PRICE ELASTICITY OF DEMAND
Demand can be defined as a schedule or a curve which shows varied amounts of a product which consumers are wiling as well as able to purchase at varied prices in a given period of time. On the other hand, supply is defined as the schedule or curve that reflects the quantities that producers or firms are willing to supply into the market in a specified time and at varied prices. The law of demand states that other things held constant, the quantity demanded has an inverse relationship to prices of the said good while the law of supply states that other factors held constant, the quantity supplied has a direct proportional relationship with the prices. These laws explain the downward sloping demand curve as well as the upward sloping supply curve. (McConnell, Brue Campbell, 2004).
An increment in the demand for corn due to the fact that it can be used for other purposes precisely as an alternative source of energy will have an effect on corn substitutes such as soybean. Substitute goods tend to replace each other in consumption but the degree by which this is possible will be influenced by whether the goods are perfect substitutes or imperfect substitutes. Again, if the prices of soybean (corn substitute) remain constant while those of corn increase with the increment in its demand then more soybeans will be purchased as opposed to corn. An increment in the relative prices of corn translates to a decline in purchases of corn. (McConnell, Brue Campbell, 2004). If the prices of soybean and corn increase in similar amounts then consumers are likely to purchase more, less or equal amounts of both soybean and corn. This will therefore influence the quantity of soybean supplied as producers respond to the prevailing demand.
The supply of soybean will depend on the prices where high prices will trigger increased supply as producers strive to earn higher revenues. Factors that will play a relevant role in influencing the supply 0of soybeans will be the existing technological knowhow to process soybeans. The cost as well as the productivity of the required or relevant inputs such as labor and will also come to play. Their ease availability will ensure increased supply of soybeans. Other factors such as the peoples expectation regarding the market consumption or prices and government policies such as taxes or subsidies will also determine whether the supply of soybeans will increase, remain constant or decrease.
2 What will happen to the price of corn oil
The prices of corn will respond depending on the prevailing market conditions. If the soybeans and corn are perfect substitutes then the prices of corn oil are likely to be controlled. They would not be too high or too low. This would emanate from the fact that although the demand for corn oil would be high necessitating higher prices before their supply is adequately met bearing in mind the competing roles performed by corn, the increased supply from the substitutes in this case soybeans will check the quantity supplied in the market. (McConnell, Brue Campbell, 2004).
However, the supply as well as the demand of corn oil will also influence the prices. A very high supply will be accompanied by lower prices as fewer consumers would be chasing a large supply of goods. The prices of corn would also be affected by the availability of corn and since corn is an agricultural product factors such as the weather and pests will be of a significant role. If there is less production emanating from unfavorable conditions, there would be less production of corn and consequently less corn oil would be produced. This would lead to higher prices of corn oil as due to the economies of scale the production of large quantities of corn is cheaper as opposed to the production of fewer quantities of corn. High production costs are transferred to the producers in form of higher prices. (media.wiley.com).
The technological know how as well as the input requirements required producing corn oil would also influence the prices of corn oil. If high level skills are required to produce corn oil then the prices of corn oil would be high in a bid to compensate the skilled manpower. The use of expensive machinery in production would also precipitate increased corn oil prices. All the same the production of soybean oil as well as other energy sources such as crude oil would also influence the prices of corn oil as they would eliminate any chances of corn oil operating as a monopoly thus exploiting the market by charging high prices. (media.wiley.com).
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 Explain, using economic terms, why this is so
Price elasticity of demand refers to the measure or degree of responsiveness of the quantity demanded to the changes in prices of the said good or product. (McConnell, Brue Campbell, 2004).In other words it refers to the sensitivity of the consumer demand to the changes in prices. It is the percentage change in the quantity demanded of a good divided by the percentage change in its price.
Demand is said to be elastic when the price elasticity of demand attained by dividing the percentage changes in demand and prices as explained above is greater than one (1). This implies that a given change in the prices of a given good in this case corn leads to a greater change in the quantity of corn. (media.wiley.com).
When the coefficient is less than one it is said to be inelastic and a given change in the prices of corn will lead to a less or smaller amount of corn. If the coefficient is equal to 1 we say there is a unitary price elasticity of demand and a unit change in the price of corn results to a unit change in the amount of corn demanded. (McConnell, Brue Campbell, 2004).
The price elasticity of demand for corn can be said to be perfectly inelastic when the coefficient is equal to infinity and a change in price will see consumers purchase as much as they can when the prices are low but demand will be zero when the prices are increased. However, if the coefficient is equal to zero there will be no effect in the quantity demanded due to price changes.
Whether elasticity will be unitary or 1, elastic1 or inelastic 1 will be influenced by factors such as the number of substitutes in the market, the proportion of the commodity purchased to the consumers income as well as the nature of the good in terms of whether it is a necessity or luxury good. The time span at which the price of the product is to prevail in the market also influences its price elasticity of demand. (media.wiley.com).
The price elasticity of demand for corn will influence the revenues in the sense that when it is elastic it implies that a slight increase in prices will trigger a larger change in the quantity demanded and the firms will yield higher revenues. When the demand is inelastic, the implication is that changes in prices do not affect the quantity demanded. Reducing the prices will lead to a slight change in the quantity demanded and consequently the revenues will decline. The total revenue will remain constant in the case of unit elasticity as a given rise in prices will lead to a similar change in the amount demanded. (McConnell, Brue Campbell, 2004).