[OPE-L:7380] speaking of price theory...

From: Rakesh Bhandari (rakeshb@stanford.edu)
Date: Thu Jun 13 2002 - 02:25:11 EDT

Plunging coffee prices probably wouldn't have had such catastrophic 
effects in Rwanda and elsewhere if the short run price elasticity was 
not so low (to use a concept from that despised Marshall).  As Singer 
and Raffer argue (Economics of North South Divide, p. 132), prolonged 
troughs of coffee prices do not increase final demand strongly, 
because producer country shares, and thus their effects on consumer 
markets are small. Price reduction are usually not passed on 
immediately, as this would mean selling stocks below the price at 
which they were bought. Intermediaries holding stocks have an 
interest in selling these before lowering their pirces. Income terms 
of trade must be expected to decline like prices in the short run. A 
long and pronounced price decline, though, is likely to increase 
demand, not least from poorer countries. Reactions by companies 
holding stocks will thus be asymmetric. While increasing prices 
quickly after commodity price increases means hefty additional 
profits from more cheaply bought stocks, "windfall losses" due to a 
price decline are usually avoided.

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