Unstable Markets & Price Volatility

Question 1

Causes of Price Volatility in Markets?

Answer 1

• Price elastic demand*
- When demand is price elastic, any change in supply will have a big impact on price in the market.

• Price elastic supply
- When supply is price elastic, any change in demand will have a big impact on price in the market.

• Time lag problems
- Time lags in supply, e.g. between planting a cereal crop and when has grown and ready to supply, can cause price fluctuations in a market.

• Speculation
- Speculators can exacerbate changes in price making them more volatile, with boom-bust cycles.

Question 2

Problems with Price Volatility in Markets?

Answer 2

For Consumers:
• Unpredictable food & energy prices

• Reduces consumer confidence

• May cause poverty/hardship

For Producers:
• May be forced to leave when prices are low; possible shortages

• Unpredictable incomes

• May reduce investment and
when prices rise rapidly innovation; lower business confidence

Question 3

Causes of Price Instability in Markets?

Answer 3

Key factors influencing demand:
• Globalisation
• Urbanisation
• Industrialisation
• Geopolitical events & pandemics

Short term influences:
• Speculation
• Fluctuating exchange rates
• Fluctuating interest rates

Cyclical factors influencing demand:
• Demand during growth/boom phase of cycle v recession
• Global growth cycle

Key factors affecting supply:
• Climate change
• Unpredictable weather
• Natural disasters
• Geopolitical events & pandemics