demand and supply
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Key term: COMMODITIES - Raw materials such as coal, oil, copper, iron ore, wheat and soya.
Key term: COMMODITY MARKET - Where buyers and sellers meet to exchange commodities. Often these are international organised markets.
- London Metal Exchange
- New York Merchantable Exchange
- London Metal Exchange
- New York Merchantable Exchange
Raw materials like copper, iron ore, coal, oil and wheat are called commodities. Farmers produce a range of commodities from wheat and potatoes to carrots, beef and milk. Many commodities are traded on organised, global commodity markets where buyers (who represent the demand for a commodity) and sellers (who represent the supply of a commodity) come together to agree prices. The price that is quoted is set by the balance between demand and supply.
Key term: GOODS MARKETS - the market for everyday products such as clothes, food, petrol etc.
In recent years, the price of oil has changed very quickly - rising sharply in some periods but then falling back just as quickly. However, the price of most items in the shops does not change like this. There is a difference between commodity markets and the market for everyday goods and services that we all use, called goods markets.
Consumers like prices to stay the same. They find it confusing if prices are changing sharply week by week. So, businesses are under pressure to keep their prices the same. It can also be expensive for businesses to keep changing prices - the labels would have to be changed, for example.
Consumers like prices to stay the same. They find it confusing if prices are changing sharply week by week. So, businesses are under pressure to keep their prices the same. It can also be expensive for businesses to keep changing prices - the labels would have to be changed, for example.
5.1_demand___supply_starter_actvity.docx | |
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Key term: DEMAND - The amount consumers are willing and able to buy at any given price.
Wheat, for example, is used to make products such as bread, pasta, biscuits, beer, flour and animal feed. The demand for wheat is affected by the decisions of millions of businesses and individuals throughout the world who buy these products. If the demand for wheat rises, it will affect the price of wheat. Countries like China and Russia are major importers of wheat, buying wheat on world markets. China is a fast growing economy. With fast rising incomes, Chinese people are choosing to eat more food including more meat. This increases the demand for wheat because wheat is used for food and to feed animals.
Key term: SUPPLY - The amount sellers are willing to offer for sale at any given price.
The supply of wheat, for example, is just as affected by global conditions as the demand for wheat. There are hundreds of thousands of small farmers who produce wheat throughout the world. The supply of wheat depends partly upon the prices that farmers think they will get for wheat compared to other products they could grow. It also depends on weather conditions.
Key term: SHORTAGE - when the demand for a good or service is greater than the supply. When a shortage exists, prices will tend to rise.
Key term: SURPLUS - when the demand for a good or service is less than the available supply. When a surplus exists, prices will tend to fall.
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Businesses have little control over the price they have to pay for many of the raw materials they have to buy. The prices are determined on international markets. However, changes in the prices of commodities can affect small businesses significantly. In 2007-2008, the price of oil rose dramatically form around $60 a barrel to $147 a barrel. By December 2008 the price of oil had fallen to under $50 a barrel. The prices of commodities like wheat, beef, oil or copper can change on a minute by minute and day by day basis. With commodity prices changing so quickly, the plans of small businesses, such as cash flow forecasts, can be thrown into chaos. A plumber might find the cost of copper piping rising quickly because of global commodity price changes.
For many small businesses the largest single cost is paying wages to employees or paying yourself a wage. There are many other costs such as rent, taxes and new machinery. Many small businesses also have to buy raw materials (commodities) and energy. If commodity prices change, it can have a major impact on the costs of production for small businesses. The size of the effect depends upon three factors.
Ultimately, changes in costs of raw materials are important to a business because they have an impact on profit and survival. Rises in costs will lead to a fall in profits unless it can raise its prices or sell more of its products. If it cannot raise its prices or find a way of selling more products, the business could start making a loss. Falls in costs, however, tend to make things easier for a business. It can raise its profits by not passing on the savings to customers, or it could cut its own prices and hope that demand for its products will rise.
- What proportion of total costs are made up of raw materials and energy costs?
- How large is the change in price?
- Can the business pass on the increase in costs? Some businesses have to absorb increases in costs. They have to pay them themselves. Other businesses can pass on increases in costs. This means they can increase their prices to reflect the higher prices they have paid for raw materials.
Ultimately, changes in costs of raw materials are important to a business because they have an impact on profit and survival. Rises in costs will lead to a fall in profits unless it can raise its prices or sell more of its products. If it cannot raise its prices or find a way of selling more products, the business could start making a loss. Falls in costs, however, tend to make things easier for a business. It can raise its profits by not passing on the savings to customers, or it could cut its own prices and hope that demand for its products will rise.
5.1_demand___supply_starter_activity__lesson_2_.docx | |
File Size: | 15 kb |
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5.1_demand___supply_activity__lesson_2_.docx | |
File Size: | 38 kb |
File Type: | docx |