MICROECONOMICS

Read the case study below and answer all the questions Case study: Emerging economies

Emerging economies that were growing rapidly, particularly Brazil and Russia, are both now in recession which means the income of the economy is shrinking. Commodity prices have played a considerable role in sending these economies into reverse, although this has been compounded by political developments in these countries.

The previous major engine of global growth, China, has also seen its economy slowing. Although still growing at a brisk pace compared with mature western economies, by the double digit standards that China set for itself in past decades it Is unquestionably experiencing slower growth. This has happened at the same time as, and is related to, China rebalancing its economic growth model from reliance on exports and capital investment towards domestic consumption and services. One consequence of this has been lower demand for imported commodifies, which has been one factor depressing global prices, particularly in areas like metals.

In contrast to India, some of the other most positive looking prospects for growth just a few years ago have been hit hard by falling commodity prices. These include a number of African countries that were seen as having great potential for rapid growth a few years ago, including Nigeria (dependent on oil and gas, South Africa (coal and metals) and other smaller economies such as Angola oil and various miner- all. Africa had in fact, been the fastest growing global region over the past decade, with the middle class in sub-Saharan Africa expected to grow 6% per annum, from 33m in 2010 to 107 m in 2030. The working age population in Africa is expected to rise by 273bn from 2010 to 2025- raising the challenge of addressing significant skill shortages when 50% of the population live off less than $1.25 per day. Africa does retain great potential, but lower commodity prices have highlighted the need for more diversified economies with strengths in sectors with strong job creating potential.

Source https://www.pwc.co.uk/issues/megatrends/shiff-in-global-economic-power.him

Questions [30marks]

Question 1 (8 marks) Identify and explain the main drivers of commodity prices.

Question 2 (10 marks) Analyse the influences on the supply of a commodity and demand of a commodity.

Question 3 (8 marks) With the aid of diagrams, evaluate why the price of a commodity may increase using supply and demand analysis.

Question 4 (4 marks) Discuss the reasons why the prices of commodities is important.