Question

This image is a graph with, price, labeling the y axis and, quantity, labeling the x axis. Two curves intersect on the graph, one upward sloping and the other downward sloping. Two horizontal axes are highlighted, one above the intersection point of the curves with the label, A, and one below the intersection point of the curves with the label, B. Use this image to answer the following question. When government sets a price for a good above equilibrium, there will be

Answer 1

The intersection between the upward sloping function (the supply curve) and the downward sloping function (the demand curve) is the equilibrium price of the market, the point at which the wishes of consumers and suppliers meet.

The graph described should be like the one attached. The example includes the demand and supply curves and the equilibrium price of a market of agricultural products.

When the economic authorities set a minimum price (also called price floor), above the equilibrium price there is a situation of excess supply.

• Producers are willing to produce a larger quantity in the price floor scenario, as they will earn a higher price per unit commercialized.
• Consumers are willing to consume a smaller amount of product units at a more expensive prices.

The wishes of producers and consumers do not meet in the price floor situation, the quantity supplied is larger than the quantity demanded and therefore there is an excess supply.