Question

The government sets the price of wheat for the coming year above the equilibrium price. what effect would this have on supply and demand?

Answer 1

When the government sets a minimum price for a good or service, they are setting a price floor.

In this case the price floor is above the equilibrium price, so that should increase the quantity supplied of wheat. But at the same time it will decrease the quantity demanded of wheat.

Since producers will earn more by selling wheat, then they will increase their offer because they want to earn higher profits. But since consumers are not willing to buy that much wheat if it is too expensive, they will buy less. This will create a deadweight loss (the difference between the quantity offered and the quantity demanded).

Answer 2

The government sets the price of wheat for the coming year above the equilibrium price. A price floor that is set above the equilibrium price creates a surplus. A surplus is used to describe many excess assets including income, profits, capital and goods. Therefore, supply and demand is in excess or is more than what is required. Hope this answers the question.