Wednesday, August 7, 2013

The Demand Side of the Market.

The Demand Side of the Market.

When discussing demand, economists like to distinguish between the effects of price changes taken in isolation and the effects of structural changes that shift the relationship between price and demand over time movements along demand curves and shifts in demand curves, if you remember that lecture from your Econ 101 course. The effects of price changes on the quantity demanded are measured by elasticity of demand the percentage change in the quantity of a good demanded as the result of a 1 percent change in its price.
Guar is a good with no important final uses. As an input for industrial uses, is elasticity of demand depends on its share in total production costs, the availability of substitutes, and the elasticity of demand for the final products it goes into oil, gas, and food products.
Together, those factors keep the elasticity of demand low. With regard to its use in energy production, demand for oil and gas is itself inelastic and there appear to be no good substitutes for guar in fracking fluid. Those considerations offset the fact that the share of guar in production costs, as noted above, is substantial. Demand for food products that use guar is more elastic than for oil and gas, and substitutes are available in some cases. For example, the U.S. company TIC Gums offers a product called Ticaloid GR4520 that it claims performs as well as guar gum for industrial baked goods, although at a somewhat higher cost. However that consideration is offset by the fact that guar accounts for only a small share of the cost common foods.
When elasticity of demand is low, short-run changes in market conditions can lead to large fluctuations in price, as happened in the guar market earlier this year.  Also, there were some problems in the futures market that led Indian regulators to suspend trading in March. Reports in the Indian business press suggested attempts to manipulate prices and corner the market. Those transitory influences have now passed, hence the recent decrease in prices.
In the long run, demand responds to trends that operate independently of prices. Over time, population growth and rising incomes throughout the world are likely to increase demand for both food and energy. For food, rising income typically brings substitution of industrial foodstuffs, including those that use guar gum, for home-cooked foods, that do not. At the same time, oil and gas produced by fracking seem certain to increase as a share of all energy. Fracking is as yet widely used only in the United States, but many other regions have oil and gas deposits that could potentially be tapped using the technology.

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