Introduction
Tour Itinerary
Destinations
Kitwe
Chingola
Mufulira
Issues
Theories
Supply Side
Dependency Ratio
Dependency Th.
Economic Effic.
Economic Growth
Models
Fisher Clark
Harrod-Domar
Lewis
Rostow
Demo. Trans.
Circular Flow
Neo-Classical
Popn Pyramids
Price Movts
Privatisation
Causes of Growth
Causes of Infl.
Multinationals
Externalities
Probs of Inflation
Worksheets
Resources

Home Field Trips Copper Tour Price Movements

Theories

Price Movements of Primary Commodities

Next theory - The Arguments for Privatisation >>

Copper is an example of a primary commodity. It is a naturally occurring raw material that is traded in world markets. Although the total exports of copper from Zambia have decreased significantly over the last 20 years it still accounts for 75% of Zambia's export earnings. The export revenue from copper depends upon firstly the price and secondly the quantity sold. Hence the price that copper earns on the commodity market is very important.

The demand for the metal still remains high however new technologies such as fibre optics are being discovered that can substitute for copper.

The prices of many primary commodities have shown two noticeable characteristics:

1. They often exhibit a downward trend over time
2. They are prone to fluctuations

How does economic theory explain this?

Downward trend in their prices?
The downward trend in commodity prices is due to changes in the long-term conditions of supply and demand.

1. Supply factors
   • An increase in the supply of the commodities due to improvements in the technology e.g. development and use of fertilizers and pesticides.
   • An increase in government subsidy or increases in production quotas
2. Demand factors
   • Many commodities are necessities and have a low income elasticity of demand. Consequently as the consuming nations experience increases in their incomes their demand for commodities grows but at a proportionately smaller rate. The demand curve has shifted to the right over time but by a small amount. If alternatives to the commodities are found then the demand curve may even decrease and shift to the left.

As the diagram shows the overall effect of these has been for the equilibrium market price to fall. The small increase in demand causes the equilibrium market price to increase from P0 to P1 however the greater increase in supply causes the price to fall from P1 to P 2.

Why are commodity prices inclined to fluctuate?
There are a number of explanation why the prices of primary commodities especially agricultural primary commodities.

1. Supply Shocks
   Agricultural prices are prone to unplanned changes in supply because of weather conditions. Shocks such as these will cause the market supply curve to make shifts to the left and right depending upon the weather conditions.
2. Low Price elasticity of demand
   The price elasticity of demand for many primary products is relatively price inelastic. They are often necessities and have few close substitutes.

The importance of the price elasticity can be demonstrated in the diagram below. Two demand curves have been drawn. One, typical of many primary commodities is relatively price inelastic, D1, and one for comparison relatively price elastic D2. Let us assume that the market is in equilibrium at price P2. If there is now a supply shock and supply decreases causing the supply curve to makes a shift to the left the equilibrium market price will increase. When demand is relatively price inelastic the price will increase from P2 to P1 and when the demand is relatively price elastic the price will increase from P2 to P0.

Theory predicts therefore that the prices of primary commodities are inclined to fluctuate more that other goods where there are less likely to be supply shocks and the price elasticity of demand is likely to be higher.

Next theory - The Arguments for Privatisation >>

Related Glossary Items:
Price Elasticity of Demand
Income Elasticity of Demand
Supply Shock
Subsidy

Related Issues:
The Importance of Copper to the Economy
Over-dependence on Copper
Government Intervention in the Maize Market
Vulnerability to Market Conditions

Related Theories:
Commodity Agreements
Instability in Commodity Markets
Price Ceilings
Producer Subsidies