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 will be 40 tons. b. To maintain the price floor, the government could buy the surplus, offer subsidies to consumers to increase demand, or enforce regulations that prevent selling below the price floor.

Step-by-step solution

Understand the Concept of Price Floor

A price floor is a minimum price buyers are required to pay for a good or service. It's above the equilibrium price. As a result, it may create a surplus.

Identify Quantity Demanded and Supplied at the Price Floor

In this case, the price floor is set at \$50. From the supply and demand schedules, at a price of \$50, the quantity demanded (Q^D) is 40 tons and the quantity supplied (Q^S) is 60 tons.

Analyze Market Trade at Price Floor

At a price of \$50, suppliers want to supply more (60 tons) than buyers want to buy (40 tons). So, the quantity traded in the market will be determined by the amount that buyers are willing to purchase– 40 tons.

Analyze Government Steps to Enforce the Price Floor

Since a price floor creates a surplus (20 tons), the government should take steps to ensure that the surplus does not lower the market price. This might involve buying the surplus itself or subsidizing consumers to increase demand.

Key concepts

Market Equilibrium

Understanding market equilibrium is foundational in microeconomics. It's the point where the quantity demanded by consumers equals the quantity supplied by producers, resulting in no excess supply or demand. At equilibrium, the market is in a state of balance, with a certain price that both buyers and sellers are happy with, leading to a stable economy. The market for rice, as presented in the textbook exercise, experienced equilibrium before the government intervention. Usually, market equilibrium is reached naturally through the interaction of supply and demand without external influences.

Quantity Demanded

The concept of quantity demanded refers to the number of goods that consumers are willing and able to buy at a specific price over a given period of time. It's important to understand that quantity demanded is not the same as demand. Rather, it is a specific point on the demand curve that illustrates what happens to the demand for rice when the price changes. In the case of the rice market, the quantity demanded decreases as the price increases, which can be seen in the supply and demand schedules.

Quantity Supplied

Quantity supplied, on the other hand, pertains to the amount of a good that producers are willing and able to sell at a certain price. Like quantity demanded, it corresponds to a specific point on the supply curve. Generally, as prices rise, it becomes more profitable for firms to increase production, thus increasing the quantity supplied. In our rice market case study, as the price of rice goes up, farmers are more inclined to supply more, hoping to capitalize on the higher price.

Government Intervention

Government intervention in the marketplace happens through various mechanisms such as price floors or price ceilings, taxes, subsidies, and quotas. Specifically, a price floor like the one in the rice market exercise is set to prevent prices from dropping below a certain level, benefiting producers. However, government intervention often results in market inefficiencies such as surpluses or shortages, because it disrupts natural market equilibrium. These interventions can stabilize markets and protect producers and consumers, but must be managed carefully to reduce negative side effects.

Supply and Demand Schedules

Supply and demand schedules are tabulations that show how much of a good will be bought and sold at different prices. They are essential for visualizing how the market works. The schedules depict various price levels and the corresponding quantities demanded and supplied at those prices. From these schedules, you can determine the market equilibrium and predict the consequences of price changes. In our textbook exercise, the schedules allowed us to observe how a government-set price floor results in a surplus where quantity supplied exceeds quantity demanded.