Can people who are doing AS or high Economics read this (it's quite long I know) and tell me if there are any errors/thing I shouldn't say in the exam?
I have written this from about 2 pages of notes and diagrams (for revision) so I added some of my own stuff. Thanks anyone who can help.
Due to many reasons, the price per unit of a commodity that farmers produce can fluctuate largely. This is seen as a problem; with no solid idea of future prices, farmers can become less productive - is it worth buying a new tractor if the next 3 years' harvests will be good enough not to need one? Uncertainty can lead to wrong decisions being made, slowing down economic growth. Things that can cause fluctuations are unforseeable circumstances such as weather conditions for growing different types of crops, and insects and diseases that can ruin a whole year's harvest.
Some things to know:
• The income elasticity of demand for commodities such as wheat and rice is very inelastic - a rise in consumer income will not shift demand by a large amount at all, because people do not eat more the richer they get. The elasticity of the demand curve itself is also inelastic because of the nessecity of a certain amount of food - consumers cannot go without food simple due to it's high price.
• The elasticity of supply of commodities is inelastic because of the yearly harvest - it is difficult to increase supply in the short run if prices rise, as most crops take a year to grow from being planted. The supply curve does gradually shife right however, due to new technologies, slowly decreasing prices.
This problem can be solved in four ways:
1. Minimum prices.
The government can set minimum prices above free-market equilibrium to ensure farmers get at least a certain amount of money per unit of a commodity. This means that at this high price, supply exceeds demand, and the government has to rely on taxes to pay for the gaping hole in farmer's incomes. This can have disastorous effects, and benefits. On one side, farmer's incomes are roughtly stabalised and they need not worry about going out of buisness. The country also has buffer stocks so it can remain self-sufficient on food for a while, due to the food piles (useful when trade routes are cut off in a war, for example). On the other side, this scheme (called the CAP) is a large burden on the taxpayer and can indirectly cause imports of cheaper food to be blocked, keeping lesser developed, but more efficiently producing countries poor - seen as market faliure.
2. Acerage Reduction Programmes
This is where the government pays the farmer not to grow commodities, and grow trees or leave fields to grow grass instead. This decreases supply and helps secure high incomes for farmers without leading to large food piles, although the taxpayer still contributes.
3. Buffer Stocks
This is aimed at stabalising farmer's incomes. One year, when good weather and no disease cause supply to shift left a lot, a scheme will pay for lots of the commodity and save it as a buffer stock. This shifts demand right as much as the shift in supply, assuming the scheme buys all the extra commodity, keeping farmer's incomes the same (prices remain constant due to equal shifts right, but revenue increases due to the extra sales to buffer schemes). The next year, when a poor harvest leaves the farmer's supply curve shifting to the left, the buffer scheme sells him back last year's surplus, shifting the supply curve to the right back to where it started (assuming that this year's harvest was as bad as last year's was good). The farmer's income over the 2 years is stable. One problem is that some commodities cannot be stored for that long - wheat will not keep for 15 years if that is the nest time prices rise high enough to require it to be put back on the market.
4. Internations Trade Agreements
Internations trade agreements are agreements between exporting countries and importing countries to keep prices per unit commodity within a decided window - say $0.90 to $1.10 for a certain amount of wheat. This scheme relies on buffer stocks as well, only this time the stocks are international. When prices go below the window, supply is withdrawn to buffer stockpiles and prices rise again, and when prices go too high, supply is put back onto the market and sold at a price inside the window. This international version must have the commitment of all exporting countries - one country that choses to sell the commodity at the low price rather than withdraw it to buffer stocks can receive huge demand and make lots of profit, leaving the other exporters in poverty. It only takes one exporter to deviate from the scheme and the whole system is undermined.
Turn on thread page Beta
Economics AS (or higher) watch
- Thread Starter
- 03-05-2004 17:44
- 03-05-2004 18:05
First of all, don't use the abbreviation CAP. Refer to it as the Common Agriculture Policy, and also elaborate on it a bit, remember to make it clear that this is an EU initiative.
Also, I didn't take to this phrase:
The elasticity of the demand curve itself
- Thread Starter
- 03-05-2004 18:18
Ok, thankyou. Price elasticity of demand.