What Role Do Speculators Play in the Market?
First, a market is defined as "a group of buyers and sellers of a particular good or services." Buyers determine demand and sellers determine supply. (Mankiw, 66).
Speculators do just that, speculate. They use past market trends and make projections about the future. They do research, they may make their own investments to see how their money increases/decreases. Their activity can artificially inflate/deflate the market. Let's take for example here on the Western Slope of Colorado. If oil shale development suddenly takes off and becomes a high commodity a speculator might start buying up the houses in this area therefore raising the housing prices because the demand will be high for those looking to relocate to this area to work with the oil shale companies. Mind you, this is all just speculation. Many times a speculator takes on the risk or reward of his/her investment. "Moreover, there may be incentive for speculators to self-classify their activities in commodity futures markets as commercial hedging to circumvent speculative position limits" (Shanmugam).
Are These Speculators Responsible for Large Price Hikes?
Speculators are responsible for some large price hikes but definitely not all of them. There are several factors that are responsible for large price hikes: Income, Prices of related goods, tastes, expectations, and the number of buyers.
- INCOME- Depending on how much people are making this affects how they spend their money.
- PRICES OF RELATED GOODS- When the price of one good goes up a "substitute" good goes down.
- TASTES- If you like something you will buy more of it.
- EXPECTATIONS- Expectations of the future may sway you into either spending or saving your money.
- NUMBER OF BUYERS- When the number of buyers goes up this means that supply goes up or the cost of goods goes up.
For a defense of speculators read:
My favorite quote from this article:
"How exactly do we define the 'speculators' whose participation in the markets is to be banned? Suppose for example, we stipulate that the only people who are allowed to trade oil futures are those who are actually physically producing or consuming the product. If we do that, what happens if a particular producer wants to hedge his risk by selling a 5-year futures contract, and a particular refiner wants to hedge his risk by buying a 3-month futures contract? Who is supposed to take the other side of those contracts, if all 'speculators' are banned?"
I can absolutely see both sides of the 'speculation' argument. Speculators can drive up the prices of goods making it difficult for those of us who buy the goods to continue to pay these prices. As demand goes down prices should go down but this isn't always the case. Maybe a particular type of buyer is being catered to and those of us who can no longer afford the higher prices are weeded out of the consumer pot.
Then again, it is the speculator, in this particular article, who takes the initial risk buying 'paper' barrels of oil at a lower price and selling for a higher one. That is the risk that he/she takes. They might end up taking a loss.
Works Cited
Mankiw, N. Gregory. Principles of Microeconomics. 6th ed. Harvard: South-Western, Cenage Learning. 2012. Print.
Shanmugam, Velmurugan, and Paul Armah. "Role Of Speculators In Agricultural Commodity Price Spikes During 2006-2011." Academy Of Accounting & Financial Studies Journal 16.(2012): 97-114. Business Source Complete. Web. 15 Feb. 2013.
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