Question

The market for rice has the following supply and demand schedules: $$\begin{array}{ccc} P(\text { per ton }) & Q^{D} \text { (tons) } & Q^{S} \text { (tons) } \\ \hline \$ 10 & 100 & 0 \\ \$ 20 & 80 & 30 \\\\\$ 30 & 60 & 40 \\\\\$ 40 & 50 & 50 \\\\\$ 50 & 40 & 60\end{array}$$ To support rice producers, the government imposes a price floor of \(\$ 50\) per ton. a. What quantity will be traded in the market? Why? b. What steps might the government have to take to enforce the price floor?

Short answer

a. The quantity traded in the market would be 40 tons, as that is the quantity demanded at the price floor of $50 per ton. \nb. The government might buy the excess supply, penalize selling below the price floor, set up regulatory bodies to monitor the market, and encourage exports to enforce the price floor.

Step-by-step solution

Identify the Quantity Supplied and Quantity Demanded at the Price Floor

Given the price floor of $50 per ton, look at the supply and demand schedules. At $50, Quantity Demanded (\(Q^D\)) is 40 tons and Quantity Supplied (\(Q^S\)) is 60 tons.

Determine the Effective Market Quantity

The quantity of rice that will be traded in the market is determined by what is demanded by consumers because this is the quantity that they are willing and able to purchase at the given price. So, the traded quantity at a price floor of $50 will be 40 tons.

Discuss Possible Steps for Government to Enforce the Price Floor

To enforce the price floor, the government might have to take steps such as: \n1. Purchase the excess supply: Since the supply (60 tons) exceeds demand (40 tons) at the price floor of $50, the government might purchase the excess 20 tons to maintain the price.\n2. Impose penalties for selling below the price floor: The government could impose fines or other penalties for producers or sellers found selling rice below the fixed price.\n3. Set up regulatory bodies: These bodies would monitor the market, ensuring compliance with the price control measures.\n4. Encourage exports: By encouraging farmers to export the surplus rice, the government can protect local prices from falling.

Key concepts

Market Equilibrium

Market equilibrium occurs when the quantity of a good consumers want to buy equals the quantity suppliers want to sell. In other words, it is the point where supply meets demand. In our rice market example, using the supply and demand schedules provided, we can see that the market equilibrium price is $40 per ton. At this price, both the quantity demanded and the quantity supplied are 50 tons.
This balance ensures there is no excess demand or supply, stabilizing the market.
Equilibrium is crucial because it reflects an efficient allocation of resources, where neither excess supply nor unmet demand exists. Whenever external forces disrupt this balance, the market may experience inefficiencies.

Supply and Demand

Supply and demand are the two key forces that shape economic markets.

• Demand represents how much of a good consumers are willing and able to purchase at various prices. As we observe in our exercise, demand for rice decreases as the price increases. For instance, at $50 per ton, the demand is 40 tons, while at $10 per ton, it spikes to 100 tons.
• Supply is how much of the good producers are willing to sell at different prices. The supply schedule shows that suppliers are willing to offer more rice as the price rises. At $50, suppliers wish to sell 60 tons, but at $10, they offer none.

The interaction between supply and demand determines the market price and quantity. A shift in either can lead to a new equilibrium or necessitate government intervention.

Government Intervention

When markets do not operate efficiently on their own, governments may step in to regulate. A price floor is one of the tools utilized to influence the market.
It represents a minimum price set by the government, below which sellers cannot legally sell their goods. In the rice market exercise, a price floor of $50 is set. This is above the equilibrium price, which can lead to unintended consequences like excess supply.
Through intervention, the government aims to protect producers' incomes, prevent prices from being too low, or stabilize the economy. However, it requires careful regulation to avoid creating inefficiencies. Strategies such as purchasing surplus or regulating sales practices are common interventions to enforce a price floor.

Excess Supply

Excess supply, or a surplus, happens when the quantity supplied surpasses the quantity demanded at a given price. This generally happens when a price floor is set above the equilibrium level but can also occur naturally due to other economic factors.
In the rice market scenario, the government-imposed price floor of $50 results in a supply of 60 tons while demand stands at only 40 tons. This leads to 20 tons of excess supply.

• Excess supply can press prices lower, though a price floor prohibits this adjustment.
• Without government action, producers may suffer losses because they cannot sell all their products at the set price.

It's essential for governments to address excess supply through actions like purchasing the surplus or promoting exports to stabilize the market.