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Explain the special characteristics of agricultural markets.

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Introduction

Stephanie Merks Agricultural Markets a.) Explain the special characteristics of agricultural markets. (15) Agricultural markets are special types of markets that have special characteristics that differ from other markets. These are mainly due to factors affecting supply of agricultural products, and the situation of producers in this business. First of all the agricultural market is very competitive because the producers are all very small and large in number. Therefore, they don't have a great influence on the price of their products. Agricultural producers are what are known as price takers, producers that have little or no influence on the price of their output. The demand for individual producers is very price elastic. This is because they are in a competitive environment due to the large number of farmers. These producers are all competing for the same market and therefore when their prices rises slightly the quantity demanded for their products decreases significantly. This happens because the consumers have the choice between a producer with a slightly higher price and the original lower prices of other producers. This is why individual farmers suffer from price changes. On the other hand, the total market demand for agricultural producers is very price inelastic. ...read more.

Middle

These decreases will inflict either less money coming in for products or too much supply for demand. Both of these situations will decrease a country's export revenue and if this revenue is the country's main source of money, and decrease can significantly hurt that country's economy. These countries should be in balance of payments deficits or else another problem of international debt will occur. b.) What policies can be used to intervene in agricultural markets? (10) Agricultural markets are markets with a large amount of government intervention to keep the markets stabilized. Because of the dramatic drops of supply and changes in prices the government sets up policies to protect both consumers and producers. In the European Union the Common Agricultural Policy (CAP) was set up in 1969 to control the agricultural markets. The CAP was put in place to increase agricultural productivity as well as stabilizing markets. By doing so they would control the fluctuations of the prices and try to increase the income of the farmers to ensure a fair standard of living for them. The CAP also helped to provide certainty of supplies and ensure these products to consumers for reasonable prices. ...read more.

Conclusion

For example, the price paid for corn by the consumers is 1 euro while the farmers are guaranteed 3 euros for the corn they produce. The government pays the 2 euros difference to satisfy both the consumer and producer to stabilize supply and demand. Although the CAP helps the consumers and producers greatly, there are also a few problems that this policy creates. First of all this policy takes up a large percentage (80%) of the EU's money. So a lot of the money that could be used to improve Europe is used up for paying farmers. Also by setting up these minimum and maximum prices, overproduction occurs and a solution needs to be found for the excess supply. Either put in buffer stocks, if possible, if not, dumping occurs where the supply is sold cheaply abroad because it is perishable. This buffer stock policy encourages the inefficiency of farmers knowing that if they cant meet demand one year, the EU will take care of the excess demand through stock. Also knowing that they don't have work to meet demand because of the money they are guaranteed already through subsidies from the government. New Zealand's milk market has been extremely successful without subsidization because farmers have many incentives to work hard because they aren't guaranteed money, and this is why it is a very strong market. ...read more.

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