Analysis of Grain Prices fall From Their Heights Article by Berry, Ian, and Tom Polansek - Essay Example

A higher price, however, will put them at a disadvantage because it will lessen their purchasing power, and as a result, they will demand less of that good. This decision will cause a change in demand as they will try to look for alternatives or substitutes for that product. This is also known as the substitution effect. A seller may see the situation differently. A lower price is not as encouraging as a higher price. This means that the sellers are more willing to make their goods available in the market at higher prices because this means more profit.

The shortage in the supply of grain had caused the prices to go up and the additional supply due to the better weather caused the prices to fall. This is a pricing mechanism in a purely competitive product market. A shortage is when the quantity demanded is greater than the quantity supplied resulting in a higher selling price while a surplus happens because quantity supplied exceeded what the market demands. When neither shortage nor surplus exists, the price and quantity supplied and demanded are at equilibrium.

The equilibrium price and quantity are where selling and buying decisions are synchronized or coordinated as a rationing function of prices (McConnell and Brue, p.58). Changes in demand or supply may affect the equilibrium price and quantity. An increase in the inventory of corn because of better weather had a quantity increase and price-decreasing effect causing the prices of grains to fall.