Best Uses:

 Price control highlights the main theme in the course which is


intervention vs market based solution
Results in disequilibrium
ED 19 Price Control
 Minimum wage is a useful additional application of this theory

SYLLABUS REFERENCE: 2.1

MARKETS- Price Control + Buffer Stock Intervention +
Guaranteed Price Scheme
 Main Course theme: Government intervention in the econo
Minimum /
Diagram 3: Price Maximum prices
P Control:government S result in
D
intervention disequilibrium in
the market. This
Pg3 y Minimum Price Control intervention does
not work well to
allocate resources
Pg2 Equilibrium: p2 and ( L,L,C+E)
qb effectively and is
usually used in
Pg1 Maximum Price Control crisis situations
such as current
Q day Zimbabwe
0 qc where markets do
qa qb
not function.

Diagram 1: how managed Exchange Rate

exchange rates work. Control:
P
So Why yes?
D 1. Stabilises currency and
S1 therefore trade.
Government sells 2. ERM (exchange rate
Er4 domestic currency
mechanism) worked well in
er 2 Europe prior to the Euro.

Price range/band
S2
Why no?
1. Requires regular
Er 1 intervention by
Government buys government(s) in the
Er3 domestic currency foreign exchange markets
to keep the exchange rate
between er 1 and er2.
Q 2. Does not allow currencies to
0 q1 qg q2 mover toward PPP
(purchasing power parity)
and therefore the currency
may be undervalued or
overvalued. See the Big
Mac index in webnote 324.

Page 1 of 2 1
  Notes:
1. Minimum / Maximum prices
result in disequilibrium in the
market. This intervention does
not work well to allocate
resources ( L,L,C+E) effectively
and is usually used in crisis
situations such as current day
Zimbabwe.
2. Buffer stock scheme is a more
effective system for stabilising
incomes/prices as it allows
market forces to operate inside
the band or range ofprices. It is
only when the market pushes
prices outside the band that
Intervention takes place.
Page 2 of 2
Tasks: Study page 2 carefully
 Select a partner and evaluate a
buffer stock scheme.
 Select one argument for and one
against
 Consider stakeholders or any
other method of evaluation
IB Questions: May 05 SL 1 Q1
(a) Explain how a buffer stock
system might be used to
stabilize agricultural prices (10
marks)
(b) Discuss the view that
intervention in agricultural
markets causes more problems
than it solves. (15 marks)
2