Many commodity markets experience prices that fluctuate and that seem to be cyclical. This causes problems to producers, workers, regions or countries that depend on exports of such commodities, and also for customers that need these commodities. Products that do not differ much from one producer to the next are likely to meet fierce competition. Similarity between products is particularly likely the closer to the natural resources the product is in the supply chain. Therefore products based on natural resources are typically sold in tough competition in global markets. Moreover, the higher up in the supply chain a product is, the more likely it is to be influenced by the "bullwhip effect". With the bullwhip effect, small variations in customer demand are amplified through the supply chains of wholesalers, distributors, factories, and raw material producers. See Sterman (1989) for experimental evidence, e.g. his Figure 4. Therefore it is particularly interesting for producers that rely on natural resources to have a good understanding of commodity markets. Similar to the models of over-shoots, cycles can be caused by 'funnel delays'.

Since commodity market fluctuations is a complicated dynamic matter, you find hardly anything about this topic in most textbooks in economics. Nor will you find a simple solution to the problem of price fluctuations in this Sections. Hence, read the sections most of all to get a sense of why the problem is complicated. New policies must be tested carefully not to cause more harm than good.

In this application you will control one sixth of the production of pigs in the US hog market. Follow the instructions in the below ILE and answer the questions.

Reference:

J. D. Sterman: "Modeling managerial behavior: misperceptions of feedback in a dynamic decision making experiment", Management Science 1989 Vol. 35 Issue 3 Pages 321-339.

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