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Price Elasticity of Demand - Essay Example

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In understanding this given economic issue, we need to study the application of Law of Supply and Demand and price elasticity 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…
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Price Elasticity of Demand
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Price Elasticity of Demand

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. ... Read More
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