Unstable markets

Question 1

Commodity prices are notoriously unstable, especially in comparison with manufactured goods, and with services.

1. Using diagrams explain commodity prices like the price of coffee or sugar can become unstable over time.

2. Evaluate alternative remedies for stabilising the prices of agricultural produce.

Question 2

Taking the example of coffee from Brazil, answer the following:

1. Using a diagram, explain how a bad frost during the coffee bean harvest in Brazil during 2008 is likely to affect the price of coffee beans in 2009.

2. Using a diagram, explain how this change could affect the price of coffee beans in the following three years (2010, 2011 and 2012).

3. Why might the price of a jar of instant coffee not be affected as much?

4. Using a diagram, explain how a guaranteed price paid to growers by the Brazilian government might help stabilise coffee bean prices.

5. Evaluate one other measure designed to stabilise coffee bean prices.

Question 3

Data response on coffee and sugar

In May 2009 it was reported that world coffee and sugar prices were expected to rise sharply because of poor crop levels and rising demand. Rising commodity prices have been largely unexpected because it was widely predicted that the global recession would reduce rather than increase prices. In a recession, real national incomes fall, and this has an effect on personal disposable income and spending.

International coffee prices hit a 6 month high of $1.28 per pound, a rise of nearly 25% in the last 6 months. The spot price reached a 12 month high at $2.20 a pound. It was reported that the Columbian crop was particularly affected by very heavy rains. Rising coffee prices forced some manufacturers to raise the price of their retail brands by around 20%. Although prices are on the rise analysts predict that demand is unlikely to fall very much in the short term.

Sugar prices also rose, to their highest levels in around 3 years, up to $450 a tonne. Analysts believe that the main reason for this rise was a crop failure in India and, as the world’s biggest consumer of sugar, it increased its imports from the rest of the world. Changes in India’s output, which is very volatile, are a main cause of unstable sugar prices worldwide.

Unstable commodity prices are often regarded as a market failure because markets fail to bring about a stable equilibrium. The main reasons for the instability is that next year’s output is based on this year’s prices, which creates a time lag during which unexpected supply shocks can dramatically alter the actual amount produced. Others argue that unstable prices are simply a sign of the price mechanism at work, sending out signals to consumers and producers, and providing incentives for them. Other economists see government intervention as ‘government failure’ which leads to over-production and surpluses.

1. With reference to the data, comment on the likely price elasticity of demand for coffee. (3)

2. Using a diagram, explain why coffee prices have reached a 6 month high. (5)

3. Explain why analysts predicted that the global recession would cause commodity prices to fall? (5)

4. Apart from unstable prices, outline three other ‘market failures’. (3)

5. What is meant by the term ‘government failure’? (2)

6. Using a diagram, explain and evaluate the use of buffer stocks by some associations of commodity producers as a method of stabilising prices. (10)

7. Evaluate one other method of stabilising commodity prices. (12)

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40 marks