Price Elasticity of Demand Persuasive Essay
The demand for corn as an ingredient for an alternative energy source has had a profound effect on its supply as a core food ingredient. So, what has been the effect on the supply of corn and its substitute such as the soybean? The answer can be found by examining the five demand determinants and five supply determinants to see which ones will shift demand and supply. The demand determinants are known as T-I-P-E-N, which stands for Taste of preference, Income, Price of complements and substitutes, Expectation of consumer, and Number of buyers in the market.
The supply determinants are known as P-R-E-S-T, which stands for Producers (number of), Resource price, Expectation of business, Subsidies and taxes, and Technology. The farming industry has had to ramp up production of corn to satisfy the demand that was caused by the increase in the number of buyers. More buyers will generate more income, so most likely farmland will be used to produce more corn. The determinants of Number of buyers and Income are responsible for this demand shift.
The land available for soybean crops will decrease, resulting in a reduction of supply. This supply shift is the result of Producers (number of). What will the effect of these shifts have on the price of corn oil? As the production of corn used for energy alternatives is increased, the available production for other corn products such as corn oil will obviously decrease. Less production will mean a decrease in corn oil supply. Because of a consistent demand for the product, the price will increase due to the lower supply.
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The demand determinant of Expectation and the supply determinant of Producers (number of) will govern this shift. The only way to modify the shift and keep prices from increasing would be to develop the supply determinant of Technology to overcome the decreased production capacity. In what way 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?
The answers can be found by referring to the characteristics of a typical demand curve. Price and quantity demanded move in opposite directions. When the quantity demanded falls, the price of a commodity such as corn oil will rise. When the quantity demanded increases, the price of the commodity will fall. The total revenue of sellers of corn oil will increase and decrease in correlation with the quantity demanded due to the supply determinant of Resource price and the demand determinant of Number of buyers.
With the information presented thus far, it is interesting to note that a unique shift in the corn and corn substitute market will be occurring in the near future. According to a Bloomberg Businessweek article (McFeron, May 2011) the inventories of produced corn and soybean for this year will be much larger than expected. Therefore, the prices will fall as concerns of the public are eased. This is the shift of the demand determinant Expectation of consumer. Soybean inventories are also much larger for the coming year than expected.
References
McFeron, Whitney, (May 11, 2011) Bloomberg Businessweek, “Corn, Wheat, Soybeans Drop as USDA Supply Outlook Tops Forecasts”, retrieved from:
http://www.businessweek.com/news/2011-05-11/corn-wheat-soybeans-drop-as-usda-supply-outlook-tops-forecasts.html
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