demand, and government policiessupply,demand, and government policies
supply,demand, and government policies
 
Monday Lecture 2 Choices 2022.pdf
Monday Lecture 2 Choices 2022.pdfMonday Lecture 2 Choices 2022.pdf
Monday Lecture 2 Choices 2022.pdf
 
price ceiling and flooring and taxes
price ceiling and flooring and taxesprice ceiling and flooring and taxes
price ceiling and flooring and taxes
 
thecostsoftaxation-150228122134-conversion-gate01.pdf
thecostsoftaxation-150228122134-conversion-gate01.pdfthecostsoftaxation-150228122134-conversion-gate01.pdf
thecostsoftaxation-150228122134-conversion-gate01.pdf
 
Demand Theory.pptx
Demand Theory.pptxDemand Theory.pptx
Demand Theory.pptx
 
Applications of Demand & Supply Elasticity.pptx
Applications of Demand & Supply Elasticity.pptxApplications of Demand & Supply Elasticity.pptx
Applications of Demand & Supply Elasticity.pptx
 
Chapter 6 presentation
Chapter 6 presentationChapter 6 presentation
Chapter 6 presentation
 
3. Principles of economics- Market supply and demand.ppt
3. Principles of economics- Market supply and demand.ppt3. Principles of economics- Market supply and demand.ppt
3. Principles of economics- Market supply and demand.ppt
 
Week 3 markets in action
Week 3 markets in actionWeek 3 markets in action
Week 3 markets in action
 
Prinecomi lectureppt ch06
Prinecomi lectureppt ch06Prinecomi lectureppt ch06
Prinecomi lectureppt ch06
 
3. Unit-Three.ppt
3. Unit-Three.ppt3. Unit-Three.ppt
3. Unit-Three.ppt
 
Equilibrium.ppt
Equilibrium.pptEquilibrium.ppt
Equilibrium.ppt
 
Chapter 4. (1).pptx
Chapter 4. (1).pptxChapter 4. (1).pptx
Chapter 4. (1).pptx
 

Mehr von ADELYNEHERMOSO1

LOCAL POLITICS AND DEMOCRACY.pptx
LOCAL POLITICS AND DEMOCRACY.pptxLOCAL POLITICS AND DEMOCRACY.pptx
LOCAL POLITICS AND DEMOCRACY.pptxADELYNEHERMOSO1
 
Hermoso-PUBLIC POLICY FORMULATION.pptx
Hermoso-PUBLIC POLICY FORMULATION.pptxHermoso-PUBLIC POLICY FORMULATION.pptx
Hermoso-PUBLIC POLICY FORMULATION.pptxADELYNEHERMOSO1
 
Issues-and-Concerns-regarding-local-politics (1).pptx
Issues-and-Concerns-regarding-local-politics (1).pptxIssues-and-Concerns-regarding-local-politics (1).pptx
Issues-and-Concerns-regarding-local-politics (1).pptxADELYNEHERMOSO1
 
ANTECRISTO_public opinion_NEW.pptx
ANTECRISTO_public opinion_NEW.pptxANTECRISTO_public opinion_NEW.pptx
ANTECRISTO_public opinion_NEW.pptxADELYNEHERMOSO1
 
LOCAL POLITICS AND DEMOCRACY.pdf
LOCAL POLITICS AND DEMOCRACY.pdfLOCAL POLITICS AND DEMOCRACY.pdf
LOCAL POLITICS AND DEMOCRACY.pdfADELYNEHERMOSO1
 

Mehr von ADELYNEHERMOSO1 (7)

LOCAL POLITICS AND DEMOCRACY.pptx
LOCAL POLITICS AND DEMOCRACY.pptxLOCAL POLITICS AND DEMOCRACY.pptx
LOCAL POLITICS AND DEMOCRACY.pptx
 
Hermoso-PUBLIC POLICY FORMULATION.pptx
Hermoso-PUBLIC POLICY FORMULATION.pptxHermoso-PUBLIC POLICY FORMULATION.pptx
Hermoso-PUBLIC POLICY FORMULATION.pptx
 
