Price Insability

In the macroeconomic market, the prices of primary products usually seem to be more unstable than prices of manufactured goods and services. People often accept this as a fact, but for me, I am more interesting in how does this phenomenon occurred, what factors caused it.

By compared with manufactured goods and services, outside disruptions might affect many primary producers more than manufacturers. Weather is the most common and important factor to those primary factors. For instance, a harsh winter or a flood in summer might do to the activities of vegetable farmers, coffee plantations, and fresh flower industry. Hence, a weather disaster can affect a substantial part of primary production process.

Secondly, there is a difference between the elasticity of demand of primary products and manufactured goods and services. Mostly, primary products tend not to be differentiated; they often sold as standardized products of specific grades. Such as in the commodity market, it is trading particular variety of wheat, and wool fiber whose strand do not exceed a certain thickness. If a market supplier does not match the price offered by other suppliers it will be difficult to achieve any sales at all. In the behavioral economics, it is an anchoring, when all the sellers selling their products at a particular price, price becomes an anchor. As an excess of supply over demand, suppliers will find it necessary to follow price reductions initiated by the most desperate suppliers. By contrast, for manufactured goods will have limited substitution between the products offered by rival firms, it means if one supplier cuts its prices when demand is reduced, other suppliers may not able to suffer a gigantic loss in their sales if they do not follow suit.

The other question is whether or not mismatches between flows of output and sales can be dealt with easily by adjustments in inventory levels. Primary goods may be expensive to store due to their bulk relative to their value, or...