Chapter5ElasticityanditsApplication：5章弹性及其应用.doc

21Harvard University Economics Study Guide Principles of Micro Economics: N. Gregory Mankiw 3rd EditionChapter 6: Supply, Demand, and Government PoliciesSummaryMain Points:1. A price ceiling is a legal maximum on the price of a good or service. If the price ceiling is lower than the equilibrium price, the quantity demanded exceeds the quantity supplied. Because of the resulting shortage, sellers must in some way ration the good or service among buyers.2. A price floor is a legal minimum on the price of a good or service. IF the price floor is above the equilibrium price, the quantity supplied exceeds the quantity demanded. Because of the resulting surplus, burs demands for the good or service must in some way be rationed among sellers.3. When the government levies a tax on a good, the equilibrium quantity of the good falls. That is, a tax on a market shrinks the size of the market.4. A tax on a good places a wedge between the price paid by buyers and the price received by sellers. When the market moves to the new equilibrium, buyers pay more for the goof and sellers receive less for it. In this sense, buyers and sellers share the tax burden. The incidence of a tax does not depend on whether the tax is levied on buyers or sellers.5. The incidence of a tax depends on the price elasticities of supply and demand. The burden tends to fall on the side of the market that is less elastic because that side of the market can respond less easily to the tax by changing the quantity bought or sold.Key Concepts:1. Price Ceiling: a legal maximum on the price at which a good can be sold.2. Price Floor: a legal minimum on the price at which a good can be sold.3. Tax Incidence: the manner in which the burden of a tax is shared among participants in a market.Questions for Review:1. Give an example of a price ceiling and a price floor.2. Which causes a shortage of a good a price ceiling or a price floor? Which causes a surplus?3. What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?4. Explain why economists usually oppose controls on prices.5. What is the difference between a tax paid by buyers and a tax paid by sellers?6. How does a tax on a good affect the price paid by buyers? The price received by sellers, and the quantity sold?7. What determines how the burden of a tax is divided between buyers and sellers? Why?Chapter 6: Supply, Demand, and Government Policies Chapter Review Economists have two roles: as scientists they develop and test theories to explain the world around them, and as policy advisors they use their theories to help change the world for the better. This chapter focuses on the economists roles as policy advisors. Policies often have effects that their architects did not intend. This chapter will begin discussing policies that deal with the direct control of prices, such as rent control, and the impact of taxes.Controls on Prices: (p114)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.How Price Ceilings Affect Market Outcomes:Price ceilings in general have two outcomes. The first outcome: the ceiling is set to a market price above the equilibrium price. Since the price that balances supply and demand is above the equilibrium price, the price ceiling is “not binding”. Market forces in turn naturally move the price towards the equilibrium, and the price ceiling has no effect on the price or the quantity sold.The second possible outcome, which has several more interesting possibilities, would be for the government to set a price ceiling that would force the market price to be lower than the equilibrium price. If this happens, the price ceiling is known as a “binding constraint” on the market. Since the market naturally moves towards equilibrium anyway, it will soon be obstructed by this lower price ceiling and ultimately result in a shortage of goods, leaving some consumers out all together of purchasing the good or service.This shortage could in turn have negative effects of its own. Since a shortage would exist, a mechanism for rationing the good or service would have to be developed. Buyers would have to wait in long lines to receive the good or service rendered, which are inefficient, and sellers would alternatively begin to ration the good off to their friends and family, leading to discrimination. In the end, although some buyers managed to buy the good or service at a lower price, many buyers missed out on the good all together because of the binding constraint placed on the price ceiling. This illustrates the basic point that when the government imposes a binding price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce goods among the large number of potential buyers.How Price Floors Affect Market Outcomes:Price floors, like price ceilings, are another attempt by government to maintain prices at other levels other than equilibrium levels. When the government places a price floor, two outcomes are possible. The first outcome: If the government imposes a price floor that is lower than the equilibrium price, then price floor is not binding and in essence has no effect; markets are free to operate and naturally move the economy towards equilibrium.The second outcome occurs when the price floor is above the equilibrium price. This price floor is known as a binding constraint on the market. As the market naturally moves towards equilibrium, the price floor will soon obstruct it. This will result in abundance in supply with limited demand, in other words, a surplus.Just as price ceilings and shortages can lead to undesirable rationing mechanisms, so can price floors and surpluses. The sellers who appeal to the personal biases of buyers will be the ones better suited to sell of their goods. This would result in possible discrimination and inefficiencies.Evaluating Price Controls:Economists in general do not like price controls. The feel that prices are the means by which economic activity is coordinated through the resulting balance of supply and demand.Taxes: (p124)Taxes play a central role in the administration of government and also in the study of economics. They are the primary means by which the government raises revenue to pay for public works projects and also as a means by which to stem market outcomes. When utilizing taxes to stem market outcomes, governments often allow the markets to share the tax burden between the buyers and sellers.Tax Incidence: the manner in which the burden of a tax is shared among participants in a market.How Taxes on Buyers Affect Market Outcomes:We start off by considering a tax levied on the buyers of a good. The first thing you do is use the three steps in analyzing supply and demand learned in chapter 4: 1) Determine whether there is a shift in the supply curve, demand curve, or both; 2) determine the direction of the shift; and 3) examine how the shift affects the equilibrium.Initially, the tax levied impacts the buyers demand curve. Since the producers have no incentive to cut down the supply, there is no initial affect on the supply curve. The direction of the shift is obviously to the left, since buyers no have less of an incentive to buy ice cream with the newly imposed tax. Eventually this can affect the quantity supplied, but that occurs when dealing over longer durations of time. Lastly, you can compare the new equilibrium to the initial equilibrium. In this situation, sellers sell less, and buyers buy less. This levied tax results in a decrease in the size of the targeted market.So what are the implications? In the end, the tax makes sellers worse off because they are selling less of their product at a lower price (since the market price is reduced as an incentive to lure buyers), and the buyers worse off because they are forced to pay more for the product. This yields two lessons: First, taxes discourage market activity. When a good is taxed, the quantity of the good sold is smaller in the new equilibrium. Second, buyers and sellers share the burden of tax. In the new equilibrium, buyers pay more for the good, and sellers receive less.How Taxes on Sellers Affect Market Outcomes:Now consider a tax levied on sellers of a good. Once again, use the three steps discussed in chapter 4 to analyze the new supply and demand.The immediate impact of the tax goes on the sellers of a good. Since it doesnt affect the buyers initially, demand is not affected. Since this makes the market for that good less profitable at any given price by raising the input costs, the supply curve shifts to the left. In this situation, comparing the new equilibrium would most