Inflexibility of commodity supply

In developing countries, the share of fixed costs in total costs of production of minerals appears to be higher than that in developed countries because of the latter's higher relative costs of capital equipment. Moreover, the objective in those countries of maintaining employment also in effect transforms wages partially or entirely into fixed-cost items, irrespective of the ownership of the mines. The supply of agricultural commodities also tends to be inflexible, particularly in the case of plantation and tree crops, since land costs are fixed and farmers do not have ready alternative opportunities for employment and earnings. Hence, as long as prices cover variable costs, production and sales tend to continue.

In the specific case of developing countries, the dominant factor which has aggravated the traditional inflexibility of supply in the 1980s is the negative impact of price falls on the balance-of-payments of the developing producer countries that depend so heavily on primary commodities, and on the earnings of the enterprises involved, whether public or private. This has led governments to take measures to maintain output irrespective of the ownership of the facilities.