Price Elasticity of Demand - Essay Example

In understanding this given economic issue, we need to study the application of Law of Supply and Demand and price elasti of demand in our product markets. From there we can see how the simple tools of demand and supply can affect the prices of goods, the consumers’ spending behavior and the businesses’ decisions and the operations of the entire economic system. If the demand for corn increases due to its use as an alternative energy source, there will be a decrease in the supply of corn's substitute such as soybean.

This is because change in the price of related goods is a determinant of demand (McConnell & Brue, 2002). As corn and soybean are substitutes, one can be used in place of the other, so when the demand for corn is increased, its price also goes up making the farmers choose to plant corn instead of soybeans. We know that producers are after their gains or profits, so higher prices will encourage them to supply more of that good. They will find the increasing demand for corn and its high price more profitable than planting soybean.

And given that the price of resources or factors of producing corn will be the same as in producing soybean, even the farmlands which were intended for soybean will be used now for planting corn resulting to a decrease in the supply of soybean. The price of corn oil will be definitely increased because as the number of buyers of corn increases, the market demand for it will also increase and price of corn have to be increased to maintain equilibrium. This is because if price will be kept at the same level even with the increase in demand, the supply of corn might not be enough for the demand and will create a shortage in corn.

This is what exactly happened in the US last October of 2010 (Berry & Polansek, 2010). Shortage in food supplies made the prices shoot up but prices of grains fell when the weather was better and inventories for US corn were increased. Prices of resources or factors of production are considered by the business firm when pricing their products. In this case, the producers of corn oil have to consider the price of corn as the main source of corn oil. So with the price of corn increased, they also have to increase the price of corn oil.

The price elasticity of demand for corn oil can influence the quantity demanded for corn oil and the total revenue earned by the producers of corn oil. This effect is seen as a change in price of corn oil will also cause a change in its quantity demanded and so the total revenue to be earned by the sellers. A specific amount of reduction in the price of corn oil will result to a larger change in its quantity demanded. This means that corn oil is highly responsive to the changes in its price. The total revenue of the sellers of corn oil will also be affected because total revenue is computed by multiplying the product price by the quantity demanded and sold (McConnell & Brue, 2002).

And because the demand for corn oil is price elastic, an increase in its price will decrease their revenue while a reduction of price will increase their total revenue. Bibliography Berry, I., & Polansek, T. (2010, October 3). Grain Prices fall From Their Heights. Retrieved March 11, 2011, from www.online.wsj.com: http://online.wsj.com/article/SB10001424052748704029304575526452832778416.html?KEYWORDS=supply+and+demand McConnell, C., & Brue, S. (2002). Microeconomics: Principles, problems and Policies.

New York: McGraw-Hill Companies,Inc.