Chapter 6 Exercises 7-11. Supply, Demand, and Government Policies.
Summary
TLDRIn this video, the speaker tackles exercises 7 to 11 from Chapter 6 of Mankiw's 'Principles of Economics,' focusing on supply, demand, and government policies. The key topics include the effects of a $0.50 gasoline tax on consumers and producers, how elasticity influences tax effectiveness, the impact of taxes on employment in relation to minimum wage, and policies aimed at reducing gun violence and cigarette consumption. Diagrams and detailed explanations are used throughout to demonstrate these economic concepts. The video ends with a discussion of government subsidies and their effect on markets.
Takeaways
- 📉 A $0.50 tax on gasoline affects both consumers and producers equally, as the tax is shared between them.
- 📊 Whether the tax is imposed on consumers or producers, the market outcome remains the same, with a reduced quantity of gasoline sold and a higher price for consumers.
- ⚖️ If the demand for gasoline is more elastic, the tax will be more effective in reducing gasoline consumption due to greater sensitivity to price changes.
- 💸 Consumers are hurt by the gasoline tax as they end up paying more, reducing their demand for gasoline.
- 🚶♂️ Workers in industries related to gasoline are also negatively affected by the tax, as reduced consumption leads to lower demand for labor.
- 💼 An increase in the minimum wage can cause unemployment, as the higher wage makes it more expensive for businesses to hire workers.
- 📈 The elasticity of demand and supply determines how much unemployment will result from a minimum wage increase, with more elastic demand leading to higher unemployment.
- 🔫 Taxing guns or ammunition can decrease demand, as higher costs make them less affordable for consumers.
- 🚬 Campaigns against smoking and price support programs for tobacco create a dual effect on cigarette consumption, reducing demand while maintaining higher prices.
- 🍦 A $0.50 subsidy for ice cream increases demand, making ice cream more affordable for buyers and increasing the quantity sold.
Q & A
What is the impact of imposing a $0.50 tax on gasoline in the U.S.?
-Imposing a $0.50 tax on gasoline increases the price consumers pay, leading to a decrease in the quantity of gasoline consumed, as consumers respond to the higher price by buying less. The tax is shared between consumers and producers, reflected in the difference between what consumers pay and what producers receive.
Does it matter whether the gasoline tax is imposed on producers or consumers?
-No, it doesn't matter whether the tax is imposed on producers or consumers because the economic outcome remains the same. The tax burden is shared between the two, with the price adjusting accordingly in both cases.
How does the elasticity of demand affect the effectiveness of the gasoline tax in reducing consumption?
-If the demand for gasoline is more elastic, the tax will be more effective in reducing consumption because consumers are more sensitive to price changes. A small increase in price due to the tax will lead to a larger reduction in quantity demanded.
Are consumers of gasoline helped or hurt by the tax?
-Consumers are hurt by the tax because they have to pay a higher price for gasoline, which reduces their purchasing power and likely leads to reduced consumption.
How does the gasoline tax affect workers in the gasoline industry?
-Workers in the gasoline industry are hurt by the tax because the reduction in gasoline consumption may lead to lower demand for labor in the industry, potentially resulting in layoffs or reduced wages.
What happens when a minimum wage is set above the equilibrium wage in the labor market for unskilled workers?
-When a minimum wage is set above the equilibrium wage, it creates a surplus of labor, meaning there are more workers willing to work at that wage than there are jobs available. This leads to unemployment, as businesses hire fewer workers.
How does the elasticity of demand and supply affect the impact of an increase in the minimum wage on unemployment?
-The more elastic the demand for labor, the greater the increase in unemployment when the minimum wage is raised. A more elastic supply of labor also increases unemployment, as more workers enter the market seeking higher wages.
How do policies aimed at reducing violent crime by restricting guns affect the gun market?
-Policies such as taxes on gun buyers reduce the demand for guns, leading to lower prices and fewer guns sold. If the tax is imposed on suppliers, the supply curve shifts, also resulting in higher prices for consumers and reduced gun purchases.
What is the effect of a tax on ammunition in the context of gun control policies?
-A tax on ammunition, a complementary good to guns, reduces the demand for ammunition. Since guns and ammunition are used together, this also leads to a decrease in the demand for guns, further reducing gun purchases.
How do subsidies on goods like ice cream cones affect the market?
