Stock And Commodity Market Bcom Notes 3,5/5 4453 reviews
- Stock And Commodity Market Bcom Notes 2017
Find the latest BBG Commodity (^BCOM) stock quote, history, news and other vital information to help you with your stock trading and investing. Find the latest BBG Commodity (^BCOM) stock quote, history, news and other vital information to help you with your stock trading and investing.
Read this article to learn about Commodity Exchanges. After reading this article you will learn about: 1. Definition of Commodity Exchanges 2. Objectives of Commodity Exchanges 3. Nature 4. Function 5. Services.
Definition of Commodity Exchanges:
A commodity exchange is an organised market that functions under established rules and regulations.
This market is the place for the purchase and sale of commodities.
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J. F. Pyle has defined organised market in this way:
Commodity exchanges are specialised organised markets which provide a place where their members buy and sell commodities or contract for future delivery under established rules and regulations.
The commodities which are generally traded in at the commodity exchanges include the following:
(i) Natural produce of the soil e.g. cotton, wheat, tea, jute etc.
(ii) Mineral products like copper, gold, mica, lead etc.
(iii) Some manufactured products like gunny bags, clothing, hides, artificial jams etc.
All types of commodities are not fit for dealings in the commodity exchanges.
The products which possess the following characteristics are fit for dealing in commodity exchange:
1. Homogeneity:
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The commodity must be homogeneous i.e., all units of a particular commodity must be perfectly identical so that all dealers may mean the same commodity when they mention it in their dealings.
2. Durability:
It must be durable so as to last for a period of a future contract (ordinarily more than one year). If it perishes rather quickly, contracts for its purchase and sale will be frustrated.
3. Gradability:
The commodity should be such as will lend itself to grading. If the commodity cannot be classified into well-known grades, trading will be difficult for every time the quality will have to be ascertained.
4. Price Fluctuation:
There must be frequent fluctuations in the price of the commodity. If there were no price fluctuations, the speculators would have no intention to speculate in it at the exchange.
5. Open Supply:
The supply of the commodity should be open and free and should not be monopolized by one or a few persons. Again, the supply of the commodity or its price must not be controlled by the Govt.
Objectives of Commodity Exchanges:
The organised market represents a public organisation consisting of buyers, sellers, producers, traders and dealers dealing in one or more commodities which constitute the articles of trade in the market. The exchange for commodity is a private association of dealers and is not for making money or profit or for fixing prices.
Its objectives are to provide an open platform for the interaction of free play of the forces of demand and supply. It only registers the prices reflecting the forces of demand and supply. Buying and selling, trading practices and actual working of the organised market are governed by a code of rules and regulations and these can ensure fair dealings, fair prices and equity.
Nature of Commodity Exchanges:
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Organised market has the following features:
1. Best facilities available for close and continuous contact between total demand and total supply both present and potential.
2. All businesses are governed by rules and regulations and these rules are strictly enforced by the exchange authorities.
3. Usually the exchange enjoys internal autonomy and it is self-regulated, self-administered and self-disciplined autonomous body. At present, almost in all organised markets there are special legislations to control the activities of these organised markets.
4. There is free competition of buyers and sellers. The forward markets for commodities and securities are also known as two-way auction markets. Open public outcry gives offers and bids by sellers and buyers. They also use finger signals to declare their prices and amounts.
5. Every forward market has a clearing house organisation to facilitate clearing of all dealings and their settlement. The clearing house guarantees payment of dues and taking and giving of delivery of commodities or securities during the settlement period.
6. An organised market acts as a clearing house of market information, i.e., collection of all facts and figures and regular publicity of all relevant statistical information which helps the traders to estimate and forecast price trends, changes in demand and supply. Constant price quotation services enable people to make their purchases and sales with certainty and confidence.
7. The speculative trader is a necessary and vital part of any broad and stable commodity or securities market. Speculation is an integral part of market mechanism whether in stock exchange or in commodity exchange.
8. It is a convenient central market place.
Functions of Commodity Exchanges:
Commodity exchanges are generally utilised for wholesale dealings in agricultural commodities or the products of some important primary industries like lumbering.
These exchanges perform the following important functions:
1. Providing a Market Place:
A commodity exchange provides a convenient place where the members can meet at fixed hours and transact business in a commodity according to a certain well established rules and regulations. Visual studio 2015 product key free. This type of facility is very important for trading in such commodities as are produced in abundance and cover a very wide field as far as trading therein is concerned.
2. Regulating Trading:
As organised markets commodity exchanges establish and enforce rules and regulations with a view to facilitating trade on sound lines. The rules define the duties of members and lay down methods for business transaction.
