Price Elasticity of Demand

The demand for corn as an ingredient for an alternative energy source has had a profound effect on its supply as a core food ingredient. So, what has been the effect on the supply of corn and its substitute such as the soybean? The answer can be found by examining the five demand determinants and five supply determinants to see which ones will shift demand and supply. The demand determinants are known as T-I-P-E-N, which stands for Taste of preference, Income, Price of complements and substitutes, Expectation of consumer, and Number of buyers in the market. The supply determinants are known as P-R-E-S-T, which stands for Producers (number of), Resource price, Expectation of business, Subsidies and taxes, and Technology. The farming industry has had to ramp up production of corn to satisfy the demand that was caused by the increase in the number of buyers. More buyers will generate more income, so most likely farmland will be used to produce more corn. The determinants of Number of buyers and Income are responsible for this demand shift. The land available for soybean crops will decrease, resulting in a reduction of supply. This supply shift is the result of Producers (number of). What will the effect of these shifts have on the price of corn oil? As the production of corn used for energy alternatives is increased, the available production for other corn products such as corn oil will obviously decrease. Less production will mean a decrease in corn oil supply. Because of a consistent demand for the product, the price will increase due to the lower supply. The demand determinant of Expectation and the supply determinant of Producers (number of) will govern this shift. The only way to modify the shift and keep prices from increasing would be to develop the supply determinant of Technology to overcome the decreased production capacity. In what way 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? The answers can be found by referring to the characteristics of a typical demand curve. Price and quantity demanded move in opposite directions. When the quantity demanded falls, the price of a commodity such as corn oil will rise. When the quantity demanded increases, the price of the commodity will fall. The total revenue of sellers of corn oil will increase and decrease in correlation with the quantity demanded due to the supply determinant of Resource price and the demand determinant of Number of buyers. With the information presented thus far, it is interesting to note that a unique shift in the corn and corn substitute market will be occurring in the near future. According to a Bloomberg Businessweek article (McFeron, May 2011) the inventories of produced corn and soybean for this year will be much larger than expected. Therefore, the prices will fall as concerns of the public are eased. This is the shift of the demand determinant Expectation of consumer. Soybean inventories are also much larger for the coming year than expected. References McFeron, Whitney, (May 11, 2011) Bloomberg Businessweek,   Ã¢â‚¬Å"Corn, Wheat, Soybeans Drop as USDA Supply Outlook Tops Forecasts†, retrieved from: http://www.businessweek.com/news/2011-05-11/corn-wheat-soybeans-drop-as-usda-supply-outlook-tops-forecasts.html Price Elasticity of Demand Price Elasticity of Demand is used to measure the responsiveness of the quantity demanded to the change in price. It is measured by the percentage of change in quantity over the percent change in price [% ? in quantity demanded/ % ? in price]. Price elasticity of demand (PED) does not have any units as all the units cancel out while calculating it. Also,  ¦PED ¦ is usually negative because the value of quantity demanded will always be inverse to its price (i. e. when price gets high, quantity demanded decreases and vice versa).This is also a reason why  ¦PED ¦ is written as an absolute value. When the value of PED is more than 1, it is a relatively more elastic demand, when equals to 1, it is unit elastic and when less than 1, the demand becomes inelastic. The slope of a demand curve cannot indicate the PED because the slope and elasticity are two different concepts. Slope measures the steepness and flatness of the curve and give units of price and quantity at a point. On the other hand price elasticity of demand measures the responsiveness of quantity to the changes in price.In a demand curve, the slope decreases by a constant unit while In PED, elasticity is different at each point. As shown in the picture above, PED changes at every point. At the change in quantity from 2. 5 to 3, and change in price from 15 to 14, the PED is  ¦2. 64 ¦ while at the change in quantity from 7 to 7. 5, and change in price from 6 to 5, the PED is  ¦0. 38 ¦. On the other hand, while seeing the slope of the line, it is changing by 2 units throughout.This shows that while the slope remains constant, the elasticity keeps varying on the curve. This is also one of the reasons that elasticity is relatively more elastic on the upper portion of the demand curve compared to the lower portion of the curve which gradually gets perfectly inelastic when the demand curve intersects the horizontal axis. Thus, the frequent change in elasticity at every point and the slope being c onstant determines that the slope of the demand curve cannot indicate Price Elasticity of Demand.