ACCA Applied Knowledge · Business and Technology · Microeconomic factors
A government imposes a minimum price on wheat above the equilibrium price to support farmers' incomes. Which outcome is most likely?
A binding minimum price above equilibrium creates excess supply of wheat. Farmers produce more at the higher price while consumers buy less, so a surplus arises that the government may have to buy up or store to maintain the price. Excess demand would result from a price ceiling.
- AExcess supply of wheat, which the government may need to buy or storeCorrect
- BExcess demand for wheat, leading to queues
- CA fall in the quantity of wheat farmers wish to produce
Explanation
A binding minimum price above equilibrium increases quantity supplied and reduces quantity demanded. This creates a surplus. To sustain the price, the government typically buys the excess, stores it or otherwise disposes of it. Excess demand arises from a price ceiling.
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