Microeconomics

Table of Contents

1. Topic pack - Microeconomics - introduction
2. 1.1 Competitive Markets: Demand and Supply
3. 1.1 Competitive Markets: Demand and Supply - notes
4. 1.1 Competitive markets - questions
5. 1.1 Competitive markets - simulations and activities
6. 1.2 Elasticities
7. 1.2 Elasticities - notes
8. Section 1.2 Elasticities - questions
9. Section 1.2 Elasticities - simulations and activities
10. 1.3 Government intervention
11. 1.3 Government Intervention - notes
12. 1.3 Government intervention - questions
13. 1.3 Government intervention - simulations and activities
14. 1.4 Market failure
15. 1.4 Market failure - notes
16. Section 1.4 Market failure - questions
17. Section 1.4 Market failure - simulations and activities
18. 1.5 Theory of the firm
19. 1.5 Theory of the firm - notes (HL only)
20. Section 1.5 Theory of the firm - questions
21. Section 1.5 Theory of the firm - simulations and activities
22. Print View

1.3 Government intervention

In the previous sections we explained markets, the rules of supply and demand, market equilibrium, the price mechanism and market efficiency and how demand and supply are used to calculate market price and plot market equilibrium. We then explained the concepts of elasticity. In this section, we consider the role and effects of government intervention in the economy.

By the end of this section you should be able to:

• Explain why governments impose indirect (excise) taxes.
• Distinguish between specific and ad valorem taxes.
• Draw diagrams to show specific and ad valorem taxes, and analyse their impacts on market outcomes.
• Discuss the consequences of imposing an indirect tax on the stakeholders in a market, including consumers, producers and the government.
• Explain why governments provide subsidies, and describe examples of subsidies.
• Draw a diagram to show a subsidy, and analyse the impacts of a subsidy on market outcomes.
• Discuss the consequences of providing a subsidy on the stakeholders in a market, including consumers, producers and the government.
• Explain why governments impose price ceilings, and describe examples of price ceilings, including food price controls and rent controls.
• Draw a diagram to show a price ceiling, and analyse the impacts of a price ceiling on market outcomes.
• Examine the possible consequences of a price ceiling, including shortages, inefficient resource allocation, welfare impacts, underground parallel markets and non-price rationing mechanisms.
• Discuss the consequences of imposing a price ceiling on the stakeholders in a market, including consumers, producers and the government.
• Explain why governments impose price floors, and describe examples of price floors, including price support for agricultural products and minimum wages.
• Draw a diagram of a price floor, and analyse the impacts of a price floor on market outcomes.
• Examine the possible consequences of a price floor, including surpluses and government measures to dispose of the surpluses, inefficient resource allocation and welfare impacts.
• Discuss the consequences of imposing a price floor on the stakeholders in a market, including consumers, producers and the government.

• Explain, using diagrams, how the incidence of indirect taxes on consumers and firms differs, depending on the price elasticity of demand and on the price elasticity of supply.
• Plot demand and supply curves for a product from linear functions and then illustrate and/or calculate the effects of the imposition of a specific tax on the market.
• Plot demand and supply curves for a product from linear functions and then illustrate and/or calculate the effects of the provision of a subsidy on the market.
• Calculate possible effects from the price ceiling diagram, including the resulting shortage and the change in consumer expenditure (which is equal to the change in firm revenue).