Draw a graph of the market for a product, such as cocoa beans, assuming that the demand is inelastic (draw the demand curve relatively steep). Now draw in a supply curve that fluctuates from year to year (try to shift the supply curve forward and backward about the same distance as in Figure 12-5). Now repeat the exercise for processed cocoa, but assume that demand for this product does not have inelastic demand (draw the demand curve relatively flat). Shift the supply curve around in the same fashion as you did for cocoa beans. Is the price fluctuation larger or smaller in the second case? What does the answer tell us about developing country commodity exports for which demand generally is inelastic? What does it tell you about the effect of processing a commodity such as cocoa beans into a product such as cocoa?

  • CreatedSeptember 03, 2015
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