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Supply, Demand, and Government Policies
Supply, Demand, and Government Policies
Supply, Demand, and Government Policies
6
Supply, Demand, and
Government Policies
Economics
PRINCIPLES OF
N. Gregory Mankiw
Rental P S
price of
apts
$800
Eq’m w/o
price
controls
D
Q
300
Quantity of
apartments
D
Q
300
Wage W S
paid to
unskilled
workers
$4
Eq’m w/o
price
controls
D
L
500
Quantity of
unskilled workers
SUPPLY, DEMAND, AND GOVERNMENT POLICIES 9
How Price Floors Affect Market Outcomes
A price floor W S
below the
eq’m price is
not binding –
has no effect $4
on the market Price
outcome. $3
floor
D
L
500
Eq’m
P
w/o tax
S1
$10.00
D1
Q
500
What matters P
is this: S1
PB = $11.00
Tax
A tax drives $10.00
a wedge PS = $9.50
between the
price buyers D1
pay and the
price sellers Q
receive. 450 500
P It’s easier
for sellers
PB S than buyers
Buyers’ share
of tax burden
to leave the
Tax market.
Price if no tax So buyers
Sellers’ share PS bear most of
of tax burden the burden
D
of the tax.
Q
P It’s easier
S for buyers
Buyers’ share than sellers
of tax burden PB to leave the
market.
Price if no tax
Tax Sellers bear
Sellers’ share most of the
of tax burden PS burden of
D the tax.
Q
Tax Hence,
companies
Sellers’ share
that build
of tax burden PS
D yachts pay
most of
Q the tax.