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About this unit

This unit begins the study of product markets: the markets for the goods and services produced. In this unit, you will begins the study of product markets, focusing on the supply and demand model. Students will be introduced to the determinants of demand and supply, market equilibrium, and how changes in equilibrium occur when supply and demand change. Then, build on the supply and demand model to deepen your economics toolkit with the concepts of elasticity, consumer and producer surplus, and the impact of government policies.

AP® is a registered trademark of the College Board, which has not reviewed this resource.

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Supply and Demand | AP®︎/College Microeconomics | Economics | Khan Academy

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This unit begins the study of product markets: the markets for the goods and services produced. In this unit, you will begins the study of product markets, focusing on the supply and demand model. Students will be introduced to the determinants of demand and supply, market equilibrium, and how changes in equilibrium occur when supply and demand change.

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Rent control does not affordable housing make - Marketplace Morning Report

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American consumers are still driving the economy. Europe implements new "open banking" rules. Plus, with California's new tenant protection laws, we look at housing affordability, or lack thereof, in the U.S.

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APMic U2 L5 Effects of Government Intervention in Markets

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1. What are price controls, and why would government intervene in markets with this tool?

2. How can price controls create problems and make a market inefficient?

3. Why are economists often deeply skeptical of attempts to intervene in markets?

4. Who benefits and who loses from price controls, and why they are used despite their well-known problems?

5. What is the meaning and importance of total surplus and how it can be used to illustrate efficiency in markets?

6. How do taxes affect total surplus and create deadweight loss?

7. Look at this graph representing the shirt market. Identify the following:

1. the after-tax price paid by consumers, and the after-tax quantity.

2. consumer surplus after the tax.

3. the area representing tax revenue received by the government.

4. deadweight loss.

5. what happens to government revenue if demand for shirts becomes more elastic.

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Define forms of government price and quantity intervention.

Explain (using graphs where appropriate) how government policies alter consumer and producer behaviors that influence incentives and therefore affect outcomes.

Calculate (using data from a graph or table where appropriate) changes in market outcomes resulting from government policies.

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Government policies influence consumer and producer behavior and therefore affect market outcomes.

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Some government policies, such as price floors, price ceilings, and other forms of price and quantity regulation, affect incentives and outcomes in all market structures.

Governments use taxes and subsidies to change incentives in ways that influence consumer and producer behavior, shifting the supply and demand curves accordingly.

Taxes and subsidies affect government revenues or costs.

Government intervention in a market producing the efficient quantity through taxes, subsidies, price controls, or quantity controls can only decrease allocative efficiency.

Deadweight loss represents the losses to buyers and sellers as a result of government intervention in an efficient market.

The incidence of taxes and subsidies imposed on goods traded in perfectly competitive markets depends on the elasticity of supply and demand.

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A Price Floor or a minimum price is an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. Ex: farmers - many governments intervene by establishing price floors to ensure that farmers make enough money. The most common price floor is the minimum wage-the minimum price that can be payed for labor.

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Price Control - Price Floor | Intelligent Economist

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A Price Floor or a minimum price is an intervention to raise market prices if the government feels the price is too low. In this case, since the new price is higher, the producers benefit. Ex: farmers - many governments intervene by establishing price floors to ensure that farmers make enough money.

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APMic Unit 2 Lesson 5 - Effect of Government Intervention in Markets Flashcards | Quizlet

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Start studying APMic Unit 2 Lesson 5 - Effect of Government Intervention in Markets. Learn vocabulary, terms, and more with flashcards, games, and other study tools.

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A Price Control occurs when the government feels the current equilibrium price is unfair and intervenes and adjusts the market price. A maximum price or price ceiling is basically when the government believes the price is too high and sets a maximum price that producers can charge, this lies below the equilibrium price.

Price ceilings often cause shortages. For examples: In agriculture, medicine and education many governments set maximum prices to make the goods or services more affordable.

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Price Control - Price Ceiling | Intelligent Economist

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A Price Control occurs when the government feels the current equilibrium price is unfair and intervenes and adjusts the market price. A maximum price or price ceiling is basically when the government believes the price is too high and sets a maximum price that producers can charge, this lies below the equilibrium price.

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Many of the causes of deadweight loss are unavoidable parts of a functioning society:

1. Taxes: These are charges by the government, in addition to the price of goods or services. One common example would be a sales tax.

2. Price ceilings: These price controls are also set by the government and prevent sellers from charging above a certain price for their goods or services. An example of a price ceiling is rent control.

3. Price floors: Price floors are similar to price ceilings but in reverse. They are price controls that prevent businesses or individuals from charging less than a specific amount for goods/services. One example is minimum wage, which prevents individuals from selling their labor for less than a certain amount per hour.

In all of these cases, external limits on prices of goods or services affect the supply and demand of these goods/services.