-A subsidy on a good like ice cream cones increases the demand, shifting the demand curve to the right. As a result, the price paid by buyers decreases, the quantity sold increases, and sellers receive a higher effective price due to the subsidy.
Outlines
💡 Introduction to Gasoline Tax and Market Impact
In this video, the speaker discusses exercises from Chapter 6 of Mankiw's *Principles of Economics*, focusing on the effects of a $0.50 tax on gasoline. Using a supply and demand diagram, the speaker explains how the tax impacts consumers and producers. Consumers pay higher prices, reducing their demand, while producers receive a lower price. The same effects occur whether the tax is imposed on consumers or producers. The difference in price before and after the tax is equivalent to the tax amount, showing that both parties share the burden.
🔄 Impact of Elastic Demand on Gasoline Consumption
The speaker examines how a more elastic demand curve affects the outcome of the gasoline tax. When demand is elastic, consumers reduce their gasoline consumption more significantly in response to price increases, making the tax more effective in reducing quantity. The tax still splits between consumers and producers, but a larger burden falls on producers, as they receive significantly lower prices due to reduced demand. Elasticity plays a key role in determining how much the quantity of gasoline decreases.
📉 Minimum Wage and Unemployment Dynamics
Here, the speaker shifts to the effects of minimum wage laws on the labor market for unskilled workers. The speaker explains that when a minimum wage is set above the market equilibrium, it creates unemployment because the quantity of labor supplied exceeds the demand from employers. The result is a surplus of workers, meaning some workers will be left unemployed. Total wage payments to employed workers are calculated by multiplying the minimum wage by the quantity of labor demanded (LD).
📊 Elasticity and Unemployment with Wage Increases
This section explores how an increase in the minimum wage further exacerbates unemployment, especially when demand is more elastic. A highly elastic labor demand means that even small wage increases result in significant drops in employment. The speaker compares situations with elastic and inelastic demand, demonstrating that inelastic demand causes less unemployment, while elastic demand leads to larger employment declines. The overall payments to workers can either increase or decrease depending on the elasticity of demand and supply.
🔫 Policy Impact on Gun Market: Tax and Price Floor
The speaker uses supply and demand diagrams to illustrate the impact of various policies aimed at reducing gun violence. A tax on gun buyers reduces demand, causing prices to fall for sellers, while a price floor for guns leads to a surplus. Additionally, a tax on ammunition, a complement to guns, decreases demand for guns as well, further reducing prices and quantities sold. These diagrams show how taxes and price floors can influence market outcomes.
🚭 Media Campaigns and Price Supports in Cigarette Market
This section analyzes the combined effects of media campaigns discouraging cigarette use and price supports for tobacco farmers. Media campaigns reduce the demand for cigarettes, leading to lower prices and quantities sold. Simultaneously, price support programs raise the price of tobacco, creating a surplus in the tobacco market. Since demand for cigarettes is typically inelastic, the price increase is more burdensome for consumers, leading to higher prices but fewer cigarettes being consumed.
🍦 Subsidies and Their Effects on Ice Cream Demand
The speaker concludes by discussing the effects of a $0.50 subsidy on ice cream cones. A subsidy shifts the demand curve to the right, increasing the quantity of ice cream sold and raising the price received by sellers. Buyers pay a lower price due to the subsidy, while sellers receive a higher effective price. The increase in quantity sold benefits both buyers and sellers, illustrating the positive market effects of subsidies on demand.
Mindmap
Keywords
💡Supply and Demand
💡Tax
💡Elasticity
💡Equilibrium
💡Minimum Wage
💡Unemployment
💡Price Floor
💡Complementary Goods
💡Surplus
💡Subsidy
Highlights
Introduction to solving exercises 7 to 11 of Chapter 6 on Supply, Demand, and Government Policies from Mankiw's Principles of Economics.
Explains the impact of a $0.50 tax on gasoline, examining both the supply and demand sides, with a detailed analysis of the equilibrium shift.
Clarifies that whether the tax is imposed on producers or consumers, the tax burden is shared, leading to a change in price and quantity.
Discusses the effect of elasticity on the effectiveness of a tax in reducing gasoline consumption, using a supply and demand diagram to illustrate the point.
Demonstrates how more elastic demand leads to a greater reduction in gasoline consumption when a tax is imposed, as consumers are more sensitive to price changes.
