Economics

Goods qualify to be substitutes if the market can consume or utilize the goods interchangeably such as soybean and corn in oil production. If corn and soybean produce the same amount of oil or have similar costs for processing then they are perfect substitutes. However, if they differ in such instances such as cost of processing or amount of oil extracted, then they are imperfect substitutes. i.e. perfect substitutes allow substitution in the same ratio (marginal rate of substitution) (Mankiw 2008).

Assuming that corn and soybean are perfect substitutes where a kilogram of corn has the same utility as a kilogram of soybean, then an increase in demand for corn as an alternate energy source, ceteris paribus, implies that the price of corn will go up in the short run before the supply side adjusts. According to the law of demand and supply, an increase in demand ceteris paribus leads to an increase in prices. Consequently, the demand for soybean or other corn substitutes will increase forcing the supply side to increase production in the long run.

However, in the short run, the prices of substitute will also go up.

Price elasticity of demand refers to the responsiveness or change in the quantity demanded due to price changes. Due to the presence of corn substitutes in oil production, corn should have perfect elasticity in that a small change in price will affect influence demand immensely as consumers opt for the substitutes assuming perfect substitution. However, this fall in demand for corn will be cancelled out by its increase in demand as an alternate energy source and substitutes increase in prices. Incase of imperfect substitutability of corn and soybean, the demand for corn will increase and as a result prices will increase to the benefit of corn suppliers in terms of increased revenue.