Answer to Question #121972 in Microeconomics for talha shakeel

Question

A news piece regarding Sugar inquiry commission report is available at the following link.
https://dunyanews.tv/en/Pakistan/546488-Govt-makes-Sugar-inquiry-commission-report-public
Read the report carefully. With the help of graph, analyze the possible consequences of setting price floor of sugarcane below equilibrium price. Compare your conclusions with the ones, stated in this report.

Answer 1

• Price ceiling prevent a price from rising above a central level and when set below the equilibrium price, quantity demanded will exceed quantity supplied and excess demand or shortages will result.

Price floor is a legal minimum price in the market that prevent a price from falling below a certain level.Hence,will cause no effect on demand or supply as it leaves room for the price to rise to its equilibrium level.

• The intersection of demand (D) and supply (S) would be at the equilibrium point E0. However, a price floor set at Pf holds the price above E0 and prevents it from falling. The result of the price floor is that the quantity supplied Qs exceeds the quantity demanded Qd. There is excess supply, also called a surplus.