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Which would you expect to fluctuate more over time: the price of coffee or the price of eggs? Why?

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Introduction

Which would you expect to fluctuate more over time: the price of coffee or the price of eggs? Why? The prices of products in the real world alter continuously in response to the prevailing market conditions. Economic theory helps to explain these changes by showing how the theoretical price of any product is dependent upon two key drivers: the level of demand and the level of supply. It is argued that the price of a product will rise if the demand for it increases, whilst all other variables (such as the demand for competing or substitute products remain the same). The resultant price rise will encourage suppliers to increase the supply of the product, provided they have the flexibility to increase it quickly, easily and economically. Conversely, other things being constant, if the demand for a product falls, its price will fall and suppliers will tend to reduce the supply of the product. Similarly, if the existing level of supply exceeds the level of demand, then the price will tend to fall which, in turn, will lead to a reduction in the level of supply to ensure that the suppliers do not hold excess stock. ...read more.

Middle

However, over time growers of the raw material can respond to shortages of supply by bringing more land into use for production, which in turn will make the supply more elastic in the longer term. There are other complicating factors with regard to agricultural products such as the vagaries of the weather. A poor crop of coffee in one year cannot be replaced quickly or easily and the effects can in fact be even more pronounced even in the year before. For instance, if, as it is planted, the crop is affected by adverse weather conditions such as frost or unseasonal heat or rain, the yield from that crop the following year will be much lower than expected. As coffee is a product which has a reasonably long shelf life, events such as adverse weather conditions, crop disease, war or exchange rate fluctuations, will have an effect not only in the year of harvest, but also in the preceding and following years. The market can "see the problem coming" so will respond accordingly, bidding up the price soon after it becomes aware of the problem. ...read more.

Conclusion

It will be interesting to discover whether egg producers are currently preparing contingency plans for a sudden reduction in demand due to the fear of the effects from the Avian Flu virus. If this did happen, it may well have a significant influence on the level of demand for eggs and the price consumers are prepared to pay. However, if it proved necessary to slaughter a substantial percentage of the chicken stock, then this would also reduce supply which may, in turn, help to keep prices more stable. It can be seen from this last example that even though the demand for, and supply of, eggs may fluctuate in the short term, because both the demand and supply are relatively elastic, it is easier for the price to remain in equilibrium over time. As we have shown, the supply of coffee is affected by longer term issues whilst demand tends to remain relatively constant. This can lead to fluctuations in the market price over time. So whilst the argument that coffee's price will fluctuate more over time is not watertight, it is more likely that the price of eggs will remain more stable. ?? ?? ?? ?? Candidate Number: H22116 ...read more.

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