3. Collecting and Disseminating Market Information:
The buyers and sellers on the commodity exchange enter into deals for settlement in future after making an assessment the trends of price and the prospects of a rise or fall in prices of a commodity. The commodity exchange acts as an association of these traders collecting the necessary information and the relevant statistical data and publishing it for the benefit of traders all over the country.
4. Grading of Commodities:
Commodities which are traded on the commodity exchanges have, to be graded according to quality. In this manner, the dealers can quickly enter into agreements for the purchase and sale of commodities by description.
5. Settling Disputes through Arbitration:
The commodity exchange provides machinery for the arbitration of trade disputes.
Services of Commodity Exchanges:
While performing these functions the commodity exchanges render a variety of valuable services to the producers, consumers, traders and others in the community.
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The most important of such services are as follows:
1. The exchanges provide a ready and continuous market for the purchase and sale of commodities. The producer is enabled to be independent of the middlemen.
2. By providing hedging facilities, the commodity exchanges reduce the effect of fluctuations in price.
3. The commodity exchanges provide the producers an opportunity to transfer their risk to the professional risk-bearers.
4. By providing continuity in the trading of commodities, the commodity exchanges induce bankers and financiers to lend against commodities.
5. The commodity exchanges provide facilities and opportunities for arbitrating and thus equalize the price levels of commodities at various centres.
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Total Output:
Output is produced through the process of production. Thus, Total Output can be defined as 'The sum total of the quantity of the commodity produced at a given period of time in the economy.' Therefore, Total Output is total amount of commodities produced during a period of time with the help of all factors of production employed by the firm.
Stock and Supply:
The term 'Stock' and 'Supply' are different but inter-related. In economics, these two terms have differentmeaning.
Stock:
Stock is the source of supply, without stock supply is not possible. Stock is the total quantity of commodity available for sale, with a seller at a particular point of time. It is potential supply, by increasing production, stock can be increased. Generally, stock is more than supply because total stock consists of current stock and previous stock.
In case of durable goods, the entire stock of goods may not be offered for sale. If its market price is low, a part of it is stored. But in case of perishable goods like vegetables, fish, etc., stock maybe equal to supply because they cannot be stored for a longer period of time. Hence, stock may be equal or more. than supply. Thus stock can exceed supply, but supply cannot exceed the stock.
Supply:
Supply is a relative term. It is always expressed in relation to price, time and quantity.
Definition of Supply:
According to Paul Samuelson, supply refers to 'The relation between market prices and the amount of goods that producers are willing to supply.'
Supply is that part of stock, which is actually brought into the market for sale at, a particular time and price. Supply is the flow out of stock. So stock is the source of supply.
Supply refers to quantity of a commodity that a seller (firm) is willing and able to offer for sale at a particular price, during a certain period of time. For example, suppose a farmer produces 2000 kgs. of rice. This is his total stock. At Rs. 30 per kg., if he offers 800 kg. rice for sale at a given period of time. That 800 kg. rice is his actual supply.
From the above explanation, it is clear that concept of supply highlights four essential elements:
ii. Willingness to sell
iv. Period of time.
Distinction between Stock and Supply:
1. Stock refers to the entire quantity of commodity which exists with the seller. It is potential supply.
Supply refers to the quantity of a commodity offered for sale at a given price and at a point of time.
2. Stock depends upon production, while supply depends on stock and price.
3. Stock is a static concept, whereas supply is a flow concept.
4. Stock exceeds supply. For perishable goods the stock and supply can be same. However, supply cannot exceed stock.
Supply Schedule Individual and Market Supply Schedule
Supply schedule is a table showing different quantities of commodity being supplied at various prices, during a given period of time. There is a direct relationship between price and quantity supplied.
1. Individual Supply Schedule:
Individual Supply schedule refers to a table which shows various quantities of a commodity offered by a single seller for sale at different prices during a given period of time.
2. Market Supply Schedule:
Market Supply schedule refers to a table which shows various quantities of a commodity, offered for sale by all the sellers in the market at different prices, during a given period of time. It is obtained by horizontal summation of supply of all individuals at various prices. It is assumed that market consists of three sellers (A, B and C). It can be explained with the help of a table given below:
• Determinants of Market Supply
The important factors that determine the market supply are as follows:
1. Price of a Commodity:
Price is an important factor influencing the supply of a commodity. More is supplied at a higher price and less is supplied at a lower price.
2. Cost of Production:
If the factor price increases the cost of production also increases. Thus, supply decreases.
3. State of Technology:
Technological improvements reduce the cost of production, which leads to an increase in production and supply.
4. Government Policy:
Government Policies like taxation, subsidies, industrial policies, etc., may encourage or discourage production and supply, depending upon government policy measures.
5. Nature of Market:
In a competitive market, the supply of goods would be more due to large number of sellers. But in monopoly, i.e., single seller market, supply would be less.
