UNIT 7

SUPPLY
AND DEMAND
 GETTING READY

1c
2c
3c

2. What essential commodities can you think of?

rice, oil, clothes, salt, medicine, ...
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 READING
Read the following article about commodities and commodity prices.
It is hard to imagine what connection could possibly exist between commodity prices and the
publication of J.R.R Tolkien’s The Lord of the Rings. In spite of the author’s original wish to publish his
work as a single book, his publishers refused because at that time, paper was so expensive that they
felt it had to be spread out as a three-volume series. Since then, paper, in common with other
commodities, has experienced highs and lows. When a commodity is in short supply its price soars;
when there is a glut or drop in demand it falls. If something is scarce, the more it is worth.
The nightmare of any producer of a commodity or raw material is that a cheaper source
becomes available elsewhere, or, worst of all, that a substitute is found. For instance, Brazilian rubber
producers lost their monopoly in the 1880s when British growers transported precious rubber plants
to Malaysia. Worse was to come with the invention of synthetic rubber based on oil in the first half of
the twentieth century. All this shows that a commodity’s price results from the relationship between
demand, stocks, and production.
Furthermore, there is the relative power-relationship existing between suppliers and buyers.
Even though we might think that it is the producer who holds all the cards, the reverse is often true-
prices can be dictated by powerful multinationals. This has always been the case for tea and coffee
producers, who are often small farmers with a low output, at the mercy of the big companies which
process their crop and add most of its value.
A classic example of this is oil. For many decades the price of petroleum was more of less
dictated by “the seven sisters” – massive petroleum multinationals who controlled the extraction,
refining, and the transport and distribution of this most precious of commodities. However, one way
that commodity producers have of winning a bigger slice of the pie is to band together and to form a
cartel. OPEC was founded by a group of oil-producing nations in 1960 as a way of controlling oil output
within their countries. The decision to limit output saw oil prices leap fourfold in the oil shock of 1974.
The vastly increased price was fed into the cost of other manufactured goods and fuelled a jump in
inflation. As prices rose, demand for manufactured goods fell, which triggered a global recession.
Despite the oil shock and economic slowdown, the world economy gradually recovered. Thirty years
on, while OPEC is far less powerful than it once was, the availability of plentiful crude oil at a reasonable
price is still crucial for the world economy.
However, the price of crude oil and other commodities is likely to be forced higher and higher
with the continuing growth of the Chinese economy, which needs raw materials to sustain it. China
now accounts for a fifth of global crude oil and aluminium and over a quarter of the world’s iron ore
consumption. Daily consumption leapt from 4 million barrels per day in 2000 to 6 million in 2004.
Nevertheless, North America remains by far the world’s biggest consumer.

A. READING COMPREHENSION
Answer the following questions.
 1. Why was the Lord of the Rings published in three volumes?
Because at that time, paper was so scarce and expensive.
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2. How is the price of argricultural products determined by the law of supply and demand?
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3. What competing forces caused the crisis of the 1970s?
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4. What is powering current growth in commodity prices?
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B. VOCABULARY
I/ List the words and expressions in the text which refer to ‘a lot’ or ‘a little’ of something.
A lot A little
highs, power-relationship, massive, more, scarce, lows, short supply,
most of, higher and higher, biggest low output, less, slice, far less
consumer.

II/ Write definitions for the following words from the text. Try to get the meaning from the context.
a substance or product that can be traded, bought, or sold
- commodity: .................................................................................................................
a group of similar independent companies who join together to control prices and limit competition
- cartel:..........................................................................................................................
a period when the economy of a country is not successful and conditions for business are bad
- recession:....................................................................................................................
the exclusive possession or control of the supply or trade in a commodity or service.
- monopoly:...................................................................................................................
a general, continuous increase in prices
- inflation: .....................................................................................................................
III/ Many verbs are used with the noun price to form collocations. Replace the words in italics with one of
the verbs from the box below.
set fix fetch match charge raise dictate
1. That shop’s really expensive – they are always increasing the prices. raise
2. He asked me to pay a high price to repair my car. charge
3. She said she would equal the price if I could find it cheaper elsewhere. match
4. If you put your price too high, then people simply won’t be interested. set
5. He knows everybody will buy his goods, so he is able to control the prices. dictate
6. The clock got a surprisingly good price at the auction. fetch
7. It is considered unfair for competing shopkeepers to secretly agree on their prices. fix
IV/ Match definitions 1 – 5 with expressions from the box below.
price range price war asking price retail price cut price
cut price
1. greatly reduced price ……………………….
asking price
2. in a negotiation, the price the seller wants …………………………..
price war
3. a battle between retailers who reduce the price ……………………………..
price range
4. spread of prices ………………………….
 retail price
5. the standard agreed price suggested by the producer …………………………..

VOCABULARY EXTENSION
WORDS FOR TALKING ABOUT ECONOMICS
Exercise I: Match the economic terms (1-10) to their definitions (a-j)
1. interest rate c a. total value of goods and services produced in a country
2. exchange rate d b. general increase in prices
3. inflation rate b c. cost of borrowing money
4. labour force f d. price at which one currency can buy another
5. tax incentives g e. percentage of people without jobs
6. government bureaucracy i f. people working
7. GDP a g. low taxes to encourage business activity
(Gross Domestic Product) h. money from overseas
8. unemployment rate e i. official rules/ regulations/ paperwork
9. foreign investment h j. difference in value between a country’s imports and exports
10. balance of trade j

Exercise II: Complete this economic profile with the terms in Exercise I.
The economy is stable following the problems of the past two years. By following a tight monetary policy, the
inflation rate
government has reduced the ………………………(1) interest rate
to 2%. After going up dramatically, the ………………………(2) is
exchange rate
now down to 8%. The last six months has seen a slight improvement in the ………………………(3) against the
GDP
dollar. The ………………………(4) has grown by 0.15%. Exports are increasing and the balance of trade is starting
………………………(5)
to look much healthier. The unemployment
………………………(6) rate continues to be a problem as it is still 16%. In order to stimulate
foreign investment
the economy and attract ………………………(7), the government is offering new tax incentives
………………………(8) as well as
government
making a renewed effort to reduce ………………………(9)
bureaucracy labour force
. Finally, a large skilled ………………………(10) means there
could be attractive investment opportunities over the next five years.