Chapter 6 ~ Chapter 9

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 Chapter 6: Price control
• Price control
− Price ceilings(Not binding or Binding constraint)
− Price floors (Not binding or Binding constraint)
− Taxes
• A tax on sellers or a tax on buyers
• Buyers and sellers share the tax burden
• Elasticity and tax incidence

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 Chapter 6: Price ceilings

• Price ceilings: Legal maximum price

− Binding
• Set below the equilibrium price:
Shortage
− Not binding
• Set above the equilibrium price
• No effect on the price or
quantity sold
− Rent-control laws

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 Chapter 6: Price floors

• Price floors: Legal minimum price

− Binding
• Set above the equilibrium
price: Surplus
− Not binding
• Set below the equilibrium price
• No effect on the market
− Minimum wage laws

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 Buyers and sellers share the tax burden
• Taxes levied on sellers and taxes levied on buyers are equivalent
− Wedge between the price that buyers pay and the price that
sellers receive
• The same, regardless of whether the tax is levied on buyers
or sellers
− Shifts the relative position of the supply and demand curves
• Buyers and sellers share the tax burden

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Buyers and sellers share the tax burden

A Tax on Sellers A Tax on Buyers

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Q3) Tax burden

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Q5) Tax incidence

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Elasticity and tax incidence
• Very elastic supply and relatively inelastic demand
− Sellers bear a small burden of tax
− Buyers bear most of the burden

• Relatively inelastic supply and very elastic demand

− Sellers bear most of the tax burden
− Buyers bear a small burden

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How the Burden of a Tax Is Divided

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Chapter 7: Surplus
• Consumer surplus CS = WTP - P
− Area below the demand curve and above the price
− A lower price increases CS
• Producer surplus, PS = P - cost
− Area above the supply curve and below the price
− A higher price increases PS
• Total surplus = CS + PS
− A market is efficient when total surplus is maximized

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Q7) Producer surplus = P - C

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Q8) Complements and surplus

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Chapter 8: Tax
• A tax affect
− Consumer surplus, producer surplus, and total surplus
• Deadweight loss(DWL) of a tax
• Factors determine the size of the deadweight loss
− Elastic vs inelastic
• Laffer curve: Tax revenue depends on the size of the tax

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Q12) Tax revenue and DWL

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How a Tax Affects Market Participants: with a tax
With the tax, C + E is called the deadweight
• CS = A P loss (DWL) of the tax, the fall in
total surplus that results from a
• PS = F
market distortion, such as a tax.
• Tax revenue = B + D
• Total surplus A
= CS + PS + tax revenue PB S
=A+B+D+F B C
D E
The tax reduces total surplus by C + E
PS D
• QE – QT = units not sold because of the
F
tax

Q
QT QE
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Q14) Tax revenue and DWL

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Q15) Laffer curve

Tax revenue
The Laffer curve

Tax size

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Chapter 9: Trade
• If PD < PW,
− Domestic country has comparative advantage,
country exports the good
− Consumer surplus↓, Producer surplus ↑
− Total surplus ↑
• If PD > PW,
− Domestic country does not have comparative
advantage, country imports the good
− Consumer surplus ↑, Producer surplus ↓
− Total surplus ↑
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Q20) Surplus

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