Key Diagrams - Price Volatility

In this revision video we explain why the prices of many commodities display a high level of price volatility.

In many commodity markets, prices can be highly volatile from one time period to another. Volatility can have serious micro and macroeconomic effects. Consider forexample, low-income countries that have high primary product dependence. Volatile prices, incomes and export revenues can make their economic cycles more unpredictable too.

The main causes of price volatility in markets are:
Low price elasticity of demand for the product
Low price elasticity of supply
Unpredictable supply shocks
Demand shocks especially uncertain global demand
Speculative demand in commodity markets
Trade conflicts that can lead to export bans
The relative ineffectiveness of price stabilisation schemes such as a buffer-stock intervention