Business Finance – Accounting assignment/ discussion

Week 2 DISCUSSION

Note: The video has Closed Captioning. To activate it, start the video, mouse over the bottom of the video and click on the CC icon, then select from the menu.

This week we will analyze what happens in a market when the government intervenes in the market and introduces price controls. In particular, we will examine what happens when the minimum wage is increased.

Assignment Summary:

1. View the two videos above and videos 1, 2 and 7 under the Week Two Videos. You may also wish to view the other videos for a deeper understanding of price controls.

Visit The Faces of <5 (https://facesof15.com/) for more perspectives on a $15 minimum wage.

3. Read Chapter 6 in your textbook in careful detail. Pay close attention to the graphs in Figures 1 – 5. Focus on Figure 5 in particular. You may also wish to review the

CBO Report

CBO Report – Alternative Formats

on employment and income impacts of an increased minimum wage.

4. Read “Controversies over the minimum wage” on pages 118 – 120 in the text.

5. Based on the videos, the readings, and any additional research you decide to do (remember to cite and reference all your sources) what you do think will be the market impact(s) of the proposed increase in the federal minimum wage?

1. Will the proposed increase help workers? And if so which part(s) of the labor market will be helped?

2. Which part(s) of the labor market will be hurt by the proposed increase? How will they be hurt?

3. What will happen to the prices of goods and services produced with minimum wage labor?

6. What is your conclusion? Is this proposal a good idea or not? Explain why.

7. Post your views to the discussion board and refer to at least two different concepts from this week’s Chapters. Remember to use CAPITAL LETTERS to name and define them. Your illustration of concepts MUST include an explanation of why you think they are relevant to the week’s topic using specific information from the articles, videos and other research that you have done.

· Each post submitted should be between 150 and 250 words. Keep them short, specific, and clear.

· Please review Plagiarism Powerpoints (

PLAGIARISM.ppt

PLAGIARISM.ppt – Alternative Formats

) and be sure to provide references (APA.ppt), including URLs where appropriate, to all works that you cite.

Week 2 DISCUSSION

Note: The video has Closed Captioning. To activate it, start the video, mouse over the bottom of the video and click on the CC icon, then select from the menu.

Assignment Summary:

1. View the two videos above and videos 1, 2 and 7 under the Week Two Videos. You may also wish to view the other videos for a deeper understanding of price controls.

2. Visit

The Faces of <5 (https://facesof15.com/) for more perspectives on a $15 minimum wage.

3. Read Chapter 6 in your textbook in careful detail. Pay close attention to the graphs in Figures 1 – 5. Focus on Figure 5 in particular. You may also wish to review the
CBO Report

CBO Report – Alternative Formats

on employment and income impacts of an increased minimum wage.

4. Read
“Controversies over the minimum wage” on pages 118 – 120 in the text.

1. Will the proposed increase help workers? And if so which part(s) of the labor market will be helped?

2. Which part(s) of the labor market will be hurt by the proposed increase? How will they be hurt?

3. What will happen to the prices of goods and services produced with minimum wage labor?

6. What is your conclusion? Is this proposal a good idea or not? Explain why.

7. Post your views to the discussion board and refer to at least two different concepts from this week’s Chapters. Remember to use
CAPITAL LETTERS to name and define them. Your illustration of concepts MUST include an explanation of why you think they are relevant to the week’s topic using specific information from the articles, videos and other research that you have done.

· Each post submitted should be between 150 and 250 words. Keep them short, specific, and clear.

· Please review Plagiarism Powerpoints (

PLAGIARISM.ppt

PLAGIARISM.ppt – Alternative Formats

) and be sure to provide references (APA.ppt), including URLs where appropriate, to all works that you cite.

149

The Effects of a Minimum-Wage Increase on Employment and Family Income

report

february 18, 2014

Read Complete Document (pdf, 504 kb)

Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would
receive higher pay that would increase their family’s income, and some of those families would see their
income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be
eliminated, the income of most workers who became jobless would fall substantially, and the share of
low-wage workers who were employed would probably fall slightly.

What Options for Increasing the Minimum Wage Did CBO Examine?

