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CA Foundation · Business Economics · Price Determination in Different Markets

The government fixes a minimum support price for wheat above the equilibrium price in a perfectly competitive market. What is the immediate market consequence if the government does not purchase the surplus?

Excess supply arises. When a minimum price is fixed above the equilibrium level, farmers want to sell more while buyers want to purchase less, so quantity supplied exceeds quantity demanded. The surplus persists unless the government buys it. Excess demand arises only under a price ceiling below equilibrium.

  1. AExcess demand arises at the fixed price
  2. BExcess supply arises at the fixed priceCorrect
  3. CEquilibrium quantity rises to a new market-clearing level
  4. DDemand curve shifts rightwards to absorb the output

Explanation

A price floor above equilibrium raises quantity supplied and reduces quantity demanded along the existing curves. Quantity supplied therefore exceeds quantity demanded, creating a surplus. Excess demand occurs only with a price ceiling below equilibrium.

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