Examine why commodity prices might be expected to be volatile than the Essay

Examine why commodity prices might be expected to be volatile than the prices of manufactured goods. Explain how the expansion of bio fuels could push up the pr - Essay Example Examples are tyre, table, etc. The word volatile means flexible. In other words it means something which is subject to change. 1. Interest rate: Commodity price changes inversely with the interest rates. That is, the higher the interest rate, lower the commodity price and the lower the interest rate higher the commodity price. 2. Future Trading: The futures contract refers to an agreement between two parties for the purchase or sale of goods or bill of exchange which is being fixed at the time of agreement, but the actual delivery of goods take place at a future date. â€Å"In futures trading, there is usually a contract, which is essentially an agreement between two parties to buy or sell an underlying asset at a certain time in the future at a certain price. A futures contract usually has a standardized date and month of delivery, quantity and price.† (Futures Trading). Future contracts result in the prices of commodities becoming more flexible. In order to safeguard the interest of some parties in future trading some company may opt for increasing the prices of commodities. Future trading mostly happens in commodities. For manufactured goods, future contracts are very less. So the prices of commodities are more volatile than the prices of manufactured goods. Demand and supply of the commodities are other reasons for the price volatility of the commodities. That is, the commodity market is more price elastic. A slight change in demand or supply of the commodity may result in a very high change in the price of the commodities. But in the case of manufactured goods the price elasticity is very less. That is, change in demand or supply results in a very low change in price of the goods. So the prices of manufactured goods are less volatile. 4. Large number of producers: There will be large number of producers for the commodities. This results in frequent fluctuations in the prices of commodities. When one producer reduces or increases the price