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AS Multi choice practice
Return Complete your answers on BACK of sheet. Choose option & explain (define, formula / calculate, explain)
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Buffer Stocks - Market Failure
1. Mrs Gordon's notes
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Answer:B (1) Explanation of how prices ration scarce goods – interaction of supply and demand (2) Supply and demand diagram to show equilibrium price (1) plus a further mark (1) for showing a change in equilibrium price (2) Correct identification of other features of free market economy, e.g., private ownership of resources - up to 2 marks (2) Also allow credit for: Definition of price mechanism (1) Definition of scarcity (1)
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Answer:A (1) Definition of income elasticity of demand (1)
Correct numerical calculation (1) Potatoes are an inferior good (1) A rise in incomes will cause a fall in demand (1)
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Answer:C (1) Define consumer surplus (2 marks) or description of the area between demand curve and price (1 mark). Maximum of 2 marks can be awarded here. Diagram or written explanation that consumer surplus falls when the supply curve shifts to the left – caused by a rise in the costs of production (2 marks).
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Answer: B (1) Explanation that increase in demand for rugby balls causes publicity & participation generates a shift in demand from D1 to D2 (1 mark). Explanation that fall in costs will result in shift of the supply curve from S1 to S2 (1 mark) With signals to generate more profit (1 mark). Annotation of diagram (1 mark)
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Economics of Buffer Stock Schemes
Buffer Stocks - Market Failure Economics of Buffer Stock Schemes AS Economics Mrs Gordon's notes
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Aims from syllabus Need to understand the causes and effects of fluctuating commodity prices on consumers and producers. To be able to assess the impact of government intervention in the form of minimum prices and buffer stocks. To be able to use diagrammatic analysis for minimum prices and buffer stocks. You should understand how uncertainty in production (for example, climatic) and time lags may affect supply and the significance of price and income elasticity of demand. You are not expected to use diagrammatic analysis of the cobweb model.
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Syllabus Requirements
Buffer Stocks - Market Failure Syllabus Requirements Buffer Stocks Students should be able to apply the concept of government intervention in the form of buffer stocks that seeks to stabilise prices and incomes in agricultural markets Any exam Q on price stability requires this theory Mrs Gordon's notes
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What is an unstable market?
Buffer Stocks - Market Failure What is an unstable market? Large fluctuations in price Too high a price Too low a price For whom is each of these a problem? Mrs Gordon's notes
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What is an unstable market?
Large fluctuations in price – owners of FoP Too high a price - eg rented accommodation, staple food products eg rice, flour (bread / pasta) Too low a price – farmers incomes eg olive oil Only for small group
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Buffer Stocks - Market Failure
What is a buffer stock? Many farmers of primary commodities face the problems of volatile prices and incomes Buffer stock schemes seek to stabilise the market price of agricultural products by buying up supplies of the product when harvests are plentiful and selling stocks of the product onto the market when supplies are low Mrs Gordon's notes
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Price volatility: Coffee
Buffer Stocks - Market Failure Price volatility: Coffee Describe the change in price over the 11 year period Is this a stable or unstable market? What has been the % change? Mrs Gordon's notes
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Price volatility: Copper
Buffer Stocks - Market Failure Price volatility: Copper Describe the change in price over the 4 year period Is this a stable or unstable market? What has been the % change? Mrs Gordon's notes
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Price volatility: Rubber
Buffer Stocks - Market Failure Price volatility: Rubber Describe the change in price over the 6 year period Is this a stable or unstable market? What has been the % change? Mrs Gordon's notes
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Rubber plantations 90% of rubber production comes from plantations of rubber trees in Southeast Asia!
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Commodities prices… Producing commodities such as coffee, cotton or tobacco for the international markets is a hazardous business. Commodity markets are characterised by instability and uncertainty. This uncertainty may arise due to fluctuations in the market prices due to market conditions changing changes in prices due to changes in exchange rates changes in foreign government protectionist measures
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Maximum Prices
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Why might the govt intervene and force rents to be lower than the equilibrium?
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Impact of a maximum price ceiling…
Because of the maximum price ceiling, the quantity supplied contracts to output Q2. Consumers gain from the price being set artificially lower than the equilibrium, but there is a loss of consumer welfare because of the reduction in the quantity traded. At P max the new level of consumer surplus = the trapezium ADEPmax. Producer surplus is reduced to a lower level Pmax EC. There has been a net reduction in economic welfare shown by the triangle DBE.
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Minimum prices
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on consumer & producer surplus?
Why might the govt intervene and force prices to be higher than the equilibrium? What type of excess is there now? What is the impact on consumer & producer surplus?
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Buffer Stocks
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Examples of buffer stock schemes
Buffer Stocks - Market Failure Examples of buffer stock schemes Cotton Price Stabilization Board International Coffee Agreement International Tin Council Coffee beans! Mrs Gordon's notes
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Draw a Demand and Supply diagram for coffee commodity rather than starbucks!
