Even when the world is at its most turbulent, commodities provide a safe haven for futures traders. Commodities are inelastic goods. In economics, elasticity quantifies how price changes affect supply and demand.
Elastic goods exhibit a high correlation between price and demand. When the price of the good goes up, demand decreases. Elastic goods are generally less-essential goods, meaning that you can live without them or at least use less of them or substitute a less expensive option. The dance between price and demand can be complex. For example, when the cost of milk rises, people buy less milk and fewer milk products. Some people will stop buying milk altogether until the price comes back down. Families with young children who still need milk will serve their children less milk or milk with a lower fat content and, therefore, cheaper price tag. They may substitute enriched soy milk or calcium supplements and calcium-fortified breads and cereals to ensure their children get a full dose of bone-building calcium. Sales on cheese, ice cream and other dairy products will plummet in concert with how necessary they are perceived to be. Ice cream is considered a luxury so when ice cream prices rise, sales fall.
Inelastic goods are goods that are so essential that consumers must have them no matter the cost. Price fluctuations have only a small effect on the demand for inelastic goods. Consumers may buy less, but they will have to buy some in order to survive. For example, in America oil costs have reached record highs. While it is true that some people are trying to cut back — making fewer and more efficiently planned trips to accomplish errands, car pooling, patronizing mass transit, walking more — the bottom line is that most Americans are dependent on their car. In most areas, there are no other options, you must drive your own car to get to work, get the kids to school, get to the grocery, etc. You may moan and groan, but you will buy gas for your car, no matter what the cost.
Most commodities are fairly inelastic goods. Commodities are the raw materials of our daily lives, the building blocks from which our homes are built, our clothes are made, our food is grown. We cannot survive in our world without the natural resources that are traded on the exchanges as commodities. In fact, it is the essential nature of inelastic goods that attracts futures traders. As long as man exists, there will be demand for commodities — and a way for futures traders to profit.
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