Week 6: Demand, Supply, and Government Policies

Podcast Beta

Play an AI-generated podcast conversation about this lesson

Questions and Answers

What is one consequence of establishing a price floor?

Increase in quantity demanded

Complete market efficiency

Higher quality of goods automatically

Deadweight loss from inefficiently low quantity (correct)

How do price floors typically affect sellers in the market?

They guarantee sellers a profit on every sale.

They lead to inefficient allocation of sales among sellers. (correct)

They eliminate the need for any competition.

They ensure all sellers can sell their goods.

Which scenario illustrates an inefficiency created by a price floor?

Market equilibrium is achieved without intervention.

Sellers only offer the minimum quality to maximize sales.

Sellers provide high-quality goods at higher prices than buyers want. (correct)

Buyers always purchase the cheapest option available.

What legal consequence might sellers face due to price floors?

They face temptation to sell below the legal price. Signup and view all the answers

Which of the following statements about minimum wage as a price floor is true?

It can lead to unemployment if set too high. Signup and view all the answers

What happens to the demand price and supply price under a quota system?

The demand price is higher than the supply price. Signup and view all the answers

What is the quota rent?

The difference between demand and supply price at the quota limit. Signup and view all the answers

Under a quota, what is typically the impact on the market?

It leads to a deadweight loss. Signup and view all the answers

Which price reflects the highest quantity demanded for sugar?

€3.00 per tonne. Signup and view all the answers

What happens to consumer prices when a quota is imposed?

Consumer prices increase due to limited supply. Signup and view all the answers

How does a quota affect the quantity of products available in the market?

It restricts the maximum quantity that can be sold. Signup and view all the answers

What is indicated by point E in the sugar market graph?

Equilibrium point where supply and demand meet. Signup and view all the answers

What can be inferred about the relationship between quantity demanded and price based on the information?

As price decreases, quantity demanded increases. Signup and view all the answers

When considering both demand and supply, where does the market for sugar typically reach equilibrium?

At the intersection of demand and supply curves. Signup and view all the answers

What does it mean when the burden of a tax falls more heavily on the side of the market that is less price elastic?

The side that is less sensitive to price changes bears more burden. Signup and view all the answers

What is a consequence of implementing a price ceiling?

It creates persistent shortages in the market. Signup and view all the answers

Which of the following describes the effects of a price floor?

It creates a surplus and decreases the quantity of goods sold. Signup and view all the answers

What is the role of a quota in a market?

It limits the quantity of a good that can be bought or sold. Signup and view all the answers

What consequence arises from implementing quantity controls like fishing quotas?

Deadweight loss due to unfulfilled transactions Signup and view all the answers

What typically happens to the equilibrium quantity when a tax is levied on a good?

It falls due to reduced supply. Signup and view all the answers

How does a tax on sellers typically affect the market outcome?

Buyers pay more while sellers receive less Signup and view all the answers

What happens when a tax is introduced on a good?

The equilibrium price is affected Signup and view all the answers

What is one potential effect of quantity controls or quotas in a market?

They create a wedge between the demand price and the supply price. Signup and view all the answers

Which types of goods should be taxed from an efficiency perspective?

Goods with inelastic supply and inelastic demand. Signup and view all the answers

What is the tax incidence in a market?

The division of the tax burden between buyers and sellers Signup and view all the answers

What unintended consequence can arise from price controls?

They can lead to the creation of black markets. Signup and view all the answers

What effect do fishing quotas have on fish stock?

They prevent depletion and protect species from extinction Signup and view all the answers

What is a potential illegal consequence of quantity control measures?

Incentives for illegal fishing activities Signup and view all the answers

What is the result of a 10 cent tax per unit on producers?

Producers will receive less after tax than before Signup and view all the answers

What typically occurs in the short term as a result of quotas on fish catches?

Fish prices increase due to restricted supply Signup and view all the answers

In a scenario with price elastic supply and price inelastic demand, who bears more of the tax burden?

Consumers bear more of the tax burden. Signup and view all the answers

When demand is more price elastic than supply, who experiences a heavier incidence of the tax?

Producers experience a heavier incidence of the tax. Signup and view all the answers

What does a deadweight loss represent in terms of economic surplus?

The loss of economic efficiency when the equilibrium outcome is not achievable. Signup and view all the answers

What shape represents the total loss of surplus depicted in the scenario?

Triangle Signup and view all the answers

Which statement is true when discussing tax incidence?

Tax incidence is affected by the elasticity of both demand and supply. Signup and view all the answers

If supply is inelastic and demand is elastic, who primarily bears the tax burden?

Producers primarily bear the tax burden. Signup and view all the answers

Which geometric representation is used to indicate the price buyers pay after a tax has been imposed?

An upward sloping line Signup and view all the answers

What is the likely result of a tax when demand is more elastic than supply?

Decreased efficiency in the market. Signup and view all the answers

Study Notes

Price Floors

A price floor is a minimum market price above the equilibrium price
Price floors benefit successful sellers, but create persistent surplus
They lead to inefficiencies such as:
- Deadweight loss from inefficiently low quantity
- Inefficient allocation of sales among sellers
- Wasted resources
- Inefficiently high quality
They also encourage illegal activity and black markets
Minimum wage is the most well-known example of a price floor.

Quantity Controls

A quantity control or quota is a restriction on the quantity of a good bought or sold
The government issues licenses to sell a given quantity of the good
A quota drives a wedge between the demand price and the supply price
This wedge is equal to the quota rent
They lead to deadweight loss and encourage illegal activity

Taxes

Governments levy taxes to raise revenue
Taxes encourage market activity
When goods are taxed, the quantity sold is smaller
The burden of tax is generally shared by buyers and sellers
The tax incidence is the manner in which the burden of a tax is shared among participants in a market

Price Elasticity and Tax Incidence

The burden of a tax falls more heavily on the side of the market that is less price elastic
The more inelastic the demand or supply, the lower the deadweight loss.

Efficiency Concerns

The burden of taxes should fall on goods with inelastic supply or demand
This is from an efficiency perspective, equity and politics may influence this approach

Studying That Suits You

Use AI to generate personalized quizzes and flashcards to suit your learning preferences.

Description

This quiz covers the concepts of price floors, quantity controls, and their effects on the market. Explore how price floors can lead to surpluses and inefficiencies, as well as the implications of quantity controls and taxation on market behavior. Test your understanding of these fundamental economic principles.