The goal of the firm is to maximize their profit. Therefore the firm has to try and store the goods and sell it at a high rate when the demand is very high and when the supply is low.
Price fluctuation is a response to elasticity of demand or supply. The elasticity of agricultural products is smaller for the production capacity in agriculture is inflexible; e.g. the area of farmland is inflexible. And the demand for agricultural products is also inflexible; e.g. the demand for foodstuff would not increase sharply. In this case, blueberry is also considered as an agricultural good, therefore it will also lie on the agricultural problems.
Firstly, from this model, we could see that as the S is shifted out to S2, the price is pushed down from P to P1. Therefore farmers faces long term downward pressure on prices. In addition to it, the difference from P to P1 is a huge cost, which means that the farmers will have unstable income.
Secondly, falling prices for farm output should be the market signal for resources to move out of agricultural goods. But if the resources do not flow out of farming, then there is market failure (refers to when the market fails to allocate resources to their best use). Then the government must intervene in the market which uses buffer stock or price control.
A buffer stock is where an organization attempts a stabilize prices at P1. They may believe that price at P is too long to keep farmers in the business of farming.
However at P1, price acts as a signal to farmers to increase production to Qs, however consumers are only prepared to purchase Qd. This results in a surplus of (Qs-Qd). In order to maintain P1 - the organization will need to purchase (Qs-Qd) and store it. Let’s say in the next year, there is a huge storm and there is a shortage of the good that drives the price up to P2. Then in order to stabilize prices, the government will release (Qd-R) on to the market and drive price down to P1. However there are some limitations with buffer stocks. For example, only storable goods are suitable – wheat and milk.
P1 also acts a market signal to farmers to increase production. Often the buffer stock organization finds that they must buy bigger and bigger surpluses each year as farmers switch into the production of the buffer stock good choosing higher returns. These reveals with buffer stocks distort market signals.
But in this case, it will not work out because blueberries are not storable. For instance the farmers has to shift back the supply curve and thus having more demand to keep them in the business. In this way from a purely economic point of view, the farmers would be better off abandoning buffer stocks and allow the market to direct resources to their best use.
Bibliography:
Article:
From the AP WIRE, “2003 blueberry harvest is up 29 percent” , 28/1/03
Definitions:
Glossary of Economics by John Sloman Fifth Edition, published 2003, Pearson Education Limited, UK
