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.

Outlines

00:00

💡 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.

05:01

🔄 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.

10:03

📉 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).

15:03

📊 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.

20:05

🔫 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.

Keywords

💡Supply and Demand

Supply and demand is a fundamental concept in economics, referring to the relationship between the amount of a good or service available (supply) and the desire of buyers for it (demand). In the video, supply and demand are crucial for explaining how taxes or policies, like a gasoline tax, affect market prices and quantities. For example, a $0.50 tax on gasoline influences both consumers and producers, changing the equilibrium in the market.

💡Tax

A tax is a financial charge imposed by the government on consumers or producers. In the context of the video, a $0.50 tax on gasoline is discussed, showing how taxes can shift the burden between consumers and producers, affecting market prices and the amount of gasoline consumed. The script uses diagrams to illustrate how taxes reduce consumption and impact the prices paid by buyers and sellers.

💡Elasticity

Elasticity refers to how sensitive the demand or supply of a good is to changes in price. In the video, it is mentioned that when the demand for gasoline is more elastic, a tax will have a larger impact on reducing gasoline consumption. The video explains how elasticity determines the effectiveness of taxes and policies in changing behavior, with more elastic goods experiencing a greater reduction in quantity demanded.

💡Equilibrium

Equilibrium in economics occurs when the quantity demanded equals the quantity supplied at a certain price level. In the video, the initial equilibrium price and quantity of gasoline before a tax is imposed is shown. When the tax is introduced, it shifts the equilibrium, leading to new prices for both consumers and producers, and a lower quantity of gasoline consumed.

💡Minimum Wage

The minimum wage is the lowest legal wage that employers can pay workers. The video explores the effects of increasing the minimum wage in the labor market using supply and demand diagrams. It shows how higher wages can create unemployment if the wage floor is set above the market equilibrium, leading to a surplus of labor where more workers are willing to work than firms are willing to hire.

💡Unemployment

Unemployment is the situation where individuals who are willing and able to work cannot find jobs. In the video, increasing the minimum wage is linked to creating unemployment, as firms hire fewer workers at higher wages. The script illustrates how higher wages, particularly when the demand for labor is elastic, can lead to significant unemployment.

💡Price Floor

A price floor is a government-imposed minimum price for a good or service, such as the minimum wage in labor markets. The video discusses how price floors above the equilibrium price lead to surpluses. In the labor market, this results in unemployment, as the supply of labor exceeds demand at the higher wage rate.

💡Complementary Goods

Complementary goods are products that are often used together, like gasoline and cars or guns and ammunition. The video uses the example of a tax on ammunition to explain how taxing a complementary good reduces the demand for the main product, in this case, guns. A decrease in the demand for ammunition leads to a decrease in the demand for guns, as one is needed for the other.

💡Surplus

A surplus occurs when the quantity of a good supplied exceeds the quantity demanded at a given price. In the video, a surplus is shown in the context of a minimum wage increase, where more workers are willing to work at the higher wage, but employers are not willing to hire as many workers, leading to unemployment.

💡Subsidy

A subsidy is a financial benefit provided by the government to encourage the production or consumption of a good. In the video, a subsidy on ice cream cones is used as an example to show how subsidies shift the demand curve to the right, lowering the price that consumers pay and increasing the quantity consumed. The effect of the subsidy is to make ice cream more affordable, benefiting both buyers and sellers.

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