Price Fluctuations of Coffee - Essay Example

PRICE FLUCTUATIONS OF COFFEE By: Presented Submission] Price Fluctuations of Coffee Coffee is a primary product and markets of primary products behave differently than those in the manufacturing sector and the service sector (Anon, 2015). Ideally a country’s government wishes to have stability in prices for all the products, whether primary, secondary or tertiary products. However, if there are enormous price fluctuations then government intervention is essential. This paper analyses how effective the intervention government through minimum/maximum prices and government subsidies can be to reduce the fluctuations in the price of coffee. If the price of any product fluctuates highly then the government can limit the fluctuation through minimum and maximum prices, also referred to as price flooring and price ceiling respectively (Dineshbakshi, 2015). The government can set a maximum price which must be below the equilibrium price of coffee in order to be effective and disallow trading above that price level (Dineshbakshi, 2015). As, the price is below the equilibrium it will lead to excess demand and eventually lead to a shortage. In such cases there will also be some consumers who will be willing to buy coffee at a higher price than the price set by the government and this will lead to black markets being created (Dineshbakshi, 2015). The situation cannot be left this way and let the economic situation of the country worsen, thus further actions are required by the government (Dineshbakshi, 2015). Government may take total control of supplying these goods or even producing goods itself (Dineshbakshi, 2015). But the problem may remain as people may not sell all their stock of coffee and black markets may still remain. On the other hand if the government takes control of the production in its hand, it will be accompanied with may management and other technical issues. The government can also help in eliminating this black market and the shortage in the market by supplying coffee from its own stocks (Dineshbakshi, 2015). All these steps by the government will lead to the supply curve shifting rightwards, achieving equilibrium and eliminating shortage (Dineshbakshi, 2015). On the other hand, if the government sets a minimum price which must be above the equilibrium price in order to be effective and ban trading lower than that price level; it may also help in reducing price fluctuations (Dineshbakshi, 2015). As the price is set above the equilibrium price it will lead to higher supply and lower demand leading to a surplus of coffee in the market (Dineshbakshi, 2015). Surplus can also be catered by the government by buying coffee, as the government is buying up stocks of coffee, it will lead to the market demand curve of coffee shifting rightwards and achieving equilibrium as well as eliminating the surplus (Dineshbakshi, 2015). However, the buying and selling of government if not alternate and effectively managed can lead to Wine Lakes and Butter Mountains. Likewise, the policies of minimum and maximum prices are highly dependent upon price elasticity of demand, if the price elasticity of demand is less than 1 and the demand is price inelastic these policies are likely to fail. This is because no matter how much the price change is the effect on demand would be little (Article, 2015). Thus, in case if the demand for coffee is price inelastic and consumers are reluctant to reduce consumption minimum and maximum prices by the government would be highly ineffective (Article, 2015). Moreover, the government can also give subsidies to encourage the production of coffee. However, government subsidies are only effective if there is a shortage of coffee and the price trend is generally rising (Mayer, 2015). The government can provide subsidies to farmers who are growing coffee in terms of money, tractors, fertilisers or interest free loans. This will help in encouraging farmers to grow more coffee with ease and will also be helpful in motivating other farmers towards growing coffee. This will boost the supply of coffee reducing the shortage in the market and maintain prices. Also, it will give a platform to farmers and overcome the problems they are facing in the production of coffee. However, the price elasticity of supply is inelastic for coffee as it is a primary product and highly dependent upon nature and giving subsidies to the farmers would not lead to coffee growing immediately (Mayer, 2015).The production will take the required time depending upon factors associated to nature such as rain, sunshine and temperature (Mayer, 2015). Moreover, the attraction by the government may also lead to many farmers being attracted and huge sums of coffee being produced. In worst cases, this may also lead to shortages for other items as the land and other resources had been dedicated to coffee (Edwards, 2015). Provision of subsidies also accompanies bureaucratic problems with it. In many developing countries the subsidies allotted by the government never reach the relevant person (Edwards, 2015). Thus, if the government is giving subsidies it is essential that the amount allotted in budget for coffee subsidy should reach the farmers and help in overcoming the problem of price fluctuations of coffee (Edwards, 2015). Furthermore, the provision of coffee can also be used to stabilize price on short term basis if urgent action is required. The government can pay a portion of price for the consumers. The government can give subsidies to the farmers and in return ask them to stabilize coffee prices. However, care must be taken, if the demand for coffee is price elastic and a small change in price leads to a drastic change in quantity demanded, then this policy is ineffective. This is because the huge rise in quantity demanded which will occur due to a change in cannot be catered immediately as production of coffee requires adequate time (Mayer, 2015). Each policy by the government would have its own positive and negative effects. It would be the wise decision of the government in selecting policies considering factors such short term or long term, current economic requirement, economic aims of the government, etc. But if the social benefits of a policy outgo its social costs it would considered as effective. Reference List Anon, (2015). [online] Available at: http://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/2420.pdf [Accessed 28 Feb. 2015]. Dineshbakshi, (2015). Price Controls : Maximum and Minimum price. [online] Available at: http://www.dineshbakshi.com/ib-economics/microeconomics/161-revision-notes/1766-price-controls-maximum-and-minimum-price [Accessed 28 Feb. 2015]. Edwards, c. (2015). Food Subsidies. [online] Downsizing the Federal Government. Available at: http://www.downsizinggovernment.org/agriculture/food-subsidies. [Accessed 28 Feb. 2015]. Mayer, D. (2015). Supply - Economics. [online] Netplaces.com. Available at: http://www.netplaces.com/economics/supply-and-demand/supply.htm [Accessed 28 Feb. 2015]. Article, (2015). Price elasticity of demand. [online] Economicsonline.co.uk. Available at: http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html [Accessed 1 Mar. 2015]. Read More