By: Brandon Walker
July 14, 2014
Instructor: Mark Erenburg
This paper was written to describe a real world experience in a free market were change occurred in supply or demand as a result of world events that led to the need for a move between two equilibrium states. I will also explain the process of how that movement occurred using behavior of consumers and suppliers while using graphs as indicated. Real Word Experience
According to a United Nations’ monthly Food Price Index, In July 2012, food prices jumped 6% because of grain prices, specifically corn prices (Smith, 2012). According to this report, global corn prices jumped to almost 23%, due to the a severe degrade of maize crop prospects in the United States, following drought conditions and excessive heat during critical stages of the crop development (Smith, 2012). According to Yousuf (2012) corn prices high a record high of $8.28 per bushel due to the drought. The Law of Demand, The Law of Supply and the Determinants
The Law of Demand states “As price falls, the quantity demanded rises, and as price rises, the quantity demanded falls. In short, there is a negative or inverse relationship between price and quantity demanded” (McConnell, Brue, & Flynn, 2009). The Law of Supply states “As price rises, the quantity supplied rises; as price falls, the quantity supplied falls” (McConnell, Brue, & Flynn, 2009). In my real world example, food prices increased, ultimately because of the drought, which limited the supply of corn. This in turn decreased the demand for corn. Given there is a low supply and a high demand, the prices are high. The determinants are the prices of related goods (as the price of corn increases, the price of food jumps), consumer and producer expectations (consumers are wanting corn because it is limited and producers are unable to provide enough corn), and the number of sellers in the market (given the drought, there may be a limited number of sellers due to them losing the crop). Efficiency in Economic Markets
There are to efficiencies in economic markets, productive efficiency and allocative efficiency. Productive efficiency is a production of any particular good in the least costly way (McConnell, Brue, & Flynn, 2009). Basically, producers should/want to use the best technology available to them along with the right mix of productive resources, which is generally force by competition (McConnell, Brue, & Flynn, 2009). Allocative efficiency is the particular mix of goods and services that are most highly valued by society (McConnell, Brue, & Flynn, 2009). For example, society want land that is suitable to grow food, not to grow weeds (McConnell, Brue, & Flynn, 2009). In my real world experience, productive efficiency seems more optimal as producers want to produce their goods as cheaply as possible, especially in a drought were supplies are limited. Shortage and Surplus
The equilibrium price is the price where the intentions of buyers and sellers match; in short it’s the price where quantity demanded equals quantity supplied (McConnell, Brue, & Flynn, 2009). When the price falls below the equilibrium price, it creates a shortage and the quantity demanded exceeds the quantity supplied at that price (McConnell, Brue, & Flynn, 2009). When the price increases above the equilibrium price, it create a surplus and the quantity supplied exceeds the quantity demanded (McConnell, Brue, & Flynn, 2009). In the real world experience, there is a shortage, as the quantity demanded exceeds the quantity supplied.
In conclusion, a real world experience can have a significant impact on supply and demand. In this particular experience, a drought caused the supply of corn to decrease, which increased the amount it sold for as the demand was high.
McConnell, C.R., Brue, S.L., & Flynn, S.M. (2009). Economics (18th ed.). Retrieved from The...
References: McConnell, C.R., Brue, S.L., & Flynn, S.M. (2009). Economics (18th ed.). Retrieved from The University of Phoenix eBooks Collection database.
Smith, A. (2012, August 9). U.S. drought drives up food prices worldwide. CNN Money. Retrieved from http://money.cnn.com/2012/08/09/news/economy/food-prices-index/
Yousuf, H. (2012, August 9). Corn prices rally to new record high. CNN Money. Retrieved from http://buzz.money.cnn.com/2012/08/09/corn-prices-record/?iid=EL
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