For this report, CBO examined the effects on employment and family income of two options for increasing
the federal minimum wage (see the figure below):

A “$10.10 option” would increase the federal minimum wage from its current rate of $7.25 per hour to
$10.10 per hour in three steps—in 2014, 2015, and 2016. After reaching $10.10 in 2016, the minimum
wage would be adjusted annually for inflation as measured by the consumer price index.

A “$9.00 option” would raise the federal minimum wage from $7.25 per hour to $9.00 per hour in two
steps—in 2015 and 2016. After reaching $9.00 in 2016, the minimum wage would not be
subsequently adjusted for inflation.

What Effects Would Those Options Have?

The $10.10 option would have substantially larger effects on employment and income than the $9.00
option would—because more workers would see their wages rise; the change in their wages would be
greater; and, CBO expects, employment would be more responsive to a minimum-wage increase that was

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larger and was subsequently adjusted for inflation. The net effect of either option on the federal budget
would probably be small.

Effects of the $10.10 Option on Employment and Income

Once fully implemented in the second half of 2016, the $10.10 option would reduce total employment by
about 500,000 workers, or 0.3 percent, CBO projects (see the table below). As with any such estimates,
however, the actual losses could be smaller or larger; in CBO’s assessment, there is about a two-thirds
chance that the effect would be in the range between a very slight reduction in employment and a
reduction in employment of 1.0 million workers.

Many more low-wage workers would see an increase in their earnings. Of those workers who will earn up
to $10.10 under current law, most—about 16.5 million, according to CBO’s estimates—would have higher
earnings during an average week in the second half of 2016 if the $10.10 option was implemented. Some
of the people earning slightly more than $10.10 would also have higher earnings under that option, for
reasons discussed below. Further, a few higher-wage workers would owe their jobs and increased
earnings to the heightened demand for goods and services that would result from the minimum-wage
increase.

The increased earnings for low-wage workers resulting from the higher minimum wage would total $31
billion, by CBO’s estimate. However, those earnings would not go only to low-income families, because
many low-wage workers are not members of low-income families. Just 19 percent of the $31 billion would
accrue to families with earnings below the poverty threshold, whereas 29 percent would accrue to families
earning more than three times the poverty threshold, CBO estimates.

Moreover, the increased earnings for some workers would be accompanied by reductions in real (inflation-
adjusted) income for the people who became jobless because of the minimum-wage increase, for
business owners, and for consumers facing higher prices. CBO examined family income overall and for
various income groups, reaching the following conclusions (see the figure below):

Once the increases and decreases in income for all workers are taken into account, overall real

income would rise by $2 billion.

Real income would increase, on net, by $5 billion for families whose income will be below the poverty
threshold under current law, boosting their average family income by about 3 percent and moving
about 900,000 people, on net, above the poverty threshold (out of the roughly 45 million people who
are projected to be below that threshold under current law).

Families whose income would have been between one and three times the poverty threshold would
receive, on net, $12 billion in additional real income. About $2 billion, on net, would go to families
whose income would have been between three and six times the poverty threshold.

Real income would decrease, on net, by $17 billion for families whose income would otherwise have
been six times the poverty threshold or more, lowering their average family income by 0.4 percent.

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Effects of the $9.00 Option on Employment and Income

The $9.00 option would reduce employment by about 100,000 workers, or by less than 0.1 percent, CBO
projects. There is about a two-thirds chance that the effect would be in the range between a very slight
increase in employment and a reduction in employment of 200,000 workers, in CBO’s assessment.
Roughly 7.6 million workers who will earn up to $9.00 per hour under current law would have higher
earnings during an average week in the second half of 2016 if this option was implemented, CBO
estimates, and some people earning more than $9.00 would have higher earnings as well.

The increased earnings for low-wage workers resulting from the higher minimum wage would total $9
billion; 22 percent of that sum would accrue to families with income below the poverty threshold, whereas
33 percent would accrue to families earning more than three times the poverty threshold, CBO estimates.

For family income overall and for various income groups, CBO estimates the following:

Once the increases and decreases in income for all workers are taken into account, overall real

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income would rise by $1 billion.

Real income would increase, on net, by about $1 billion for families whose income will be below the
poverty threshold under current law, boosting their average family income by about 1 percent and
moving about 300,000 people, on net, above the poverty threshold.

