Bread Bread Bread

1)  Use a supply and demand diagram to illustrate (a) what has been happening to wheat prices (b) what is likely to happen to wheat prices over the coming months?

Wheat prices lately have been rising. There has been a contraction on the supply curve due to bad harvests and floods. This leads to the prices rising even if the demand is the same, since there is less of the supply. This is nicely illustrated on the supply and demand diagram. The ideal position of demand and supply would be at the equilibrium where the supply and demand line meet. Although due to the bad harvest recently there has been a shift to the left on the the supply line (Red) making the price higher. The wheat prices are probably going to drop again to normal prices when the new harvest will be ready and the supply curve will shift to the right again. 

2) How relevant is the price elasticity of demand and supply and the income elasticity of demand to your analysis?

Price elasticity of demand, supply, and income are very relevant to wheat prices since wheat is a basic product almost everyone consumes. It is a necessity not a extra like a new watch or video game. Therefore the elasticity of wheat is very low since its probably one of the cheapest food sources as well. 

3)  What factors have caused the shifts in demand and/or supply of wheat and copper?

The shift in the supply curve has happened to due bad harvests of wheat. There has even been a ban put on export of wheat in Russia due to lack of this resource. Copper demand has fallen massively in the recent months. The demand curve has shifted inwards causing the price of copper to go down, as well as the supply. This has happened to a risk of another recession and drop in the metals market.  

4) What has been the role of speculation in the price rises? Is this role likely to change over the coming months?

There is a speculation that the prices will remain high for a while, although this is no longer the problem now days. When there is a speculation of high prices, the demand expands since people want to still be able to buy the good at its lower price. Although when there are speculations of high prices, the supply curve might shift outward or to the right depending on the response time of the certain area. Wheat production has pretty slow response since it needs a long time to produce the good. The graph above shows how the prices of wheat have peaked during May 2011 although now they are stabilizing. 

5) What is likely to happen to food prices in the shops over the coming months? Would you expect bread prices to rise by the same percentage as wheat? If so, why; if not, why not?

No I do not except the prices of wheat to go up anymore. I believe the prices of bread are pretty tightly fixed upon the prices of wheat since, wheat is the main ingredient of bread and probably most of its production cost. Since it is not very expensive to produce bread and no much education needed in it, as well as not much capital except a pot and a oven. Since bread is pretty cheap, wheat does effect the prices of bread quite a lot. 

6) If commodity prices generally rose by 5 per cent over the coming year, would you expect inflation to be 5 per cent? Again, if so, why; if not, why not?

I believe if commodities rise by 5 per cent, then the inflation would rise around 4 - 4.5 per cent since inflation is measured by the CPI and RPI, both basing their results on pretty cheap and everyday objects like milk, wheat and bread. The inflation is much more affected by the change in price of a basic object than the change of price in a advanced super computer. This is that milk and bread are much more everyday affordable items for almost everyone not like luxurious goods.