12. The relationship between quantity supplied and price is
_____ and the relationship between quantity demanded
and price is _____.
A) direct, inverse
B) inverse, direct
C) inverse, inverse
D) direct, direct
E) strong, weak
13. A leftward shift of a supply curve might be caused by:
A) an improvement in the relevant technique of
production.
B) a decline in the prices of needed inputs (resources).
C) an increase in consumer incomes.
D) some firms leaving a market.
14. Which of the following statements is correct?
A) If demand increases and supply decreases, equilibrium price
will fall.
B) If the demand and the supply both fall at the same time,
quantity will be indeterminate
C) If demand decreases and supply increases, equilibrium price
will rise.
D) If supply increases and demand decreases, equilibrium price
will fall.
E) If supply falls and demand remains constant, equilibrium price
will fall.
15. At price $20, there would be a SURPLUS of…
A) 100 B) 150 C) 200
D) 50 E) 0
16. What would be the effect of a price floor at $60
A) It would ineffective D) A shortage of 100
B) A shortage of 50
E) A surplus of 100
C) Quantity demanded would increase
17. Which of the following statements is correct?
A) If demand increases and supply decreases, equilibrium price
will fall.
B) If the demand and the supply both fall at the same time,
quantity will be indeterminate
C) If demand decreases and supply increases, equilibrium price
will rise.
D) If supply increases and demand decreases, equilibrium price
will fall.
E) If supply falls and demand remains constant, equilibrium price
will fall.
18. If Buyer’s Max=$300, Seller’s Min=$150, & Price=$350 then
A) consumer’s surplus is 50
B) consumer’s surplus is 100
C) producer’s surplus is 200
D) producer’s surplus is 50
E) there would be no exchange
Government Intervention
Basic Economic Concepts #6
Government
Involvement
#1-Price Controls: Floors and Ceilings
#2-Import Quotas
#3-Subsidies
#4-Excise Taxes
6
#1-PRICE CONTROLS
Who likes the idea of having a price ceiling on gas
so prices will never go over $1 per gallon?
7
Price Ceiling
Maximum legal price a seller can charge for a product.
Goal: Make affordable by keeping price from reaching Eq.
P
Gasoline
S
$5
Does this
4
policy help
consumers?
Result: BLACK 3
MARKETS
Price Ceiling
To have an effect,
a price ceiling must be
below equilibrium
2
Shortage
(Qd>Qs)
1
o
10
20
30
40
D
50
60
70
80
Q
8
Price Floor
Minimum legal price a seller can sell a product.
Goal: Keep price high by keeping price from falling to Eq.
P
Corn
S
$
Surplus
(Qd<Qs)
To have an effect,
a price floor must be
Does this above equilibrium
Price Floor
4
3
policy help
corn
producers?
2
1
o
D
10
20
30
40
50
60
70
80
Q
9
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers
and producers surplus
P
S
CS
Pc
PS
D
Qe
10
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and
producers surplus
P
S
Price FLOOR
Pc
CS
DEADWEIGHT LOSS
The Lost CS and PS.
PS
INEFFICIENT!
D
Qfloor Qe
11
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and
producers surplus
P
S
CS
Pc
PS
D
Qe
12
Are Price Controls Good or Bad?
To be “efficient” a market must maximize consumers and
producers surplus
P
S
Pc
DEADWEIGHT LOSS
The Lost CS and PS.
CS
INEFFICIENT!
Price
CEILING
PS
D
Qceiling Qe
13
#2 Import Quotas
A quota is a limit on number of imports.
The government sets the maximum amount that
can come in the country.
Purpose:
•To protect domestic producers from a
cheaper world price.
•To prevent domestic unemployment
14
International Trade and Quotas
Identify the following:
1. CS with no trade H
2. PS with no trade TLI
3. CS if we trade at world
price (PW) HIJKLMNRS
4. PS if we trade at world
price (PW) T
5. Amount we import at
world price (PW) Q5-Q1
6. If the government sets
This graphs show the domestic
a quota on imports of
supply and demand for grain.
Q4 - Q2, what happens
The letters represent area.
to CS and PS? CS smaller
PS bigger
#3 Subsidies
The government just gives producers money.
The goal is for them to make more of the goods
that the government thinks are important.
Ex:
•Agriculture (to prevent famine)
•Pharmaceutical Companies
•Environmentally Safe Vehicles
•FAFSA
16
Result of Subsidies to Corn Producers
Price of Corn
S
SSubsidy
Price Down
Quantity Up
Everyone
Wins, Right?
Pe
P1
D
o
Qe Q1
Q
Quantity of Corn
17
18
#4 Excise Taxes
Excise Tax = A per unit tax on producers
For every unit made, the producer must pay $
NOT a Lump Sum (one time only)Tax
The goal is for them to make less of the goods that
the government deems dangerous or unwanted.
Ex:
•Cigarettes “sin tax”
•Alcohol “sin tax”
•Tariffs on imported goods
•Environmentally Unsafe Products
•Etc.
19
Excise Taxes
Supply
Schedule
P
Qs
$5
140
$4
120
Government sets a $2 per
unit
tax
on
Cigarettes
P
S
$5
4
3
$3
100
$2
80
$1
60
2
1
o
D
40
60
80
100
120
140
Q
20
Excise Taxes
Supply
Schedule
P
Qs
$5 $7
140
$4 $6
120
Government sets a $2 per
unit
tax
on
Cigarettes
P
S
$5
4
3
$3 $5
100
$2 $4
80
$1 $3
60
2
1
o
D
40
60
80
100
120
140
Q
21
Excise Taxes
Supply
Schedule
P
Qs
$5 $7
140
$4 $6
120
P
S
$5
4
Tax is the vertical
distance between
supply curves
3
$3 $5
100
$2 $4
80
$1 $3
60
STax
2
1
o
D
40
60
80
100
120
140
Q
22
FRQ #2