Buffer stock

Question 1

why a buffer stock might increase economic growth and development ?

Answer 1

With less price instability, it will be easier for investors to predict prices and profits. This will increase the level of investment. This will cause aggregate demand and long run aggregate supply will shift to the right. This will increase real GDP, which will lead to economic development.

The chains of reasoning here are:
More stable prices → Easier to predict prices → Higher levels of investment → Shifts AD right → Increases real GDP → Increases economic development

More stable prices → Easier to predict prices → Higher levels of investment → Increases productivity → Right shift of LRAS → Increases real GDP → Increases economic development

More stable prices → Easier to predict prices → Higher levels of investment → Increase productivity → Decrease unit costs → Decrease prices → More competitive → More profit → More corporation tax revenue → More government spending on development

Question 2

What will the PES, PED ans YED be for primary products?

Answer 2

all inelastic and so they should all be less than one (the % change in quantity demanded is less than the % change in price/income).

Question 3

Explain the PED for primary products.

Answer 3

The demand for primary products does not respond very much to a change in the price. This means that it is price inelastic - the PED is less than one. This is because primary products are often necessities with few substitutes, meaning people have to continue buying them even if the price increases.

Question 4

Explain the PES for primary products.

Answer 4

The supply of primary products does not respond very much to a change in the price. This means that it is price inelastic - the PES is less than one. This is because primary products often take a long time to grow or mine from the ground, meaning an increase in price doesn’t immediately change the quantity supplied.

Question 5

Explain the YED for primary products.

Answer 5

The demand for most primary products does not respond very much to a change in the income. This means that it is income inelastic - the YED is less than one. This is because primary products are often necessities with few substitutes, meaning people have to continue buying them even if their income changes

Question 6

The government is operating a buffer stock scheme with a floor price of P1 and a ceiling price of P2. In 2016, the government bought up 3000 kilograms of wheat to add to its stockpile at a price of £2.
Which of the following shows the minimum intervention from the government in 2017 ?

Answer 6

The government will release a quantity of 2000kg on to the market. Quantity supplied in the 2017 bad harvest is 12000kg, which will lead to a price that is above the ceiling (£6). So, the government wants to bring the price back down by increasing the supply of wheat to 14000kg. To bring the price back within the range, they need to release 2000kg of wheat (from 12000 to 14000) because the price at 14000kg will be the ceiling (£4). Buying more than this will bring the price further within the range but the question asks for the minimum quantity that the government needs to release. Generally, the government will intervene as little as possible in order to bring the price within the range.

Question 7

definition of: Primary Product

Answer 7

A product made from raw materials

Question 8

Write the definition of: Price Instability

Answer 8

Small changes in the supply and demand for primary products can lead to big changes in price.

Question 9

Draw the digram that shows the market for grapes in bad, good and average harvests?

Answer 9

Supply is perfectly inelastic for all three harvests - each supply curve is shown by a vertical line. This means that any change in price will have no impact on quantity supplied.
The price for the bad harvest is very high at PB.
The price for the good harvest is very low at PG

Question 10

What will happen to the equilibrium price of grapes when the government buys up the grapes to put in the buffer stock?

Answer 10

The government is buying up grapes, which means that there are fewer grapes in the market. Supply is therefore decreasing. This will increase the equilibrium price back towards the average price, Pa