Free «Price Elasticity of Demand» Essay Sample

Price elasticity of demand is the way prices change in rapport to the demand, or the way demand changes in connection to pricing. Price elasticity can also reference the amount of money every individual consumer is willing to pay for something. Thus, the price elasticity of demand, Ed is the magnitude of proportionate change in quantity demanded divided by proportionate change in price (Adil, 2006).

If the demand of corn increases due to the use of another energy source, the supply of corn substitutes such as soybeans will go down. Although the law of demand indicate that when demand increases the supply increases this will not be the case here. This is because farmers will start to produce more corn to meet the demand. Supplier of soybeans will diminish since farmers will utilize their farm in producing corn. Goodman (2006) asserts that, determinants of supply includes; business expectations, technology, subsidies and taxes, producer and price. Demand of corn may be as a result of change in preference or increase in buyers due to alternative energy source. An increase in demand indicates increase in price and more income to farmers. Therefore, farmers will prefer using more or all of their land in producing corn as compared to soybeans. Judging on demand determinant which are price of commodity substitutes, taste of preference, income, customer expectation and number of buyers in the market, consumer may have realised that future price of corn may increase due to alternative energy source (Goodman, 2006).

It is evident that if farmers will engage in producing more corn for production of alternative energy, it means that other corn products such as corn oil production will be minimal. Demand in corn will lead to low production of corn oil and hence corn oil supply will automatically go down. When supply of other corn products decreases, the price of corn oil increases (Goodman, 2006). In case that the price of corn oil stays constant but the production of corn for energy is huge, it is obvious that farmers will stop producing corn for corn oil but instead it will maximize corn production for energy. Also constant in corn oil price means suppliers will need to increase price for corn products so as to keep them longer (law of supply). Goodman (2006) asserts that it is clear that when prices start going up customers start consuming alternatives and because corn has several numbers of substitutes people will go on buying the cheapest substitute in the market affecting total revenue. Decrease of total revenue is due to decrease in units of corn being sold. Revenue is calculated as price multiplied by number of sold units (Mceanchem, 2006).

The price elasticity of demand weighs the change in the measure demanded for a good in reaction to a change in price. According to Hoag (2006), changes are calculated in percentage requisites and the price elasticity of demand equals the percentage change in quantity demand divided by the percentage change in price. In the case of high production of corn for alternative energy source price and quantity requires move in converse directions along a demand curve, if the price of corn oil rises, the quantity of this same oils will significantly fall (Hoag, 2006).

When the price of corn increases, consumer will work out on their budget and it is likely that demand for corn will automatically go down. A price is considered to be elastic if the demand shift is proportionally greater than change in price. For instance, if demand of corn increases by one percent and the quantity demanded decreases by one point five percent, then corn is termed to have an elastic demand. A price is said to be inelastic if its calculated elasticity is less than one absolute value. This price is considered to be weakly responsive toward demand shifts.


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