Question

Question 10: Suppose that, based on market demand and market supply, the market equilibrium price for a pound of tangerines is Pe = $3, and the equilibrium quantity is le = 1,700. Suppose that policymakers decide to impose a price of Pm = $5 per pound. This results in a new quantity supplied at this price, namely Qs = 2,200; as well as a new quantity demanded at this price, namely (p = 1,100. Show graphically and calculate the impact of this intervention in the market place, noting whether there will be a market shortage or surplus. Explain this effect. Answer:

Answer 1

S $5 को 23 D 1100 1700 2200

Equilibrium is achieved where demand and supply both are supply, the point on a graph where demand curve and supply curve both intersect each other.

According to the question, equilibrium is at 1700 units at a price of $3

Now the policymakers decide to impose a price higher than the equilibrium price at $5. This is known as a price floor.

Now at a price of $5, demand is 1100 units, and supply is  2200 that means supply is more than demand hence there is a surplus in the market.

Surplus = Supply - Demand

Surplus = 2200 - 1100

Surplus = 1100

Price Floor

Price floor is a situation where the government sets the price more than the equilibrium. The reason government does this is that sometimes the equilibrium price isn't fair price for producers hence government help the producers to earn enough profit but it has a another side too, as a result of high price, the demand decreases in the market hence there is a surplus in the market.