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Explain why the prices of primary commodities are prone to instability in the short term and downward movements in the longer term Examine the alternative way commodity prices can be stabilized Use real world examples wherever possible to illustrate your answers A primary commodity is a physical substance such as food and grains and metals which is interchangeable with other products of the same type and which investors buy or sell usually through future contracts More generally a product which trades on a commodity exchange Examples are iron and oil On the supply side primary products account for about half on average of developing countries export earnings and many developing countries derive the bulk of their earnings from one or two commodities Why are primary commodities prone to price fluctuations in the short term Price Fluctuations are falls and rises in the prices of a good Commodities are prone to fluctuations due to a number of reasons Price of petroleum Year19601965197019751980198519901995199819992000 Price342921101224173100100635476 1 Primary Commodities are relatively inelastic Primary commodities are like and can be necessities so they have very few substitutes if any at all Example oil Demand therefore hardly changes if prices changes 2 Primary commodities are prone to supply shocks Its mainly the agricultural commodities that are prone to supply shocks A supply shock occurs when a condition needed for a production of a certain good changes causing the production of good difficult leading in a drastic shift of the supply curve An example of a condition that can cause a supply shock is a change in weather Supply shocks vary in duration but they tend to be relatively long Some take up to 12 months like bananas others are permanent like gold 3 Primary commodities can also be prone to demand shocks Mineral commodities are more likely to
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