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Microeconomics
Semester 1
Lesson 6
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Created by
Matezik Sebestak
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Cards (25)
What is the main focus of this lecture?
The lecture focuses on
government
policies
.
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Why do governments intervene in markets?
To make them work better and to promote
fairness
.
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What are the two concepts governments balance when intervening in markets?
Efficiency
and
equity
(fairness).
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What is the purpose of price controls?
To keep prices low or high in the
market
.
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What is the role of indirect taxes in government policy?
To raise revenue that can be
redistributed
.
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What can happen if the basic economics is not understood?
There can be unintended
consequences
from
government
interventions.
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What are the main topics covered in today's lecture?
The effects of
price controls
and
indirect taxes
.
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What are the effects of a price ceiling?
Prevents the price from rising above a certain level
Causes
excess demand
if binding
Has no effect if above
equilibrium price
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What is a price ceiling?
A maximum price set by the
government
that prevents prices from rising above a certain level.
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What happens when a binding price ceiling is imposed?
It lowers the market price and causes
excess demand
.
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What is the current situation regarding renting a home in London?
Renting a home in London is very
expensive
.
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What is likely to happen if the UK government imposes rent controls?
The problem of
excess demand
is likely to increase in the
long run
.
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What can the government do to influence supply and demand in housing?
They can try to build new houses to
increase
supply.
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What are the effects of a price floor?
Prevents the price from falling below a certain level
Causes
excess supply
if binding
Has no effect if below
equilibrium price
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What is a price floor?
A minimum price set by the
government
that prevents prices from falling below a
certain
level.
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What happens when a binding price floor is imposed?
It raises the market price and causes
excess supply
.
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What is the purpose of minimum wage legislation?
To ensure people receive reasonable
incomes
.
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How does minimum wage affect high-skilled workers?
Minimum wage has
no effect
on the wage of high-skilled workers.
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What factors determine the extent of unemployment due to minimum wage?
The
elasticity
of demand and supply.
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What are the effects of imposing taxes on goods?
Specific tax
: a fixed amount per unit sold
Ad valorem tax
: a percentage of the price
Decreases supply and raises
equilibrium price
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What is the incidence of tax?
The distribution of tax burden on
buyers
and
sellers
.
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How does the elasticity of demand and supply affect tax incidence?
When demand is more
inelastic
than supply, a higher burden falls on the
buyers
.
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What was the goal of the luxury tax adopted by the US government in 1990?
To raise tax revenues from the
wealthiest
in society.
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What was the effect of the luxury tax on yacht builders?
The
incidence
of the tax was paid by the less wealthy yacht builders.
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What are the key takeaways regarding price controls and taxes?
Price ceilings
prevent prices from being too high but cause
excess demand
.
Price floors
prevent prices from being too low but cause
excess supply
.
Indirect taxes
decrease supply and raise the equilibrium price of goods.
Tax incidence
depends on the
price elasticity
of demand.
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