Finace EJ Case Study Example | Topics and Well Written Essays - 3000 words

Finace EJ - Case Study Example This policy assured that even though the actual market clearing competitive prices of agricultural products in a nation is low, farmers of the community will still experience the benefit of higher minimum prices (way above the market clearing price level). After implementation of the ‘minimum price policy’, as shown in the above graph, the European Community is experiencing over-production or excess supply of agricultural output. The above graph reflects the demand and supply analysis of the minimum price program. As the minimum price is way above the equilibrium price, quantity of agricultural supply has increased from Q0 to Q2. On the other hand, supply of agricultural products at a higher price (compared to the equilibrium price) has lowered the market demand for products from Q0 to Q1. So, according to the law of demand and supply (given ceteris paribus assumption), the agricultural output’s supply has increased and demand has fallen with response to the change in price. Apart from the ‘minimum price policy’, the CAP authorities in EU had also undertaken other policies in order to stabilize the agricultural sector as well as sustain negative externalities in the market like, bad weather and high price competition (especially in developing nations). Along with the price support program (minimum pricing), the CAP was seen to introduce the strategy of import substitution and export promotion in the agricultural sector. In order to protect domestic farmers within the community, the CAP have also introduced the policy of Quota in the EU agricultural market. This is a type of quantitative restriction imposed on agricultural imports of the nations. The above graph explains the demand and supply analysis for the Quota policy. The world market price (Pw) is much below the equilibrium price (P0) of the agricultural market of the European Community. The supply of agricultural products that