Price Elasticity of Demand for Primary Commodities (2024)

FAQs

Price Elasticity of Demand for Primary Commodities? ›

Primary commodities include extracted products such as crude oil and natural gas together with food grown in farming sectors. A low coefficient of PED means demand is price inelastic. For example, a 25% rise in crude oil prices leads to only a 5% fall in demand. PED = -0.2.

Many primary commodities have a relatively low PED (price inelastic demand) because they are necessities and have no substitutes (for example, food and oil). The PED of manufactured products is relatively high (price elastic demand) because they usually have substitutes.

Demand elasticity measures the responsiveness of demand for a commodity when there is a change in an economic factor. Mostly this economic factor is the price. However, other than price, a product's demand can react to a consumer's income level, product substitute, level of necessity and more.

Explain why the PES for primary commodities is relatively low and the PES for manufactured products is relatively high. Primary commodities tend to have relatively lower PES than manufactured goods because they require a longer time to increase production.

'Price elasticity of supply' measures how the price of a commodity affects the quantity supplied. If supply is elastic, a change in price causes a significant change in the supply of a particular good or service; if supply is inelastic, a change in price might not cause much of a change in the quantity supplied.

Primary commodities include extracted products such as crude oil and natural gas together with food grown in farming sectors. A low coefficient of PED means demand is price inelastic. For example, a 25% rise in crude oil prices leads to only a 5% fall in demand.

For example, when a commodity's purchased quantity falls by 5% owing to a 10% increase in price, the price elasticity of demand is −0.5, reflecting inelastic demand. If the same price increase reduces the commodity's purchased quantity by 15%, demand for the product is elastic (−1.5).

Salt is generally considered to have the most inelastic demand. The demand for salt is often characterized as highly inelastic because it is a basic necessity with no close substitutes.

The lower the PES, the more elastic the product is. Price Elasticity of Supply (PES) is a measure that determines the relationship between price changes and consumer demand. A high PES signifies more demand.

Primary commodities like crude oil tend to have a lower PED due to their essential nature and limited substitutes, while manufactured products like High-end laptops exhibit a higher PED owing to greater substitution possibilities and discretionary consumption.

How does elasticity affect the price of commodities? ›

If a group of commodities is studied, a tariff reduction will decrease the average price of the group if the cheaper commodities have a larger elasticity of demand than the more expensive commodities; and similarly for a tariff increase.

The price elasticity of demand is calculated as the percentage change in quantity divided by the percentage change in price. Therefore, the elasticity of demand between these two points is 6.9%−15.4% which is 0.45, an amount smaller than one, showing that the demand is inelastic in this interval.

Primary products have a low income elasticity of demand, whereas manufactured goods have higher YED's, hence as incomes increase over time the price of manufactured goods rises faster than commodities. Consequently, over time prices of imports (manufactured goods) rises faster than that of exports (commodities).

Generally primary commodities have relatively low PED values (inelastic), while manufactured goods will tend to have higher values (more elastic).

About the Primary Commodity Price System (PCPS) Definition: Indices in terms of dollars or sdrs, indices of market prices for non-fuel commodities and petroleum, actual market prices for non-fuel commodities and petroleum, and average weekly prices for non-fuel commodities and petroleum.

A commodity, also called primary product or primary good, is a good sold for production or consumption just as it was found in nature. Commodities include crude oil, coal, copper or iron ore, rough diamonds, and agricultural products such as wheat, coffee beans or cotton; they are often traded on commodity exchanges.