Journaling of Chapter 6: Supply, Demand, and Government Policies

     Chapter 6 further deals with supply and demand but in regards to government policies in competitive markets. Two main sections of this chapter are price controls and taxes.

     With price controls there are price ceilings and price floors. Price ceiling is the legal maximum on the price at which a good can be sold. Thus, price floor is the opposite, the legal minimum on the price at which a good can be sold. Both of these only matter if they are binding constraints. A price ceiling can only cause a shortage if it is set below the equilibrium price. A price floor can only cause a surplus if it is set above the equilibrium price.

     The next section is about taxes. A tax hurts buyers and sellers in the relationship because buyers have to pay more for their good and the profit made by the sellers decrease as well. The difference between what the buyer pays and what the seller receives is called the tax wedge. When there is a tax wedge, the tax burden will be heavier on whatever relies on the product more. A helpful example referenced in the book was on the cigarette market. Because cigarette users are likely to be addicted, they are more reliant on the supply so the tax burden will fall on them rather than the suppliers.

     I give this chapter a difficulty rating of 1 out of 3. It’s a very straightforward chapter. I get the concepts so I think I just need to work on applying it to supply and demand graphs as of right now.