jP J. Case study
J.l. Read the following selection.
How Government Can Affect Market
What can happen when government intervenes in a market economy? Using imaginary figures, we will take the market for potatoes as an example.
The demand and supply schedules show how many bushels farmers would be willing to put on the market at each price.
| Price | Quantity Demanded | Quantity Supplied | Result |
| $ 3.00 | 10.000 bu | 60,000 bu | Surplus |
| S 2.50 | 15,000 bu | 50,000 bu | Surplus |
| $2.00 | 20,000 bu | 40,000 bu | Surplus |
| $ 1.50 | 30,000 bu | 30,000 bu | Equilibrium |
| $ 1.00 | 40,000 bu | 20,000 bu | Shortage |
| $0.50 | 50,000 bu | 10,000 bu | Shortage |
The graph below shows the supply and demand situation presented in the above table.
For example, at a price of $ 3.00 per bushel, buyers would purchase only
- bushels; but farmers would put 60,000 bushels on the market. There would be a surplus of potatoes. At $ 1.00 per bushel, buyers would try to purchase 40,000 bushels, but farmers would be willing to put only 20,000 on the market.
There would be a shortage of potatoes. Equilibrium occurs at the price of $ 1.50, at which buyers would be willing to purchase 30,000 bushels and farmers would be willing to produce and sell 30,000. There would be no surplus and no shortage. The market would be “cleared.”
Price
0 10 20 30 40 50 60
Quantity (Thousands of Bushels)
Price
Quantity (Thousands of Bushels)
Now, suppose that the government decides that farmers ought to receive at least $ 2.00 per bushel.
That is, it puts a “floor” under the price and takes action to prevent the price from falling below $ 2.00. In the graph below, the broken line at $ 2.00 shows this “floor” price. Notice where this broken line touches the demand curve (D). Go from this point down to the horizontal axis at the bottom. It shows that buyers will purchase only- bushels at this price. Notice where the broken line touches the supply curve (S). Moving from this point down to the horizontal axis at the bottom, you will see that farmers will try to put 40,000 bushels on the market when the price is $ 2.00. As a result, there will be a surplus of potatoes. Consumers will pay more for potatoes, even though there is a surplus of unsold potatoes in existence.
J.2. Describe the graphs and discuss with a partner the following problems. Share your ideas with the whole group.
- What will happen if the government raises the support price to $ 2.50? How many bushels will be purchased? How many will be produced and put on the market? How large will the surplus be?
- Suppose that the government decides to put a “ceiling” on potato prices, forbidding farmers to charge more than $ 1.00 per bushel. How many bushels would appear on the market? How many bushels would buyers he trying to purchase? Would there be a shortage or a surplus?
- Instead of potatoes, consider the price of labor (wages per hour). Assume that hourly wages for a particular type of worker (unskilled laborer) and the supply of workers are at equilibrium at $ 4.35 per hour. What will happen if government increases the legal minimum wage from $ 3.35 per hour to $ 5.50 per hour?
- Using the same principles, what will probably happen to the supply of apartments if the government sets a legal “ceiling” on the amount of rent a landlord can charge if it is below the equilibrium price for rental property?
- If it is the role of government to assure economic security and equity, are there situations where price supports or ceilings are necessary?