Question

• Respond to each short answer question using two to three well-constructed paragraphs (150 – 250 words) containing specific details and examples that support your understanding of the concepts.

1. Explain, using supply and demand analysis, the consequences for the wheat market of providing price supports for agricultural production in the United States? Who benefits from them? Who loses out?

Answer 1

Price support for agricultural production is refers as price flooring. It is a government imposed price support for producers that is a minimum price that can be charged for agricultural products. Price floor must be higher than equilibrium so that market gets affected otherwise it will not effect market outcome and equilibrium price will prevail.

Consequently, price support leads to increase in price of wheat above equilibrium due to this there will be surplus of wheat in market. Supply increases and demand decreases. Govt will be forced to purchase the surplus from wheat farmers.

Wheat producers will gain because due to increase in price. That gain will be equal to the increase in surplus. Wheat consumers will be looser in this case and that loss will be equal to the decrease in consumer surplus. Market will become inefficient because as govt will purchase surplus from producers. Consumers loose twice because that money also comes from consumers in form of taxes. There will be dead weight loss in the market.