Examines how consumers of gasoline are negatively impacted by the tax as they face higher prices, leading to reduced consumption.
Analyzes how the tax impacts workers in the gasoline industry, potentially reducing the demand for labor as gasoline consumption decreases.
Uses a supply and demand diagram to show the effects of minimum wage on the labor market, highlighting the creation of unemployment due to a wage floor.
Explores the role of elasticity in determining the extent of unemployment caused by increases in the minimum wage, with more elastic demand leading to greater unemployment.
Illustrates how an increase in the minimum wage affects total wage payments to workers, depending on the elasticity of demand for labor.
Analyzes the impact of various policies aimed at reducing gun violence, such as taxes on gun buyers and sellers, using supply and demand diagrams.
Explains the consequences of a price floor on guns, showing how it creates a surplus in the market, similar to the effect of a minimum wage.
Explores the effects of taxing ammunition as a complementary good to guns, which leads to a decrease in both the demand for guns and ammunition.
Discusses the combined impact of media campaigns and price support programs on cigarette consumption, using supply and demand analysis to explain price and quantity effects.
Describes the impact of a $0.50 subsidy for ice cream cones on demand, showing how the subsidy shifts the demand curve and increases quantity sold.
Transcripts
hi everyone in this video we're going to
solve the exercises from 7 to 11 of
chapter 6 supply demand and government
policies this is a book of regular
Mankiw principles of economics so the
seventh exercise says that come and the
president decide that the United States
should reduce air pollution by reducing
its use of gasoline the they impose a
$0.50 tax for each gallon of gasoline
sold a should they impose of these tax
and producers or consumers explain
carefully using a supply and demand
diagram so here we have the market of
gasoline so here we have the prize in
quantities here we have the initial this
is the initial condition where we have
this this price and equilibrium so given
the tax the consumers they have to pay
more so remember when they have to pay
more they because of the law of demand
are you going to consume less so in this
case we have here that this is going to
be the quantities that the consumers
they are going to consume after the tax
and the price this price this p2 is
going to be what the sellers they are
going to receive remember this q1 was
the initial one now with the tax the
market is going just to be sold these
quantities less than the original the
price of the sellers are going to
receive is p2 and this p3 is the prices
that is going to be charged for the
consumers and the distance P 3 minus P 2
is given by the $0.50 tax what about if
a Congress
as in the president they tax the other
side
the supply so in this case this is going
to be this case this because the initial
was this apply and the this is going to
be they have to be they have to pay the
sellers so the suppliers are going to be
affected so remember when something
affects supply it goes to shift to the
left so this is going to be the case so
here we have the de prize the p3 is the
quantity of money that the demand have
to pay but this money is not taken but
completely 100% but it supply because
they have to give the difference from p3
to B 2 so this is going to be p2 is
going to be the money that they're going
to receive so the conclusion is it is
the same so it doesn't matter if you
charge the consumer or the seller
because this is going to be reflected at
the same time they're going to divide
displayed bargain the tax if the demand
for gasoline were more elastic would
these tags be more effective in reducing
the quantity of gasoline consumed
explained with both words and diagram so
here remember we have the the first case
when we have the diamond and here we
have the situation right what about if
the demand is more elastic so here we
have here this which is like clearly
more elastic than the other curve so in
this case we have the demand is going to
shift down to d2 and this is going to be
this Picchu is going to be the plot the
money that the sellers they are going to
receive but the quantities that they're
going to be reduced from q1 to q2 and
the price that they're going
be charged for the consumers is going to
be p3 and a difference p3 mpg and you
see here that the distance here is lower
than the distance from p1 to p2 so what
does he mean it means that even even the
tax is going to be split between
consumers and supply their consumers and
sellers this is going to be heavily like
it's going to be more taxed for the
supply because they are just going to
receive this the difference is going to
be larger P 1 2 minus P 2 then P 1 from
P 3 it means that if the demand so the
curve which is more elastic it's going
to suffer less the tax so in this case
with the question is would this tax be
more effective in reducing the quantity
yes because given the elasticity they
are more sensitive of changes in the
price so in this case is going to be
reduced from q1 to q2 which is larger
than the change that they have before so
this is more effective definitely so
consumers of gasoline helped or hurt by
these tax well I there there are
obviously they are heard they they are
hurt because they have to pay more for
the for the gasoline so they could be
lef initely less they go Benham definite
