The European Union sets guaranteed prices to farmers for agricultural products. This is in order to encourage production. Show how this can happen with a supply and demand diagram.
The provision of food is extremely significant for the human well-being so agricultural markets have always been treated in a different way by governments. There are various factors on which the success of farmers depends. It is not a simple production that needs a certain amount of resources to manufacture a certain amount of products which will bring expected profits. Variable determinants of the agricultural market like the weather or natural disasters create a situation in which in order to maintain a particular amount of food available on the market, governments encourage farmers to produce more. They tend to do it in a similar way, often, by providing them with subsidies and setting guaranteed prices of the products. Pic.1.
This diagram shows us the correlation between the supply and demand curves in the farming sector. Both of them are quite inelastic, because of a constant need for agricultural products and their regular provision. We can see that the excess of supply is cause by the encouraging policy of the EU, increasing the competition among the farmers. This leads to a greater supply which is often far above the real demand.
The difficult matter to solve for authorities is setting the actual minimum price, because the consumers would obviously prefer a lower price than the farmers. This leads to many misunderstandings and mistakes in the chain of supporting the agricultural production. The European Union decided to create a whole system of subsidies for the farmers. However, to maintain the food safety within its borders, the EU established guaranteed prices for products. This particular system of intervention is called the Common Agricultural Policy, The CAP. The farming sector is protected and purposefully kept stable. The most important aim of CAP is to...
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