Chapter 4: Demand and Supply: Applications and Extensions
TEXTBOOK Reading Assignment: MindTap Textbook Chapter 4
Chapter Learning Tools
WHAT TO LEARN: Chapter 4 OUTLINE
I. The Link Between Resource and Product Markets
A. The markets for resources and products are closely linked.
1. Changes in one will affect the other.
II. Economics of Price Controls
A. Price Ceilings
1. A price ceiling is a legally established maximum price that sellers may charge.
2. The direct effect of a price ceiling below the equilibrium price is a shortage: quantity demanded exceeds quantity supplied.
B. Secondary Effects of Price Ceilings
1. Reduction in the quality of the good.
2. Inefficient use.
3. Lower future supply.
4. Non-price rationing will be of more importance.
C. Effects of Rent Control
1. Shortages and black markets will develop.
2. The future supply of housing will decline.
3. The quality of housing will deteriorate.
4. Non-price methods of rationing will increase in importance.
5. Inefficient use of housing will result.
6. Long-term renters will benefit at the expense of newcomers.
D. Price Floor
1. Price floor is a legally established minimum price that buyers must pay.
2. The direct effect of a price ceiling below the equilibrium price is a surplus: quantity supplied exceeds quantity demanded.
E. Minimum Wage Effects
1. Direct effect.
2. Indirect effects.
3. A higher minimum wage does little to help the poor.
III. Black Markets and the Importance of the Legal Structure
A. Black Markets
1. Black market: markets that operate outside the legal system.
a. Either sell illegal items or items at illegal prices or terms.
2. Black markets have a higher incidence of defective products, higher profit rates, and greater violence.
B. Legal System
1. A legal system that provides secure property rights and unbiased enforcement of contracts enhances the operation of markets.
IV. The Impact of a Tax
A. Tax incidence
1. The legal assignment of who pays a tax is called the statutory incidence.
V. Tax Rates, Tax Revenues, and the Laffer Curve
A. Average Tax Rate
1. Average tax rate equals tax liability divided by taxable income.
a. Progressive tax is one in which the average tax rate rises with income.
b. Proportional tax is one in which the average tax rate stays the same across income levels.
c. Regressive tax is one in which the average tax rate falls with income.
B. Marginal Tax Rate
1. Marginal tax rate equals change in tax liability divided by change in taxable income.
C. Tax Rate and Tax Base
1. Tax rate is the percentage rate at which an economic activity is taxed.
2. Tax base the level of the activity that is taxed.
D. Laffer Curve
1. Laffer curve illustrates the relationship between tax rates and tax revenues.
E. Laffer Curve and Tax Changes in the 1980s
1. During the 1980s, the top marginal income tax rate fell from 70% to 33%.
2, Need to distinguish between changes in tax rates and changes in tax revenues.
VI. The Impact of a Subsidy
A. Benefit of a Subsidy
1. The division of a benefit from a subsidy us determined by the relative elasticities of demand and supply rather than to whom the subsidy is actually paid.