QD= 100 - 5P
The market equilibrium price and quantity of widget corn can be determined by equating the demand and supply functions-
100 - 5P = 5P
10P = 100
P = 10
Q = 5*10 = 50
The market equilibrium price is $10 and the equilibrium quantity is 50 units.
CS= 0.5 * (50 * 10)
CS = 250
Producer surplus can be calculated as the area of triangle above the supply curve and below the equilibrium price. Therefore, producer surplus is given as:
PS = 0.5 * (50 * 10)
PS = 250
Total economic surplus is defined as the sum of consumer surplus and producer surplus.
TES= CS + PS
TES = 250 + 250
TES = 500
(ii) If this price ceiling is imposed by the government, the quantity supplied is reduced as the price falls to $5. The quantity supplied will be:
QS = 5P = 5 * 5 = 25 units
The quantity demanded would increase as the price falls from $10 to $5. The quantity demanded will be:
QD = 100 - 5P = 100 – 5*5 = 75 units
Thus, there is a shortage as the quantity demanded is 75 units which is more than the quantity supplied which is 25 units. There is a shortage of 50 units.
(iii) As the price falls to $5, there is an increase in the consumer surplus as they are getting widget corn at low price than before. While, with a fall in the prices the producer surplus would decrease.
The price at which the quantity supplied is 25 units is :
QS = 100 - 5P
25 = 100 - 5P
5P = 75
P = 15
The consumer surplus and producer surplus after price ceiling would be:
CS = 0.5 * (5 * 25) + (25 * 10) = 62.5 + 250 = 312.5
PS = 0.5 * (25 * 5) = 62.5
The total economic surplus is given as:
TES= CS + PS = 312.5 + 62.5 = 375
The consumer surplus has increased from 250 to 312.5 after price ceiling while the producer surplus has decreased from 250 to 62.5. The total economic surplus has also decreased from 500 to 375.
(iv) The deadweight loss can be calculated by imposing price ceiling in the widget corn market. The deadweight loss is the loss to the economy and is calculated by the area of triangle:
DWL = 0.5 (10 * 25) = 125
The government should abandon this policy as it is inefficient. There is deadweight loss to the economy. Also, the total economic surplus has been reduced from 500 to 375.
The important assumptions of PPF are:
The properties of PPF are:
The above ways can lead the production possibility curve to shift towards the right. This would increase the production of both the goods, that is, toilet rolls and sanitizers.
Demand and Supply of Online Movie Rentals
The diagram shows that as the price of in store movie rentals rises, the demand curve of online movies rentals would shift rightwards from D to D1. This leads to increase in the equilibrium price from P1 to P2 as well as equilibrium quantity from Q1 to Q2 of online movie rentals.
If the government regulates the price of Netflix by imposing price ceiling on the market, this would impact both in a positive and negative way.
Some of the pros of price ceiling:
Some of the cons of price ceiling are:
The price ceiling should not be imposed by the government in the online streaming market.
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