12
Practical No: 4
Study of price behaviour over time for some selected commodities-I
Price of a commodity is the value expressed in terms of a standard monetary unit. Prior to the
evolution of money, the price of a community is used to be expressed in terms of units of other
commodities available in exchange. It is commonly known as barter system. The price of a
commodity is an exchange value in term of money. The price of an agricultural commodity is
the exchange value of the agricultural product measured in terms of money. Understanding the
nature and causes of price movements is facilitated by a systematic analysis to time element in
price. A time series of prices is a set of observations taken at specified times, usually at regular
intervals (an hour, day, week, month, season and year). Mathematically a time series of prices
is expressed as follows:
𝑃𝑡 = 𝑓(𝑡)
Where, Pt is price of a commodity in time‘t’ and
t is time variable.
Based on the duration of the time period involve, the following six major time elements in
prices have been identifies. These are often called components of a time series.
a. Trend movements
b. Cyclical price movements
c. Seasonal price movements
d. Year to year price movements
e. Short period price movements, and
f. Irregular price movements
The study of behaviour of each section requires the division of each element from the study to
realize the basis and characters of price fluctuations.
a. Trend movements: The tendency of price to move up and down over a longer period
of time is termed as trend. A trend is price is usually established on the basis of at least
15 years data.
b. Cyclical price movements: It refers to upswings or downswings or oscillations in price
around a trend line over a fairly large number of years. It is generally observed that the
price of any farm product decreases during the harvest season and continues to rise
during the rest of the year until the next harvest season. In general, commodities whose
supply can be adjusted easily in response to a cyclical change in demand would show
narrow price fluctuations than that supply cannot be so adjusted. As part of the price
forecasts, therefore, it may be useful and even necessary to make a forecast of general
business conditions.
c. Year to year price movements: Changes in prices from one year to another are known
as the year to year fluctuations. Such fluctuations are observed for agricultural
commodities mainly because of the annual nature of production. The area under and
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yield of crop fluctuate from year to year, apart from other factors, due to changes in
weather. Supply rather than demand plays the main role in price fluctuation.
d. Seasonal Fluctuation: Seasonal price variations are regularly occurring increase and
decrease in prices that occur within the year. We observed that just after the harvesting
season, the price crop is decreased and increase in the off-season.
e. Short period price movements: It refers to price dissimilarity within a very short time,
within a season. Provisional changes in demand and supply of a specific day or within
a week are the prime features resulting in short-term price variations.
f. Irregular price movements: It represents the part of the activities of prices which is
not regular. No simplification can be made about such price movements because of the
variety in their character and abnormality is the reason and consequence connection in
their incidence. The significant features accountable for such price movements are war,
drought, floods, and other natural calamities.
Analysis of annual series of prices:
The annual price series is often available as farm harvest price for individual crops for a district,
state, annual wholesale price for individual commodity or group of commodities and their
indices. The annual time series is composed of three components trend, cyclical, and an
irregular component. There are four approaches to determine the trend in annual series of price.
The four approaches are as follows:
a) Graphical method:
b) Moving average method:
c) Semi-average straight line method, and
d) Least squares trend line method
a) Graphical method: It is most simple method. The method involves plotting the data in
a two dimensional space with price on vertical axis and time or year along the horizontal
axis. This provides a scatter diagram. To observe the general trend in prices, a straight line
can be drawn in such a way that it is as close as possible to the scatter points and the
departure of all points above the line is almost same as that of points below the line.
Table: 4.1 Wholesale prices of Rice along with index numbers for period in West Bengal
2001 -14
Year Rs. / quintal Index Number (base period= 100)
2001 - 02 1280.0 100
2002 - 03 1149.4 89.80
2003 – 04 1163.1 90.86
2004 – 05 1163.6 90.91
2005 – 06 1158.9 90.54
2006 – 07 1171.7 91.54
2007 – 08 1172.9 91.63
2008 - 09 1111.7 86.85
2009 – 10 937.9 73.28
2010 - 11 952.5 74.41
2011 - 12 932.6 72.86
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2012 - 13 937.9 73.28
2013 - 14 924.3 72.21
2014 - 15 919.8 71.86
The graph illustrated clearly indicates the downward trend in prices of rice over the period
2001 – 15. (graph plotted with the help of MS- excel software )
A scatter diagram is generally used as a first step to decide the period and nature of trend
line, because the method itself does not provide an objective measurement of the trend
component.
b) Moving average method:
A moving average is a technique to get an overall idea of the trends in a data set; it is
an average of any subset of numbers. The moving average is extremely useful
for forecasting long-term trends. You can calculate it for any period of time. For example,
if you have sales data for a twenty-year period, you can calculate a five-year moving
average, a four-year moving average, a three-year moving average and so on. Stock market
analysts will often use a 50 or 200 day moving average to help them see trends in the stock
market and (hopefully) forecast where the stocks are headed.
