PED for Primary Commodities
Primary Commodities
Goods and services that directly come from natural resources or using the factor of production called land.
Primary commodities, such as agricultural products (e.g., wheat, rice) and raw materials (e.g., crude oil, iron ore), generally have price inelastic demand. The reasons are the following provided below.
Lack of Close Substitutes
Primary commodities often have few or no close substitutes.
- When substitutes are scarce, consumers have little to no choice but to continue purchasing the product, even if prices rise.
- Therefore the demand is relatively unresponsive to price changes.
Some primary commodities are oil, minerals, foods, etc. These are also considered as necessities with little to no substitutes.
Degree of Necessity
Primary commodities are often necessities for consumers or producers:
- For consumers, staple foods like rice, maize, or potatoes are essential for survival.
- For producers, raw materials like iron ore and timber are critical inputs in manufacturing processes.
Proportion of Income Spent
Primary commodities typically account for a small proportion of consumers' income:
- For example, the cost of salt or sugar is a negligible part of household budgets.
- Even if prices double, the impact on overall spending is minimal, so consumers continue purchasing similar quantities.
PED for Manufactured Products
Manufactured Products
Goods or services produced by the workings of labour, capital and raw materials.
Manufactured products typically have a higher price elasticity and are more elastic. This is discussed below.
Availability of Substitutes
Manufactured products often have a higher degree of substitutes compared to primary commodities.
The abundance of alternatives makes consumers more sensitive to price changes, leading to higher PEDs.
ExampleThere are quite a number of substitutes for cars such as other price range of cars or even other modes of transport.
Lower Degree of Necessity
Most manufactured products are not necessities but rather luxuries or convenience items:
Example- Furniture, electronics, and fashion items are not essential for survival.
- If prices rise, consumers can delay purchases or forego them altogether.
The lower degree of necessity increases the elasticity of demand for manufactured goods.
Common MistakeEven though a lot of manufactured products are elastic, there are still many manufactured necessities such as medicine, which do have a low price elasticity!
Self review- Explain why in general, primary commodities have a lower price elasticity using some examples.
- Give any examples where this is not the case.
To what extent should governments intervene in markets for necessities to protect consumers from price volatility?