Families whose income would have been between one and three times the poverty threshold would
receive, on net, $3 billion in additional real income. About $1 billion, on net, would go to families
whose income would have been between three and six times the poverty threshold.

Real income would decrease, on net, by $4 billion for families whose income would otherwise have
been six times the poverty threshold or more, lowering their average family income by about 0.1
percent.

Effects of a Minimum-Wage Increase on the Federal Budget

In addition to affecting employment and family income, increasing the federal minimum wage would affect
the federal budget directly by increasing the wages that the federal government paid to a small number of
hourly employees and indirectly by boosting the prices of some goods and services purchased by the
government. Most of those costs would need to be covered by discretionary appropriations, which are
capped through 2021 under current law.

Federal spending and taxes would also be indirectly affected by the increases in real income for some
people and the reduction in real income for others. As a group, workers with increased earnings would
pay more in taxes and receive less in federal benefits of certain types than they would have otherwise.
However, people who became jobless because of the minimum-wage increase, business owners, and
consumers facing higher prices would see a reduction in real income and would collectively pay less in
taxes and receive more in federal benefits than they would have otherwise. CBO concludes that the net
effect on the federal budget of raising the minimum wage would probably be a small decrease in budget
deficits for several years but a small increase in budget deficits thereafter. It is unclear whether the effect
for the coming decade as a whole would be a small increase or a small decrease in budget deficits.

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Principles of Economics, 10e

Chapter 6: Supply, Demand, and Government Policies

‹#›

Mankiw, Principles of Economics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
‹#›

Chapter Objectives (1 of 2)
By the end of this chapter, you should be able to:
Determine the impact of price controls on economic welfare using the supply and demand model.
Determine if a price control is a price ceiling or a price floor using the supply and demand model.
Determine if a price control is binding using the supply and demand model.
Determine the amount of shortage or surplus generated by a price control using the supply and demand model.

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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Objectives (2 of 2)
Describe the unintended consequences of rent control using the supply and demand model.
Explain how a change in a labor supply determinant impacts labor supply.
Identify the tax incidence on consumers and producers for a given market.
Determine the impact of a tax on the equilibrium price and quantity in a market.
Analyze the relationship between elasticity and tax burden.

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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6-1
The Surprising Effects of Price Controls

‹#›
Mankiw, Principles of Economics, Tenth Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Price Controls
Economists as policy analysts and advisers try to use theories to change the world
Policymakers often enact price controls when they believe that the market price of a good or service is too high or too low
These policies can generate problems of their own

Price Ceiling and Price Floor
Price ceiling*
A legal maximum on the price at which a good can be sold
Rent-control laws
Price floor*
A legal minimum on the price at which a good can be sold
Minimum wage laws
*Words accompanied by an asterisk are key terms from the chapter.

How Price Ceilings Affect Market Outcomes
Not binding
Set above the equilibrium price
No effect on price or quantity sold
Binding constraint
Set below the equilibrium price
Market price must be the price ceiling

Active Learning 1: Price Ceilings for Muffins
The Muffin Buyers’ Association lobbies the government to impose a price ceiling. Which of the following is binding and what’s the effect on the market?
The price ceiling is set at $5
The price ceiling is set at $2

Allow your students 5–10 minutes to work by themselves or in groups before asking for volunteers to share their answers. The correct answers are on the next slide.

Remind your students that a price ceiling is a maximum legal price (so any prices below the price ceiling are fine, but prices above the ceiling are not possible/legal).
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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Active Learning 1: Answers
The price ceiling is set at $5
Not binding
P = $3, Q = 15
The price ceiling is set at $2
Binding
P = $2, Qd = 18, Qs = 10
Shortage = 8 muffins

Allow your students 5–10 minutes to work by themselves or in groups before asking for volunteers to share their answers. The correct answers are on the next slide.

A price ceiling is a maximum legal price, so prices set above the ceiling will not be legal.

