Unstable Commodity markets

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  • Created on: 14-10-12 18:55
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Unstable Commodity Markets
What are commodity markets?
A commodity is a word used when referring to raw materials used in the production of goods. It can
be produced and/or sold by many different firms, and in terms of quality, you cannot tell the
difference between the firms that sell it. Examples include oil, coal, tin, copper, wheat, coffee, tea
and sugar.
Commodity markets are often characterised by fluctuating prices and producer incomes which
make it hard to plan future investment and production programmes. This is best shown in agricultural
markets where the climate will affect the supply in any one year.
What are the causes and effects of fluctuating commodity prices?
1. Price inelastic supply. Supply of agricultural goods is price inelastic because the length of the
growing season means no more of the good can be produced until the following year.
2. Price inelastic demand. Demand of agricultural goods is price inelastic since agricultural goods
are often used as ingredients for the production of other food, e.g. sugar is used in tea and
cakes. This shows that the agricultural good is a necessity.
3. Unpredictable supply shifts. Unpredictable weather conditions and other unexpected events
(such as insect infestation) mean that the supply curve can shift dramatically in both
directions, showing that there can be bumper harvests or crop failure.
4. Income inelastic demand. The supply of agricultural commodities has increased dramatically
due to big technological innovations, e.g. genetically modified crops. However, the growth in
demand has failed to keep up with the rise in supply. Commodities tend to be inelastic in
demand since each individual has a limited food intake. This can limit the price of commodities
and therefore the revenue for farmers.
Good and bad harvests
Good and bad harvests can both cause problems for farmers. In a good year when harvests are high,
the shift right in the inelastic supply curve against the inelastic supply curve means that price and
farmers' revenue will be very low. For consumers a good harvest is good because it implies low

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In a bad year when harvests are low, the shift left in the inelastic supply curve against the inelastic,
supply curve means that price and farmers' revenues will be very high. For consumers a bad harvest
implies higher prices so it is bad.
Consequently, many farmers make huge profits one year and big losses the next.…read more

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Imagine there is a normal supply curve on this graph) (3)
When there is a good harvest, supply shifts to S1, and the initial equilibrium price is within the
maximum and minimum prices. However, in an increase in supply causes the piece to fall. So the
government agency intervenes by purchasing quantity AB (in diagram above) which prevents the
price from falling below the minimum price and increases its stockpile.…read more

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The government might stabilise commodity prices and producer incomes through a guaranteed
minimum price scheme. An example of this is EU farmers who are guaranteed a set or minimum price
for some commodities, including sugar and wheat. Usually the minimum price is set above the free
market price, so there are agricultural surpluses. Excess supply is stockpiled by the government.
Advantages of a minimum price scheme
Farmer incomes are stabilised, leading to greater investment into agriculture.…read more

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(3) http://www.google.co.uk/imgres?q=buffer+stock+scheme+diagram&num=10&hl=en&biw=
(4) http://www.google.co.uk/imgres?q=Minimum+price+scheme&num=10&hl=en&biw=1366&
//tutor2u.net/economics/content/diagrams/min_price1.…read more


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