Maximum And Minimum Prices Flashcards
Define minimum prices
A price below which firms cannot change
Define maximum prices
A price above which firms cannot charge
What are volatile prices
There are certain goods markets that experience frequent and large fluctuations in price
If prices are volatile then it is likely that entrepreneurs may avoid entering such markets because large changes in price could reduce profits significantly
Main characteristics of price volatility
Primary products have inelastic PED and PES - PED for primary is inelastic as they are necessary and only a few subs.
Primary product markets are prone to demand and supply shocks - shocks are sudden and large scale shifts either the D or S curves.
Define a guaranteed minimum prices
A price below which firms cannot charge and the government guarantees to buy up all the excess supply
What is a buffer stock scheme
Prices of agricultural products seem to fluctuate more, largely due to volatility in the market supply as well as that demand and supply are price inelastic, buffer stock schemes seek to stabilise the market price. Require a buffer stock manager who buys and sells in the market to manipulate D and S in order to stabilise world price
Benefits of buffer stock schemes
Price stability - creates certainty for producers therefore they should be willing to remain in the industry and undertake investment
Price stability - creates certainty for consumers, guaranteed food shops at a reasonable price
In theory buffer stock schemes should be profit making - since they buy sticks of product when price is low and sell them when the price is high
Limitations of buffer stocks
Very perishable items
If the price band is set too high
If the price band is set too low
Technological change
Requires a large market share to be effective
Setting up a buffer stock shame also requires a significant amount of start up capital
