Why are prices of agricultural commodities volatile? Discuss, drawing on economic theory and using examples.taking the wheat market as an example. What happens to the income of all wheat growers if the wheat supplied increases, with no other changes? What happens to the income of all wheat growers if the wheat supplied decreases, with no other changes?

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Asked Nov 7, 2019

Why are prices of agricultural commodities volatile? Discuss, drawing on economic theory and using examples.

taking the wheat market as an example. What happens to the income of all wheat growers if the wheat supplied increases, with no other changes? What happens to the income of all wheat growers if the wheat supplied decreases, with no other changes?

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Step 1

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Primary products like food are volatile because:

  • Supply is inelastic in short run as supply of agricultural products cannot be increased suddenly in the short run. For example if demand increases for Wheat in short-run, the supply would not increase and almost remain constant as production of wheat needs new seeds, growing them and then harvesting it which takes time.
  • Supply of agricultural products varies due to the weather condition and certain weather conditions can completely wash out the crops and decrease its supply in the market. If there is drought in an area, are there is no chance of irrigation which leads to plant destruction.
Step 2

 

  • Demand is price inelastic as even a small change in quantity supplied can change greater percentage of price.  This is so as agricultural goods are basic necessity goods and even a fall in price would not encourage the buyers to b...
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