Question

The federal government announces that it will pay RM 3.00 a loaf for all the bread that can't be sold in a competitive market at that price. At the end of each week, the government purchases 1 million loaves of bread. Use supply and demand analysis to show on a graph that the market equilibrium price is less than 3 per loaf. Why doesn't the market price fall in this case?

Please I need the diagram !!

Very important pls

Answer 1

The equilibrium is defined as that price for which quantity demanded (Q) is =to quantity supplied (Q).

when the demand  and supply curves intersect. Since there is 1 million a surplus of loaves at $3, the price market must be below $3. If the government stopped purchasing the excess production of bread, some firms would not sell all their bread.

Rather than let the bread mold,  some firms will lower their price. Price pushed down continue until the  equilibrium price is reached and there is no surplus of shortage of bread.