[Eng.economics] Lecture #6

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(ECEN 4503) Engineering EconomicsLecture #6:Supply, Demand and Government PoliciesSunday May 31st 2015Lecturer: Nguyen Minh Y, Ph.D.Thai Nguyen UniversityThai Nguyen University of TechnologyFaculty of International TrainingReviewing6/1/2015Department of Electrical Engineering taught in English2Introduction 6/1/2015Department of Electrical Engineering taught in English3Two roles of economistsScientistsDevelop and test theories to explain the world(So far)Policy adviserChange the world to be better

This chapter focuses onAnalyze various types of government policiesUsing tools of supply and demandThe side-effect of the policies?

1. Control of Prices6/1/2015Department of Electrical Engineering taught in English4Example:Control of price:Maximum rent that landlord may charge tenantsMinimum wage that firms may pay workers

Why?Sometimes, policymakers believe that the market price is unfair to buyers or sellers.

Price ceiling a legal maximum on the price at which a good can be sold.Price floor a legal minimum on the price at which a good can be sold.

1. Control of Prices6/1/2015Department of Electrical Engineering taught in English51.1 How price ceiling affect market outcomes?Example:The government set the price ceiling in the market for ice creams?

Case 1:The price ceiling is above the equilibrium price.The price ceiling is not binding.1. Control of Prices6/1/2015Department of Electrical Engineering taught in English61.1 How price ceiling affect market outcomes?Example:The government set the price ceiling in the market for ice creams?

Case 2:The price ceiling is below the equilibrium priceThe price ceiling is binding.The market price is equal to the ceiling priceShortage in the market1. Control of Prices6/1/2015Department of Electrical Engineering taught in English71.1 How price ceiling affect market outcomes?Example:The government set the price ceiling in the market for ice creams?

Shortage because of price ceilingBuyers need to arrive early and wait in a long lineSellers could ration ice cream according to their personal biasesSelling to friends, relatives, etc.Selling to members of their racial or ethnic group

Market efficiency and equity???1. Control of Prices6/1/2015Department of Electrical Engineering taught in English81.2 How price floor affect market outcomes?Example:The government set the price floor in the market for ice creams?

Case 1:The price ceiling is below the equilibrium price.The price ceiling is not binding.1. Control of Prices6/1/2015Department of Electrical Engineering taught in English91.1 How price ceiling affect market outcomes?Example:The government set the price floor in the market for ice creams?

Case 2:The price ceiling is above the equilibrium priceThe price floor is bindingThe market price is equal to the floor priceSurplus in the market1. Control of Prices6/1/2015Department of Electrical Engineering taught in English101.1 How price ceiling affect market outcomes?Example:The government set the price floor in the market for ice creams?

Surplus because of price ceilingBuyers could ration ice cream shops according to their personal biasesFriends, relatives, etc.Their racial or ethnic group

Market efficiency and equity???Practice6/1/2015Department of Electrical Engineering taught in English11Ex1. Lover of classical music persuade Congress to impose a price ceiling of $40 per concert ticket. As a result of this policy, do more or fewer people attend classical music concept?

6/1/2015Department of Electrical Engineering taught in English12Ex2. A recent study found that the demand and supply schedules for Frisbees are as follows:

What are the equilibrium price and quantity of Frisbees?Frisbees manufacturers persuade the government that Frisbees production improves scientists understanding of aerodynamics and thus is important for national security. A concerned Congress votes to impose a price floor of $2 above the equilibrium price. What is the new market price? How many Frisbees are sold?Irate college students march on Washington and demand a reduction in the price of Frisbees. An event more concerned Congress votes to repeal the price floor and impose a price ceiling $1 below the former price floor. What is the new market price? How many Frisbees are sold?Price per FrisbeesQuantity demandedQuantity supplied$111098761 million Frisbees24681015 million Frisbees1296312. Taxes6/1/2015Department of Electrical Engineering taught in English13What is taxes?A source of government income (revenue)Spend for public projects: Roads, school, hospital, and national defense, etc.

How bears the burden of the tax?Buyers of the good and seller of the good?How the burden of the tax shares between buyers and sellers?

Tax incidenceThe study of who bears the burden of taxation.2. Taxes6/1/2015142.1 How taxes on buyers affect market outcomes?Example:The government levies a tax of $0.50 on the buyers of ice creams cones?For each ice cream bought, buyers need to pay $0.50 to the governmentThree step the analyze the new market equilibrium?How this tax affect demand/supply?How the demand/supply curve move?New equilibrium point?

$2.30$1.802. Taxes6/1/2015Department of Electrical Engineering taught in English152.1 How taxes on buyers affect market outcomes?Summary:Taxes discourage market activityWhen a good is taxed, the quantity of the good sold is smaller in the new equilibrium.

Buyers and sellers share the burden of taxesIn the new equilibrium, buyers pay more for the good, and sellers receive less.

2. Taxes6/1/2015162.1 How taxes on sellers affect market outcomes?Example:The government levies a tax of $0.50 on the sellers of ice creams cones?For each ice cream sold, sellers need to pay $0.50 to the governmentThree step the analyze the new market equilibrium?How this tax affect demand/supply?How the demand/supply curve move?New equilibrium point?

$2.30$1.80Practice6/1/2015Department of Electrical Engineering taught in English17Ex2. If the government place a $500 tax on luxury cars, will the price paid by consumers rise by more than $500, less than $500, or exactly $500? Explain.Ex7. A subsidy is the opposite for a tax. With a $0.50 tax on the buyers of ice-cream cones, the government collects $0.50 subsidy for each cone purchased; with a $0.50 subsidy for the buyers of ice-cream cones, the government pays buyers $0.50 for each cone purchased.Show the effect of a $0.50 per cone subsidy on the demand curve for ice-cream cones, the effective price received by sellers, and the quantity of cones sold.Do consumers gain or lose from this policy? Do producers gain or lose? Does the government gain or lose?

2. Taxes6/1/2015Department of Electrical Engineering taught in English182.1 How taxes on buyers affect market outcomes?Summary:Taxes discourage market activityWhen a good is taxed, the quantity of the good sold is smaller in the new equilibrium.

Buyers and sellers share the burden of taxesIn the new equilibrium, buyers pay more for the good, and sellers receive less.

Compare two casesTaxes on buyers and taxes on sellers are equivalent.

2. Taxes6/1/2015Department of Electrical Engineering taught in English19The supply is elasticThe price received by sellers falls slightlyThe demand is inelasticThe price paid by buyers falls substantially

The buyers bear most of the burden of the tax.

2.3 Elasticity and tax incidence?2. Taxes6/1/2015Department of Electrical Engineering taught in English20The supply is inelasticThe price received by sellers falls substantiallyThe demand is elasticThe price paid by buyers falls slightly

The sellers bear most of the burden of the tax.2.3 Elasticity and tax incidence?

Practice6/1/2015Department of Electrical Engineering taught in English21Ex4. Consider the following policies, each of which is aimed at reducing violent crime by reducing the use of guns. Illustrate each of these proposed policies in a supply and demand diagram of the gun market.A tax on gun buyers.A tax on gun sellers.A price floor on guns.A tax on ammunition.

Conclusion6/1/2015Department of Electrical Engineering taught in English22Control of pricesPrice ceilingHow the market affected?Price floorHow the market affected?

Efficiency vs. equity?TaxesTax incidenceShare the tax burdenBuyers/sellersElasticity of demandElasticity of supply