The graph shown on the left shows the above mentioned change in demand of corn. Previously, the demand for corn stood at D1 because it was almost solely used for food consumption. However, the demand for bio-fuel has added to this demand and an addition of D2 has resulted in an overall demand of D1+D2 for corn. Along with showing the total demand for corn, the graph also shows the rise in price of the product which is corn in this case. The previous demand of D1 had a lower price but due to the increased demand, an upward pressure on price has forced the price to rise to PC*. In a market economy, if the increased demand is not addressed by added production and hence increased supply, then the prices rise because the market forces come into play and determine the market prices which are at a higher point (AmosWEB n.d.). The graph here shows that the supply has been unchanged due to which the increased demand has resulted in a rise in the prices of corn. ii) The price of a product usually tends to go up if the increase in demand is not met by an increase in the supply in the same ratio. However, when the demand rises and the prices start to go up, then it tempts others to invest in improving the production methods by introducing new technology or new producers enter into the market. When this happens, the supply of the industry rises and the supply curve of the industry shifts outwards which results in the fall in prices (AmosWEB, Supply and Demand Increase n.d.). The supply of product that is under consideration cannot be increased simply because it is an agricultural product and therefore numerous limitations such as the availability of agricultural land suitable for the growth of crops. In this case when the product is an agricultural product, then the options left to increase the yield of crops is to improve the agricultural and conversion technologies. During harvesting, the conversion process usually results in wastage of product. Therefore if there is an improvement in the conversion technology, then there will be less wastage and increased supply. Similarly, if the seed quality can be improved, then it will result in an improved yield. Both of these steps will lead to a rise in the supply of corn and as a result of an outward shift in the supply curve, the price will fall. Here in the graph on the right, the supply curve has shifted outwards as a result of increase in supply. In our context, the increased supply is the improved yield of corn. The increase in corn has resulted in the readjustment of the equilibrium point and the price at this point has gone down. Therefore, an increased demand can be handled by a simultaneous increase in supply to keep the price under control. iii) After raising the concerns that the earth is facing the possibility of environment and resource depletion, there were calls of innovating and moving towards environment friendly energy solutions. These calls were answered by the introduction of bio-fuels which are partly renewable and emit less dangerous gases. Due to this, many have shifted their consumption to the bio-fuels and it has emerged as a dominant and growing force in the oil industry throughout the world. (Analytica n.d.) The bio-fuels have added to the competition in the oil industry and manufacturer companies now face a greater challenge with
MICROECONOMICS 200 ASSIGNMENT SEMESTER 1 2012 Part A i) The bio-fuels have emerged as a prominent field in the industry of energy and work is under progress to discover more and more sources of raw materials. In 2007 bio-fuels replaced 1-2% of liquid fuels, and reduced prices by 2-4%…
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