If the demand for corn increases due to its use as an alternative energy source, what will happen to the supply of corn’s substitute such as soybean?
Assume that, besides being substitutes for one another, corn and soybeans require the same raw material, such as the same farm land. Think about whether farmers will use their soybean farms to produce more or less corn. Explain, in economic terms [e.g. supply determinants], why this is so.
Key:
- The points of intersection shows the quantities produced as a result of changes in demand of either corn or Soybeans.
- Both demands for Soybeans and corn increase upwards from the chart.
- Quantity produced for Soybeans increases to the left.
- Quantity produced for corn increases towards the right.
Discussion
Demand for a product is usually described as the desire of a product which is usually backed with willingness and ability to pay while the supply for a product is usually the quantity of a commodity which a seller is willing to sell at a given price in a given time (Tucker, 2008).
Assuming that both corn and Soybeans are produced using the same raw materials, an increase in demand for corn required for energy production would lead to decreased production of Soybeans. For example as shown in the diagram above if an increased demand for corn results in increased revenues for the farmer and originally the farmer was producing corn at level B, he or she would increase the production level from B to D and that would result in the production of Soybeans declining from E-B to E-D. This happens due to the fact that in economics, resources are usually scarce and have got no substitutes if the two crops were using constant resources, an increased production in one crop means that more resources were being used to produce it and thus the other crop would have to utilize fewer resources and thus the declined quantity of Soya beans produced.
The five determinants likely to force this to happen will be the tastes of preference, income price of complements and expectation of consumers regarding future prices while the supply determinants in this case will be: the number of producers, resource price expectations, subsidies and taxes. In this case the increase in demand for corn is the result of increase in number of buyers in corn market due to it’s use as an alternative energy source, since there are more buyers in the market which means more income too, therefore farmers will use more or all their farm land to produce corn leading to the less production of soybeans.
What Will Happen To The Price Of Corn Oil?
If suppliers are producing corn for the production of energy that can only indicate that the production of other corn products such as corn oil will decrease.
As the production of corn increases for energy purposes, the prices of corn oil will eventually increase due to the fact that most of corn is now being used for producing energy. So there is less corn to produce corn oil resulting in decrease in corn oil supply. When the production (supply) of other corn products decreases the price for those products such as corn oil will increase. The demand for corn oil in the market will increase resulting in increased prices for corn oil in line with the law of demand and supply which states that as production decreases the market demand will as a result increase leading to increased prices of the product (Komesar, 2001).
How does the price elasticity of demand for corn oil influence the quantity-demanded of corn oil and the Total Revenue earned by sellers of corn oil? Explain, using economic terms, why this is so.
The price elasticity of a commodity measures the response of a commodity demanded in relation to the changes in prices. For high price elasticity, the demand curve is a bit flatter while a steeper demand curve depicts low price elasticity (Mankiw, 2008).
Since price and quantity demanded always moves in opposite directions along the demand curve, an increase in the price of corn oil will result in the quantity demanded declining and when the price of corn oil rises, consumers will migrate into using the substitute in Soya beans oil and thus due to the presence of various substitutes, this will cause the demand of corn oil to decline and we can conclude that the high price elasticity of corn oil leads to the total revenue earned by sellers to decline in return.
Reference List
Komesar, N.K. (2001). Law’s Limits: The Rule of Law and The Supply And Demand Of Rights. London: Cambridge University Press.
Mankiw, N.G. (2008). Principles of Economics. 5th Edition. New York: Cengage Learning.
Tucker, I.B. (2008). Microeconomics for Today. 6th Edition. New York: Cengage Learning.