Buffer Stocks: A Simpler Diagram

Figure 1: Overly complex depiction of how a buffer stock works. From http://learneconomicsonline.com/bufferstock.php

The basic model

Figure 2: Demand curve that includes a buffer stock operator who will buy in unlimited quantities at an announced buy price.
Figure 3: Supply curve which includes a buffer stock operator who will sell in unlimited quantities at an announced sell price.
Figure 4: Basic model of a buffer stock scheme.
Figure 5: Market demand curve shifts to the left, forcing the buffer stock to buy the commodity.
Figure 6: Market supply curve shifts to the left, forcing the buffer stock to sell the commodity.

Fiddling with prices

Figure 7: The buffer stock operator sets the sell price below the buy price. This creates a risk-free profit opportunity for other traders, who can make money by buying the good from the buffer stock and then selling it right back to the buffer stock. The ‘equilibrium quantity’ then is infinite, at least until the scheme breaks.
Figure 8: The buffer stock operator sets the buy and sell prices to be equal. However in this case, the market equilibrium without the buffer stock also happens to equal that price.
Figure 9: The buffer stock operator selling the commodity in order to maintain the market price at its target price.
Figure 10: The buffer stock operator buying the commodity in order to maintain the market price at its target price.

Further comments

What’s a commodity anyway?

Whose operation is it anyway?

Central bank interest rate targets

Figure 11: Corridor system for central bank interest rate targets. From The Macroeconomic Effects of Student Debt Cancellation: Appendix C —Digression of the Fed’s Operations, by Scott Fullwiler.

The Job Guarantee and other one-way buffer stocks

Figure 12: A buffer stock where there is only a buy price, no sell price. This graph can be used loosely to understand how a Job Guarantee works. (But in general, don’t use supply and demand models to understand the labor market!!!) The government uses AD management policy to keep the demand curve sufficiently far to the left that the price of basic labor always equals the JG wage.

Conclusion

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Sam Levey

Sam Levey

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