Some goods tend to have stable prices, while others fluctuate a lot. For example, the prices of staple items like fruit, vegetables, milk and bread tend to remain fairly steady on a day-to-day basis. On the other hand, the price of petrol changes every day, and some times several times a day (at least it does where I live). Why is this? Why isn’t the price of petrol averaged out to a weekly price, or conversely, why don’t milk prices change daily?
I know that the price of fruit changes quite a bit from time to time. For a while tomatoes were hard to even get at Subway. Petrol is also subject to fluctuations because it’s an internationally traded commodity, whereas milk is generally not imported, at least around here. The more variables added the more volitile the price will be.
Also there are societal factors, many people would be annoyed if the price of the newspaper changed daily, they wouldnt know whether to bring 40cents or 70 cents. An entrepreneuring newspaper might even come out with a “never more then 50cents” type campaign to bring stability, and customers would buy it because they were constantly annoyed by the previously fluctuating price (this is an example where consumers would add a marginal benefit premium to lower risk.)
This explains the micro day to day changes, for petrol its abit easier to change price, the market got accustomed to it, because if they wanted to fill up $50 they jst pump until they get to the point 46.7 litres or 52.3 litres isnt that big of a deal.
That explains the update rate.
But for sheer movement in prices, it would come down to supply and demand, the question should be stated why is the supply and demand volatility greater for some products then for others. This would come down to alot of factors, but an important one is the quantity in stock. Say the world consumes 5000 worth of meat a day, and meat is EXTREMELY important, its almost impossible to live without it, A tiny shock in supply would lead to massive runups in the price. This is what happens with agricultural goods as they are not stock piled for very long (they have a massive contango) and they expire.
To compare Gold and Petrol. Petrol is actualy exhausted (like most goods) and when you use its supply depletes, so the amount in stock is constantly changing both up and down. If demand is lower that month, supply goes up, if demand goes up supplies go down. This can be contrasted to gold, where the amount of stock is constantly growing (some is used in jewelery and lost or destroyed, but most is reused (smeltered) or stored (gold bars) here the supply only goes up and as the numbers get very large, an extra year of production makes a very small increase in the total amount.
Say for example the gold stock increases by 2 tonnes. It would have a very little impact as the stock of gold is already 142,000 tonnes. Very little change in supply and demand. This could be contrasted to a product like petrol where a 200tonne increase is much bigger relative to the quantity in stock.
So another reason why something is more volatile then others is the proportional change in supply vis a vis the qty of stock.
A reason why the qty of stock may be small is due to the cost of carry.
Another reason could be the certainty of future demand and supply, if food production was completely random (it isnt due to weather etc), it would suffer larger movements in price, if it was almost guarenteed (such as at mcdonalds) or the eletricity coming off a solar panels per year it would be alot smoother.
Just my 2cents
“Just my 2cents”
Great Post! TY.