Price Ceiling Practice Problem | (STEP-BY-STEP SOLUTION)| PART 1 | Think Econ

Think Econ
28 Oct 202308:02
EducationalLearning
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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
  • πŸ“š 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.
  • πŸ” The demand and supply equations for bus fares are given as QD = 2400 - 500p and QS = 300p, respectively.
  • 🧩 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.
  • πŸ’‘ The equilibrium price (P*) is calculated to be $3, and the equilibrium quantity (Q*) is 900 bus trips.
  • πŸ›‘ 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.
  • πŸ“‰ A price ceiling creates a market disequilibrium, leading to a surplus of demand over supply at the ceiling price.
  • ✏️ By substituting the price ceiling into the supply equation, the quantity supplied (QS) is found to be 750 bus trips.
  • πŸ“Š Part C focuses on calculating the dead weight loss caused by the price ceiling, which is represented by the loss in total surplus.
  • πŸ“ 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.
  • πŸ”’ The calculated dead weight loss is $60, representing the inefficiency introduced by the price ceiling.
  • πŸ‘ 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
00:00
πŸ“š 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.

05:00
πŸ› 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
πŸ’‘Market Equilibrium
Market Equilibrium refers to a state where the quantity demanded of a good or service equals the quantity supplied. It is a fundamental concept in economics where the price of a product is determined by the intersection of supply and demand curves. In the video, the equilibrium price and quantity for bus fares are calculated using the given demand and supply equations, resulting in an equilibrium price of $3 and an equilibrium quantity of 900 bus trips.
πŸ’‘Price Ceiling
A price ceiling is a government-imposed limit on the price of a good or service, typically set below the market equilibrium price. It is used to make goods or services more affordable to consumers. In the video, the government imposes a price ceiling at $2.50 per bus trip, which is lower than the market equilibrium price, leading to a change in the quantity of bus trips taken.
πŸ’‘Dead Weight Loss
Dead Weight Loss is an economic measure of the loss of total surplus that occurs when the government imposes a price control, such as a price ceiling or a price floor, resulting in an inefficient allocation of resources. In the video, the dead weight loss created by the price ceiling is calculated by finding the area of a triangle formed by the difference between the market equilibrium price and the price ceiling, and the difference in quantities supplied and demanded.
πŸ’‘Quantity Demanded (QD)
Quantity Demanded (QD) is the amount of a product that consumers are willing and able to purchase at a given price. It is usually represented as a downward-sloping curve on a graph. In the script, the demand equation for bus fares is given as QD = 2,400 - 500p, which shows the relationship between the price (p) and the quantity demanded.
πŸ’‘Quantity Supplied (QS)
Quantity Supplied (QS) is the amount of a product that producers are willing to sell at a given price. It is typically represented as an upward-sloping curve on a graph. In the video, the supply equation for bus fares is QS = 300p, indicating how the quantity supplied changes with price.
πŸ’‘Consumer Surplus
Consumer Surplus is the difference between what consumers are willing to pay for a good and what they actually pay. It represents the benefit consumers receive from participating in a market transaction. In the context of the video, the price ceiling reduces consumer surplus as consumers are now paying less than the equilibrium price for bus trips.
πŸ’‘Producer Surplus
Producer Surplus is the difference between the price at which producers are willing to sell a good and the actual price they receive. It represents the profit or benefit producers gain from selling their goods. The video explains that the price ceiling reduces producer surplus because producers receive less for each bus trip sold.
πŸ’‘Total Surplus
Total Surplus is the sum of consumer surplus and producer surplus, representing the total benefit derived from market transactions. It is maximized at the market equilibrium. The video discusses how the price ceiling reduces total surplus by creating a dead weight loss.
πŸ’‘Supply and Demand Curves
Supply and Demand Curves are graphical representations of the relationship between the price of a good and the quantity supplied and demanded. They are fundamental tools in economic analysis. In the video, these curves are used to illustrate the effects of a price ceiling on the market for bus fares.
πŸ’‘Economic Efficiency
Economic Efficiency refers to the optimal allocation of resources in an economy, where resources are used to satisfy the most urgent wants of consumers as much as possible. The video explains that the price ceiling disrupts economic efficiency by creating a shortage and a dead weight loss.
πŸ’‘Short Side of the Market
The short side of the market refers to the point at which the quantity supplied or demanded is less than the other, resulting in a surplus or shortage. In the video, it is explained that in the case of a price ceiling, the quantity consumed in the market is determined by the short side, which is the quantity supplied at the price ceiling.
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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EconomicsMarket EquilibriumPrice CeilingDead Weight LossSupply and DemandTutorialEconomic PolicyConsumer SurplusProducer SurplusTutorial VideoEducational Content