Ch 6. Supply, Demand, and the Government

.title[
# Ch 6. Supply, Demand, and the Government
]
.subtitle[
## Microeconomics I
]
.author[
### Lyuben Ivanov, PhD; Georgy Ganev, PhD
]
.institute[
### Faculty of Economics and Business, Sofia University
]
.date[
### Fall Term 2025/2026
]

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Introduction</strong>
]
<hr>

---

# Market Failure

---

---

# Reasons for Government Intervention

Governments intervene in a market economy for the following (somewhat overlapping!) reasons:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-gavel"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to set and enforce the rules for social interaction</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-money"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to obtain revenues</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-blind"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to redistribute income</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-line-chart"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to smoothen the business cycle</td>
  </tr>
</table>

---

# Evaluating Government Intervention

We will use the models of supply and demand and the concepts of elasticity and revenue to analyse and evaluate some policies related to the following reasons for government intervention:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-car"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to 'correct' market outcomes</td>
  </tr>
</table>
<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-money"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to obtain revenues</td>
  </tr>
</table>
<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-blind"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">to redistribute income</td>
  </tr>
</table>

The policies we will analyse and evaluate are the following:

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-chevron-right"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">price controls</td>
  </tr>
</table>
<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-chevron-right"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">taxes</td>
  </tr>
</table>

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Price Controls</strong>
]
<hr>

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Price Ceiling</strong>
]
<hr>

---

# Price Ceiling

.pull-right-2[
_In many cases rent control appears to be the most efficient technique presently known to destroy a city - except for bombing._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Assar Lindbeck </span>
]

.pull-right-2[
_Price controls turned a minor adjustment into a major shortage._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Thomas Sowell </span>
]

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# Price Ceiling

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>price ceiling</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a legal maximum on the price at which a good can be sold</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> rent controls in France between the two world wars; price ceiling on gasoline in USA in the 1970s; price ceilings in Venezuela; rent controls in Berlin and Barcelona recently </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> price ceilings are imposed due to a belief of the rulers that for some reason the market price (equilibrium price!) is too high and this is against the public interest </td>
  </tr>
</table>

---

# Binding Price Ceiling

---

# Quick Test

<div class="container">
    <div class="question">
        <p>Which of the following would NOT be a form of competition between buyers if a binding price ceiling is imposed?</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceA1" value="A">
        <label class="form-check-label" for="choiceA1">
            long queues and waiting (expending time with uncertainty of success)
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceB1" value="B">
        <label class="form-check-label" for="choiceB1">
            creating personal links and relations with sellers (connections)
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceC1" value="C">
        <label class="form-check-label" for="choiceC1">
            bribing the sellers and creation of networks of lawbreaking
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice1" id="choiceD1" value="D">
        <label class="form-check-label" for="choiceD1">
            spending on lavish advertising
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('D', 'result1', 'choice1')">Submit</button>
    <div class="result" id="result1"></div>
  </div>

---

# Non-Binding Price Ceiling

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Case Study:<br>&nbsp;Rent Controls in New York City</strong>
]
<hr>

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# Short-Run Effects

<br>

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# Long-Run Effects

<br>

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# Evaluation of Price Ceilings

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The competition between buyers to get the deficit good can take the form of waiting in queues (spending time with uncertainty of success), creating personal relations with the sellers, bribing the sellers and even creation of networks of law-breaking to evade the law</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The buyers who get the good at cheaper price might be better off but those who don't get it at all are worse off</td>
  </tr>
</table>

---

---

# Evaluation of Price Ceilings

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">By imposing price ceilings the rulers deprive the society from the opportunity to use the price as a mechanism to assist in the communication and the discovery of the most valuable use of society's scarce resources</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">To correct the negative effects of the deficit, the rulers are tempted to impose other policies, further increasing the scope of government intervention in the market economy</td>
  </tr>
</table>

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Price Floor</strong>
]
<hr>

---

# Price Floor

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>price floor</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">a legal minimum on the price at which a good can be sold</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> agricultural policies; minimum wages </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> price floors are imposed due to a belief of the rulers that for some reason the market price (equilibrium price!) is too low and this is against the public interest </td>
  </tr>
</table>

---

# Binding Price Floor

---

# Quick Test

<div class="container">
    <div class="question">
        <p>Which of the following would NOT be a strategy to attract buyers without lowering the price if a binding price floor is imposed?</p>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceA2" value="A">
        <label class="form-check-label" for="choiceA2">
            extravagant advertising
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceB2" value="B">
        <label class="form-check-label" for="choiceB2">
            damaging competitors' image
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceC2" value="C">
        <label class="form-check-label" for="choiceC2">
            creating personal link and relations with buyers (connections)
        </label>
    </div>
    <div class="form-check">
        <input class="form-check-input" type="radio" name="choice2" id="choiceD2" value="D">
        <label class="form-check-label" for="choiceD2">
            tying the purchase of the good to other benefits
        </label>
    </div>
    <br>
    <button class="btn btn-custom mt-3" onclick="checkAnswer('C', 'result2', 'choice2')">Submit</button>
    <div class="result" id="result2"></div>
  </div>

