The Principles of Economics 

6  Supply, Demand, and Government Policies

6-1 Controls on Prices

-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. 

6-1a How Price Ceilings Affect Market Outcomes

-When the price is below the ceiling, the price ceiling is not binding, but if the price is above the ceiling, it's a binding constraint on the market. 

-When a binding price ceiling is imposed on a competitive market by the government, the good experiences a rise in shortages, causing sellers to ration the scarce goods. 

6-1b How Price Floors Affect Market Outcomes

-A price ceiling places legal maximums on prices, while price floors place legal minimums. 

-Minimum wages dictate the lowest price paid to laborers. 

-Minimum wages help improve the income of workers but hurts those who're in search of jobs and cannot find any. 

-The minimum wage is not binding for experienced and skilled workers because their equilibrium wages are well above the minimum. 

-Equilibrium wages for teenagers are typically at the minimum but because of a lack of training and experience, teenagers typically accept these lower wages and/or are willing to work as interns without pay, in some cases. Because of this, minimum wages are usually more binding for teens than any other age group in the workforce. 

6-1c Evaluating Price Controls 

-Prices are responsible for millions of business and consumer decisions. 

-An earned income tax credit is a government program where incomes are supplemented to low-wage workers. 

6-2 Taxes 

-tax incidence: the manner in which the burden of a tax is shared among participants in a market. 

6-2a How Taxes on Sellers Affect Market Outcomes 

-The quantity of ice cream remains constant but the supply curve shifts to the left (upward) because of taxes on the sellers of ice cream. 

-The size of the ice cream market shrinks because sellers sell less and buyers buy less. 

-Earned Income Tax Credit targets low-income families. 

-Activity in markets is discouraged by taxes, resulting in smaller quantities of a good to be sold if the good is being taxed in the new equilibrium. 

-Both buyers and sellers are burdened with taxes, so while buyers are paying more for goods, sellers are receiving less. 

6-2b How Taxes on Buyers Affect Market Outcomes

-Taxes levied on sellers and buyers are the same. 

-Pay roll taxes are taxes on wages that firms pay their workers. 

-Lawmakers have the power to determine whether taxes come for the pocket's of buyers or sellers.

6-2c Elasticity and Tax Incidence

-A tax negatively effects an inelastic market more than an elastic one. 

-When there's little elasticity of supply, sellers do not have many other options to produce this specific good. 

6-3 Conclusion