Price Ceiling Practice Problem | (STEP-BY-STEP SOLUTION)| PART 1 | Think Econ
TLDRThis educational video offers a step-by-step guide to solving an economics problem involving market equilibrium, price ceilings, and dead weight loss. It begins by determining the equilibrium price and quantity for bus fares using demand and supply equations. Next, it explores the impact of a government-imposed price ceiling of $2.50 on the number of bus trips taken. Finally, the video calculates the resulting dead weight loss using graphical analysis and demonstrates the concept of total surplus loss due to the price control. The content is tailored for viewers with no prior knowledge, ensuring clarity and understanding.
Takeaways
- π The video is a tutorial on solving a practice problem related to price ceilings and dead weight loss in the context of bus fares in a city.
- π The demand and supply equations for bus fares are given as QD = 2400 - 500p and QS = 300p, respectively.
- 𧩠Part A of the problem asks for the market equilibrium price and quantity, which are found by setting QD equal to QS and solving for p and Q.
- π‘ The equilibrium price (P*) is calculated to be $3, and the equilibrium quantity (Q*) is 900 bus trips.
- π Part B introduces a price ceiling imposed by the government at $2.50 per bus trip, and the task is to determine the new quantity of bus trips taken.
- π A price ceiling creates a market disequilibrium, leading to a surplus of demand over supply at the ceiling price.
- βοΈ By substituting the price ceiling into the supply equation, the quantity supplied (QS) is found to be 750 bus trips.
- π Part C focuses on calculating the dead weight loss caused by the price ceiling, which is represented by the loss in total surplus.
- π The dead weight loss is calculated using the formula for the area of a triangle, with the base being the price difference and the height being the quantity difference from equilibrium.
- π’ The calculated dead weight loss is $60, representing the inefficiency introduced by the price ceiling.
- π The video encourages viewers to like, subscribe, and comment with topics or questions for future content.
Q & A
What is the main topic of the video?
-The video discusses solving a practice problem related to market equilibrium, price ceilings, and dead weight loss in the context of bus fares in a city.
What are the equations for quantity demanded and quantity supplied given in the video?
-The quantity demanded (QD) is given by the equation QD = 2400 - 500p, and the quantity supplied (QS) is given by QS = 300p.
What is the market equilibrium price and quantity according to the video?
-The market equilibrium price (P*) is $3, and the equilibrium quantity (Q*) is 900 bus trips.
What does Part B of the problem ask for after the government imposes a price ceiling?
-Part B asks for the number of bus trips that will be taken after the price ceiling of $2.50 per bus trip is implemented.
What is the quantity of bus trips that will be consumed in the market after the price ceiling is implemented?
-After the price ceiling is implemented, the quantity of bus trips consumed will be 750.
What is the price at which the price ceiling intersects the demand curve according to the video?
-The price at which the price ceiling intersects the demand curve is $3.30.
How is the dead weight loss calculated in the video?
-The dead weight loss is calculated as the area of the triangle formed by the price ceiling, the demand curve, and the equilibrium quantity, using the formula for the area of a triangle (base times height divided by 2).
What is the dead weight loss created by the price ceiling according to the video?
-The dead weight loss created by the price ceiling is $60.
What economic principle is used to determine the quantity consumed after the price ceiling is implemented?
-The principle used is that in a disequilibrium market, consumption occurs at the short side of the market, which is determined by the intersection of the supply curve and the price ceiling.
What is the advice given by the video for solving this type of problem?
-The advice given is to draw out the supply and demand curves, label the equilibrium points, introduce the price ceiling, and then determine the quantity consumed at the short side of the market.
What does the video suggest for future content based on viewer feedback?
-The video suggests that viewers can provide feedback on the types of economic topics or homework questions they would like to see covered in future videos.
Outlines
π Market Equilibrium Analysis
This paragraph introduces a video tutorial on solving a practice problem related to price ceilings and deadweight loss in the context of bus fares in a city. The demand and supply equations are provided, and the video aims to find the market equilibrium price and quantity, the impact of a price ceiling, and the resulting deadweight loss. The explanation begins with calculating the equilibrium by setting the demand and supply equations equal to each other, solving for the price ($3) and quantity (900 bus trips). The paragraph emphasizes a step-by-step approach suitable for viewers with no prior knowledge.
π Impact of Price Ceiling on Bus Trips
The second paragraph delves into the effects of a government-imposed price ceiling of $2.50 per bus trip. It suggests a visual approach by graphing the supply and demand curves and identifying the market quantity at the point where the price ceiling intersects the supply curve, which is on the 'short side' of the market. The calculation shows that the quantity supplied at the price ceiling is 750 bus trips. This part of the video focuses on understanding how price ceilings can lead to a change in market dynamics and affect the quantity transacted.
Mindmap
Keywords
π‘Market Equilibrium
π‘Price Ceiling
π‘Dead Weight Loss
π‘Quantity Demanded (QD)
π‘Quantity Supplied (QS)
π‘Consumer Surplus
π‘Producer Surplus
π‘Total Surplus
π‘Supply and Demand Curves
π‘Economic Efficiency
π‘Short Side of the Market
Highlights
Introduction to a practice problem involving price ceilings and dead weight loss in the context of bus fares.
Equations for quantity demanded (QD) and quantity supplied (QS) are provided: QD = 2400 - 500p, QS = 300p.
Market equilibrium is found where QD equals QS, leading to an equilibrium price (P*) of $3.
Equilibrium quantity (Q*) is calculated to be 900 bus trips using either the demand or supply equation.
Government intervention is introduced with a price ceiling set at $2.50 per bus trip.
The rule of thumb in economics for disequilibrium markets is to consume at the short side of the market.
Quantity supplied (QS) at the price ceiling is calculated to be 750 bus trips.
A graphical approach is recommended to visualize the effects of the price ceiling on supply and demand.
Dead weight loss is introduced as a measure of the loss in total surplus due to the price ceiling.
The critical value for calculating dead weight loss is found by setting QD to 750 and solving for the price.
The price corresponding to the quantity of 750 on the demand curve is calculated to be $3.30.
Dead weight loss is calculated using the formula for the area of a triangle: base times height divided by 2.
The base for calculating dead weight loss is the price difference between $3.30 and $2.50.
The height for the dead weight loss triangle is the difference in quantity between 900 and 750.
The calculated dead weight loss is $60, representing the inefficiency caused by the price ceiling.
A step-by-step solution is provided for understanding the effects of price ceilings on market equilibrium.
The video concludes with an invitation for viewers to suggest topics for future economic discussions.
Transcripts
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