Copyright © 2004 South-Western 6 Supply, Demand, and Government Policies (Framboð, eftirspurn og stefna stjórnvalda)

Copyright © 2004 South-Western

66Supply, Demand, and Government Policies (Framboð, eftirspurn

og stefna stjórnvalda)

Copyright © 2004 South-Western/Thomson Learning

Supply, Demand, and Government Policies

• In a free, unregulated (óreglusett) market system, market forces (kraftar markaðarins) establish (leggja grunn að) 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.


CONTROLS ON PRICES

• Are usually enacted when policymakers believe the market price is unfair to buyers or sellers.

• Result in government-created price ceilings and floors.


CONTROLS ON PRICES

• Price Ceiling (verð þak)• A legal maximum on the price at which a good can

be sold.

• Price Floor (verð gólf)• A legal minimum on the price at which a good can

be sold.


How Price Ceilings Affect Market Outcomes

• Effects of Price Ceilings

• A binding price ceiling creates• shortages because QD > QS.

• Example: Gasoline shortage of the 1970s

Figure 2 The Market for Gasoline with a Price Ceiling

Copyright©2003 Southwestern/Thomson Learning

(b) The Price Ceiling on Gasoline Is Binding

Quantity ofGasoline

0

Price ofGasoline

Demand

S1

S2

Price ceiling

QS

4. . . . resultingin ashortage.

3. . . . the priceceiling becomesbinding . . .

2. . . . but whensupply falls . . .

P2

QD

P1

Q1


The Minimum Wage

• An important example of a price floor (verðgólf) is the minimum wage (lágmarkslaun). Minimum wage laws dictate (stýra verðir niður í lægsta mögulega verð) the lowest price possible for labor that any employer may pay.

Figure 5 How the Minimum Wage Affects the Labor Market


Quantity of MagnLabor vinnuafls

WageLaun

0

Labordemand

LaborSupply

Equilibriumemployment

Equilibriumwage

Figure 5 How the Minimum Wage Affects the Labor Market


Quantity ofLabor

Wage

0

LaborSupply

Labor surplus(unemployment)

Labordemand

Minimumwage

Quantitydemanded

Quantitysupplied

Umframframboð(atvinnuleysi)


TAXES

• Governments levy taxes (leggja á skatta) to raise revenue for public projects.


How Taxes on Buyers (and Sellers) Affect Market Outcomes Áhrif skatta á markaðinn

• Taxes discourage market activity.

• When a good is taxed, the quantity sold is smaller.

• Buyers and sellers share the tax burden.


Elasticity and Tax Incidence

• Tax incidence (dreifing skattbyrðar) 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.

Figure 6 A Tax on Buyers


Quantity ofIce-Cream Cones

0

Price ofIce-Cream

Cone

Pricewithout

tax

Pricesellersreceive

Equilibrium without taxTax ($0.50)

Pricebuyers

pay

D1

D2

Supply, S1

A tax on buyersshifts the demandcurve downwardby the size ofthe tax ($0.50).

$3.30

90

Equilibriumwith tax

2.803.00

100


Elasticity and Tax Incidence

• What was the impact of tax? • Taxes discourage market activity.• When a good is taxed, the quantity sold is smaller. • Buyers and sellers share the tax burden.

Figure 7 A Tax on Sellers


2.80

Quantity ofIce-Cream Cones

0

Price ofIce-Cream

Cone

Pricewithout

tax

Pricesellersreceive

Equilibriumwith tax

Equilibrium without tax

Tax ($0.50)

Pricebuyers

payS1

S2

Demand, D1

A tax on sellersshifts the supplycurve upwardby the amount ofthe tax ($0.50).

3.00

100

$3.30

90

Copyright © 2004 South-Western 6 Supply, Demand, and Government Policies (Framboð, eftirspurn og stefna stjórnvalda)

Documents

tax tax

tax price sellers

market price

price buyers

tax equilibrium

price of icecream cone

tax burden

impact of tax