PowerPoint Presentations for
Principles of Microeconomics
Sixth Canadian Edition
by Mankiw/Kneebone/McKenzie
Adapted for the
Sixth Canadian Edition by
Marc Prud’homme
University of Ottawa
SUPPLY, DEMAND,
AND
GOVERNMENT
POLICIES
Chapter 6
Copyright © 2014 by Nelson Education Ltd.
6-2
SUPPLY, DEMAND, AND
GOVERNMENT POLICIES
 This chapter analyzes various types of
government policy using only the tools of supply
and demand.
 We begin by considering policies that directly
control prices.
 Then we consider the impact of taxes.
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CONTROLS ON PRICES
 Let us consider the effects of the following
policies on market outcomes.
 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
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How Price Ceilings Affect Market Outcomes
 Let’s assume that the government imposes a
price ceiling on the market for ice cream.
 Two outcomes are possible:
1. The price ceiling is not binding on the market
and the market price will equal the equilibrium
price.
2. The price ceiling is a binding constraint on the
market and the market price will equal the
price ceiling.
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FIGURE 6.1:
A Market with a Price Ceiling
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Case Study
Lines at the Gas Pump
Figure 6.2: The Market for Gasoline with a Price Ceiling
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Case Study
Rent Control in the Short Run and the Long Run
Figure 6.3: Rent Control in the Short Run and in the Long Run
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How Price Floors Affect Market Outcomes
 Let’s assume that the government imposes a
price floor on the market for ice cream.
 Two outcomes are possible:
1. The price floor is not binding on the market and
the market price will equal the equilibrium
price.
2. The price floor is a binding constraint on the
market and the market price will equal the
price floor.
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FIGURE 6.4:
A Market with a Price Floor
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Case Study
The Minimum Wage
Figure 6.5: How the Minimum Wage Affects the Labour Market
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Evaluating Price Controls
 One of the ten principles of economics discussed in
Chapter 1 is that markets are usually a good way to
organize economic activity.
 Prices have the crucial job of balancing supply and
demand and thereby coordinating economic
activity.
 When policymakers set prices by legal decree, they
obscure the signals that normally guide the allocation
of society’s resources.
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Evaluating Price Controls
 Another of the ten principles of
economics is that governments can
sometimes improve market outcomes.
Christopher Elwell / Shutterstock
 Price controls are often aimed at
helping the poor.
• Rent‐control laws try to make
housing affordable for everyone.
• Minimum‐wage laws try to help
people escape poverty.
 Yet price controls often hurt those they
are trying to help.
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Active Learning
Price Controls
140
Determine effects
of:
The market
for
hotel rooms
130
120
P
110
A. $90 price ceiling
S
100
B. $90 price floor
90
D
80
C. $120 price floor
70
60
50
40
0
50
60
70
80
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90 100 110 120 130
Q
6-14
Active Learning
A. $90 Price Ceiling
The price falls to
$90.
Buyers demand
120 rooms, sellers
supply 90, leaving a
shortage.
P
140
The market for
hotel rooms
130
S
120
110
100
90
Price ceiling
80
70
shortage = 30D
60
50
40
050 60 70 80 90 100 110 120 130
Q
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Active Learning
B. $90 Price Floor
Eq’m price is
above the floor, so
floor is not binding.
P
140
P = $100,
Q = 100 rooms.
100
130
The market for
hotel rooms
S
120
110
90
80
D
70
60
50
40
050 60 70 80 90 100 110 120 130
Q
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Active Learning
C. $120 Price Floor
The price rises to $120.
Buyers demand
60 rooms, sellers
supply 120, causing
a surplus.
P140
The market for
hotel rooms
130
S
120
110
100
90
D
80
70
60
50
40
0
50 60 70 80 90 100 110 120 130
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Q
6-17
QuickQuiz
Define price ceiling and price floor, and give
an example of each.
Which leads to a shortage?
Which leads to a surplus?
Why?
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TAXES
 When the government levies a tax on a good, who
bears the burden of the tax?
 The people buying the good?
 The people selling the good?
 Or, if buyers and sellers share the tax burden, what
determines how the burden is divided?
 Tax incidence: the manner in which the burden of a
tax is shared among participants in a market
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How Taxes on Buyers
Affect Market Outcomes
 Suppose, for instance, that our local government
passes a law requiring buyers of ice‐cream cones
to send $0.50 to the government for each
ice‐cream cone they buy.
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How Taxes on Buyers
Affect Market Outcomes
 How does this law affect the buyers and sellers
of ice cream?
 To answer this question, we can follow the
three steps in Chapter 4 for analyzing supply
and demand:
1. Does the law affect the supply curve or
demand curve.
2. Which way the curve shifts.
3. Examine how the shift affects the equilibrium.
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FIGURE 6.6:
A Tax on Buyers
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How Taxes on Sellers
Affect Market Outcomes
style-photography.de / Shutterstock
 Suppose the local government
passes a law requiring sellers of
ice‐cream cones to send $0.50 to
the government for each cone
they sell.
 What are the effects of this law?
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FIGURE 6.7:
A Tax on Sellers
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How Taxes on Sellers
Affect Market Outcomes
 IMPLICATIONS:
 If you compare Figures 6.6 and 6.7, you will notice a
surprising conclusion: Taxes on buyers and taxes on
sellers are equivalent.
 In both cases, the tax places a wedge between the
price that buyers pay and the price that sellers
receive.
 The only difference between taxes on buyers and
taxes on sellers is who sends the money to the
government.
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Elasticity and Tax Incidence
 When a good is taxed, buyers and sellers of the good
share the burden of the tax.
 But how exactly is the tax burden divided?
 Only rarely will it be shared equally.
 To see how the burden is divided, consider the impact
of taxation in the two markets:
1. A market with very elastic supply and relatively
inelastic demand
2. A market with very relatively inelastic supply and a
very elastic demand
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FIGURE 6.9:
How the Burden of a Tax Is Divided
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FIGURE 6.9 (continued)
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QuickQuiz
In a supply-and-demand diagram, show how a tax
on car buyers of $1000 per car affects the quantity
of cars sold and the price of cars.
In another diagram, show how a tax on car sellers of
$1000 per car affects the quantity of cars sold and
the price of cars.
In both of your diagrams, show the change in the
price paid by car buyers and the change in price
received by car sellers.
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Classroom Activity
Ducks in a Row
1. I need three volunteers.
2. One volunteer will play the role of the
government.
3. The second volunteer is an urban shopkeeper.
4. The third volunteer is a consumer.
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THE END
Chapter 6
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