Show a ‘shock’ to the market – what would happen if there was a coffee ‘mite’? Show the immediate reaction? How would ‘business’ consumers react? How would the supplier react to this? So what do you think might happen in the next season?
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Buffer Zone in diagrams
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Price support in a buffer stock
Buffer Stocks - Market Failure Price support in a buffer stock The government offers a guaranteed minimum price (P min) to farmers of wheat. The price floor is set above the normal free market equilibrium price. Supply Price P min Price Floor (Guaranteed) Pe The government offers a guaranteed minimum price (P min) to farmers of wheat. The price floor is set above the normal free market equilibrium price. Notice that the price elasticity of supply for wheat in the short term is very low because of the length of time it takes for producers to supply new quantities of wheat to the market. Demand Q2 Q1 Quantity Mrs Gordon's notes
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Price support in a buffer stock
Buffer Stocks - Market Failure Price support in a buffer stock If the government is to maintain the guaranteed price at P min, then it must buy up the excess supply (Q2-Q1) and put these purchases into intervention storage. Supply Price P min Price Floor (Guaranteed) Pe Demand Q2 Q1 Quantity Mrs Gordon's notes
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Price support in a buffer stock
Buffer Stocks - Market Failure Price support in a buffer stock Supply Price P min Price Floor (Guaranteed) Pe Intervention purchases required to keep the price at Pmin Demand Q2 Q1 Quantity Mrs Gordon's notes
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Price support in a buffer stock
Buffer Stocks - Market Failure Price support in a buffer stock Supply Price P min Price Floor (Guaranteed) Pe Total spending on intervention by the buffer stock = Pmin x (Q2-Q1) Demand Q2 Q1 Quantity Mrs Gordon's notes
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The effects of a rise in supply
Buffer Stocks - Market Failure The effects of a rise in supply Should there be a large rise in supply due to better than expected yields of wheat at harvest time, the market supply of wheat will shift out putting downward pressure on the free market equilibrium price In this situation, the government will have to intervene once more in the market and buy up the surplus stock of wheat to prevent the price from falling. Mrs Gordon's notes
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Rising supply – more intervention
Buffer Stocks - Market Failure Rising supply – more intervention How much would the ‘market buy? Supply S2 Price P min Price Floor (Guaranteed) Pe How much would Govt buy? P2 Demand Q2 Q1 Q3 Q4 Quantity Mrs Gordon's notes
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Does it really work?
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What would happen if there was a supply shock to cause S1?
Consider this diagram What would happen is supply curve shifts between S2, S3 and S4? What would happen if there was a supply shock to cause S5? What would happen if there was a supply shock to cause S1? Max Min
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Consider this diagram Max Min
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The answers! In the diagram shifts in the supply curve between S2, S3 and S4 will only result in the price changing between the acceptable price band. If a supply shock causes the supply curve to shift to the right to S5 then the buffer stock authority will intervene and purchase the surplus Q4-Q5 thus preventing the market clearing by itself through a lowering of the equilibrium market price to P1. If the supply curve shifted to the left then the buffer stock authority would release stocks equal to Q1-Q2 on to the market thus preventing the price rising to P4.
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What can you do with surplus stock?
In the case where the surplus is bought there are number of options that can happen to the stock It can be stored It can be destroyed It can be sold to other countries It can be given as overseas assistance. What are the implications of each of these?
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Implications of stock surplus…
Storage is expensive and involves an opportunity costs of the storage facilities. Destroying surpluses especially if the surplus is a food is morally questionable in a world devastated by poverty and hunger. Selling to other countries at low prices or dumping can undermine domestic producers in the countries where the goods are sold. Giving the food as aid could, it is argued, lead to a dependency culture.
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Problems with buffer stocks
Buffer Stocks - Market Failure Problems with buffer stocks Setting up a buffer stock scheme requires a significant amount of start up capital, since money is needed to buy up the product when prices are low. There are also high administrative and storage costs to be considered. The success of a buffer stock scheme however ultimately depends on the ability of those managing a scheme to correctly estimate the average price of the product over a period of time Mrs Gordon's notes
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Problems with buffer stocks
Buffer Stocks - Market Failure Problems with buffer stocks If the target price is significantly above the correct average price then the organization will find itself buying more produce than it is selling and it will eventually run out of money Conversely if the target price is too low then the organization will often find the price rising above the boundary, it will end up selling more than it is buying and will eventually run out of stocks Mrs Gordon's notes
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Any exam Q on price stability requires Buffer stock diagrams!
Exam skills Using at least one demand and supply diagram and the information in Extract B, explain how ???? might try to stabilise the world price of ??? between $55 and $65? Any exam Q on price stability requires Buffer stock diagrams!
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Homework – analysis … News article What do you consider to have been the cause of this problem? What might be the short term impact (on customers? Toy company? Chinese Manufacturers?) What type of elasticity do you think these type of toys have? (Include price, income and supply elasticities) What might be the impact of the toy withdrawals for this Christmas? Include diagrams where-ever possible!
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