THE CONFERENCE PROCEEDINGS - IFEAT

eturn, say, mint, in this case. In contrast, cost to manufacturers is made up of direct material costs +direct labour costs + manufacturing overheads.Demand and SupplyDemand is not static but active. The price elasticity of demand (i.e. the responsiveness of quantitydemanded to change in price) depends very much on the availability of substitutes. Demand isinelastic in the short-term. When a man decides to buy a car, he can either buy a brand new car, or anold car. Or he can buy either a bigger car or a smaller car. In this case, the demand for cars is elastic.That is, if the price of a brand new car increases drastically, he may choose a cheaper older car instead.Examples of inelastic demand include electricity, water and petroleum.Supply is inelastic in the short term. Once the crops are planted, the supply is “fixed” and pricefluctuations would not affect the supply. The switching of crops (say, from mint to other crops) isrestricted by geographical conditions (i.e., climate, soil, availability of rainfall and irrigation) and thesupply of labour in the area.Supply of, say, mint is inelastic in the short term. Why is this so? Once farmers have planted mint, thesupply is basically fixed. Even if prices fluctuated upwards or downwards, the supply remainsunchanged.Supply is usually concentrated in certain periods. For example, mint is planted in February~May andharvested in June~August, while the demand is spread across the whole year. This leads to supplydemandnon-equilibrium or imbalance and price fluctuations.The trading of agricultural products in commodity exchanges, such as the Multi CommoditiesExchange (MCX) in India, simply magnifies price fluctuations.Imperfect InformationImperfect information increases the difficulty of estimating total supply and demand. The assumptionof traditional economics is that all market participants have perfect information. That is, I know whatyou have and you know what I have. In fact in the real world, all market participants have imperfectinformation, especially in the supply and demand of agricultural products and financial markets. Nomarket participant knows exactly what is the overall production, overall supply or overall demand.What are the stock positions of individual users and their expectation of future prices? So in real life,we all have an imbalance of information to a certain extent.Here you can see the cycle of price fluctuation thatapplies to agricultural products. An increase inprice leads to more planting. This in turn leads tooversupply, followed by a price decrease and lessplanting. This in turn leads to undersupply, thenprice increases again and another circular round.Cycle of Price Fluctuation7