Buffet Stock Scheme on Sugar

Posted by: Evangel on: October 16, 2010

• In: Articles | Section 2: Microeconomics
• 1 Comment

Demand is the willingness and ability to purchase a quantity of a good or service at a certain price over a given time period. Supply is the quantity of goods and services that produces are willing and able to produce at a certain price. Buffer stock schemes are a way to stabilize prices and protect producers from sudden shifts in demand and supply. When there is a good harvest, the central authority buys the commodity to keep the price from falling. Then when there is a bad harvest, the government releases the stored goods to the market, keeping the price from rising.

Buffer stock scheme is commonly used in the real world. Below is the diagram (figure 1) of buffer stock scheme used in India.

(Figure 1) Buffet stock scheme of sugar in India

According to an article “Government wields the cane on errant sugar mills” from Indian press the Indian government has bought loads of sugar when there was a great harvest.When there was a great harvest of sugar, the equilibrium price of sugar dropped from P₁ to P₂ because there were a lot of sugar was available. Therefore, the Indian government increased the price of sugar back to P₁ (P₃), raising the equilibrium point from E₂ to E₃. With buffer stock scheme, the demand increased from D₁ to D₃, increasing the quantity demanded from Q₁ to Q₃ even though the price is the same. Apparently, Indian government succeeded in carrying out the buffer stock scheme. However, the government has now allowed the sugar that was stored to be sold slowly in the market. This, as shown in figure 1, brought down the equilibrium price from P₃ to P₄, creating a new equilibrium point of E₄.

Tags: Buffet stock scheme, Consumers, Decrease, Demand, Farmers, Government, Increase, India, Price, Sugar, Supply