If the price ceiling is set at $5, above the equilibrium price, there’s no impediment to the market reaching the equilibrium (well, staying in equilibrium at P = $3). Sellers continue to sell muffins at $3 each, and 15 muffins are sold and bought.
If the price ceiling is set at $2 (at the request of the “buyers’ association” of “Oh, no, muffins are too expensive, and the government should do something about the very expensive muffins!!”). Because it is below the market equilibrium, the $2 price ceiling is binding and it will keep the market in disequilibrium: shortage of muffins!! Though the buyers requested and got the lower prices, buyers will not be able to buy the 15 equilibrium muffins, but they will have to be happy with the 10 muffins sellers will be willing and able to sell at the lower price. Yikes!
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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 1 A Market with a Price Ceiling
In panel (a), the government imposes a price ceiling of $4. Because it is above the equilibrium price of $3, the ceiling has no effect, and the market can reach the equilibrium of supply and demand. At this point, quantity supplied and quantity demanded both equal 100 cones. In panel (b), the government imposes a price ceiling of $2. Because the ceiling is below the equilibrium price of $3, the market price is $2. At this price, 125 cones are demanded while only 75 are supplied, so there is a shortage of 50 cones.

Binding Price Ceiling
When the government imposes a binding price ceiling
Shortage arises
Sellers must ration scarce goods among potential buyers
Rationing mechanisms are rarely desirable
Long lines waste buyers’ time
Bias of sellers
Inefficient (good may not go to the buyer who values it most)
Unfair

Rationing Mechanism
Rationing mechanism in a free, competitive market is straightforward
When market reaches its equilibrium, anyone who wants to pay the market price can buy the good
May seem unfair to some buyers when prices are high
Is efficient and impersonal

Figure 2 The Market for Gasoline with a Price Ceiling
Panel (a) shows the gasoline market when the price ceiling is not binding because the equilibrium price, P1, is below the ceiling. Panel (b) shows the gasoline market after an increase in the price of crude oil (an input into making gasoline) shifts the supply curve to the left from S1 to S2. In an unregulated market, the price would have risen from P1 to P2. The price ceiling, however, prevents this from happening. At the binding price ceiling, consumers are willing to buy QD, but producers of gasoline are willing to sell only QS. The difference between quantity demanded and quantity supplied, QD – QS, measures the gasoline shortage.

Ask the Experts: Rent Control
“Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”

Source: IGM Economic Experts Panel, February 7, 2012.

This “Ask the Experts” feature provides the opportunity for class discussion. If you want, you can move this feature and class discussion after you have presented the rent control example on the next slide.
Start by asking the class what they know about rent control (you may have to explain what rent control is, and tell them that the main goal of this policy is to help the poor by making housing more affordable).
After showing the statement, you can ask your students to choose one of the options: agree, disagree, or uncertain. You can collect their answers in a variety of ways: show of hands, ballot, clicker system, etc. If time permits, you can allow students to group together and discuss some of the reasons of why they chose their answer.
Ask the students to share with the class their reasons. Their answers will vary.
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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 3 Rent Control in the Short Run and in the Long Run
Panel (a) shows the short-run effects of rent control: Because the supply and demand curves for apartments are relatively inelastic, the price ceiling imposed by a rent-control law causes only a small shortage of housing. Panel (b) shows the long-run effects of rent control: Because the supply and demand curves for apartments are more elastic, rent control causes a larger shortage.

How Price Floors Affect Market Outcomes
Not binding
Set below the equilibrium price
No effect on price or quantity sold
Binding constraint
Set above the equilibrium price
Some sellers are unable to sell what they want

Binding Price Floor
When the government imposes a binding price ceiling
Surpluses arise
Sellers who appeal to the buyers’ personal biases may be better able to sell their goods than those who do not
In a free market, price is the rationing mechanism
Sellers may not be happy about how much they are paid at the equilibrium price, but they can sell all they want

Figure 4 A Market with a Price Floor
In panel (a), the government imposes a price floor of $2. Because it is below the equilibrium price of $3, the floor has no effect, and the market can reach the equilibrium of supply and demand. At this point, quantity supplied and demanded both equal100 cones. In panel (b), the government imposes a price floor of $4. Because the floor is above the equilibrium price of $3, the market price is $4. At this price, 120 cones are supplied while only 80 are demanded, so there is a surplus of 40 cones.

