Theory Of Economics Essay, Research Paper

theory

THE THEORY OF STORAGE. ?THE SUPPLY OF STORAGE REFERS

NOT TO THE SUPPLY Of STORAGE SPACE BUT TO THE SUPPLY OF

COMMODITIES AS INVENTORIES. IN GENERAL A SUPPLIER OF

STORAGE IS ANYONE WHO HOLDS TITLE TO SKS WITH A VIEW

TO THEIR FUTURE SALE, EITHER IN THEIR PRESENT OR IN A

MODIFIED FORM. SINCE PRODUCTION IS NOT STABLE FOR ALL

COMMODITIES ESPECIALLY ARGICULTURAL CONSUMERS DEMAND

THAT THE STORAGE FUNCTION BE SO PERFORMED THAT THE

FLOW OF COMMODITIES FOR SALE WILL BE MADE RELATIVELY

STABLE.? (BRENNAN P. 51)

?the theory purports to provide an explanation of

the holding of all stocks, including those for which

there is not an active future market. it will be shown

that, on the supply side, in addition to the marginal

expenditure on physical storage and the marginal

convenience yield another variable, a risk premium, is

required to explain the holding of stocks as

functions of price spreads. in the empirical part of

the study the theory will be applied to stocks of

several agricultural commodities. the risk premium for

each commodity will be measured residually under

specified conditions by deducting form the price

spread between two periods the other two

components of the marginal cost of storage.?

(brennan p.50)

IN GENERAL WE CAN OBTAIN A MEASURE OF THE RELATIVE RISK

PREMIUMS INVOLVED IN THE STORAGE OF DIFFERENT

COMMODITITES.

?allen Paul, in a 1970 American journal of agricultural

economics article, studied the pricing of grain storage

space in the u.s. during the surplus period of the 1950s

and 1960s. Paul?s work differs from other works in

that he investigates the pricing of all grain storage

not just that available to a particular commodity.

While brennan?s marginal storage cost is from the

point of view of the owner of the grain, Paul is

looking at the first component only. he is only

looking at the charge to owners of grain for

binspace by elevator operators… while paul?s

estimated equations may suggest a traditional

positively sloped supply function, he was forced to

concede that, despite his assumptions of ?no

convenience yield,? his estimated equation appeared to

reflect this phenomenon. the study suggests that

commodity contracts are an indirect means of pricing

services.? (book article p. 215-220)