Price VolatilityUnit 1 Economics

Examiners reward answers that provide

chains of reasoning

These are good connective phrases

by contrast…

A consequence of this might be

…

therefore…

this might

mean… on the other hand…this is because

Diagrams matter!

Diagram must havesFully labeledOriginal and new equilibriumDemand and supply the correct way round Well explained – you must explain why the

curve has shifted, in detailThink about the elasticity – e.g. oil has

inelastic demand and supply

Why are prices volatile in the markets for many commodities?

Low Ped

Low Pes

Volatile Supply

Speculators

Using analysis diagramsPrice

Quantity

Price

Quantity

Using analysis diagramsPrice

Quantity

Price

Quantity

S1

D1

Using analysis diagramsPrice

Quantity

Price

Quantity

S1

D1 D2

P1

P2

Using analysis diagramsPrice

Quantity

Price

Quantity

S1

D1 D2

P1

P2S1

D1

Using analysis diagramsPrice

Quantity

Price

Quantity

S1

D1 D2

P1

P2S1

D1

S2

P1

P2

RISE IN MARKET SUPPLYRISE IN MARKET DEMAND

Problems arising from price volatilityRisk and Uncertainty• Uncertain incomes and profits• May limit investment by poorer farmers

Risk of poverty and unemployment• Millions of smaller farmers suffer • Many do not gain when world prices rise

Macroeconomic effects• Volatile export revenues affects the trade balance• High prices can cause inflation and food poverty

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