Price Elasticity of Demand

Topics: Supply and demand, Elasticity, Price elasticity of demand Pages: 2 (589 words) Published: February 2, 2011
Price Elasticity of Demand
Shinan Chen

Week Two Assignment
Price Elastic of Demand

1. 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? To answer this, first we have to understand what determinants will shift demand and supply. There are five demand determinants, they are T-I-P-E-N. Taste of preference, income, price of complements and substitutes, expectation of consumer regarding future price and numbers of buyers in the market. And there are five supply determinants, they are P-R-E-S-T. Number of producers, resource price, business expectations, subsidies and taxes, and technology. 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 and less or no farm land to produce soybeans. And this will result in a decrease in soybean supply due to less farm land for soybean production. The factor for this supply shift is because the number of producers decreased.

2. What will happen to the price of corn oil?
If suppliers are producing corn for the production of energy that can only indicate the production of other corn products such as corn oil will decrease. So there is less corn to produce corn oil result 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.

3. 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? As we all have emphasized, price and quantity demanded move in opposite directions along a demand curve, if the price of corn oil rises, quantity demanded falls. When the price of corn rises, consumers will...
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