Chapter 6: Supply, Demand and Government Policies

This chapter talks about price ceiling, which are the legal maximum price a good can be sold at, and price floor which is the legal minimum price a good can be sold at. It talks about how a price ceiling or price floor can affect a good by either having surpluses or shortages. Changes in the legal price of a good can either be non-binding or binding. When the government imposes binding prices ceiling in a competitive market, shortages arise and sellers need to ration the scarce sources. When this happens, discrimination tends to occur and the market becomes unfair. The chapter also talks about how the change in the minimum wage affects both firms and laborers. It talks about how the government tends to make laws that help improve the life quality of the poor but in reality, their policies tend to affect the middle class as well. Raising the minimum wage which seems to be a solution, tends to increase total revenue of the workers but leaves a lot of people unemployed in order to be able to pay those workers their now higher salaries. A tax incidence is the manner in which the burden of a tax is shared among the participants in a market, or in simpler terms, the distribution of a tax. For example, the government may choose to tax the firms or the laborers in order to raise revenue. In such cases, if only one of the two is taxed, they end up affecting the opposite curve in the same way. Even if they do share the tax by splitting it, one ends up loosing more than the other and usually, it is the laborer who ends up paying more than the firm.