Tp2
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Ch.6 Government Interventions
1
Government interventions Government interventions include:
Price control Price ceiling (maximum price control) Price floor (minimum price control) Quantity Quota Sales tax Per-unit sales tax Subsidy Per-unit subsidy 2
Introduction How many of you have a foreign domestic helper at home? How much does it cost to employ a foreign domestic helper? $3580 per month
3
4
Price Floor Reason for setting price floor The current market price is too low for the supplier to cover the cost
Meaning A minimum price imposed by the government on goods or services (e.g. PF) The seller is not allowed to set a price lower than PF 5
Price Floor In some countries, there are: Minimum wage laws to protect workers Wage (for workers aged 22 or above): ₤5.73/hour (UK)
Agricultural products Corn: RMB 0.75/catty (China)
6
Effective price floor Price ($)
Market for Good X S surplus
PF
PF D Quantity Qt 7
Effective Price Floor The price must be set above the equilibrium price in order to regulate the market price effectively Effects:
Excess supply/surplus Quantity transacted = quantity demanded Quantity transacted ↓ Change in total revenue depends on elasticity of demand
8
Price Floor Effects of ineffective price floor: Price is set below the equilibrium price It cannot regulate the market price If the seller sells at PF Excess demand, many buyers cannot buy But they can choose to increase the price to discourage customers
Price goes back to equilibrium Quantity transacted remains unchanged 9
Revision question Currently there is a minimum wage to protect foreign domestic helpers in HK. Suppose the government is going to increase this minimum wage. With the aid of a diagram, explain the effects on the quantity transacted and the unemployment level of the helpers 10
11
Answer wage ($)
Market for foreign domestic helpers S
P
F
U2 2
U1
PF1
Qt: drops from Q1 to Q2 U: rises from U1 to U2
D Labour Q2
Q1 12
END
13
1
Government interventions Government interventions include:
Price control Price ceiling (maximum price control) Price floor (minimum price control) Quantity Quota Sales tax Per-unit sales tax Subsidy Per-unit subsidy 2
Introduction How many of you have a foreign domestic helper at home? How much does it cost to employ a foreign domestic helper? $3580 per month
3
4
Price Floor Reason for setting price floor The current market price is too low for the supplier to cover the cost
Meaning A minimum price imposed by the government on goods or services (e.g. PF) The seller is not allowed to set a price lower than PF 5
Price Floor In some countries, there are: Minimum wage laws to protect workers Wage (for workers aged 22 or above): ₤5.73/hour (UK)
Agricultural products Corn: RMB 0.75/catty (China)
6
Effective price floor Price ($)
Market for Good X S surplus
PF
PF D Quantity Qt 7
Effective Price Floor The price must be set above the equilibrium price in order to regulate the market price effectively Effects:
Excess supply/surplus Quantity transacted = quantity demanded Quantity transacted ↓ Change in total revenue depends on elasticity of demand
8
Price Floor Effects of ineffective price floor: Price is set below the equilibrium price It cannot regulate the market price If the seller sells at PF Excess demand, many buyers cannot buy But they can choose to increase the price to discourage customers
Price goes back to equilibrium Quantity transacted remains unchanged 9
Revision question Currently there is a minimum wage to protect foreign domestic helpers in HK. Suppose the government is going to increase this minimum wage. With the aid of a diagram, explain the effects on the quantity transacted and the unemployment level of the helpers 10
11
Answer wage ($)
Market for foreign domestic helpers S
P
F
U2 2
U1
PF1
Qt: drops from Q1 to Q2 U: rises from U1 to U2
D Labour Q2
Q1 12
END
13
