Theory question 101
Price DeterminationSection A (data response: answer one question only from this section)
The table below shows the supply and demand for kilograms of maize per month in thousands. Use the information in the table to answer the questions that follow.
Quantity Supplied (000) | Price per thousand Kilogram ($) | Quantity Demanded (000)
16 | 3.00 | 3
13 | 2.50 | 5
9 | 2.00 | 9
6 | 1.50 | 14
3 | 1.00 | 19
1 | 0.50 | 26
(a)(i) If the government fixed the price of maize at $1.50 per thousand kilogram, what will be the excess demand for maize? (ii) If the government fails to enforce the fixed price, what will happen to the price of maize?
(b) How can the government maintain a fixed price of $3.00 per thousand kilogram for maize?
(c) In relation to the equilibrium price, what will be the effects on the quantities demanded and supplied if the government enforced a fixed price of $1.00?
Show the model answer
Equilibrium: price $2.00, where 9 (thousand) is both demanded and supplied.
(a)(i) At $1.50: quantity demanded 14 − quantity supplied 6 = excess demand of 8 (thousand), i.e. 8,000 kg.
(ii) A black market develops and the price rises towards the equilibrium price of $2.00 (or above).
(b) $3.00 is a minimum price above equilibrium, giving a surplus of 16 − 3 = 13 (thousand). Government can keep it by buying up the surplus (buffer stock / marketing board) and storing or exporting it, by limiting output with quotas, and by punishing sellers who sell below $3.00.
(c) At $1.00 (below the equilibrium of $2.00): quantity demanded rises from 9 to 19 (thousand), up by 10; quantity supplied falls from 9 to 3 (thousand), down by 6; there is a shortage of 16 (thousand), leading to queues, rationing, hoarding and black markets.
Find the equilibrium first; a price below it gives a shortage, above it a surplus.