The price prevailing in the market for wheat and rice was Rs. 50/kg and Rs. 60 per kg. The government under its policy of MSP set the price at Rs. 60/kg and Rs. 70/kg. What will happen in such a situation?
Answer & explanation
Correct answer: option 2
The correct answer is option 2: Excess supply
The Minimum Support Price (MSP) is a price floor, meaning the government sets a minimum price above the equilibrium price to ensure that farmers get a fair price for their crops.
- Initially, the market price for wheat was Rs. 50/kg, and the government set MSP at Rs. 60/kg (higher than market price).
- Similarly, the market price for rice was Rs. 60/kg, and MSP was set at Rs. 70/kg.
- Since the MSP is higher than the equilibrium price, suppliers (farmers) are willing to supply more, but consumers are not willing to buy as much at the higher price.
This results in excess supply, as more goods are produced than what is demanded in the market.