PPT.-Jonah-1.pptx
PPT.-Jonah-1.pptxPPT.-Jonah-1.pptx
PPT.-Jonah-1.pptx
 
Issues-and-Concerns-regarding-local-politics (1).pptx
Issues-and-Concerns-regarding-local-politics (1).pptxIssues-and-Concerns-regarding-local-politics (1).pptx
Issues-and-Concerns-regarding-local-politics (1).pptx
 
ANTECRISTO_public opinion_NEW.pptx
ANTECRISTO_public opinion_NEW.pptxANTECRISTO_public opinion_NEW.pptx
ANTECRISTO_public opinion_NEW.pptx
 
Civil-Society.pptx
Civil-Society.pptxCivil-Society.pptx
Civil-Society.pptx
 
LOCAL POLITICS AND DEMOCRACY.pdf
LOCAL POLITICS AND DEMOCRACY.pdfLOCAL POLITICS AND DEMOCRACY.pdf
LOCAL POLITICS AND DEMOCRACY.pdf
 

Kürzlich hochgeladen

MichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdfMichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdfmstarkes24
 
Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...
Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...
Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...Rahul Bedi
 
Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...
Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...
Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...Björn Rohles
 
FEXLE- Salesforce Field Service Lightning
FEXLE- Salesforce Field Service LightningFEXLE- Salesforce Field Service Lightning
FEXLE- Salesforce Field Service LightningFEXLE
 
Vendors of country report usefull datass
Vendors of country report usefull datassVendors of country report usefull datass
Vendors of country report usefull datassDilipParmar63
 
PitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for StartupsPitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for StartupsAlejandro Cremades
 
Constitution of Company Article of Association
Constitution of Company Article of AssociationConstitution of Company Article of Association
Constitution of Company Article of Associationseri bangash
 
What is social media.pdf Social media refers to digital platforms and applica...
What is social media.pdf Social media refers to digital platforms and applica...What is social media.pdf Social media refers to digital platforms and applica...
What is social media.pdf Social media refers to digital platforms and applica...AnaBeatriz125525
 
How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?Alejandro Cremades
 
HR and Employment law update: May 2024.
HR and Employment law update:  May 2024.HR and Employment law update:  May 2024.
HR and Employment law update: May 2024.FelixPerez547899
 
Cracking the Change Management Code Main New.pptx
Cracking the Change Management Code Main New.pptxCracking the Change Management Code Main New.pptx
Cracking the Change Management Code Main New.pptxWorkforce Group
 
Shoe Deodorizer Manufacturing Plant Project Report.pptx
Shoe Deodorizer Manufacturing Plant Project Report.pptxShoe Deodorizer Manufacturing Plant Project Report.pptx
Shoe Deodorizer Manufacturing Plant Project Report.pptxSmith Anderson
 
Special Purpose Vehicle (Purpose, Formation & examples)
Special Purpose Vehicle (Purpose, Formation & examples)Special Purpose Vehicle (Purpose, Formation & examples)
Special Purpose Vehicle (Purpose, Formation & examples)linciy03
 
The Ultimate Guide to IPTV App Development Process_ Step-By-Step Instructions
The Ultimate Guide to IPTV App Development Process_ Step-By-Step InstructionsThe Ultimate Guide to IPTV App Development Process_ Step-By-Step Instructions
The Ultimate Guide to IPTV App Development Process_ Step-By-Step InstructionsWHMCS Smarters
 
zidauu _business communication.pptx /pdf
zidauu _business  communication.pptx /pdfzidauu _business  communication.pptx /pdf
zidauu _business communication.pptx /pdfzukhrafshabbir
 
Revolutionizing Industries: The Power of Carbon Components
Revolutionizing Industries: The Power of Carbon ComponentsRevolutionizing Industries: The Power of Carbon Components
Revolutionizing Industries: The Power of Carbon ComponentsConnova AG
 
How to Maintain Healthy Life style.pptx
How to Maintain  Healthy Life style.pptxHow to Maintain  Healthy Life style.pptx
How to Maintain Healthy Life style.pptxrdishurana
 
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdfInnomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdfInnomantra
 
Potato Flakes Manufacturing Plant Project Report.pdf
Potato Flakes Manufacturing Plant Project Report.pdfPotato Flakes Manufacturing Plant Project Report.pdf
Potato Flakes Manufacturing Plant Project Report.pdfhostl9518
 
Creative Ideas for Interactive Team Presentations
Creative Ideas for Interactive Team PresentationsCreative Ideas for Interactive Team Presentations
Creative Ideas for Interactive Team PresentationsSlidesAI
 

Kürzlich hochgeladen (20)

MichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdfMichaelStarkes_UncutGemsProjectSummary.pdf
MichaelStarkes_UncutGemsProjectSummary.pdf
 
Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...
Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...
Unleash Data Power with EnFuse Solutions' Comprehensive Data Management Servi...
 
Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...
Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...
Meaningful Technology for Humans: How Strategy Helps to Deliver Real Value fo...
 
FEXLE- Salesforce Field Service Lightning
FEXLE- Salesforce Field Service LightningFEXLE- Salesforce Field Service Lightning
FEXLE- Salesforce Field Service Lightning
 
Vendors of country report usefull datass
Vendors of country report usefull datassVendors of country report usefull datass
Vendors of country report usefull datass
 
PitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for StartupsPitchBook’s Guide to VC Funding for Startups
PitchBook’s Guide to VC Funding for Startups
 
Constitution of Company Article of Association
Constitution of Company Article of AssociationConstitution of Company Article of Association
Constitution of Company Article of Association
 
What is social media.pdf Social media refers to digital platforms and applica...
What is social media.pdf Social media refers to digital platforms and applica...What is social media.pdf Social media refers to digital platforms and applica...
What is social media.pdf Social media refers to digital platforms and applica...
 
How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?How Do Venture Capitalists Make Decisions?
How Do Venture Capitalists Make Decisions?
 
HR and Employment law update: May 2024.
HR and Employment law update:  May 2024.HR and Employment law update:  May 2024.
HR and Employment law update: May 2024.
 
Cracking the Change Management Code Main New.pptx
Cracking the Change Management Code Main New.pptxCracking the Change Management Code Main New.pptx
Cracking the Change Management Code Main New.pptx
 
Shoe Deodorizer Manufacturing Plant Project Report.pptx
Shoe Deodorizer Manufacturing Plant Project Report.pptxShoe Deodorizer Manufacturing Plant Project Report.pptx
Shoe Deodorizer Manufacturing Plant Project Report.pptx
 
Special Purpose Vehicle (Purpose, Formation & examples)
Special Purpose Vehicle (Purpose, Formation & examples)Special Purpose Vehicle (Purpose, Formation & examples)
Special Purpose Vehicle (Purpose, Formation & examples)
 
The Ultimate Guide to IPTV App Development Process_ Step-By-Step Instructions
The Ultimate Guide to IPTV App Development Process_ Step-By-Step InstructionsThe Ultimate Guide to IPTV App Development Process_ Step-By-Step Instructions
The Ultimate Guide to IPTV App Development Process_ Step-By-Step Instructions
 
zidauu _business communication.pptx /pdf
zidauu _business  communication.pptx /pdfzidauu _business  communication.pptx /pdf
zidauu _business communication.pptx /pdf
 
Revolutionizing Industries: The Power of Carbon Components
Revolutionizing Industries: The Power of Carbon ComponentsRevolutionizing Industries: The Power of Carbon Components
Revolutionizing Industries: The Power of Carbon Components
 
How to Maintain Healthy Life style.pptx
How to Maintain  Healthy Life style.pptxHow to Maintain  Healthy Life style.pptx
How to Maintain Healthy Life style.pptx
 
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdfInnomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
Innomantra Viewpoint - Building Moonshots : May-Jun 2024.pdf
 
Potato Flakes Manufacturing Plant Project Report.pdf
Potato Flakes Manufacturing Plant Project Report.pdfPotato Flakes Manufacturing Plant Project Report.pdf
Potato Flakes Manufacturing Plant Project Report.pdf
 
Creative Ideas for Interactive Team Presentations
Creative Ideas for Interactive Team PresentationsCreative Ideas for Interactive Team Presentations
Creative Ideas for Interactive Team Presentations
 

