Economics

Suppose the demand for corn increases (due to its use as an alternative energy source), the price of substitutes (such as soybean) decreases. Increase in demand induces a parallel increase in price due to constant constraints in supply. If, for example, there is both an increase in the supply and demand of corn, then market price moves to the initial market price, ceteris paribus. An increase in the demand for a good induces a parallel decrease in the demand for substitute goods, vice-versa. The same case can be said of price. An increase in the price of a good leads to a decrease in the price of substitute goods. Now, if there is an induced increase in the demand for corn, the supply of substitute goods naturally decreases (the increase in the demand for corn induces an increase in its price), as producers shift from the productionprovision of say, soybean, to corn.

Suppose there is a complementary good, say, corn oil. An increase in the demand for corn induces increased demand for corn oil, vice-versa. An increase in the price of corn leads to an increase in the price for corn oil. Any change in either the price or demand of a good naturally leads to a parallel (same direction) change in either the price or demand of complements.

Now, what is the nature of the demand function The demand function is downward sloping (negative slope), showing the inverse relationship between quantity demanded (dependent variable) and price (independent variable). Along the demand function, there are points of elasticity. Suppose the percentage change in price is greater than the percentage change in quantity demanded, the price elasticity for the good (upper portion of the demand function) is inelastic. When the percentage changes for both the price and quantity demanded are equal, the good is said to be unit elastic. When the percentage change in price is less than the percentage change in quantity demanded, the good is elastic. Now, if the good is inelastic (say corn oil), suppliersproducers can actually command higher revenues, because an increase in the price of a good, say corn oil, will have little effect on the quantity demanded.