Understanding Price Support and Buffer Stock Schemes | Maintaining Market Stability

1. Price Support and Buffer Stock Schemes By: Ervin Mafoua-Namy

2. Price Support • We have been considering the way markets work under normal conditions. • Sometimes, markets are not allowed to work. • This means that the price is not allowed to move to the equilibrium level. Two such conditions are price ceilings and price floors.

3. Types of Price Support • Price Ceiling • Price Flooring • Buffer Stock Schemes

4. Price Ceiling • A price ceiling occurs when the price is artificially held below the equilibrium price and is not allowed to rise. • Price ceilings lead to shortages • Shortages create a rationing problem

5. Ways To Ways to Resolve Shortages • First-come, First-served • Sellers to choose • Lottery • The government make the choice of buyer

6. Price Floors • Aprice floorexists when the price is artificially held above the equilibrium price and is not allowed to fall. • Price floors always generate surpluses.

7. Ways To Resolve Surpluses • The problem is: “What to do with the surpluses” • Store simply broke the manufacturers policy . • Absorb the surplus • Change the name of the product

8. Buffer Stock Scheme   • A buffer stock scheme is a government plan to stabilise prices in volatile markets. • Prices for agricultural products are often volatile because • Supply can vary due to the weather. • Demand is inelastic • Supply is fixed in the short term • Buffer stock schemes aim to • Stabilize Prices • Ensure supplies. • If there is a surplus one year, the market price would fall. This is when the government will buy the surplus stocks and store the goods. This reduces supply and keep prices higher. • If there is a shortage in the next year, the government can sell from its buffer stock to reduce prices and increase market supply

9. Buffer Stock Scheme Graph