6. Prices of other Goods:
An increase in the prices of other goods makes them more profitable in comparison to a given commodity. As a result, the firm shifts its limited resources from production of a given commodity to the production of other goods. For example, an increase in the price of wheat will induce the farmer to use his land for the cultivation of wheat instead of rice. So supply of rice decreases.
7. Infrastructure Facility:
Infrastructure in the form of transport, communication, power, etc., influence the production process as well as supply. Shortage of these facilities decreases the supply.
8. Exports and Imports:
Exports reduce the supply of goods within the country. Whereas imports increase the supply of goods.
9. Future Expectations:
If the prices are expected to rise in the near future, the producer may with hold the stock. This will reduce the supply.
10. Natural Conditions:
The supply of agricultural products depends on the natural conditions. For example, a good monsoon and favourable climatic condition will produce a good harvest, so the supply of agricultural products will increase.
• Law of Supply:
The Law of Supply is introduced by Dr. Alfred Marshall in his book 'Principles of Economics', which was published in 1890. The law explains the functional relationship between price and quantity supplied.
• Statement of the Law:
According to Dr. Alfred Marshall, 'Other things being constant the higher the price of the commodity, greater is the quantity supplied and lower the price of the commodity, smaller is the quantity supplied.'
The law states that other things remaining the same, the seller will supply more quantity of goods at a higher price and less quantity of goods at a lower price.
• Assumptions of the Law of Supply:
The law of supply is conditional. Since we assume that price alone changes and allother factors determining supply remain constant. These assumptions are, as follows:
1. Cost of Production is unchanged:
It is assumed that there is no change in the cost of production. A change in cost will change profits of the seller and therefore supply at the same price.
2. No change in Technique of Production
It is assumed that there is no change in the method or technique of production. Improved technology may increase supply at, the, same price.
3. Government's Policies remain unchanged:
It is also assumed that Government policies like taxation policy, trade policy, etc., remain unchanged.
4. No change in transport cost:
It is assumed that there is no change in the condition of transport facilities and transport costs. e.g. Better transport facility increases supply at the, same price.
5. No Future Expectations:
The law also assumes that the sellers do not expect future changes in the price of the product.
It is assumed that there is no change in the weather conditions. There are no natural calamities like floods, earthquakes which may decrease supply.
The prices. of other goods are assumed to remain constant. If they change, the law of supply may not hold true because producer may transfer resources to other products.
8. Constant scaleof production:
It is assumed that the scale of production remains constant during the given period of time.
• Exceptions to the Law of Supply:
There are some exceptional cases, where supply tends to fall with the rise in price or tends to rise with the fall in price. Such exceptions are:
1. Labour Supply:
In case of labour, as the wage rate rises, the supply of labour (number of curve slopes upward, but the supply of labour decreases, with a further rise in the wage rate. Thereafter, supply curve of labour slopes backwards. This is because the worker would prefer leisure to work after receiving higher amount of wages. Thus after a certain point when wage rate rises the labour supply tends to fall.
2. Saving:
Normally, when the rate of interest rises saving increases. But some people want to have fixed regular income, by the way of interest. They may save less at a higher rate ofinterest and saving tend to rise as the rate ofinterest falls.
For example, suppose, a person is interested in earning a fixed income Rs. 200. Then he has to save Rs. 5000, when the rate of interest is 4% but with an increase in the rate of interest from 4% to 5%, he will reduce savings from Rs. 5000 to Rs. 4000. This is an exception to the law of supply.
3. Need for Cash:
If a seller is in urgent need for cash, he will supply a large amount of a commodity even at lower price.
4. Agricultural Goods:
The law of supply does not apply to agricultural goods as they are produced once a year and their production depends on climatic condition. Due to unforeseen changes in weather, if the agricultural production is low, then their supply cannot be increased even at higher price.
5. Future expectations about price:
If a seller expects a fall in price in the near future he will be willing to sell more, even at a lower price.
6. Rare Articles:
Antiques, artistic articles are exceptions to the law of supply because a change in price cannot change their supply.
Increase and Decrease in Supply (Change in Supply)
When supply of commodity changes due to change in other factors at the same price; then it is known as 'Change in Supply'. There are two types of changes in supply. They are:
2. Decrease in Supply
Increase in Supply refers to rise in the supply of given commodity, due to favourable changes in other factors such as decrease m the prices of. inputs, decrease in tax, technological upgradation, etc. price remaining constant. The supply curve shifts to the right of the original supply curve. It can be explained with the help of following diagram.
2. Decrease in Supply:
Decrease in Supply refers to a fall in the supply of a given commodity due to unfavourable changes in other factors such as increase in the prices of inputs. increase in taxes, technological degradation, etc. price remaining the same. The supply curve shifts to the left hand side of the original supply curve as shown in the diagram.
