Buffer Stocks – 2. 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 10 a carat. Here the materials are cut into consumerfriendly shapes and then sold to shop, for 50 a carat, where the consumer buys it for 100 a carat.
Total Revenue here is (10 + 50 + 100) 160. Adding up the Value Added, you avoid double counting, and instead the amount is (10 + 40 + 50) 100. 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 LDCs.