If this person doesn’t care about rice and he found that price of rise is very high, he would probably prefer buying potatoes instead of rice.
Basic commodities are often bought, so people cares lot about the prices but this doesn’t mean a great change in demand. The variation of the quantity demanded is less than the variation of prices of a product, so basic commodities are inelastic. This means that the prices can be changed and people would not stop buying them. The prices are not stable.
For example, gas for cars is inelastic, because if price increases according to the international market, people would continue buying it, perhaps less quantity but the change is minimum.
Salt for example, has no substitutes, so it is inelastic, the brands are more elastic, but salt as product is less elastic. So people buy them although the price changes.
For manufactured products is different. People choose to buy according to their possibility, price and likeness. Manufactured products like pasta, detergent and cars have different brands. The variation of the quantity demanded is more than the variation of the prices of a product; so manufactured products tend to be elastic. This means that if prices changes people buy other things, this make the price of this kind of products more stable. There are exceptions also: if someone is able to buy a Mercedes Benz Car, he won’t buy a Toyota because it is cheaper, he would buy the Mercedes Benz because he like it. But if another better brand appears perhaps the demand for Mercedes Benz would prefer the new, more expensive and better car. There is always a change in the demand, more than the variation of prices.
As manufactured products are rarely bought, the demand and prices depend on the substitutes and competence. Promotions also increase the demand for products, if some brands advertise a basic commodity product people buy more of them and perhaps leave aside other products and brands. So people can choose making manufactured products prices stable.
In a short run it is impossible to increase or decrease production of a basic commodity because it takes time to get them from nature, so products are less elastic.
A better explanation for this is that there is a time lag before and intended expansion in production actually is available or sale in the market.
The decision by producers to change their output depends on the basis of the current market price. Thus, supplies in year 2 are dependent on prices actually received in year 1, rather than what is expected to be received in year 2. Producers are many and they each take decisions to adjust their scale of production according to their personal convenience. So these conditions make that if supplies happen to be scarce in one time period, the high level of the market-clearing price will encourage producers to begin a major expansion in production. This rise in production will in due course depress market prices, which stimulates a major contraction in the scale of production. Showing the reasons of fluctuation of basic commodities supply and prices.
An example of a shift in supply was the excess of potatoes in 1992 in Britain led to growers receiving very low prices. An example of a leftward shift in the supply curve would be the impact of frost damage on coffee in Brazil in June 1994. In September 1994 a tropical storm passing through the Caribbean divested the banana crop in the Windward Islands, resulting in a loss of export earnings of millions of dollars for Dominica, Grenada, Sta Lucia and St Vicent
For basic products the difference in quantity supplied is less than the difference in prices, making it relatively inelastic. For these products, when price increases although producers want to increase production, they can’t because of lack time.
For manufactured products, the capacity of increasing output can be managed according to the technology. So supply is more elastic.
The income elasticity for basic commodities is very low, because rich people, as their income increases they do not buy more basic products, but they increase their manufactured products. So luxury products have higher income elasticity, for them. This also makes the basic products less stable as rich people don’t care about the price, and make luxurious and manufactured product stable, as people care about the price.
Poor people only manage to buy basic necessity products, so as there is more poor people the demand for these products is greater making the curves more sensitive.
Some basic commodities prices also depend on international agreements, for example copper, gold, coffee, cocoa and oil.
Coffee prices are amongst the most volatile in international commodity markets. Fluctuations in demand and supply conditions can cause big swings in market prices for producers. One key factor is the control over market supply engineered by the Association of coffee Producing countries like Brazil and Colombia, by seeking a balance between world supply and demand the ACPC aims to stabilize coffee prices at levels that are fair and remunerative to producers and yet consistent with increasing consumption. However it was agreed to have a price fluctuating between 95 cents per pound as the “floor” and 105 cents as the “ceiling”.
The growing global demand for chocolate has helped push the price of cocoa up to 50% within 2 months and led to fears of shortage to come. The global output has dropped because of weather problems in the main world producer country: Ivory Coast
So this factor shows the instability of basic commodities as cocoa.
The international community no longer maintains large stocks of commodities as it is used to, in an effort to stabilise the incomes received by commodity producers. Farmers and suppliers of other commodities are now much more vulnerable to the swings in international market prices. Commodity prices are particularly sensitive to general fluctuations in the economies of countries that consume them.
The international oil market is placed under daily scrutiny because oil is perhaps the most important internationally traded commodity. World prices fluctuate because of changes in demand and supply.
Oil is an essential input in the production processes of many industries. The demand for oil also comes from household consumers to meet their energy requirements. And, crude oil is refined into petroleum products for transport. This makes the oil demand constantly grow.
The OPEC had achieved substantial cuts in total production in 1999, in the wake of the collapse of oil prices in 1997 because of the Asian economic crisis. There was pressure on the OPEC cartel to cut output and raise price in order to boost revenue from oil exports to rebuild their own domestic economies. An inward shift in oil supply matched with an increase in demand causes an increase in demand causes an increase in equilibrium price.
Oil supply from non-OPEC countries was affected by cutbacks in capital investment spending when oil prices dropped in the late 1990s.
So again, a basic commodity suffers of fluctuating demand and prices, making them not stable.
For manufactured products, the enterprises are in charge of measuring they profits and calculate suitable price for their products, organizations can’t discuss the prices. So if other countries want our manufactured products, they have to pay what the enterpriser asks.
Internationally, when basic product prices increase are elastic, but when they decrease are inelastic. This is controlled by the superpowers that buy our basic products so it is better to export manufactured products that are more stable.
Accordingly to my analysis, the price for basic commodities are less stable that the price of manufactured product because their prices are inelastic, the variation of demand is less than the variation of the price. Supply also depends on the difference of prices. When there is overproduction of basic goods, prices fall and enterpriser try to reduce output to receive more revenues. This shows the constantly instability of basic goods. These kinds of goods usually have a regular demand and it is greater than manufactured products.
Manufactured goods have lots of substitutes to choose. Supply depends on demand and the prices depend on the decision of the enterprisers. Also production can be controlled by machinery. So the prices are more stable.
