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Economics - Essay Example

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Price Elasticity of Demand Courting a critical juncture that the world is facing an energy crisis that would eventually might lead to absolute halt of all sorts of economic growth and development, an alternative energy source that might be able to replace the fossil fuel dependency of human civilization does attract substantial attention…
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Download file to see previous pages This way corn serves a two-way purpose and that will definitely increase its demand. Corn and soybean are considered as substitutes and according to economic theory if demand for a product raises then the demand for its substitute will obviously decline. Following this principle the price of the soybean will decline. Again corn and soybean shares the same habitat for production, especially the prime raw material for any agricultural production the land. Now an increased demand for corn will also lead to a higher price for the same, since price and demand are directly correlated. A product that is offering higher price will definitely translate into higher profit for the producer and an immediate shift from production of soybean to that of corn. Higher percentage of land and effort will now be directed towards corn production than that of soybean (Pearce, 2006). The above discussion seems economically sound, however a careful investigation might reveal that this holds for short run. Once the producer starts to devote more land and other raw materials to the production of corn, corn production will rise and production of soybean will fall. Hence in long run owing to higher supply of corn its price will come down and that of soybean will go up as it is scarce now. These points to the fact that in long run an eventual equilibrium will be reached where both will be produced at an optimum level for the economy. Last but not the least since, energy has an ever increasing demand, hence if corn can project itself as a viable source of alternative energy in long run that have enough potential to replace fossil fuels then the trend for substituting soybean production land and raw material in favor of the corn might show a sustained trend, with soybean production looking for an alternative way as itself is a nutritious and valuable food source along with a rich source for food oil. It is obvious that since there is high need of alternative form of energy and that especially of bio fuel; corn oil as an important source of bio fuel will enjoy this boom in demand and price for this product will go up. The magnitude of this rise in price is subject to much debate. First of all if demand for a product is matched by its supply then the rise in price is minimal or zero. However if this is not the scenario that is there is excess demand then the price will go up. Interestingly it is worth noting that in case of excess supply the price might also go down even courting a rise in demand for the concerned product. The excess supply often follows a rise in demand owing to the behavioural pattern of the producer who might over estimate the rise in demand and increase his supply of corn in tune of his expectations. Apart from this demand-supply interaction, many other factors do operate while determining the fate of the corn oil. If people are well aware of the potential that corn oil holds as a fuel and alternative source of energy that will definitely translate into higher demand. Again this has to be also undertaken into the realm of analysis that whether any other form of substitutes to corn oil does exist, that might be cheaper, easily available in plenty and better source of energy. As a viable source of alternative energy in the long run corn oil will face quite a competition with Jatropha and Pongamia pinnata (Bridgewater, Halford and Karp, 2010, p. 236) and that outcome will ...Download file to see next pagesRead More
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