Supply, Demand and Price Elasticity Essay Example for Free

Supply, Demand and Price Elasticity Essay A commodity is a basic good that can be bought, sold, or even used as currency in parts of the world. Items such as coffee, sugar, soybeans, gold, silver, wheat, gasoline, corn, platinum, oranges, and crude oil are examples of commodities in the global marketplace. Consumers demand commodities to meet their needs in the consumption of food, or the creation of other goods or services. Suppliers, often farmers, supply the commodities to the marketplace. Several factors can affect both the supply and demand of commodities. Selected causes that affect supply and demand will be discussed as well as the effects these causes have on price, quantity, and market equilibrium. Finally, the paper will determine whether the chosen commodity, sugar, is a luxury item or a necessity, identify the availability of substitutes, and discuss how these attributes impact sugar’s price elasticity. Supply and Demand Impacts and Effects As mentioned above, the commodity chosen for discussion is sugar. Much of the world considers sugar an important commodity, used for sweetening foods, and in making other products such as baking. For these reasons, consumers highly value sugar, so its demand remains high. Crops such as sugar cane and sugar beets produce refined sugar. These crops grow in many areas of the world, including the United States, Australia, and India. Sugar operates within a market economy, so several factors cause shifts in supply and demand. Perhaps the most important factor that affects the supply of sugar is weather. As a crop grown throughout the world, sugar cane or beets are subject to extreme temperatures, flooding, drought, and even insects. Recent severe flooding in northeastern Australia has diminished the world sugar supply (Josephs, 2010). As large amounts of sugar are lost to weather, the supply curve shifts to the left, quantity supplied drops, prices increase, and market equilibrium increases as overall demand decreases. Another impact to the world supply of sugar is the development of farming and harvesting techniques to allow planting of sugar cane or sugar beets in new nvironments and climates. This scenario increase the quantity of sugar supplied to the world marketplace, shifting the supply curve to the right. When this happens, quantity increases, prices fall, and market equilibrium edges lower as demand increases. Importing and exporting of sugar directly impacts sugar supply. Nations that produce sugar determine how much sugar to export, what price they will charge for the sugar, and whom they are willing to supply sugar. For example, India is currently exporting less sugar than expected (Josephs, 2010). This action reduces the quantity supplied, in turn increasing price and market equilibrium because of decreased demand for sugar at higher prices. Another impact to the supply and demand of sugar is speculative buying. In this case, buyers purchase sugar in hopes of raising the price of sugar by reducing the supply available on the open market. The effect of the reduced supply causes prices to rise as well as market equilibrium. As prices rise, the buyers sell their sugar holdings, increasing the total sugar supply in turn reducing prices and market equilibrium. Price Elasticity Determination Though used by people in nearly every country, sugar remains a luxury item. Sugar is mainly used to add flavor or sweeten foods such as baked goods, fresh fruit, tea, and coffee. According to recent studies, the average American consumes 150 – 170 pounds of sugar per year (Regan, 2011). Excess sugar consumption produces side effects such as weight gain, hyper activity, diabetes, or high blood sugar. To counteract these effects, numerous sugar substitutes such as Equal, Splenda, Stevia, Truvia, and high fructose corn syrup exist in the marketplace. The availability of many sugar substitutes in the marketplace creates elastic demand for pure sugar (Hubbard O Brien, 2010). As sugar prices rise, consumers seek lower priced substitutes. Substitutes lower the demand for sugar without changing the quantity of sugar supplied, signaling a shift of the demand curve to the left, lowering the price as well as market equilibrium of sugar. Conclusion Many factors such as adverse weather, farming innovations, importing and exporting, and substitute availability influence both the supply and demand of soft commodities like sugar, coffee, and wheat. Each effect on supply or demand influences price, quantity, and market equilibrium differently. Luxury items with many available substitutes, like sugar, have a more elastic demand than necessity products like gasoline or heating oil having few or no substitutes available.