Question

The long-run downward trend in commodity prices is consistent with the idea that: a. We are quickly running out of resources. b. Resource demands have been increasing faster than resource supplies. c. Birthrates will soon increase due to the falling cost of living. d. Resource supplies have increased faster than resource demands.

Short answer

Option D is correct: Resource supplies have increased faster than resource demands.

Step-by-step solution

Understanding the Problem

The exercise provides four statements about the long-run trend in commodity prices, and asks which statement is consistent with a downward trend. Commodity prices refer to the prices of goods like oil, metals, and agricultural products. A downward trend means these prices are generally decreasing over time.

Analyzing Option A

Option A suggests that we are quickly running out of resources. If this were true, scarcity would increase, leading to higher prices, not a long-run downward trend in prices.

Analyzing Option B

Option B states that resource demands have been increasing faster than resource supplies. If demand outstrips supply, it usually causes prices to rise rather than fall, as more consumers compete for fewer resources.

Analyzing Option C

Option C suggests that birthrates will soon increase due to the falling cost of living. While a lower cost of living might affect birth rates, this is more about socio-economic factors and unrelated to the direct cause of the downward trend in commodity prices.

Analyzing Option D

Option D posits that resource supplies have increased faster than resource demands. If supplies are rising more quickly than demand, this would lead to surplus and decrease prices, aligning this statement with the observed long-run downward trend in prices.

Selecting the Best Answer

After analyzing each option, we find that Option D best explains the long-run downward trend in commodity prices, as increased supply relative to demand typically results in lower prices.

Key concepts

Resource Supply

Resource supply refers to the availability of natural resources such as minerals, oil, and agriculture, which are required for production processes. The supply of resources can increase through technological advancement, improved extraction methods, or the discovery of new reserves. For example, if new methods allow oil to be extracted more efficiently, it means the supply of oil in the market increases.
An increase in resource supply generally results in a downward pressure on prices. More supply with constant demand creates excess, leading to price drops. This scenario aligns with the statement that supply increases faster than demand. This pattern underscores why resource management and innovation is crucial in maintaining steady resource prices.

• Technological advances can expand resource supply.
• Improved recovery techniques contribute to more available resources.
• New discoveries add to the already existing resource pool.

Understanding how resource supply impacts prices can help in predicting market trends and in making informed investment and economic decisions.

Resource Demand

Resource demand involves how much of a resource consumers or industries want at specified price levels. Demand for resources can be influenced by several factors like economic growth, consumer preferences, and population size. When the economy grows, industries and consumers typically need more resources, which initially pushes demand upwards.
The inverse relationship between demand and price suggests that if demand increases faster than supply, prices tend to rise. However, when demand grows slower than supply, prices fall because there's more of the resource available than consumers want. In the context of commodity prices, if the supply of resources increases at a higher rate than demand, prices could see a downward trend, as seen with our current long-run trend.

• Economic expansions increase resource demand.
• Consumer habits and preferences affect demand levels.
• Stable demand with rising supply reduces commodity prices.

Economic Trends

Economic trends play a pivotal role in shaping the dynamics of resource supply and demand, which in turn influences commodity prices. Trends such as globalization, technological progress, and government policies can create shifts in both supply and demand.
Globalization allows for a more efficient allocation and distribution of resources, often increasing supply. Technological advances impact how resources are harvested, boosting supply capabilities. Meanwhile, economic policies like tariffs and subsidies can affect the balance of supply and demand by making resources more or less accessible.

• Globalization enhances resource accessibility and distribution.
• Technology increases the efficiency of resource extraction.
• Policy changes can heavily influence market supply and demand dynamics.

By understanding these trends, stakeholders can better anticipate changes in commodity prices and adjust strategies accordingly.