![]() While the demand for food has increased, that increase has not been nearly as great as the increase in supply. But as incomes rise, people spend a smaller and smaller fraction of their incomes on food. While the supply curve for agricultural goods has shifted to the right, the demand has increased with rising population and with rising income. While such price reductions have been celebrated in computer markets, farmers have successfully lobbied for government programs aimed at keeping their prices from falling. As we have learned, technological improvements cause the supply curve to shift to the right, reducing the price of food. Worldwide production capacity has expanded markedly. Technological improvements in the form of new equipment, fertilizers, pesticides, and new varieties of crops have led to dramatic increases in crop output per acre. ![]() Why have many governments around the world set price floors in agricultural markets? Farming has changed dramatically over the past two centuries. The surplus persists because the government does not allow the price to fall.Ī price floor for wheat creates a surplus of wheat equal to ( W 2 – W 1) bushels. Because P F is above the equilibrium price, there is a surplus of wheat equal to ( W 2 − W 1) bushels. Reading over to the supply curve, we find that sellers will offer W 2 bushels of wheat at the price floor of P F. At P F, we read over to the demand curve to find that the quantity of wheat that buyers will be willing and able to purchase is W 1 bushels. Notice that P F is above the equilibrium price of P E. Suppose the government sets the price of wheat at P F. (Notice that, if the price floor were for whatever reason set below the equilibrium price, it would be irrelevant to the determination of the price in the market since nothing would prohibit the price from rising to equilibrium.) A price floor that is set above the equilibrium price creates a surplus.įigure 4.8 “Price Floors in Wheat Markets” shows the market for wheat. With a price floor, the government forbids a price below the minimum. A minimum allowable price set above the equilibrium price is a price floor. Governments often seek to assist farmers by setting price floors in agricultural markets. In each case, we will look at reasons why governments have chosen to control prices in these markets and the consequences of these policies. Through these examples, we will identify the effects of controlling prices. In this section we will examine agricultural markets and apartment rental markets-two markets that have often been subject to price controls. In some markets, however, governments have been called on by groups of citizens to intervene to keep prices of certain items higher or lower than what would result from the market finding its own equilibrium price. ![]() Surpluses and shortages of goods are short-lived as prices adjust to equate quantity demanded with quantity supplied. ![]() So far in this chapter and in the previous chapter, we have learned that markets tend to move toward their equilibrium prices and quantities. Discuss the reasons why governments sometimes choose to control prices and the consequences of price control policies.Use the model of demand and supply to explain what happens when the government imposes price floors or price ceilings.
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