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It is often argued that buffer stock schemes should be used to control the prices of industrial raw materials such as nickel and tin.

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Introduction

c) It is often argued that buffer stock schemes should be used to control the prices of industrial raw materials such as nickel and tin. Assess the possible advantages and disadvantages of using a buffer stock scheme to control the price of an industrial raw material. A buffer stock scheme generally takes the form of a coordinated attempt by producers of commodities (for instance, metals) to stabilise the price of their product within acceptable limits over time. When market forces push the price too low, the organisation buys up stocks; when prices go too high, they sell its stocks. The scheme therefore can be used to reduce the undesirable effects of widespread fluctuations in prices that will occur if demand and/or supply changes frequently; and as the price of industrial raw materials is very volatile a buffer stock scheme is very successful. An example of a buffer stock scheme is the International Tin Council support scheme. This buffer stock scheme unfortunately collapsed in 1985. The diagram below is an illustration of the operation of a buffer stock scheme. ...read more.

Middle

Clearly the perishable items cannot be stored for long periods of time and can therefore be immediately ruled out of a buffer stock scheme. Setting up a buffer stock scheme can also require a significant amount of start up capital, since money is needed to buy up the product when the prices are low. There are also very high administrative and storage costs to be looked over. The success of a buffer stock scheme ultimately depends on its ability to correct estimate the average price of the product over a period of time. This estimate is the schemes target price and obviously determines the maximum and minimum price boundaries. But if the target price is significantly above the correct average price then the organisation will find itself buying more goods then it is selling, and so it will eventually run out of money. This will result in the price of the product ultimately crashing as the excess stocks built up by the organisation, being dumped onto the market. Conversely if the target price is too low, then the organisation will often find the price rising above the boundary; it will end up selling more than it is buying and will eventually run out of stocks. ...read more.

Conclusion

rises. This could possibly result in the fluctuation of a workers income (as the total revenue would also fall.) therefore the buffer stock scheme assures stable incomes to workers also, as prices of industrial raw materials would be stabilised too. Consequently, buffer stock schemes may also help keep unemployment levels low. This is because if the price of an industrial raw material such as nickel or tin falls, then the firms total revenue will also fall which could mean that firms will have to cut their production costs in an attempt to produce more, and therefore increase their total revenue. A way for the business to cut production costs would be to exploit workers from the third world countries who would be willing to work on lower wage rates possibly. Cutting the production calls may also mean firing workers, which would cause an increase in the unemployment levels. There are also many possible disadvantages from using a buffer stock scheme to control the price of an industrial raw material. Firstly, the presence of a buffer stock scheme will cause the cost of buying excess supply to increase greatly. ...read more.

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