Volatile Commodity Markets content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Intro to Volatile Commodity Markets Impacts of Market Volatility

1. Volatile
Commodity
Markets
Lower 6th Micro
How Markets Work

2. Intro to Volatile
Commodity
Markets
Volatile Commodity Markets
Mr O’Grady

3. Intro to Volatile Commodity Markets
Market Volatility: Where the prices of a good, often a commodity, fluctuate readily
With prices fluctuating regularly, it is difficult for consumers and producers to make
consumption and production decisions
Since prices are determined by supply and demand, it follows that this volatility is a result of
underlying supply and demand characteristics
Factors Leading to Volatility:
Inelastic PED: A shift in supply leads to a large change in price
Inelastic PES: A shift in demand leads to a large change in price
Proneness to Supply Shocks: Changes in supply of commodities can be sudden and
significant
E.g. Extreme weather or trade embargoes
Market Speculators: Traders who buy and sell commodities, buying when prices are low, and
selling when they are high in order to try and make a profit
If speculators believe price will rise, they will rush to buy the commodity, increasing demand and
actualising the price increase.
If speculators believe price will fall, they will rush to sell the commodity, increasing supply and actualising
the price decrease.

4. Impacts of
Market
Volatility
Volatile Commodity Markets
Mr O’Grady

5. Impacts of Market Volatility
Risk & Uncertainty: With equilibrium price and quantity being highly volatile,
producers are uncertain of their incomes and profits
This may limit capital investment by poorer farmers which then harms productivity and real
wages in the long run
Risk can also incentivise suppliers to leave the market, reducing the quantity available of
important commodities into the future
Unemployment and Extreme Poverty: Volatile prices and unstable output can not
sustainably employ high quantities of labour
Millions of small farmers in developing countries will suffer, as they are the least resilient
Some do not gain either when prices do rise
Higher prices can cause inflation and extreme food poverty
Macroeconomic effects: Commodities can be key industries within an economy
Fluctuating export revenues affect nation’s trade balance
Especially true when a nation’s primary product dependency is high
Overall: Welfare is not maximised – the socially optimal quantity is not produced!

6. Where next?
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