1.

4 Buffer Stocks – maximum/minimum prices

Sources: https://www.tutor2u.net/economics/reference/government-intervention-buffer-stock-schemes ; www.statistica.com

FAQs

1. Buffer stocks: what’s the definition?

These are government schemes or plans that require intervention in the buying/selling of a
commodity(a product that doesn’t change in price around the world) in order to reduce fluctuations
in (often volatile) prices.

2. Main purpose?

Price stabilisation to protect consumers (maximum price) and producers (minimum price)

3. Typical markets?

Agriculture (rubber, wheat, cotton, cocoa,

tea and coffee) and primary commodities,
like iron ore or rubber.

4. Why do prices in these markets fluctuate so much?

PED determinants PEs determinants

Time Spare capacity

Substitutes Time

Habits Inventory

Addiction Raw materials

Price in proportion to income Barriers to entry

Note: PED inelastic and PES inelastic, so sudden or unexpected shifts in either D or S will cause large
price changes.

5. Draw the S/D diagram for the global market for rubber, showing inelastic PED and PES and a
large price change: Cold summer

Poor harvest

 Fluctuating
 Volatile prices
 Small shifts lead to large changes
in price

6. Why does it matter?

Producers, farmers especially in poorer regions or countries, need stable incomes to maintain their
standard of living. Small scale farmers will sell all that they produce at the “going rate” on the market.
If there is a ‘glut’ or a good harvest in region/world then prices fall dramatically.

Unpredictable revenues/incomes/profits lead to uncertainty. Uncertainty leads to a lack of

investment. Long run damage to productivity. Unable to increase production when prices rise.

Risk of extreme poverty.

A solution = buffer stocks

Eg Ghana’s ‘Buffer Stock Management Agency’ introduced in 2013 for cocoa beans
 7. So, how does a BUFFER STOCK work?

Diagram analysis here:

8. How can a buffer stock intervention be ‘self-financing’ or even ‘profit-making’?

Government authorities will aim to buy up s__________ when the prices are l_____ . On the other
hand, they will sell when p__________ are high.

9. Why don’t they work then?

The success of these schemes often start with a correct calculation of the average price of the
commodity over time, and the target price that the plan uses. The UK government famously
miscalculated the value of the £ against the DM (Deutsch mark) in 1992 when the £ fell out of the ERM
(exchange rate mechanism).
Government finances available may not be s__________________ to change the price enough to
benefit consumers or producers when upper and lower limits are passed. Especially if the commodity
is t_____________ worldwide.

If the minimum price is too high, to protect producers, there is a huge incentive for farmers to produce
m___________ and again, this is too e_________________ for the governments to sustain. Any over-
production will, of course, demonstrate a_________________ inefficiency in the market.

In addition, storage costs are often h___________ and the quality of the products will d___________
over time. Each of these points demonstrate u_____________________ consequences.

Short questions

Explanation (3)
Explanation (3)
Explanation (3)