Chapter 6 Exercises 7-11. Supply, Demand, and Government Policies.

Summary

In 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.