5.7 Volatile Commodity Prices Flashcards
What causes the high volatility of prices of primary commodities?
The prices of primary commodities can be highly volatile due to very price inelastic demand and supply.
Why is PED extremely low for primary commodities?
PED is extremely low because there are few substitutes available, the percentage of income a price change takes is low and these goods are necessities for either consumers or producers.
Why is PES also very low for primary commodities?
PES is also very low due to the large production lag involved and low stocks due to the perishable nature of some commodities.
What are the consequences of regular price fluctuations in markets with highly volatile prices?
With very price inelastic demand and supply, any shift in demand and/or supply will cause a sharp change in price, making it very difficult for producers to interpret the change in price and whether to increase or decrease production as a result. The signalling function of price becomes confusing and challenging to understand leading to potentially an over allocation of resources or under allocation of resources in a given market with regular price fluctuations. The result could be a misallocation of resources, allocative inefficiency and market failure.
Why are regular price swings considered inequitable for producers in markets with highly volatile prices?
Some would argue that for producers operating in markets with highly volatile prices, regular price swings are inequitable (unfair) for producers whose livelihoods depend on such prices. For example if commodity prices suddenly fell, the incomes of commodity producers would fall immediately, harming their own living standards and the living standards of their family. From a development point of view this impact could be substantial and a market failure in this normative way.
