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 $1.00?
First find the equilibrium, where quantity supplied equals quantity demanded. Reading the table, at a price of \$2.00 per thousand kg both quantity supplied and quantity demanded equal 9 (000). So equilibrium price is \$2.00 and equilibrium quantity is 9,000 kg.
| Price ($) | Qty supplied (000) | Qty demanded (000) | Position vs equilibrium |
|---|
| 3.00 | 16 | 3 | surplus 13 |
| 2.00 | 9 | 9 | equilibrium |
| 1.50 | 6 | 14 | shortage 8 |
| 1.00 | 3 | 19 | shortage 16 |
(a)(i) A fixed price of \$1.50 is below equilibrium, so it creates excess demand:
\[ \text{Excess demand} = Q_d - Q_s = 14 - 6 = 8\;(000) = 8{,}000\text{ kg} \]
(a)(ii) If the government fails to enforce the \$1.50 ceiling, the shortage will drive the price up until it returns to the equilibrium price of \$2.00, where the shortage disappears.
(b) A fixed price of \$3.00 is above equilibrium, creating a surplus of \( 16 - 3 = 13\;(000) \) kg. To maintain it the government must mop up the surplus, that is buy the 13,000 kg of excess maize (buffer-stock purchase) so that the extra supply does not force the price down.
(c) A fixed price of \$1.00 is below the equilibrium of \$2.00. Compared with equilibrium, quantity demanded rises from 9 to 19 (000) while quantity supplied falls from 9 to 3 (000). This produces a shortage of \( 19 - 3 = 16{,}000 \) kg of maize.
First find the equilibrium, where quantity supplied equals quantity demanded. Reading the table, at a price of \$2.00 per thousand kg both quantity supplied and quantity demanded equal 9 (000). So equilibrium price is \$2.00 and equilibrium quantity is 9,000 kg.
| Price ($) | Qty supplied (000) | Qty demanded (000) | Position vs equilibrium |
|---|
| 3.00 | 16 | 3 | surplus 13 |
| 2.00 | 9 | 9 | equilibrium |
| 1.50 | 6 | 14 | shortage 8 |
| 1.00 | 3 | 19 | shortage 16 |
(a)(i) A fixed price of \$1.50 is below equilibrium, so it creates excess demand:
\[ \text{Excess demand} = Q_d - Q_s = 14 - 6 = 8\;(000) = 8{,}000\text{ kg} \]
(a)(ii) If the government fails to enforce the \$1.50 ceiling, the shortage will drive the price up until it returns to the equilibrium price of \$2.00, where the shortage disappears.
(b) A fixed price of \$3.00 is above equilibrium, creating a surplus of \( 16 - 3 = 13\;(000) \) kg. To maintain it the government must mop up the surplus, that is buy the 13,000 kg of excess maize (buffer-stock purchase) so that the extra supply does not force the price down.
(c) A fixed price of \$1.00 is below the equilibrium of \$2.00. Compared with equilibrium, quantity demanded rises from 9 to 19 (000) while quantity supplied falls from 9 to 3 (000). This produces a shortage of \( 19 - 3 = 16{,}000 \) kg of maize.
