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OCR A2 Economics F585 (Feb 2011) - Price Volatility
8th December 2010
One important aspect of the OCR A2 Economics F585 (Feb 2011) Pre-Release Case Study is the causes of price volatility in world markets. As Extract 1, page 4, paragraph four says:
“The value of banana exports for developing countries depends critically on the world price of bananas. The price is volatile in the short term, yet there are distinct trends in price over the medium term.”
Banana prices have been volatile in recent years and this is due to a mix of demand and supply-side factors
Demand causes include:
1. Cyclical demand (i.e. high income elasticity of demand) Many commodities are used in producing other goods and services
2. Peak/off-peak demand differences and seasonal changes in demand
3. Speculative demand from investors who treat commodities as financial assets
4. Low price elasticity of demand (Ped) – e.g. when there are few close substitutes and where the raw material is essential in providing other products
Supply causes include:
1. Unstable conditions of market supply including uncertain yields in farming because of volatile climate. This leads to changes in actual versus planned supply and thus changes in stock levels
2. Artificial limits on supply e.g. Export quotas / bans introduced by a government
3. Low price elasticity of supply e.g. due to limited capacity or a low level of stocks. Fresh fruits are expensive to store and refrigerate and may deteriorate if held as part of a buffer stock scheme
Here are some links for further reading on this topic:
UNCTAD: Background on the world banana market
Mongabay.com US banana price chart
Tutor2u revision presentation on price volatility - causes and consequences
Geoff Riley
Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.