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Micro economics price in a competitive market - Essay Example

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A statutory minimum price, set above the market-clearing price, acts as a price floor. This will lead to excess supplies or surpluses, since the quantity that the market demands (QA) is less than the quantity that the suppliers want to supply (QB) for the given price level…
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Micro economics price in a competitive market
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A Sta y minimum price, above the market-clearing price A sta y minimum price, set above the market-clearing price, acts as a price floor. This will lead to excess supplies or surpluses, since the quantity that the market demands (QA) is less than the quantity that the suppliers want to supply (QB) for the given price level. Because of the price floor, buyers will only be willing to buy at QA, even if the suppliers are willing to sell at QB. This leads to an inefficient allocation of resources, and will later on force the government to be the last option buyer of the surplus goods, in the event that the market is unwilling to purchase the surplus.
A. 2. Sales subsidy paid to sellers, at a fixed amount per unit sold
A sales subsidy, paid on a per unit basis to sellers, creates a subsidy wedge between the price that the market will pay (P1), and the price that the suppliers will receive (P2). The per-unit subsidy will also shift the supply curve to the right, from S1 to S2, depending on the magnitude of the subsidy. The benefit of the price subsidy is usually shared by the market buyers and the suppliers, with the allocation of the benefits depending on the balance of the elasticities of the demand and supply for the product.
B. From society's point of view, the per-unit subsidy paid to the sellers will prove to be more beneficial than the statutory minimum price that is set above the market-clearing price. The subsidy shifts the supply curve to the right, and provides either (or both) the buyers (market) and the sellers (suppliers) benefits from the subsidy. On the other hand, the price floor set above the market-clearing price creates surpluses, leading to an inefficient allocation of resources and to the unfortunate scenario where the government will be forced to purchase the surplus goods. Read More
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