Supply,Demand and Government Policies

Controls on Prices

Price Ceiling

Price Floor

Effect Market Outcomes

Not Binding

Binding

Set above equilibrium price

Set below equilibrium price

Shortage

Quantity demanded > Quantity supplied

Effect Market Outcomes

Not binding

Binding

Set below equilibrium price

Set above equilibrium price

Surplus

Quantity supplied > Quantity demanded

Taxes

Effect Market Outcomes

Taxes discourage market activity

Good is taxed, Quantity sold smaller

Buyers and Sellers share tax burden

Elasticity and Tax Incidence

Depends on price elasticities of supply and demand