Topics: Supply and demand, Economic equilibrium, Austrian School Pages: 2 (1004 words) Published: November 3, 2014

The prices of agricultural products such as wheat, cotton, cocoa, tea and coffee tend to fluctuate more than prices of manufactured products and services. This is largely due to the volatility in the market supply of agricultural products coupled with the fact that demand and supply are price inelastic.

Products with unstable conditions of supply and demand will experience price fluctuations. Agricultural (farm) prices tend to be volatile because:
Supply changes because of weather conditions which affect the size of the harvest When supply falls short of planned output, for a given demand, price will rise When actual output is in excess of planned output, for a given level of demand, market price will fall The effects of changes in supply can be amplified by a price-inelastic demand, for raw materials and components where the buyer sees them as essential to their production processes they must buy at whatever the market price is. Price volatility can be magnified because of speculators who are betting on future price changes. Many economists regard price volatility as a source of market failure. Problems arising from price volatility in markets can include the following: Risk: Makes incomes and profits for producers unpredictable and may inhibit investment spending because suppliers are concerned about their expected profits. Poverty: Sharp falls in prices and incomes can cause hardship and poverty and also unemployment, especially in regions and countries dependent on cash from exporting. Balance of Payments: Big swings in prices cause large changes in export revenues for major exporters of primary commodities - affecting their balance of payments and their ability to finance essential imports of food and technology. One way to smooth out the fluctuations in prices is to operate price support schemes through the use of buffer stocks. But many of them have had a chequered history. Buffer stock schemes seek to stabilize the market...
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