• Extension and Contraction of Supply (Variations in Supply)
When quantity supplied of a commodity changes due to change in its price, other factors remaining constant, it is known as Variation in Supply. There are two types of Variation in Supply. They are:
2. Contraction of Supply
1. Extension in Supply:
Extension of Supply refers to a rise in the quantity supplied due to an increase in price of a commodity, other factors remaining constant. Extension of supply leads to an upward movement along the same supply curve due to rise in price. It can be better understood from the given diagram.
2. Contraction of Supply:
Contraction of Supply refers to a fall in the quantity supplied, due to fall in price of the commodity, other factors remaining constant. In case of Contraction of supply, there is a downward movement along the same supply curve as seen in the given diagram.
• Concept of Elasticity of Supply and Types of Elasticity of Supply
The concept of Price Elasticity of Supply explains the quantitative change in supply of a commodity, due to given change in the price of the commodity.
Elasticity of Supply may be defined as a ratio of the percentage change or the proportionate change in the quantity supplied to the percentage or proportionate change in the price. In symbolic terms.
Types of Price Elasticity of Supply
There are five types of Price Elasticity of Supply:
With a negligible change in price there is infinite change in quantity supplied, and if there is slight fall in price supply become zero. Then it is said to be Perfectly Elastic Supply. It can be explained with the help of diagram.
ii. Perfectly Inelastic Supply:
When change in price does not bring about any change in quantity supplied, it is known as perfectly Inelastic Supply.
iii. Unitary Elastic Supply:
When a change in price brings about ,a proportionate change in quantity- supplied, then it is unitary elastic Supply. In this case Es = l.
iv. More Elastic Supply/Relatively Elastic Supply:
When percentage change in quantity supplied is more than the percentage change in price, then it is more elastic supply. Here, the price elasticity of supply is more than one (Es > 1).
v. Less Elastic Supply/Relatively Inelastic Supply:
When percentage change in quantity supplied is less than the percentage change in price, then it is less elastic supply. In this case elasticity. of supply is less than one. So supply curve is steeper.
• Measurement of Elasticity of Supply
Price elasticity of supply can be measured by the following methods:
1. Percentage Method:
This method is also known as 'Ratio Method'. According to this method, elasticity is measured as a ratio of percentage change in the quantity supplied to percentage change in the price.
Ex : Suppose 100 kg Potatoes are supplied, at a price of Rs. 8 and at price of Rs. 10, the supply expands to 125 kg of Potatoes.
If answer is one then it is unitary elastic supply, if answer is more than one, it is more elastic supply, and if answer is less than one, it is inelastic supply.
Elasticity of Supply is always positive because of the direct relationship between price and quantity supplied.
2. Geometric Method:
According to geometric method, elasticity, is measured at a given point on the supply curve. This method is also known as point method.
To measure the price elasticity of supply at a given point on the given supply curve, a tangent is drawn touching supply curve at that point, which meets the X-axis at a certain point. Then a perpendicular is drawn from point 'A'.
Let us now discuss the three different cases of Geometric Method:
i. More Elastic Supply:
The tangent NN is drawn touching supply curve SS at point A. This tangent is extended to meet X axis at point N shown in the diagram. Hence Es > 1.
ii. Unitary Elastic Supply:
The tangent NN to the supply curve SS passes through the point of origin. Hence Es = 1.
iii. Less Elastic Supply:
If the tangentNN meets the X axis before the origin at point N then the supply is inelastic.
• Determinants of Elasticity of Supply
1. Nature of Commodity:
By Nature, commodities are generally classified as perishable goods and durable goods. In the case of perishable commodities like vegetables, fruits, etc., supply is inelastic. Whereas in the case of durable goods like Furniture, T.V, etc., supply is elastic.
2. Time/Period:
In the short run, supply is relatively inelastic, but in the long run supply is elastic.
3. Techniqueof Production:
When advanced technology is adopted for production, the supply of a product tends to be more elastic on the other hand, the supply remains less elastic, if backward technology is adopted.
4. Cost of Production:
If cost of production is more, supply will be inelastic. However, if the cost of production is less, supply will be elastic.
5. Natural Factors:
The commodity whose production depends on natural factors, such as climatic conditions etc. the supply will be inelastic. For example, agricultural products.
6. Availability of Factors of Production:
If raw material and factor of production are easily available, then supply will be elastic. However, if the factors of production are scarce, supply is inelastic.
7. Scale of Production:
If goods are produced on a small-scale, their supply would be relatively inelastic. However, if goods are produced on a large-scale, their supply would be elastic.
8. Mobility of Factors:
In those industries where there is a high degree of mobility of factors of production, supply will be more elastic.
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