Unstable commodity markets (Unit 1)

A problem of commodity markets are the fluctuating prices

Factors causing commodity prices to fluctuate are:

1) Price inelastic supply - demand shock

   - Agricultural output = long time lag to produce (grow/ harvest/ extract)

   - demand shock = demand curve increases = prices are expensive

2) Unpredictable Supply shocks

  - bumper harvest = good weather conditions = supply increases = prices are cheap

  - Bad harvest = drought / natural disaster = supply decreases = prices are expensive

3) Income Inelastic demand

agricultural output = income inelastic demand = people have a limit to eat = supply increases = prices are cheap

Consequences of price fluctuations:

  - Farm Revenue changes = bumper harvest = inelastic demand = revenue falls 

  - Lower investment = supply shocks are unpredictable = don't know if harvest is good/           bad = cannot invest

  - Consumer surplus changes = bumper harvest =…