Buffer Stocks


One step a government might take in order to stabilize
agricultural prices is to use the technique of buffer
stocks. The very basic idea of this is letting the
government set a minimum price on agricultural goods. This
price will usually be above the price where demand meets
supply, so the government must buy the excess quantity
produced, in order to stabilize prices. This quantity will
then be stored till, for example, next year where there is
a bad harvest, and then it will be put on the market. In
case of famine, or earthquake the goods can also be given
to the people. In pracise, using fig. 1, the market price
would be at OP. This price is obviously so low, that the
farmers will receive too little profit, hence the
government agrees to a minimum price at OG. Here there is
an excess supply, OQ to OQ1, which the government then
buys, so they stabilize the prices. - 3. Monopoly - It is
easy to mention the obvious disadvantages which might occur
to the consumer of a monopoly (eg. higher prices, lower
quality etc), but there are also several ways a consumer
might benefit from the existence of a monopoly. Basically
there are two options. A monopoly controlled by the
government, and monopoly controlled by the private sector.
Monopoly under government, is properly where the consumer
will find the greatest advantages. The government will try
to minimize prices for the consumer, and if necessary,
cover the loss of doing so. Quality wise, the consumer will
most likely benefit from this type of monopoly. If we take
the dutch PTT, which is not completely a monopoly, but
still very dominating, over the telecommunication in the
Netherlands. The quality of the goods they sell (phones,
answering machines etc.) is very good. They all have to go
through certain tests, and get the 'blue seal'. In the
monopoly, which lies under the private sector, the
conditions are different. If here the monopoly fears it
will loose faith from its consumers, it will benefit the
consumer. For example Intel's 586 chip had a bug, and
consumers globally were very displeased. Intel chose to
replace the bug with functional one, instead of remaining
passive. They most likely feared other, much smaller firms,
could enter the market and take advantage of the situation.
- 4. Double Counting - When calculating N.I., adding up
total revenue is one way. This does though include the
problem 'Double Counting'. If we as an example use
diamonds, from the extraction to the sale, it should be
easy to see the phenomenon of 'Double Counting'. First the
diamond is extracted by one firm. They sell the raw diamond
to a cutlery, for 10o a carat. Here the materials are cut
into consumerfriendly shapes and then sold to shop, for 50o
a carat, where the consumer buys it for 100o a carat. Total
Revenue here is (10 + 50 + 100) 160o. Adding up the Value
Added, you avoid double counting, and instead the amount is
(10 + 40 + 50) 100o. Obviously double counting is a
problem, which ultimately leads to very inaccurate numbers.
Adding the value added up, is definably a much better
method, if a more exact number is wanted. - 6. 'Bayona' - A
LDC like Bayona faces many disadvantages if the Terms of
Trade go against it. What many times happens, is that the
country enter a vicious circle. Let me outline both. If the
Terms of Trade go against a country, it means that the
prices of imported goods are higher than the prices of
exported goods. The consequences of Bayona, which only
exports one good, is that they would have no other products
to try to export. In order to stabilize the Terms of Trade,
Bayona would have to either raise prices, or increase
production. If they raise prices, QD will go down. If they
increase production, wages and other costs will have to go
down in order to establish a competitive price. No matter
what, N.I. will go down, leading to less production,
leading to lower standards of living, leading to pour
health, leading to less production, etc. The Terms of Trade
is an important factor. The system nowadays, gives the
industrialised countries an uneaqual advantage against the

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