worse in the irregular workers all
industry helped or hurt by this type 1
so it will be the 10k seem to be less
price so there's going to receive less
money so they they don't need the same
quantity of inputs in this case labor in
this case workers so they're going to be
held people hired because of the tax 8
case study in this chapter discusses the
federal minimum wage law a suppose the
minimum wage is the market for unskilled
labor using a supply and demand diagram
of the market for instilled labor show
the market wage the number of workers
who are employed and the number workers
who are unemployed also show the total
wage payments to unskilled workers so
here we have the labor market instead of
price we have here wage okay so this is
going to be these decays so so here we
have the wage instead of price of
workers instead of the quantity so so
here we have the demand and in this case
we have the de Cleveland and here is the
minimum wage so this is called surplus
so this is called unemployment because
the the enterprises they are just have
this position for having this quantity
of people at these of this wage but at
the same time the supply which is the
unskilled workers they have this price
they're they they are like this pose to
receive all these this these weights
it's going to be like larger than the
enterprise they're going to be like
disposed to to hire so this is the case
so here we have the LD which is demand
the quantity which is effective demand
by the enterprises on the other side is
why they are willing to to offer to the
market this is the L else and this okay
this L 1 was the initial case so the
question was ok we already have the the
market way the numbers workers who are
employed or LD and the numbers of
workers who are unemployed L as les
subtract LD also show the Tod
which payment 'when skilled workers for
the total the total payment is double
minimum x LG is going to be the easiest
work it's going to be the total payment
okay so be now pause the Secretary of
Labor proposes an increase half in the
minimum wage what effect would this
increase half unemployment does the
change in employment depend on the
elasticity of demand the elasticity of
supply both elasticity's or neither so
here we have the initial case you know
we have before so remain imagine that is
going to be an increase in the minimum
wage so you're going to be double prime
so what happened here you see that the
the poiice like they're hired is much
less from LG to l prime d on direct case
we have the l prime s which people that
they desire to work at this wage they
are much higher because of the wage they
have a lot of incentives to work so the
question is so the more elastic the more
unemployment why because this is going
to be more distance remember when it's
more elastic the course they are
definitely more lie down so in this case
the more elastic the more unemployment
because it's going to be a more distance
between these two remember that
employment is measured by the difference
between the labor supply - the labor
demand okay so the C point asked the
wife this increase in the minimum wage
have for unemployment does the charge in
employment depend of the elasticity of
demand to a C to supply both elasticity
or neither so now I'm going to put the
examples supposing Dad here okay here
was the
we already we're British shop okay now
here is the case when their main is much
more inelastic so in this case where is
more inelastic the minimum wage and the
increase in the minimum wage what you
see here is interesting because we see
here first that the demand change a lot
in price I mean wage but it has like
little changes in the workers is not
like a big issue in that there isn't
going to be like less people employee
not too much so this is going to be
given that by that so why we have higher
payments because remember we have here
the initial case were the total payment
for unskilled workers was ee 1 times L 1
so it's going to be this old EC square
but with the first minimum wage increase
we have instead of L 1 we have LT and in
stable with everyone we have W 1 min W
old mean minimum so this is going to be
the increase so the total payment
increase because this portion that is
gained is larger than this little one
that we have like worse we have just
like loss lost in this case with the
next W prime minimum we have here this
is going to be the the money the price
the salary the workers are going to
receive which is high here and this
again earned this part and we just lost
this one so it means that they are
higher pile higher payments in the other
case when we have a demand which is more
elastic you see here that remember one
is elastic in some good we have the case
that when we increase the price will
receive less when it is elastic it means
they proportionately change in the price
is less that the last we have because in
the quantities what I mean for example
this was the initial cage with the
minimum wage it is this one so with a
change we have this one so if you notice
this little portion here that we earn
more as a total payment is less that
this total square that we have lost
because of the increase and the minimum
wage so this is the point that's going
to be in this case decreased payments
over a here don't we decrease payment as
the total wage payments nine point
consider the following policies each of
which is ain't reducing violent crime by
reducing violent crime sorry repeated by
reducing the ease of gans illustrate
