Determinants of Speculative Demand of Wheat and Its Impact on Consumer Welfare Loss

Abstract

A much-neglected concept of price speculation from the side of consumers plays an important role in the determination of prices and quantity traded in the market. Almost all the consumers speculate about future prices of commodities and at the first stage, whenever prices increase, most of the consumers believe and speculate that the prices will increase more in the future. The current study underhand is conducted to find the factors of speculative demand for wheat and its relationship with consumer’s welfare. The need for this study was to find the factors of speculative demand and its and its relationship with the welfare loss. For this purpose data were collected from one hundred wheat consumers who buy wheat monthly from rural and urban areas of District Mandi Baha ud Din, Pakistan at random by direct interviewing to analyze which factors compel them not to buy wheat at annual bases and how it is related to their income, family size, and monthly income. Results show a negative relationship between the speculative demand for wheat and income. There is also a positive relationship between speculation and family as well as between speculation and actual quantity demanded. The lower-income consumers do speculation about the prices of the wheat from September to March and cause prices to increase about 8.92% more than the normal prices which cost them to lose consumer welfare and surplus. It is concluded that if consumers avoid speculation, they can buy wheat at 8.92% lesser price and can enjoy more consumer welfare and surplus. An increase in speculative demand increases prices more than a normal increase. The addition of some portion of price increment merely is due to consumer’s psychological phenomenon of speculation.