P
Target Price
Q
D
TP
P1
Q1 Q2
1. Evaluate the case for and against governments intervening to try to
stabilise the price of copper, for example, through setting up a buffer
stock scheme.
The price of copper can be volatile for various reasons. Firstly, in the short
term, the supply of copper is inelastic. Demand can change rapidly due to
speculation causing prices to rise or fall rapidly. A buffer stock scheme is a
government policy which aims to stabilise prices and therefore benefit both
consumers and producers from excess volatility in the price.
For example, if there was an unexpected increase in supply or a fall in
demand, the government could intervene to buy the excess supply and keep
prices high. If the government allowed prices to fall, then some producers
would go out of business. It is not desirable to allow firms to go out of
business because of falling prices. It would lead to unemployment and could
lead to a shortage of supply in future years.
Diagram of Buffer Stock
To maintain price at TP the government buy Q1 to Q2 * TP
Similarly, if prices increase significantly, then consumers will be faced with
higher prices, therefore, there will be a decline in consumer surplus. Also
copper is an important raw material for electric wiring. If the price of copper
increases firms would be faced with unexpected costs which can cause
problems and decrease confidence to invest. If the government bought
copper, when prices were falling they could increase supply when prices are
rising. This greater stability of prices would be beneficial for both producers
and consumers.
However, governments tend to be more concerned about falling prices. Falling
prices could cause producers to go out of business leading to unemployment.
S2
S1
Buffer Stock