---

# Non-Binding Price Floor

---

# Evaluation of Price Floors

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The competition between sellers to sell their production can take the form of expensive actions to attract buyers despite the higher price such as advertising and strategies to effectively lower the price of the product (e.g. giving a 'free' loaf of bread with every bottle of milk)</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The sellers who get to sell the good at higher price might be better off but those who remain with unsold production are worse off</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The producers who do sell their production are not necessarily the ones who can produce it with the lowest cost</td>
  </tr>
</table>

---

# Evaluation of Price Floors

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"</td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The revenues of the sellers as a group might be higher if the demand is price inelastic but the price elasticity of demand tends to increase over time and this might lead to decreasing revenues for the sellers</td>
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top;"><i class="fa fa-balance-scale"</td>
    <td> </td>
    <td style="text-align: left; vertical-align: top;"> By imposing price floors the rulers deprive the society by the opportunity to use the price as a mechanism to assist in the communication and the discovery of the most valuable use of society's scarce resources </td>
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top;"><i class="fa fa-balance-scale"</td>
    <td> </td>
    <td style="text-align: left; vertical-align: top;"> To remove the surplus from the market, the rulers are tempted to buy it, further increasing the scope of government intervention in the market economy </td>
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top;"><i class="fa "</td>
    <td> </td>
    <td style="text-align: left; vertical-align: top;">  </td>
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top;"><i class="fa "</td>
    <td> </td>
    <td style="text-align: left; vertical-align: top;">  </td>
  </tr>
</table>

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# Conclusion

.pull-right-2[
_The nine most terrifying words in the English language are: I'm from the government and I'm here to help._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Ronald Reagan </span>
]

---

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# Taxes

.pull-right-2[
_Taxes are what we pay for civilized society._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Oliver Wendell Holmes, Jr. </span>
]

.pull-right-2[
_In this world nothing can be said to be certain, except death and taxes._
<hr style="background-color: black; margin: 0em 0em 0em 0em;">
<span style="float: right; font-variant: small-caps; "> Benjamin Franklin </span>
]

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# Taxes

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top; width: 150px;"><b>taxes</b></td>
    <td> </td>
    <td> </td>
    <td style="vertical-align: top;">money that the government collects from households and firms in order to raise government revenue and to restrict the consumption of certain goods</td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-globe"></i></td>
    <td> </td>
    <td> </td>
    <td> value added tax (VAT), corporate income tax, personal income tax, excise duties, tariffs </td>
  </tr>
  <tr style="background-color: transparent;">
  <td>   </td>
  <td>   </td>
  <td>   </td>
  <td>   </td>  
  </tr>
  <tr style="background-color: transparent;">
    <td style="text-align: center; vertical-align: top;"><i class="fa fa-lightbulb-o"></i></td>
    <td> </td>
    <td> </td>
    <td> tax policy has many moral and practical implications &mdash; some people see taxes as a theft, indirect taxes seem to be better than direct taxes with regard to encouraging saving (and investment!) but are also considered regressive </td>
  </tr>
</table>

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# Tax Imposed On Sellers

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# Tax Imposed On Buyers

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# Evaluation of Taxes

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The main consequence of taxes is that the quantity of the product that is produced, exchanged and consumed decreases</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">In the general case, the shrinkage of the market means that the society is worse off because some of the potential gains from trade are not realised</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The extent of the shrinkage depends on the size of the tax and the responsiveness of buyers and sellers to price changes (PED and PES)</td>
  </tr>
</table>

---

# Evaluation of Taxes

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The distribution of the tax burden (the tax incidence) DOES NOT depend on the intentions of the ruler because it is effectively determined by the relative elasticities of buyers and sellers and not by the ruler's decision  to impose the tax on the buyers or on the sellers</td>
  </tr>
</table>

---

class: clear, middle, no-scribble
  
  .font200[
<strong>  Case Study:<br>&nbsp;Rent Controls in New York City</strong>
]
<hr>

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# New York City FARE Act Rally

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# NYC Median Asking Rent

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# Zohran Mamdani

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# Zohran Mamdani

Two of Zohran Mamdani's major campaign promises:

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class: clear, middle, no-scribble
  
  .font200[
<strong>  Conclusion</strong>
]
<hr>

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# Conclusion

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">By intervening in the market economy the government 'takes sides' and 'picks winners and losers', creating a lot of controversy</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">The majority of economists agree that taxes (especially on demerit goods) are acceptable means for governments to obtain revenues and influence buyers' behaviour but oppose price controls as a very inefficient way to help certain groups in society</td>
  </tr>
</table>

<table class="none">
  <tr style="background-color: transparent;">
    <td style="text-align: right; vertical-align: top; width: 50px;"><i class="fa fa-balance-scale"></td>
    <td style="width: 20px"> </td>
    <td style="text-align: left; vertical-align: top; width: auto;">Even the economists who agree that taxes are legitimate may have a lot of disagreement about the size of the tax burden and the structure of the tax system because of differences in normative views</td>
  </tr>
</table>

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# Questions?

<br>

</body>
</html>

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  .font200[
<strong>  Bonus Content</strong>
]
<hr>

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# Thank You!

<br>