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Home Worksheets Commodity Prices

Commodity Prices Worksheet

A printable version of this worksheet is available for classroom or personal use with spaces to fill in the answers.

Introduction

This worksheet deals with a variety of issues about the primary commodities. It considers the contribution that two commodities, copper and coffee, have on the economy of Zambia. It considers why the prices of these two commodities change and how these changes affect people's lives and the economy in general.

Step 1

Before starting this section it would be worth having a look at the theory section on price movements of primary commodities and the destination of Kitwe on the Copper tour. These will help you appreciate the importance of these issues for Zambia.

1. Make a list of all the primary commodities used in the production of:

(a) the items you consumed for your breakfast this morning or your evening meal last night

(b) the items of furniture in your living room

2. For each of the following primary commodities, name three different products that the commodity might be used to make. You may need to use an encyclopaedia.

• Coffee beans
• Cobalt
• Cotton
• Tobacco
• Copper
• Timber

3. For each use, consider how easy it would be to substitute the product for something else that used another primary commodity. Write a brief paragraph summarising your findings.

Review your understanding of price elasticity of demand. You could use either the glossary term price elasticity of demand or the price elasticity of demand theory section in the trade tour.

The concept of price elasticity of demand measures how responsive the demand for a good is to changes in its price. The availability and closeness of substitute goods is an important factor that influences the price elasticity of demand. The less easy it is to replace a good with a substitute the less price elastic the demand for the good is.

4. Do you think the above products would be relatively price elastic or inelastic (give your reasons)? Which of the above would you think was the most price inelastic?

Step 2

This section is going to look at the market prices of copper and coffee.

1. Use the resources section to find the prices of copper per metric tonne over the period from 1960 to 1999.

a) Using a spreadsheet, plot the price data for the years given

b) Calculate the % change in prices between 1965 and 1999

c) Describe the trend you have found from these two activities (refer in detail to the data)

2. Use the resources section to find the prices of arabica coffee per metric tonne over the period from 1990 to 1999.

a) Using a spreadsheet, plot the price data for the years given

b) Would you describe the price as stable or fluctuating over the time period? (Justify your answer by referring to the data)

c) Calculate the % difference between the lowest and highest price (show your workings)

d) Do you still stick to your answer that you arrived at in b)?

e) Examine the data for copper prices for the same time period. Are the prices stable or fluctuating? (Justify your answer by referring to the data)

f) Calculate the % difference between the lowest and highest price (show your workings)

Step 3

Make sure you have read the theory section on price movements of primary commodities.

The next section involves you manipulating supply and demand curves for a commodity and examining the effect on the equilibrium market price and the revenue from sales. For each stage complete the supply and demand diagram taking care to show the effect of the changes in the conditions of demand and supply on the equilibrium market price and the revenue earned from sales of the commodity.

1. On a set of axes draw a supply and demand curve. Assume that the demand for the commodity is highly inelastic. Then draw on the diagram each of the changes given in the table below, and complete columns 3 and 4 in the table for each stage.

3. Using economic theory write a paragraph that clearly explains what has happened to the market price and the revenue. In your explanation use data from coffee and copper markets to support your analysis of theory.

Step 4

The fall in copper prices has had a serious impact on the economy of Zambia. It has impacted on both the macroeconomy and the microeconomy. Let us deal first with the macroeconomic impact. As copper is the chief export of Zambia we need to examine the effect of the falling copper prices on the country's balance of trade. The balance of trade is the record of the foreign currency transactions resulting from international trade in goods.

1. Using a spreadsheet and the data in the resources section, plot the data for the exports earnings from copper in US$ between 1990 and 1998

2. Plot the data for the balance of trade for Zambia between 1990 and 1998

3. Describe the two sets of data that you have plotted. Explain how the two sets of data are related. (Refer in detail to the data to justify your answer)

4. What is the impact of a negative balance of trade? How might it affect the economy?

The microeconomic effect of falling commodity prices is the impact on the firms producing the commodity. The parastatal KCCM produces the bulk of Zambia's copper. It also employs a large number of people. As the price of copper has fallen firms such as KCCM have made many people redundant. In addition the government is finding it more difficult to privatise the copper industry.

Read the section on unemployment and underemployment.

5.Why would falling copper prices result in KCCM lay off workers?

6. Why would falling copper prices slow down the pace of privatisation?

Step 5

One way in which falling commodity prices can be slowed or stalled is by the producers of the commodity to co-operate together and form a commodity agreement. These can be either a buffer stock scheme or a quota system.

Read the section on commodity agreements in the theory section of the Rural Life and Agricultural tour.

1. Which of the two methods would you recommend to the government of Zambia as the more appropriate scheme to prevent the continuing decline in the price of copper? (Give reasons for your answer)

2. What would be the advantages and disadvantages of each?