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

The long-run downward trend in commodity prices is consistent with option d: Resource supplies have increased faster than resource demands.

Step-by-step solution

Understand Long-run Trends

Recognize that a long-run downward trend in commodity prices indicates that, over time, the prices of commodities have generally been falling. This suggests changes in the balance between supply and demand.

Analyze Resource Supply and Demand

If resource demands had been increasing faster than supplies, prices would likely increase, not decrease, according to basic supply and demand principles. This rules out option b.

Evaluate Resource Supply

If resource supplies have been increasing faster than demands, it implies an abundance of resources relative to demand, leading to falling prices. This aligns with option d.

Consider Long-run Resource Depletion

A long-run downward trend in prices does not support the idea that resources are running out quickly, as scarcity would typically drive prices up. Thus, option a is not consistent with the price trend.

Assess Birthrate Influence

Falling commodity prices might impact cost of living, but the link between this and immediate birthrate changes is not direct or evident in the context of commodity price trends. Thus, option c is unlikely.

Conclusion

The most plausible explanation for the long-run downward trend in commodity prices is that resource supplies have increased faster than resource demands (option d).

Key concepts

Commodity Prices

When we talk about commodity prices, it's essential to understand that commodities include basic goods like oil, metals, wheat, and corn, which are traded on the global market. Commodity prices impact both consumers and producers widely.
These prices can fluctuate over time due to various factors, affecting supply and demand.

• When the supply of a commodity exceeds demand, prices tend to fall. More product means competition between sellers lowers prices.
• Conversely, when demand exceeds supply, prices rise because buyers are competing for limited resources.

The long-run downward trend in commodity prices suggests an increase in supply relative to demand over time. Despite short-term fluctuations, a persistent decrease in commodity prices usually points to a greater availability of the resources in question.

Resource Supply

The concept of resource supply refers to the amount of a specific resource available in the market. A key driver of supply in the long run is technological advancement, which can make resource extraction and production more efficient.
In essence, increased supply can be the result of:

• Discovering new resource deposits, which adds to the overall supply available.
• Technological improvements making it cheaper or easier to produce commodities.
• Policy changes and investments leading to enhanced production capacities.

With these factors in play, the supply can grow substantially, even in the face of increasing demand. As resource supply increases more rapidly than demand, prices tend to fall, explaining the long-term downward trend in commodity prices.

Resource Demand

Demand for resources can be influenced by a wide array of factors, varying from consumer preferences to economic growth. An increase in demand generally occurs when more people or industries seek a resource.
Factors that can drive up demand include:

• Population growth raises consumption of resources like food and energy.
• Economic development in emerging markets increases resource consumption.
• Changes in consumer behavior, favoring certain commodities over others, can also elevate demand.

When demand rises but supply keeps pace or exceeds it, prices can stay stable or even fall. This balance is crucial in explaining why commodity prices may follow a downward trend, even in growing economies.

Long-Run Trends

Long-run trends in economics help us understand the direction where things are heading over an extended period, ignoring short-term volatility. In the context of commodity prices, a long-run downward trend suggests that over the years, commodities have generally become cheaper.
This can often point towards factors such as:

• Technological advancements improving productivity and resource utilization.
• Better agricultural practices leading to higher yields and more output.
• Globalization opening new markets and access to resources.

These trends show how dynamic economies adapt over time, responding to shifts in technology and market access, thereby altering the long-term supply-demand balance. A clear understanding of these long-run trends allows economists and policymakers to make more informed predictions and decisions about future resources and pricing.