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Commodities

Question 1

With the help of a diagram:

  1. Explain why cocoa bean prices might have fallen in recent months

  2. Who gains and who loses from such a fall?

  3. Explain why a fall in the price of cocoa does not necessarily lead to an equivalent fall in the price of a popular chocolate bar.

Question 2

Data response

‘...The price of wheat soared to record levels as grain traders reacted to news that stock levels in India were the lowest for 25 years. India is the world’s second largest wheat producer and the rapid price rise coincides with the Indian Government calling for an increase in its buffer stocks. Prices in India are now at record levels following a period of droughts, then floods and growing demand. India, like other countries, is worried that it cannot produce enough to satisfy domestic demand, let alone export onto the world market. It is estimated that global demand for wheat will be 614m tonnes in 2008, but production will only be 607m tonnes. The result is that stocks will fall to dangerously low levels, with price rises predicted to continue...’ (Adapted from The Times, August 2007).

  1. With the help of a diagram, explain how ‘..droughts, floods and growing demand..' affect the global price of wheat. (5)

  2. Analyse how buffer stocks affect the price of wheat. (7)

  3. Explain why a rise in the price of wheat to ‘record levels’ might not lead to a large rise in the price of bread in the local supermarket? (8)

Question 3

Data response

During 2010, global cotton prices reached record levels. There were a number of factors contributing to this record price rise. Firstly, the floods in Pakistan; secondly growing demand from China’s vast cotton mills; and thirdly a delayed cotton harvest in the USA. No one can quite predict the likely effect with any certainty, but clothes manufacturers in the UK, USA and EU are likely to suffer, at least in the short term.  At the retail end, the market for cheap clothes is highly competitive, with Primark, Next, Asda and Tesco dominating the ‘cheap end’ of the market. These retailers must be careful about whether they pass on price rises - what is likely is that, faced with rising prices, consumers will defer consumption, suggesting a high price elasticity of demand. Unstable prices can also be disastrous for a commodity market, and buffer stocks and guaranteed prices have all been used in the past to stabilise commodity prices. Even a small change in supply can trigger an episode of increasingly volatile prices. Inflation is also likely to worsen as the effect of two decades of low cotton prices wear out – may newspapers have run with the headline ‘Is This the End of Cheap?’ One of the only positive effects will be on the environment, given that cotton production requires vast quantities of chemicals, including bleaches such as calcium hypochlorite, and disinfectants.

  1. With reference to cotton, explain what is meant by a high price elasticity of demand. (2)

  2. Using demand and supply analysis, carefully explain why global cotton prices have reached a record high. (6)

  3. Explain the possible effect of such high cotton prices on clothes retailers, such as Primark and Next. (8)

  4. With the help of a diagram, explain the external cost of cotton production. (4)

  5. Evaluate two alternative policies to reduce chemical pollution to socially efficient levels. (8)

  6. With the help of a diagram, explain why some commodity markets exhibit potential for period of price instability. (8)

  7. Evaluate the use of buffer stocks and guaranteed prices as a means of stabilising commodity prices.  (14)

 

50 marks