For instance, in the case of rent control (a type of price ceiling), the demand will be higher than the supply of a building as more people will want to live in a building as compared to the number of people that can get an apartment. Likewise, taxes increase the price of products, which naturally decreases their demand. And minimum wage may increase the unemployment rate (a clear deadweight loss) in cases when employers who need to hire employees are unable to pay the minimum wage.

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A deadweight loss is a cost to society as a whole that is generated by an economically inefficient allocation of resources within the market. It arises at times when supply and demand--the two most fundamental forces driving the economy--are not balanced.

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In 1971, President Nixon, in an effort to control inflation, declared price increases illegal. Because prices couldn't increase, they began hitting the ceiling. Join us as we look at the effects of Nixon's regulation on trade and industry, including some bizarre unintended consequences.

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Administration in government run institutions in India is also very unpleasant to deal with. They are regularly rude to the people they are providing a service to. Your logic explains why stores in communist countries might be unpleasant to their customers, but why would people in government run institutions where the service does not involve an exchange of money also be so rude?Moreover, I have seen that lower administration in India are extremely obsequious to the upper administration, there is a very common tendency to show servile behavior to one's boss. Why might this be? Can economics explain this?

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Price Ceilings: Shortages & Quality Reductions | Microeconomics Videos

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A price ceiling is a government-imposed maximum on the price that can be charged for a good. Price ceilings result in five major unintended consequences, and in this video we cover two of them. Using the supply and demand curve, we show how price ceilings lead to a shortage of goods and to low quality goods.

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I got two questions:

First, how did you determinate that, when the price is stucked in one point, for example 1 dolar, at a quiantity of Qs, in wich the consumers pay 3 dolars, the diference of both prices must be payed by waiting in line?
Second, I think that to say the time used to wait in line is wasted is a judgement too fast maked...For example, I prefer to take a bus than to go in car to some place, although I spend more time, because in the bus I can read. So, if I wait 4 hours in the same place, I obviusly do the same, and finally pay less for X good.

Thanks. I hope you to understand my questions, because I'm not ''American'', and I think my engish is too rusted xD.

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Price Ceilings: Lines & Search Costs | Microeconomics Videos

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We explore two unintended consequences of price ceilings: long lines and search costs. When price ceilings were imposed on gasoline, people could not compete for gas by bidding up the price. Instead, the only way to compete was to wait in line, which was more wasteful.

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I think that while misallocation of resources as described in the video is a very important (and often unduly omitted) point, it applies precisely to situations when goods are allocated to buyers in a totally random fashion, where there is no competition among buyers on other (non-price) margins - lines, bribes etc. On the other hand, if buyers engage in any activity to outcompete other buyers and secure allocation of goods to themselves, these very activities ensure that ultimately the goods will indeed end up in the hands of those buyers who value the goods most as they were willing to sacrifice the most. (These successful buyers will not be always the same group of people as their composition will be affected by the structure of the ultimate cost these buyers incur in getting the goods.) There would then be, strictly speaking, no misallocation of resources as described in the video. Would it be fair to say then, that unlike the DWL, the misallocation of resources is a consequence of price controls that is possible, but not necessary?

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Price Ceilings: Misallocation of Resources | Microeconomics Videos

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I think that while misallocation of resources as described in the video is a very important (and often unduly omitted) point, it applies precisely to situations when goods are allocated to buyers in a totally random fashion, where there is no competition among buyers on other (non-price) margins - lines, bribes etc.

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Hi Maxim,
I think I'm too late for your essay but here's the answer. That graph is in the Modern Principles of Economics textbook by Tyler Cowen and Alex Tabarrok - it is from "Smith, Lawrence B. 1998. An economic assessment of rent controls: The Ontario experience. Journal of Real Estate Finance and Economics 1: 217-231."

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Price Ceilings: Rent Controls| Microeconomics Videos

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Hi Maxim, I think I'm too late for your essay but here's the answer. That graph is in the Modern Principles of Economics textbook by Tyler Cowen and Alex Tabarrok - it is from "Smith, Lawrence B. 1998. An economic assessment of rent controls: The Ontario experience.

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To renters, rent control is often seen as a very good thing. But cheap rents can actually cost a lot.

Let's take a look at the consequences of rent control in Mumbai, where many tenants are paying for their flats at 1940s rates. If a landlord receives a few hundred rupees per month for large flats that, on the market, should be renting at 100,000 rupees, this greatly disincentives making necessary building repairs. The landlord may not even be able to afford the taxes on the building, not to mention the upkeep.

When you have enough rental situations like this, it can lead to a crumbling city - quite literally. Occupied rent-controlled buildings have been known to suddenly collapse.

