Price Elasticity of Demand - Essay Example

PRICE ELASTI OF DEMAND Institute Price Elasti of Demand The principles of demand and supply help in making predictions about the buying and the selling behaviors of individuals as well as firms. A rise in the price of any particular product would lead to a decrease in the quantity demanded of that product, considering that it is not a necessity product. Individuals would not buy the product as they used to and the quantity demanded will fall whilst the firms would supply more of the product i.e. the supply curve will move to the right.

In the case above, if the demand for corn increases, there would be a shift in the demand curve to the right. Consequently there would be a decrease in demand for soybean, thereby a reduction in the demand for soybean. As soybean is a substitute for corns, people would prefer the corns over the soybeans because of its use as an alternative energy source. In respect of the facts at hand when the farmers would look at the fact that there is an increased demand for corn by way of the demand curve shifting to the right and the fact that there has been a market in equilibrium because of the fact that there has been an increase in demand thereby the quantity demanded is more than then the quantity supplied and therefore there is a disparity between the two.

Furthermore due to the fact that the ram material being used is the same it would not take much time to switch to produce corns instead of soybeans. Therefore the incentive of the increased price would allow certain producers to switch to produce corns thereby increasing the quantity supplied meeting the level where the quantity demanded is equal to the quantity supplied thereby reaching new market equilibrium. The price of corn oil because of the increase in demand and the fact there has been a shortage in the quantity that is being supplied thereby creating disparity between the quantity demanded and the quantity supplied.

Due to such inequality and the shift in demand curve there would be an increase in price. To meet such inequality the farmers of soy bean would shift to producing corns thereby meeting the quantity supplied and reaching anew equilibrium whereby the price of corns would be higher than it originally was before the increase in such demand. The price elasticity of demand is defined as the percentage change in quantity demand divided by the percentage change in price. This is the basic calculation of the price elasticity of demand.

There are other factors which also need to be taken into account and one of the most fundamental aspect is whether the product that is being talked about is inelastic, elastic, highly inelastic, highly elastic, perfectly inelastic or perfectly elastic. In respect of the current facts at hand it is seen that there is a substitute for corns that is soybean, therefore the demand curve of corn would clearly be elastic and the quantity demanded of the corn would clearly be dependent upon such elasticity and due to the alternate energy the increase in demand would lead to a significant change in price because of the fact that the price elasticity of demand is elastic.

As far as total revenue is concerned there would be an increase in it because the new demand is being served with the higher price. References Top of Form Case, K. E., & Fair, R. C. (2004). Principles of economics. Upper Saddle River, NJ: Pearson/Prentice Hall. Bottom of Form