Ask the Experts: The Minimum Wage
“The current US federal minimum wage is $7.25 per hour. States can choose whether to have a higher minimum—and many do. A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.”

Source: IGM Economic Experts Panel, February 2, 2021.

This “Ask the Experts” feature provides the opportunity for class discussion.
I think this feature is better suited here, after the discussion of minimum wage as a binding price floor.
After showing the statement, you can ask your students to choose one of the options: agree, disagree, or uncertain. You can collect their answers in a variety of ways: show of hands, ballot, clicker system, etc. If time permits, you can allow students to group and discuss some of the reasons they chose their answer.
Ask the students to share with the class their reasons. Their answers will vary.

On the next slide, we see some things from the minimum wage case study in the text that are worth mentioning to explain why economists disagree on this issue.
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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 5 How the Minimum Wage Affects a Competitive Labor Market
Panel (a) shows a labor market in which the wage adjusts to balance labor supply and labor demand. Panel (b) shows the impact of a binding minimum wage. Because the minimum wage is a price floor, it causes a surplus: The quantity of labor supplied exceeds the quantity demanded. The result is unemployment.

Active Learning 2: Price Floors for Muffins
The Muffin Buyers’ Association lobbies the government to impose a price floor. Which of the following is binding and what’s the effect on the market?
The price floor is set at $1
The price ceiling is set at $4

Allow your students 5–10 minutes to work by themselves or in groups before asking for volunteers to share their answers. The correct answers are on the next slide.

Remind your students that a price floor is a minimum legal price (so any prices above the price floor are fine, but prices below the floor are not possible/legal).
21
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Active Learning 2: Answers
The price floor is set at $1
Not binding
P = $3, Q = 15
The price floor is set at $4
Binding
P = $4, Qd = 12, Qs = 20
Surplus = 8 muffins

A price floor is a minimum legal price, so prices set below the floor will not be legal.

If the price floor is set at $1, below the equilibrium price, there’s no impediment to the market reaching the equilibrium (well, staying in equilibrium at P = $3). Sellers continue to sell muffins at $3 each, and 15 muffins are sold and bought.
If the price floor is set at $4 (at the request of the “sellers’ association” of “Oh, no, muffins are too cheap and we’re not making enough money, and the government should do something about the very cheap muffins!!”), because it is above the market equilibrium, the $4 price floor is binding, and it will keep the market in disequilibrium: surplus of muffins!! Though the sellers requested and got the higher prices, sellers will not be able to sell the 15 equilibrium muffins, but they will have to be happy with the 12 muffins the buyers will be willing and able to buy at the higher price. Yikes!
22
©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Evaluating Price Controls (1 of 2)
Markets are usually a good way to organize economic activity
Prices balance supply and demand
Price-setting obscures signals that guide the allocation of society’s resources
Governments can sometimes improve market outcomes
Motivated to control prices
View the market’s outcome as unfair

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Evaluating Price Controls (2 of 2)
Price controls can hurt some people they are intended to help
Alternative policies are often better
Rent subsidy
Wage subsidy (earned income tax credit)

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©2019 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

6-2
The Surprising Study of Tax Incidence

Taxes
Governments use taxes to raise revenue for public projects
Tax incidence*
Manner in which the burden of a tax is shared among participants in a market
*Words accompanied by an asterisk are key terms from the chapter.

How Taxes on Sellers Affect Market Outcomes
Taxes discourage market activity
Quantity sold is smaller in the new equilibrium
Buyers and sellers share the tax burden
Buyers pay more, and sellers receive less
Sellers send the money to the government

Figure 6 A Tax on Sellers
When a tax of $0.50 is levied on sellers, the supply curve shifts up by $0.50 from S1 to S2.
The equilibrium quantity falls from 100 to 90 cones.
The price that buyers pay rises from $3.00 to $3.30.
The price that sellers receive (after paying the tax) falls from $3.00 to $2.80.
Even though sellers are legally responsible for paying the tax, buyers and sellers share the burden.

