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Econ Videos 79 videos

Econ: What is a Production Possibilities Curve?
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Econ: What are Price and Quantity Controls? 3 Views


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Transcript

00:00

and finance Allah shmoop what our price and quantity controls

00:08

All right people while the invisible hand does a lot

00:11

of good bringing consumer demand to producer supply at equilibrium

00:16

But sometimes the invisible hand can't work its magic For

00:19

instance in cases of monopoly on Olonga pally firms are

00:23

incentivized to produce less quantity at higher prices you know

00:27

than they would if they had some competition Well in

00:30

cases like these the government can step in to try

00:33

to correct the market making it more efficient by setting

00:36

price and quantity controls In other cases the government may

00:39

set price and quantity controls in response to social issues

00:43

and actually creating market distortion rather than a correcting one

00:48

So how do price and quantity controls work If you

00:52

look at your typical supply and demand graph like this

00:54

take a look at the axes on the X axis

00:56

We've got quantity on the Y axis We've got price

00:59

Since the X axis and a Y axis are price

01:01

and quantity on the graph well those are the two

01:04

things the government has to play with to affect the

01:06

markets No excess demand or supply means we're at equilibrium

01:11

where supply and demand cross like right there This means

01:13

the supply a good or service is sold at matches

01:17

the same supply demand it all for an agreed upon

01:20

price by buyers and sellers What market inefficiencies produce what's

01:24

called a dead weight loss which we can see on

01:27

the graph right there representing the cost of inefficiency When

01:31

there's either excess supply or excess demand while we Khun

01:33

see dead weight loss the larger the deadweight loss triangle

01:37

on the graph while the farther away from equilibrium The

01:40

market is when there's excess demand That means there's a

01:43

shortage of supply when lots of people want a limited

01:46

quantity of stuff while prices skyrocket On the flip side

01:50

when there's excess supply demand shrinks When there's an abundance

01:53

of something compared to you know how much of it

01:56

people want Well prices fall sometimes Government price in quantity

02:00

controls are designed to reduce deadweight loss and other times

02:02

these controls create deadweight loss First up price controls A

02:07

government can set a price control basically setting price limitations

02:12

on firms in a certain market Well there's two main

02:15

types of price controls Price ceilings and price floors Well

02:18

price ceilings mean there's an upper limit on how much

02:21

affirm Khun Selig odor service for For instance a government

02:24

might set a price ceiling on something that everyone needs

02:27

to keep you know affordable like food for natural monopolies

02:30

that affect a lot of society like utilities Internet service

02:34

providers and buses that buses Will governments oftentimes set a

02:38

price ceiling Will these air all natural monopolies since their

02:42

monopolies that happened spontaneously from very high fixed startup costs

02:46

Price ceilings on natural monopolies like these insure businesses aren't

02:51

taking too much advantage of their monopoly status and overcharging

02:55

consumers on those evil business is rent controlled areas are

02:58

another example of price ceilings However rent controlled areas are

03:02

more likely creating a dead weight loss Ten Getting rid

03:05

of one but artificially lowering the cost of housing that

03:08

creates excess demand Rent control Lower supply to since that

03:14

means landlords and rent controlled areas will be feeling the

03:17

squeeze of the price ceiling Why be a landlord in

03:20

an area where prices are kept artificially low Hello rent

03:24

control when you could be a landlord in an unregulated

03:27

red state area with much higher rent prices in therefore

03:31

profits These landlords and rent controlled areas who are making

03:34

less money because of government intervention are then incentivized to

03:37

provide housing with you know worst quality Another reason government

03:41

might set a price ceiling is to prevent hyper inflation

03:45

which history has told us happens often during war time

03:48

Right Well price floors are the opposite you know when

03:51

a government sets a lower bound on price for firms

03:54

While price ceilings often help consumers price floors often help

03:58

producers For instance governments sometimes help farmers out by setting

04:03

price floors on things like milk By setting the price

04:06

artificially high though this can create reduced a man and

04:10

excess supply usually does well In the case of farmers

04:12

governments usually set price floors along with the promise of

04:16

buying up any excess supply from farmers Well why does

04:19

the government bother helping out these farmers and keeping him

04:21

around Technology made farming go from meeting a ton of

04:25

people needing very few people for the same output of

04:28

food producing on mass farming equipment fancy fertilizers and pesticides

04:32

Ball radically transformed the farming industry Some governments have used

04:35

price floor simply to reduce consumer demand for a good

04:39

for instance making alcohol or tobacco more expensive would ideally

04:43

drive demand for alcohol and tobacco down well in the

04:46

labor market Minimum wages a price floor Here the suppliers

04:49

are workers not the firms Firms are demanding labor and

04:53

workers are supplying it to remember when the price of

04:56

something rises It's usually followed by a drop in demand

05:00

Okay so what about quantity controls Well a quantity control

05:04

is usually referred to as a quota and it limits

05:07

the quantity of a good quotas work well in cases

05:10

when controlling the quantity is easier or more important than

05:14

controlling the cost For instance a government may set a

05:17

quota for nuclear power plants since there's a potentially high

05:20

social cost If you know something went awry and the

05:24

international markets it's common for countries to set import quotas

05:28

So this quota restricts a supply of a certain good

05:30

from international markets so that gives the domestic country a

05:34

leg up against them Foreign competitors like another example of

05:37

quota on imported steel would mean that domestic steel firms

05:41

would get an advantage over imported steel while international quotas

05:45

benefits some domestic firms This comes at the cost of

05:48

everyone buying the goods meaning a steel quota in the

05:51

US would mean higher steel prices from domestic steel producers

05:54

then from cheaper foreign producers in an unregulated market A

05:58

limited number of hunting and fishing licenses and tags are

06:01

another example of quotas in order to keep hunting and

06:04

fishing populations you know in existence the young ones have

06:07

to be given time to be born grow up and

06:09

reproduce right Well oftentimes A combination of quotas and price

06:13

floors in the form of high price licenses and tags

06:16

are used to keep hunted and fished populations at sustainable

06:19

levels Setting a quota a quantity limit has similar effects

06:23

as a price floor Artificially restricting quantity sold means higher

06:26

prices and lower demand compared to free market equilibrium Well

06:30

if you were wondering it's not too common when a

06:33

capitalistic government sets a quantity minimum or floor But if

06:36

they did in theory it'd create a surplus of supply

06:38

compared to equilibrium levels and potentially would need to be

06:41

supported by the government like price floors on agriculture to

06:45

make up for the lack of demand Well for instance

06:47

let's say in the future the government created an enforceable

06:49

law on the labor market making firms hire a minimum

06:52

number of people in response to shrinking jobs Yes Hello

06:56

Robots They're coming for our jobs Firms would then be

06:58

forced to hire people when they wouldn't want or need

07:01

thio creating forced oversupply of workers on two firms Well

07:06

all this government regulation can breathe rebellion rebellion in the

07:09

form of the underground economy the market free of any

07:12

government regulations And yes black market milk is a thing 00:07:15.992 --> [endTime] just like black market booze Hey

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