Demand, supply and government policies nnn.pptx

  • 2. 2 Supply, demand, and government • In a free, unregulated market system, market forces establish equilibrium prices and quantities • The market equilibrium may be efficient, but it may not leave everyone satisfied • Those who consider themselves to be losing from the market outcomes will ask for government to intervene in the market • The government intervention in the markets may take several ways, depending on the circumstances • We will look at two different cases of direct government involvement in markets: – Price controls – Taxes levied on goods and services
  • 3. 3 Price controls • Price control: government sets an upper or lower limit (or both) to the price of good or service • Price controls are often used in many countries • Price controls are enacted by governments because there is a demand for them from some sections of the public • Who, either as buyers or sellers feel that the existing market price is unfair to them • We will distinguish between two types of controls • 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
  • 4. 4 Price ceilings • Price ceilings limit the maximum price that sellers can charge to their customers • In other words, market price can be lower but can not be higher than the price fixed by government • Two outcomes are possible when the government imposes a price ceiling • The price ceiling is not binding if it is set above the equilibrium price • It will have no impact on the market • The price ceiling is binding if it is set below the equilibrium price • It will lead to shortages in the market as demand exceeds supply at that price
  • 5. A price ceiling that is not binding $4 3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 100 Equilibrium quantity Price ceiling Equilibrium price Demand Supply
  • 6. A price ceiling that is binding $3 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 2 Demand Supply Price ceiling Shortage 75 Quantity supplied 125 Quantity demanded Equilibrium price
  • 7. 7 Effects of price ceilings • A price ceiling prevents the price to rise further even if demand is high • A binding price ceiling creates shortages because QD > QS. • Example: there was a margarine shortage in Turkey during 1978-79 crisis because the price was fixed too low to cover the costs of producers • Shortages result in non-price rationing such as long lines in front of the shops, discrimination by sellers and as a rule the formation of a “black market” • In Turkey there was a black market for dollars before 1980s because the government had fixed the exchange rate below the market equilibrium rate
  • 8. 8 (a) The Price Ceiling on Gasoline Is Not Binding Quantity of Gasoline 0 Price of Gasoline (b) The Price Ceiling on Gasoline Is Binding P 2 P 1 Quantity of Gasoline 0 Price of Gasoline Q 1 Q D Demand S 1 S 2 Price ceiling Q S 4. ... resulting in a shortage. 3. ...the price ceiling becomes binding... 2. ...but when supply falls... 1. Initially, the price ceiling is not binding... Price ceiling P 1 Q 1 Demand Supply, S 1 Price ceiling on gasoline A fall in supply turns an unbinding price ceiling into a binding ceiling and causes shortages of gasoline
  • 9. 9 (a) Rent Control in the Short Run (supply and demand are inelastic) (b) Rent Control in the Long Run (supply and demand are elastic) Quantity of Apartments 0 Supply Controlled rent Shortage Rental Price of Apartment 0 Rental Price of Apartment Quantity of Apartments Demand Supply Controlled rent Shortage Demand Rent control: short and long run Controling rents cause bigger shortages in the long run because new construction becomes unattractive, reducing long run supply
  • 10. 10 Price floors • Price floors set the minimum price that buyers must pay for a product • Market price can be higher but not below the price set by the government • When the government imposes a price floor, again two outcomes are possible • The price floor is not binding if it is set below the equilibrium price • It has no effect on the market • The price floor is binding if it is set above the equilibrium price • It leads to a surplus because demand is less than supply at that price
  • 11. 11 A price floor that is not binding $3 2 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 100 Equilibrium quantity Price floor Equilibrium price Demand Supply
  • 12. 12 A price floor that is binding $4 Quantity of Ice Cream Cones 0 Price of Ice Cream Cones 3 Demand Supply Price floor 80 Quantity demanded 120 Quantity Supplied Equilibrium price Surplus
  • 13. 13 Effects of a price floor • A price floor prevents price to fall even if demand is very low • When the market price hits the floor, it can fall no further, and the market price equals the floor price • A binding price floor causes a surplus of supply over demand because at that price QS > QD. • Agricultural support prices are typical examples • When set above market levels, they result in large unsold stocks (tobacco?) • Minimum wage laws also set price floors for wages • Binding minimum wages prevent wages to go down and therefore cause unemployment
