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Download Unstable Markets - Surbiton High School
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Inappropriate Prices • Sometimes society thinks prices are too high or too low for the good of everyone: • Price too high: may be an essential item, or deemed ‘good for society’ but inaccessible to those on low incomes (merit goods or positive externalities) • Price too low: consumption may give rise to negative externalities (eg. cigarettes) or sellers can’t make a living (farming) Minimum Prices • Gov’t may intervene to raise agricultural prices and farm incomes • Price can’t go below the minimum • Min price is always above the market price Price S Min Price Mkt Price D Qd Qs Excess supply Quantity of Wheat Minimum Prices • While aims may be noble, outcomes can be dire: • Sellers have incentive to sell lots (they get a higher price now); buyers don’t buy so much at the higher price • Excess supply must be dealt with: - destroyed (waste of resources) - ‘dumped’ on less developed countries for rockbottom prices (puts local producers out of business) Maximum Prices • Gov’t may fix a maximum price to ensure more people have access to the product • Price cannot go above the maximum; eg max rent on low-cost housing • A maximum price is always below the market price Rent S Mkt Rent Max Rent D QS QD Shortage Quantity of flats Maximum Prices • While the aims may be noble, the outcome may be worse! • Shortages occur and even less is available to those who need it (sellers don’t want to sell for such a low price – not worth their while) • Black markets may develop (with accompanying corruption & illegal activity) Unstable Commodity Prices • Prices may fluctuate too greatly to achieve efficient allocation of resources • Commodities are: raw materials used in production of goods (eg. minerals, metals, or agricultural goods) • Large swings in price distort messages sent to producers & consumers, often resulting in under-production • Makes it difficult for producers to earn a steady income, plan & invest for the future Agricultural Markets • Although there is a long-term supply curve determined by all the different suppliers theoretical willingness to supply, actual supply in any given season is fixed & perfectly inelastic • Because demand for food tends to be relatively inelastic, a ‘good harvest’ where prices fall, actually can mean falling revenue & profits Good Weather; Good Harvest S actual S planned Price - Revenues tend to fall P planned P actual D Q planned Q actual Quantity of Wheat Bad Weather; Bad Harvest S actual S planned Price P actual - Revenues tend to rise P planned D Q actual Q Planned Quantity of Wheat Price & Income Elasticity • Over the long run, supply of agricultural commodities has increased – technology, GM foods, etc. – decreased relative price of food • But demand for food is price inelastic so revenues have fallen • World incomes have risen, raising the cost of living and relative standard of living of production in the non-agricultural sector. • But food is very income inelastic so farmers have not seen the benefits & have fallen even further behind on relative terms Time Lags • The length of the growing season means there are time lags between farmers making decisions about production and actual changes in production • This reduces the ability of producers to respond to changes in the market and find the best allocation of resources – it’s a guessing game! Buffer Stock Schemes • Gov’t or relevant agencies establish a ‘band’ outside which prices are not allowed to go – authorities will step in to bring prices back into the band Price S1 S2 S If prices rise above max, gov’t sells stock into the market to bring the price down Max Price Min Price D If prices fall below min, gov’t buys up stock to bring price back up Quantity of Wheat CAP (in a nutshell!) • 1/3 of European Commission budget spent on CAP • Subsidies & min. prices cause food surpluses which have to be dealt with • Selling them into foreign markets cheaply disrupts agricultural systems in other countries • Destroying them represents a complete waste of resources • Many countries object to CAP and it is criticised by the WTO