An average represents the “middling” value of a set of numbers. The moving average is
exactly the same, but the average is calculated several times for several subsets of data.
For example, if you want a two-year moving average for a data set from 2000, 2001, 2002
and 2003 you would find averages for the subsets 2000/2001, 2001/2002 and 2002/2003.
Moving averages are usually plotted and are best visualized.
Calculating a 5-Year Moving Average Example
Sample Problem: Calculate a five-year moving average from the following data set:
Year Sales (Rs. in Millions)
2003 4
2004 6
2005 5
2006 8
2007 9
2008 5
2009 4
15
2010 3
2011 7
2012 8
The mean (average) sales for the first five years (2003-2007) are calculated by finding
the mean from the first five years (i.e. adding the five sales totals and dividing by 5). This gives
you the moving average for 2005 (the center year) = 6.4M: (4M + 6M + 5M + 8M + 9M) / 5 =
6.4M
Year Sales (Rs. in Millions)
2003 4
2004 6
2005 5
2006 8
2007 9
The average sales for the second subset of five years (2004 – 2008), centred around 2006,
is 6.6M:
(6M + 5M + 8M + 9M + 5M) / 5 = 6.6M
The average sales for the third subset of five years (2005 – 2009), centred around 2007,
is 6.6M:
(5M + 8M + 9M + 5M + 4M) / 5 = 6.2M
Continue calculating each five-year average, until you reach the end of the set (2009-
2013). This gives you a series of points (averages) that you can use to plot a chart of moving
averages.
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Practical: 5
Study of price behaviour over time for some selected commodities-I
C) Semi-average straight line method
From the following serious find the Trend by Semi Average method. Estimate value for the
year 2021.
Year 2012 2013 2014 2015 2016 2017 2018 2019 2020
Profit 170 231 261 267 278 302 299 298 340
(in
lakhs)
Answer:
Year Values 4 yearly Semi-total Semi Average
2012 170
2013 231
929 232
2014 261
2015 267
2016 278
2017 302
2018 299
1239 310
2019 298
2020 340
Therefore, (310-232) = 78 = 78/5
Estimate of the year 2021: 310 + (5/2) x (78/5) = 349
So, the estimated value for the year 2021 is 349 lakhs.
c. Least squares trend line method:
Fit a straight line trend equation by the method or least square from the following date
and estimate the profit for the year 2005
Year 1975 1980 1985 1990 1995 2000
Profit (in lakhs ) 10 13 15 20 22 28
Answer:
Year (X) Profit(Y) Deviation (X*= X- 1987.5) X*2 X*Y
1975 10 1975 – 1987.5 = -12.5 156.25 (-12.5 x 10) = -125.0
1980 13 1980 – 1987.5 = -7.5 56.25 (-7.5 x 13) = -97.5
1985 15 1985 – 1987.5 = -2.5 6.25 ( -2.5 x 15) = -37.5
1990 20 1990 – 1987.5 = 2.5 6.25 (2.5 x 20) = 50
1995 22 1995 – 1987.5 = 7.5 56.25 (7.5 x 22) = 165
2000 28 2000 – 1987.5 = 12.5 156.25 (12.5 x 28) = 350.0
N= 6 ΣY= 108 ΣX*2 = 437.5 ΣX*Y = 305
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1985 + 1990
= 𝟏𝟗𝟖𝟕. 𝟓
2
∑𝑌 108 ∑ 𝑋 ∗𝑌 305
So,a = = = 18; andb= ∑ 𝑋2
= = 0.697 (𝐴𝑝𝑝𝑟𝑜𝑥)
𝑛 6 437.5
Therefore, profit for the year 2005
Y = a + bX
Y = 18 + 0.697 x 17.5 (X = Year – 1987.5; 2005 – 1987.5 = 17.5)
Y = 18 + 12.1975
Y = 30.1975
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