Reading notes--Principles of Economics (chapter6)

Summary

Chapter 6 is Supply, Demand, and Government Policies. This chapter explains maximum price, minimum price and how sellers/consumers burden the tax.

Maximum price

• Also called price ceiling– a legal maximum on the price at which a good can be sold

• If the maximum price is lower than the equilibrium price, we call it a price ceiling that is binding(because this price ceiling will affect the equilibrium price).

• The quantity demanded will increase and quantity supplied will decrease so there is shortage(excess demand).

Minimum price

• Also called price floor– a legal minimum on the price at which a good can be sold

• If the minimum price is higher than the equilibrium price, we call it a price floor that is binding(because this price floor will affect the equilibrium price).

• The quantity demanded will decrease and quantity supplied will increases so there is surplus(excess supply).

• For elastic supply and inelastic demand, buyers burden more tax than sellers.

• For inelastic supply and elastic demand, sellers burden more tax than sellers.

Conclusion: A tax burden falls more heavily on the side of the market that is less elastic.

Definitions

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

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. When the government imposes a binding price floor, it causes_____ (Correct answer: D)

a. the supply curve to shift to the left

b. the demand curve to shift to the right

c. a shortage of the good to develop

d. a surplus of the good to develop

My wrong answer: C

2. Which of the following increases quantity supplied, decreases quantity demanded, and increases the price that consumer pay? (Correct answer: C)

a. the passage of a tax on a good

b. the repeal of a tax on a good

c. the imposition of a binding price floor

d. the removal of a binding price floor

My wrong answer: D