Additionally, Indian tenant rights are strong, and the courts are very slow, so it's difficult to evict anyone. Many landlords simply prefer to leave their rent-controlled flats unoccupied rather than risk getting stuck with the same tenant, at the same price, for the next fifty or so years. And yet there's a massive housing shortage in Mumbai. Thanks to the costs of rent control, it's estimated that about 15% of the Mumbai housing stock is vacant.

In the video, Alex Tabarrok talks with Vaidehi Tandel, Reuben Abraham, and Kshitij Batra at the IDFC Institute, a think tank in Mumbai that focuses on the issues surrounding urban infrastructure. Their conversations offer insight into the housing crisis plaguing Mumbai.

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Rent Control in Mumbai | Microeconomics Videos

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In the video, Alex Tabarrok talks with Vaidehi Tandel, Reuben Abraham, and Kshitij Batra at the IDFC Institute, a think tank in Mumbai that focuses on issues surrounding urban infrastructure. They take a look at the consequences of rent control in Mumbai, where many tenants are paying for their flats at 1940s rates.

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Price Floors: The Minimum Wage | Microeconomics Videos

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Using the supply and demand curve and real world examples, we show how price floors create surpluses (such as unemployment) as well as deadweight loss.

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Price Floors: Airline Fares | Microeconomics Videos

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In this video, we show how consumers are negatively affected by price floors, which lead to wasteful increases in quality and a misallocation of resources.

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Blaming gas lines on price controls may be correct in a narrow sense but it seems to me the root cause (and blame) still falls to the collusion of suppliers (the OPEC cartel) in controlling and limiting world-wide oil production. Without this imposed restraint on competition of production, there would have been no need (or even any consideration) of government intervention of any sort or by any policy, good or bad. It may also be true that "there are no shortages in free market" but this statement totally ignores that OPEC had already compromised free-market mechanisms..

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Why Do Governments Enact Price Controls? | Microeconomics Videos

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Blaming gas lines on price controls may be correct in a narrow sense but it seems to me the root cause (and blame) still falls to the collusion of suppliers (the OPEC cartel) in controlling and limiting world-wide oil production.

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Yes, if elasticities are like that. But the supply of labor is not necessarily more elastic than demand for labor. Imagine that technology allowed demanders of labor (employers) to more easily substitute machines for labor. In that case the demand curve would be more elastic. Also imagine there was less welfare assistance for the unemployed and no minimum wage laws either. Supply of labor would be less elastic. Regarding spending, I would also count investment spending as spending. If business owners have more money to invest, they might invest it - spend it on future goods as it were. The problem in a depression is there is neither consumption nor investment spending.

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In this video we cover commodity taxes, or taxes and subsidies on goods. We show that the economic outcome is the same, no matter the legal incidence of the tax. Regardless of whether buyers or sellers pay, the laws of supply and demand shift the supply or demand curve and the price is the same for either case.

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Is there a typo in this question:

"Let's take a look at the supply side of junk food. If junk food supply is highly elastic-perhaps because it's not that hard to start selling salads with lowfat dressing instead of mayonnaise- and cheese-laden burgers-will a junk food tax have a bigger effect if supply were inelastic or elastic?"

Should the last use of the word 'supply' actually be 'demand'? It seems odd to establish an if-condition ("if junk food supply is highly elastic"), and then ask us to consider whether the condition holds or not.

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Who Pays the Tax? | Microeconomics Videos

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Who bears the burden of a tax? Buyers or sellers? This video looks at why the more elastic side of the market pays a smaller share of a tax and the more inelastic side of the market pays a greater share of a tax.

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Hello gents,
Regarding the following 2 questions:
"Suppose that Maria is willing to pay $40 for a haircut, and her stylist Juan is willing to accept as little as $25 for a haircut. If the state where Maria and Juan live instituted a tax on services that included a $5 per haircut tax on stylists and barbers, what will happen to the $15 of economic benefit?"
I have asnswered that this $ 15 will be decreased since there is $ 5 will be gone for the Tax but the answer was wrong, is there any clarification or I have misunderstood something?

The 2nd question is:
The competitive market equilibrium maximizes gains from trade. Taxes and subsidies, by altering the market outcome, reduce the gains from trade. Does this happen primarily because of the impact of taxes and subsidies on prices, or the impact of taxes and subsidies on quantities?

I have answered the "Prices" but again the answer was wrong, could you help me with clarification?

Thanks - Helu.

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Tax Revenue and Deadweight Loss | Microeconomics Videos

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Governments levy taxes to get revenues, though raising revenues through taxes does not come without a cost. We call this cost of raising revenues "deadweight loss." In this video, we look at how taxes affect consumer and producer surplus, and the concept of deadweight loss.

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Price Ceilings and Floors- Micro Topic 2.8

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AP Microeconomics: 2.8-2.9 Government Intervention and International Trade