WHAT DETERMINES THE RATE OF EXCHANGE OF A COMMODITY IN A COMPETITIVE MARKET?
Supply and demand, which causes the rate of exchange to fluctuate above or below its value. If, for example, there is a shortage of sugar in a particular market, those who wish to obtain it will tend to offer more than its value in order to obtain it. On the other hand, if there is a glut of sugar in a particular market, those who wish to dispose of it will tend to offer it at less than its value in order not to have it left on their hands. However, if the rate of exchange of a commodity is above its value as a result of shortage, the production of sugar will yield exceptionally high returns, Consequently, more people will go in for producing it, and the production of sugar will rise until its rate of exchange goes down to its value. The reverse process operates if the rate of exchange of sugar is below its value as a result of supply exceeding ‘demand’; the production of sugar then yields exceptionally low returns, so that the production of sugar will decrease until its rate of exchan
