Unit 1 MicroBuffer Stocks

Geoff Riley FRSAEton College and Tutor2u

Buffer Stocks – Do They Work?

Price volatility – can buffer stocks work?

Cocoa prices – vital for the economies of major producers & exporters

How might a buffer stock help to stabilise prices in the cocoa market?

Price of Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Protecting consumer

Protecting producer

Incentives!

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1Q1

Excess supply at this price

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

Demand with buffer stock purchases

Q1

A rise in market supplyPrice of

Cocoa

Quantity

Market Demand

Planned Supply

Upper Target

Upper Target Price

Lower Target

Lower Target Price

Actual Supply

S1

Demand with purchases

Q1

Cost of buying up

stocks

The case for price stabilisation

Lower risk of food poverty & malnutrition – damaging to growth

and development

More stable incomes and profits for farmers – rural/urban econ balance

Helps promote macro stability e.g. Trade, Jobs, GDP, Living Standards

Buffer stock ought to be self-financing / profitable

Problems in using buffer stocks

Buffer stock may not be large enough to change world price

Frequent intervention price leads to rising surpluses

Costs of storage and falling quality of product

There might be better long run measures for farmers

Alternatives to buffer stocksInfrastructure Investment Diversification

Fair Trade Premiums Micro-Insurance for crops

Identifying alternatives is always a good way of evaluating in an AS micro paper

Sometimes the extract will hint at an alternative – use it (application), analyse it and possibly evaluate it

Buffer stock multiple choice question

Buffer stock multiple choice question

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