each of these proposed policies in a
supply and demand diagram of the can
market a attacks and gun buyers so
remember when we are talking about the
buyers is going to be the demand so it's
going to be a decrease of the demand so
instead of paying P one they have to pay
their they're going to pay P 3 and the
suppliers the sellers instead of
receiving P 1 they are going to receive
Picchu and the payment the tax is going
to be given by B 3 minus minus P minus
p0 okay so what about if in the
suppliers in the supply part it's going
to do it again similar case they're
going to receive just P 2 the supply and
the demand the consumer they have to pay
P 3 and the difference is tax is going
to be P 3 minus P 2 okay now the next
the price floor s so when we fix up
price
luring guns the member in this case is
binding so when it has effect is in like
the minimum wage is going to be above
the minimum the equilibrium price so
this is going to be the surplus so this
is unaffected again so we have the
productions from q1 to key to QD and
it's going to be a purple because at
this price the sellers they want they
decide to sell cheek us but they just
have QD and the quantity of gun we have
here in this case it tax an ammunition
so remember emission it could be like a
complement of this book of this book
story of this good so in this case well
there is a attacks in the complement
there's going to be addict wheeze in the
consumer of ammunition so because of
their complement you don't need guns
with without ammunitions okay so the
demand of Gans can't achieve to down so
in this K is going to be a decrease in
the presence and decreasing quantities
okay then point US government
administers two programs that affect the
market for cigarettes media campaigns
and labeling requirements are aimed at
making the public aware of the dangers
of cigarette smoking at the same time
the Department of Agriculture maintained
surprise support program for to bake
tobacco farmers which raises the price
to make above the Knievel price how do
these two programs affect cigarette
consumption is used a graph of cigarette
marking you answer so here we have the
first case remember we have here there
is made a campaign level requirements
that they are saying to people is so bad
smoking so in this case people change
little bill here taste their testers so
the demand is going to shift down it's
going to decrease it's going to be a
decrease in prices and decreasing
quantities on the other side when we
have the the support program for tobacco
farmers so which
is the price of tobacco so it D
establish a minimum price which is a
prize for so in this case is going to be
a surplus because it's going to produce
the quantities but it depends on the
demand if it's inelastic or elastic and
in this case is they want to receive
more or less depending of the curve
demand remain remember if the if it's
elastic is bad to charge a higher price
but as usual demand for cigarettes is
high
I mean is la inelastic so in this case
is better for the suppliers because
they're going to receive more given the
de lasticity of demand is effect of
these two programs on the price of
cigarettes so in this case we have here
initial case there is a minimum price
okay but at the same time there is at
the demand so this effect bind these two
side we have the increased minimum or a
minimum price but bigger because of the
bad campaign were saying people is so
bad it's so bad smoking Sun in so in
this case the quantities they are going
to be they're going to be less so in
this clique case is going to be even
more decreasing in quantities and the
price is going to be at this one okay so
it's going to be the effect a big
surplus because at this price they're
going to they're willing to suppliers to
offer that but they're going to be just
demanded this one instead of this one
because of the campaign solely tax what
effect does this Texans have on
cigarette consumption so here is the
forget these guns is cigarette
so here remember we have a decrease in
demand so in this case they have to pay
br3 instead of p1 and sellers they're
going to receive p2 and the difference B
3 minus p2 is going to be the tax so
there's going to be a decrease in the
consumption cigarette at Point a subsidy
in the opposite is the opposite of
attacks with us $0.50 tax on the buyers
of ice cream cones the government
collects 50 cents for each color changed
with a 750 cent subsidy for the buyers
of the ice cream cones the government
pays buyers as 50 cents for each count
purchased show the effect of our fifty
cents per call subsidy on the demand
curve for ice cream cones the effective
price received by sellers and the
quantitive consult so here we have the
ice cream the initial kale we have the
pricing quantities of equilibrium so
here is a subsidy so it's better for the
demand is going to be shift to the right
so in this case it's going to be is not
very the attention to the I'll just copy
paste but I forgot to to cancel it out
so here is going to be the price that
the demand they are going to pay is
going to be P 3 which is less than P p1
and p2 is going to be the effective
price received by the sellers which is
going to be p3 plus 50 cents it's going
to repeat up-3 the price paid by buyers
and keeps you is going to be the
quantities of consult okay that's pretty
much all I hope it has worked for you
have a great success with economics and
see you the next video bye-bye
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