Economics
One hour test
Choice Nr.: 2

- 2. Buffer Stocks -

     One step a government might take in order to stabilize
agricultural prices is to use the technique of buffer stocks. The
very basic idea of this is letting the government set a minimum
price on agricultural goods. This price will usually be above the
price where demand meets supply, so the government must buy the
excess quantity produced, in order to stabilize prices. This
quantity will then be stored till, for example, next year where
there is a bad harvest, and then it will be put on the market. In
case of famine, or earthquake the goods can also be given to the
people.
     In pracise, using fig. 1, the market price would be at OP.
This price is obviously so low, that the farmers will receive too
little profit, hence the government agrees to a minimum price at
OG. Here there is an excess supply, OQ to OQ1, which the government
then buys, so they stabilize the prices.


- 3. Monopoly -

     It is easy to mention the obvious disadvantages which might
occur to the consumer of a monopoly (eg. higher prices, lower
quality etc), but there are also several ways a consumer might
benefit from the existence of a monopoly. Basically there are two
options. A monopoly controlled by the government, and monopoly
controlled by the private sector.
     Monopoly under government, is properly where the consumer will
find the greatest advantages. The government will try to minimize
prices for the consumer, and if necessary, cover the loss of doing
so. Quality wise, the consumer will most likely benefit from this
type of monopoly. If we take the dutch PTT, which is not completely
a monopoly, but still very dominating, over the telecommunication
in the Netherlands. The quality of the goods they sell (phones,
answering machines etc.) is very good. They all have to go through
certain tests, and get the 'blue seal'.
     In the monopoly, which lies under the private sector, the
conditions are different. If here the monopoly fears it will loose
faith from its consumers, it will benefit the consumer. For example
Intel's 586 chip had a bug, and consumers globally were very
displeased. Intel chose to replace the bug with functional one,
instead of remaining passive. They most likely feared other, much
smaller firms, could enter the market and take advantage of the
situation.

- 4. Double Counting -

     When calculating N.I., adding up total revenue is one way.
This does though include the problem 'Double Counting'.
     If we as an example use diamonds, from the extraction to the
sale, it should be easy to see the phenomenon of 'Double Counting'.
First the diamond is extracted by one firm. They sell the raw
diamond to a cutlery, for 10œ a carat. Here the materials are cut
into consumerfriendly shapes and then sold to shop, for 50œ a
carat, where the consumer buys it for 100œ a carat. Total Revenue
here is (10 + 50 + 100) 160œ. Adding up the Value Added, you avoid
double counting, and instead the amount is (10 + 40 + 50) 100œ.
     Obviously double counting is a problem, which ultimately leads
to very inaccurate numbers. Adding the value added up, is definably
a much better method, if a more exact number is wanted.

- 6. 'Bayona' -

     A LDC like Bayona faces many disadvantages if the Terms of
Trade go against it. What many times happens, is that the country
enter a vicious circle. Let me outline both.
     If the Terms of Trade go against a country, it means that the
prices of imported goods are higher than the prices of exported
goods. The consequences of Bayona, which only exports one good, is
that they would have no other products to try to export. In order
to stabilize the Terms of Trade, Bayona would have to either raise
prices, or increase production. If they raise prices, QD will go
down. If they increase production, wages and other costs will have
to go down in order to establish a competitive price. No matter
what, N.I. will go down, leading to less production, leading to
lower standards of living, leading to pour health, leading to less
production, etc.
     The Terms of Trade is an important factor. The system
nowadays, gives the industrialised countries an uneaqual advantage
against the LDCs.



                                                  Jens Schriver