Bài giảng topic 3 applications of d s

Applications of Demand
and Supply
Topic 3

So far…

Demand & Supply

Equilibrium determined

by market forces

Equilibrium maintained

by market forces

Price Controls

Some cases market forces are not allowed to
determine equilibrium price and quantity

Intervention by authorities (Govt.)

Price Ceilings

Price Floors

Taxes

on Producers


on Consumers
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Maximum
pric e
“A
price ceiling
is the maximum legal price a seller
may charge for a good or service” (Jackson page 160)

Price Ceilings

Govt. sets the price LOWER than the
equilibrium.

Why would they do this?

What is the result?

Who benefits? Who loses?

What is likely to happen?

Why would they do it?

To keep the price down to an acceptable level.

During wartime price controls may be imposed on
essential items such as petrol, rice etc.

To help the poor & the disadvantaged
fig
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Q O
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Q
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shortage
maximum
pr ice
What are the results?

What are likely to happen?

Effects:

dealing with resulting shortages
=> rationing


black markets

fig
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g
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Q
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Q
d
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S
Effect of price control on black-
market prices
Price ceiling
Blackmarketeers’
profits

Gainers & Losers?
Gainers

Consumers who are
able to obtain supplies

at the price ceiling
Losers:

Consumers who cannot
obtain supplies
(even though they are
willing to purchase at
the equilibrium price )

Price Controls- Consumer
Surplus & Producer Surplus

Originally

CS = A+B

PS = C+E+F

After Price ceiling

CS = A+C

PS = F

What about B & E?

net loss in total
surplus

Price Floors

A
price floor
is the minimum price set by the gov’t for
a good or service

Govt. sets the price
floor HIGHER than
the equilibrium

Why would they do
this?

What is the result?

Who benefits? Who
loses?

What is likely to
happen?

Why does the government do it?

To support prices (income) in important sectors
of the economy (eg. Agriculture).

To protect workers (eg. minimum wages)

fig
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Q O

P
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minim um
price
Q
d
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surplus
What is the impact?

Gainers & Losers?
Gainers

Suppliers who receive
higher price per unit
and probably, higher
income.

Workers who are in job
receive a higher wage
Losers:

Consumers who have to
pay higher prices for
the goods.

Workers who were

previously working, are
now unemployed

Price Controls, CS & PS (contd.)

Originally

CS = A+B+C

PS = E+F

After Price floor

CS = A

PS = C+F

What about B & E?

net loss in total
surplus

Taxes on Producers

Supply curve shifts up

vertical shift = amount of
tax

Equilibrium price

increases, equilibrium
quantity decreases

Notice the difference in
amount of tax and
increase in price.

As elasticity of demand
and supply vary, the
burden changes

Taxes on Producers

Effects of imposing tax on producers:
S
o
S
1
Q
P
E
0
E
1
Q
0
Q
1
Consumers’ tax burden
Tax

D
Consumers’ tax burden >
Producers’ tax burden if
Demand is relatively
inelastic
Producers’ tax burden

Taxes on Producers

Taxes on Producers

Taxes on producers

Taxes on Producers

Taxes on Consumers

Demand curve shifts down

vertical shift = amount of
tax

Equilibrium price
decreases, equilibrium
quantity decreases

Notice the difference in
amount of tax and
decrease in price.


As elasticity of demand
and supply vary, the
burden changes

Elasticity and Tax burden
- Summary
Elastic Inelastic
Demand Producer Consumer
Supply Consumer Producer

So, the burden of tax is not affected by who it is levied on
(producer or consumer).

It is affected by the elasticities of demand & supply