  • 14. 14 (a) A Free Labor Market Quantity of Labor 0 Wage Equilibrium employment (b) A Labor Market with a Binding Minimum Wage Quantity of Labor 0 Wage Quantity demanded Quantity supplied Labor supply Labor demand Minimum wage Labor surplus (unemployment) Equilibrium wage Labor demand Labor supply Minumum wage law and employment Minimum wage legislation increases both the real wage of employed and the number of unemployed
  • 15. 15 Taxes: impact • Taxes levied on goods and services are called indirect taxes • The amount of tax fixed by the government is added to the price and paid everytime the good is sold • Taxes discourage market activity • When a good is taxed, the quantity sold is smaller • Buyers and sellers share the tax burden • 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
  • 16. Impact of a 50¢ tax on buyers 3.00 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 100 D1 Supply, S1
  • 17. Impact of a 50¢ tax on buyers $3.30 3.00 2.80 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Price sellers receive 100 90 Equilibrium with tax Equilibrium without tax Price buyers pay D1 D2 Supply, S1
  • 18. Impact of a 50¢ tax on sellers 3.00 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone 100 S1 Demand, D1
  • 19. Impact of a 50¢ tax on sellers $3.30 3.00 2.80 Quantity of Ice-Cream Cones 0 Price of Ice-Cream Cone Price without tax Price sellers receive 100 90 Equilibrium with tax Equilibrium without tax Tax ($0.50) Price buyers pay S1 S2 Demand, D1 A tax on sellers shifts the supply curve upward by the amount of the tax ($0.50).
  • 20. 20 The incidence of tax • Tax incidence tries to establish who pays the tax in the end? • In other words, in what proportions is the burden of the tax divided between buyers and sellers? • Alternatively, how do the effects of taxes on sellers compare to those levied on buyers? • This is an opportunity for us to see how the measure of elasticity can be used in economics • Because the answers to these questions depends on the elasticity of demand and the elasticity of supply. • We shall show that the burden of a tax falls more heavily on the side of the market that is less elastic
  • 21. 21 Elasticity and tax incidence • Elasticity enters the picture because total revenue in the market depends on the price elasticity of demand and price elasticity of supply • We can distinguish among three major cases – If demand is inelastic while supply is elastic, then a larger share of the tax will fall on the buyers – If demand is elastic while supply is inelestic, then a larger share of the tax will fall on the sellers – If demand and supply are unit elastic, buyers and seller will share the tax burden equally • The government is able to target correctly those whom it wishes to pay the tax when the price elasticities of demand and supply are known
  • 22. 22 Elastic supply, inelastic demand Quantity 0 Price Demand Supply Price without tax
  • 23. 23 Elastic supply, inelastic demand Quantity 0 Price Demand Supply Tax 2. ...the incidence of the tax falls more heavily on consumers... 1. When supply is more elastic than demand... 3. ...than on producers. Price sellers receive Price buyers pay Price without tax
  • 24. 24 Inelastic supply, elastic demand Quantity 0 Price Demand Supply Price without tax
  • 25. 25 Inelastic supply, elastic demand Price without tax Quantity 0 Price Demand Supply Tax Price sellers receive Price buyers pay 2. ...the incidence of the tax falls more heavily on producers... 3. ...than on consumers. 1. When demand is more elastic than supply...
  • 26. 26 Taxing luxuries or necessities? • There is always a demand from the public to tax luxuries but not necessities • Taxing goods that are considered luxuries is popular both with the public and governments • Unfortunately luxury goods usually have high price elasticity of demand (bigger than 1) • Therefore taxes reduce the consumption of luxuries • Tax revenue is much lower than expected • In turn, necessities have low price elasticity of demand (smaller than 1) • And yield high tax revenues to the government
  • 27. 27
  • 28. 28 Conclusion • The economy is governed by two kinds of laws: – The laws of supply and demand. – The laws enacted by government • Prices can be controled by ceilings or floors • Price ceilings cause shortages and black market • Price floors result in surpluses and unsold stoks held by the government • Taxes raise revenue to the government • Taxes create new price equilibriums in which buyers and sellers share the tax • The incidence of the tax depends on the price elasticity of demand and supply • Necessities are taxed to get more revenue