PED for Primary Commodities
Definition
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.