How Taxes on Buyers Affect Market Outcomes
Taxes discourage market activity
Quantity sold is smaller in the new equilibrium
Buyers and sellers share the tax burden
Buyers pay more, and sellers receive less
Buyers pay a lower market price but effective price (with tax) rises

Figure 7 A Tax on Buyers
When a tax of $0.50 is imposed on buyers, the demand curve shifts down by $0.50 from D1 to D2.
The equilibrium quantity falls from 100 to 90 cones.
The price that sellers receive falls from $3.00 to $2.80.
The price that buyers pay (including the tax) rises from $3.00 to $3.30.
Even though buyers are legally responsible for paying the tax, buyers and sellers share the burden.

Tax Incidence
Taxes on sellers and taxes on buyers are equivalent
The tax
Inserts a wedge between price that buyers pay and price that sellers receive
Shifts the relative position of the supply and demand curves
Buyers and sellers share the tax burden in the new equilibrium

Figure 8 A Payroll Tax
A payroll tax places a wedge between what firms pay and what workers receive.
Comparing wages with and without the tax makes it clear that workers and firms share the tax burden.
This division does not depend on whether the government imposes the tax entirely on workers, imposes it entirely on firms, or divides it equally between the two groups.

Elasticity and Tax Incidence (1 of 2)
Tax burden falls more heavily on the side of the market that is less elastic
Elasticity measures the willingness of buyers or sellers to leave the market when conditions worsen
A small elasticity of demand means that buyers do not have good alternatives to consuming this particular good
A small elasticity of supply means that sellers do not have good alternatives to producing this particular good
The side of the market less willing to leave the market bears more of the burden of the tax

Elasticity and Tax Incidence (2 of 2)
Elastic supply, inelastic demand
Price received by sellers does not fall much
Price paid by buyers rises substantially
Buyers bear most of the tax burden
Inelastic supply, elastic demand
Price paid by buyers does not rise much
Price received by sellers falls substantially
Sellers bear most of the tax burden

Figure 9 How a Tax Burden Is Divided (1 of 2)
In panel (a), the supply curve is elastic, and the demand curve is inelastic.
In this case, the price received by sellers falls only slightly, while the price paid by buyers rises substantially. This means that buyers bear most of the tax burden.

Figure 9 How a Tax Burden Is Divided (2 of 2)
In panel (b), the situation is reversed: The supply curve is inelastic, and the demand curve is elastic.
In this case, the price received by sellers falls substantially, while the price paid by buyers rises only slightly. Here, sellers bear most of the burden.

6-3
Conclusion

Conclusion
Price controls and taxes are common in various markets, and their effects are frequently debated
When analyzing government policies, supply and demand are the first and most useful tools of analysis

Think-Pair-Share Activity
Suppose that your state needs to raise more tax revenue. The governor proposes a tax on food because everyone must eat and, thus, a food tax would surely raise a great deal of tax revenue. The governor insists the tax should be placed on food sellers to protect less wealthy individuals who spend a large proportion of their income on food.
Will the burden of a food tax fall only on the sellers of food as the governor said? Explain.
Who will bear most of this tax burden? Explain.

Suggestion: For the Think-Pair-Share activities, if time allows, allow students to work in small groups for 5–10 minutes. Then allow student groups to share with other groups or with the entire class. Or, you can treat the Think-Pair-Share activity as an open-to-all in class discussion.

Discussion points:
A. No. Both sides of the market will be affected by a tax on food, regardless of what the law says. The effects of this tax will be: lower Q (quantity of food bought and sold), higher PB (buyers pay a higher price for food), lower Ps (sellers receive a lower price for food).
B. The tax burden is determined by the elasticity of supply and demand. The burden of a tax falls most heavily on the side of the market that is less elastic. That is, the burden is on the side of the market least willing to leave the market when the price moves unfavorably. The burden will fall most heavily on the buyers of food regardless of whether the tax is legally imposed on buyers or on sellers. Food is a necessity, and therefore the demand for food is relatively inelastic. When the price rises due to the tax, people still must eat. Grocery chains can sell another product line when the price they receive for food falls due to the tax.
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Self-Assessment
What determines how the burden of a tax is divided between buyers and sellers? Why?
When the government levies a tax on the amount that firms pay their workers, do the firms or workers bear the burden of the tax?

Summary
Click the link to review the objectives for this presentation.

Link to Objectives

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