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Ten Principles of Economics - Part 14

Ten Principles of Economics - Part 14. Economics is the study of how society manages its scarce resources. In most societies, resources are allocated not by a single central planner but through the combined actions of millions of households and firms. Economists therefore study how people make decisions: how much they work, what they buy, how much they save, and how they invest their savings. Economists also study how people interact with one another. | CHAPTER 6 SUPPLY DEMAND AND GOVERNMENT POLICIES 135 The mistaken assumptions about the incidence of the luxury tax quickly became apparent after the tax went into effect. Suppliers of luxuries made their congressional representatives well aware of the economic hardship they experienced and Congress repealed most of the luxury tax in 1993. I QUICK QUIZ In a supply-and-demand diagram show how a tax on car buyers of 1 000 per car affects the quantity of cars sold and the price of cars. In another diagram show how a tax on car sellers of 1 000 per car affects the quantity of cars sold and the price of cars. In both of your diagrams show the change in the price paid by car buyers and the change in price received by car sellers. CONCLUSION The economy is governed by two kinds of laws the laws of supply and demand and the laws enacted by governments. In this chapter we have begun to see how these laws interact. Price controls and taxes are common in various markets in the economy and their effects are frequently debated in the press and among policymakers. Even a little bit of economic knowledge can go a long way toward understanding and evaluating these policies. In subsequent chapters we will analyze many government policies in greater detail. We will examine the effects of taxation more fully and we will consider a broader range of policies than we considered here. Yet the basic lessons of this chapter will not change When analyzing government policies supply and demand are the first and most useful tools of analysis. Summary A price ceiling is a legal maximum on the price of a good or service. An example is rent control. If the price ceiling is below the equilibrium price the quantity demanded exceeds the quantity supplied. Because of the resulting shortage sellers must in some way ration the good or service among buyers. A price floor is a legal minimum on the price of a good or service. An example is the minimum wage. If the price floor is above the equilibrium .