Topic 22- Unstable Comodity Markets Flashcards
Causes and effects of fluctuating commodity prices
-unpredictable supply shocks
- Agricultural output from unpredictable supply shocks.
- A bumper harvest will result if weather conditions are good(shift to the right)
- A bad harvest will result if there is a drought, heavy rain fall and hurricane (shift to the left)
Causes and effects of fluctuating commodity prices
-income Inelastic demand
- agricultural output e.g food is income Inelastic because people have a limit to how much food they can consume, so demand for agricultural goods rises only a little bit as world income rises
- if supply keeps increasing because of technology (genetically modifying crops and pest resistance) but demand rises by a small amount prices will fall over time
Causes and effects of fluctuating commodity prices
-price Inelastic supply
- supply doesn’t respond quickly to price changes e.g agricultural output has a long time lag because it takes time to plant&grow crops and raw materials e.g oil as difficult to find&extract from land
- if supply is Inelastic demand shifts to the right and prices change a lot
Causes and effects of fluctuating commodity prices
-price Inelastic demand
Agricultural output (e.g food) and raw materials (oil) are necessities so they have an Inelastic demand. If demand is Inelastic and there is a supply shock, supply curve shifts to the right and prices decrease a lot
Consequences of price fluctuations
1.) farm revenue/income
A bumper harvest means price falls and because demand is Inelastic, revenue falls for farmers. Although a bad harvest means prices rise and because demand is inelastic revenue rises for farmers
Consequences of price fluctuations
3.) consumer surplus
A bad harvest means price rises, consumers pay more for agricultural goods so consumer surplus fails. Although a bumper. Although a bunker harvest means price falls, consumers pay lower prices for agricultural goods so consumer surplus rises
Consequences of price fluctuations
2.) lower investment
Because supply shocks are unpredictable farmers do not know if harvests will be good or bad so farmers cannot plan and the development of farming may be restricted
Buffer stock Scheme
- Used by the government to reduce commodity price fluctuations
- government sets a band within which price is allowed to fluctuate between a maximum price and a minimum price.
- government the buys/sells the extra stock of the commodity to ensure price remains within the band
Advantages of buffer stock schemes
-reduced uncertainty: price fluctuations are reduces, making it easier to plan and invest so the agricultural sector can develop
-stabilised farm revenue/ income
Farm revenues are stabilised, so there is less change that farmers fall into poverty
-self-financing: it should not cost the government much money because they just buy up and stockpile the commodity when price is too low and sell the commodity from their stockpile when price is too high
Disadvantages of a buffer stock scheme
- run out of stockpiles: government runs out of stockpiles because there are too many bad harvests and not enough good harvests, the buffer stock scheme then breaks down
- run out of money: maybe the gov runs out of money to keep buying up stocks of commodities after bumper harvests
- perishable: many agricultural goods are perishable so they cannot be stockpiles for an adequate amount of time to make the buffer stock scheme work
- storage costs: maybe the cost of storing stockpiles is too expensive for the gov. Monitoring and security costs may be too high
Minimum price scheme
- Government set a legally binding minimum price in a market
- A minimum price is a price floor, the market price cannot fall below it
- set to stabilise prices
Advantages of a minimum price
- ) incomes rise workers receive a higher price for their output so farm incomes rise, farmers can buy more goods and services so workers’ living standards rise
- ) reduced fluctuations: farmers are received a minimum price for their output so prices will fluctuate less, makes it easier for farmers to plan and invest so agriculture can develop
- ) rural employment: farmers may hire more workers to produce more so rural employment will rise
Disadvantages of a minimum price in agriculture
- )magnitude: a minimum price set slightly above equilibrium will not have that much affect
- )Below equilibrium:min price below equilibrium will have no effect
- )prices fluctuate above the minimum price: A minimum price will stop prices fluctuating below the min price but not above it
- )length: min price set for short period=little effect
- )lower quality: farmers may be incentivised to produce low q goods because they are guaranteed a high price for their output
