Essay Plans

Explain carefully why the prices of agricultural goods fluctuate more than the prices of other (manufactured goods).

SYNOPSIS:

POINTS:

  1. The key to this essay revolves round the interaction of demand and supply and their relative elasticities.

  2. Demand for agricultural products tends to be relative price inelastic in the short term.

  3. Long term: income elasticity for specific product types may be elastic.

  4. For manufactured goods, demand long term is income elastic (positive).

  5. Role of seasonal factors

    • Weather and salad (eg. Summer 1989 in UK)
    • Autumn for new car registrations
    • Specific events
    • Wimbledon and strawberries
    • Xmas and Xmas Trees

  6. Supply: agricultural supply affected by climate thus fluctuation in ouput.

  7. On a global scale the weakness of the market itself may worsen the imbalance as farmers may increase production to meet high prices that were caused only by shortages (full diagrams and analysis of cobweb theorem needed).

  8. Example: low sugar prices (1980s caused by over production in less developed regions owing to poor market operations, lack of market information about total world production and likely demand growth).

  9. Manufactured goods

    • oligopolistic/monopolistic markets
    • better market information
    • collectively may restrict supply
    • prices tend to be stable
    • less unpredictability/speculation as climate itself has less effect

  10. Oligopolistic - little price competition, barriers to entry (not least the scale of operations); competition TENDS to be non-price.

  11. The above assumes no interference. You should show knowledge of the schemes to stabilise and/or income levels for farmers in particular:-

    • Efficiency payment
    • Buffer stock system plus external tariff

  12. For the above systems to work changing market conditions must be incorporated otherwise:

    • Excessive oversupply (mountains and lakes)
    • Bankruptcy of producer's associates
      EXAMPLES:
      1986 London Metal Exchange's Tin Support policy
      1986 Common Agricultural Policy

  13. Important: Kaldor in the 1983 edition of the Lloyds Bank Review shows that the agriculture and manufactured goods market are interdependent. Without price support in agricultural markets, there will be destabilisation in manufacturing markets. Unstable agriculture prices will lead to uncertain income for farmers, insufficient or excessive future investment in agriculture products (directly affecting manufactured goods that use agricultural products).

  14. The agricultural production period is therefore longer than for manufactured goods resulting in inelastic short supply; for manufacturers the supply curve is more elastic.

  15. Note: the experience of OPEC in 1973 - 4 and 1979 - 80 shows that price stability may NOT necessarily follow from cartel operations - equally as the cartel breaks up, prices may fall dramatically (oil in the 1980's).
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