Chapter 6: Supply, Demand, and Government Policies

This chapter talks about how the government can control the competitive market and the positive and negative effects of it. They can set price ceilings, price floors, and taxes. For a price ceiling, if the equilibrium price is lower than the ceiling, that is a price ceiling that is not binding. However, if the price ceiling is lower than the equilibrium price, that is binding and will cause a shortage. Although the price ceiling was set to help buyers, sometimes because of low prices more demand and less supply mean some people don't even get to buy the good. That is when sellers also start to ration the scarce goods among the large number of buyers. One example of a real life shortage was when OPEC raised the price of oil and US regulations limited the price of oil sold in the US. The result was a reduced supply in gasoline from raised prices. But the ceiling prevented gas from reaching its equilibrium point, therefore causing a shortage. An opposite situation would happen if the price floor raised prices. Obviously if the price floor was below the equilibrium point the price floor is not binding. However when the price floor was above the equilibrium point, it would raise the prices and cause a surplus. A real life example of price floor is minimum wage. The minimum wage is above equilibrium level which means the quantity of labor supplied was greater than the quantity demanded. That meant more unemployment. It raises the incomes of the workers who have jobs, but it lowers the incomes of workers who can't find jobs. Taxes also play a huge role of government control in the market. A tax on the sellers makes the business less profitable so the supply curve shifts to the left or upward. Ultimately, taxes make the sellers sell less and buyers buy less so the size of the market is smaller. A tax on the buyers makes the demand shift downward. Often when a good is taxed, buyers and sellers don't share the the same burden on the tax and it is divided. The burden of the tax falls more on the side that is inelastic. Overall this chapter can be given a difficulty rating of 2, it introduces new concepts while still using connections to previous chapters.