Supply and Demand in the Market for Corn Oil
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The paper explores how the market for corn oil is determined by the different supply and demand drivers, including the price and availability of substitutes, its own price and cross-price elasticity of demand, and the physical constraints that impact on the supply of and demand for the product. The paper shows how each set of market dynamics leads to different equilibrium points, and understanding where these points lie is essential to understanding how the market for corn oil functions.
Price Elasticity of Demand
Price Elasticity of Demand
From the Paper:"If demand for corn for fuel increases, this should increase the price of corn. In order to bring the corn market to a new equilibrium point, farmers should produce more corn. In doing so, the farmers would divert land away from soybean production. Because soybeans are substitutable for corn in animal feed, demand for soybeans would increase as more corn production is diverted to fuel production. By reducing the supply of soybeans and increasing the demand for soybeans, farmers would drive the price of soybeans up. The costs for both commodities will ultimately rise because aggregate agricultural production is constrained by the fixed quantity of farm land. Whether farmers would actually substitute soybean production for corn production in this circumstance would depend mainly on the degree of price increase that each commodity would face. If corn for fuel increases more than soybeans for feed, then farmers would make the switch. The new equilibrium points, however, could see an equal increase in price for each and no production substitution on the part of farmers.
"If we consider the corn market independent of the soybean market, the price of corn oil would increase as demand for it increases. In fuel, corn oil is a substitute for fossil fuels and alternative energy sources. Thus, there is a ceiling to the price of corn oil that is set by the price of substitute energy products. The price elasticity of demand for corn oil is determined as much by the cross-price elasticity of petroleum oil."
Sample of Sources Used:
- NetMBA.com (2010). Price elasticity of demand. Retrieved March 14, 2011 from NetMBA.com website http://www.netmba.com/econ/micro/demand/elasticity/price/
- Riley, G. (2006). Markets and market systems. Retrieved March 14, 2011 from Tutor2U.net website http://tutor2u.net/economics/revision-notes/as-markets-equilibrium-price.html
Cite this Term Paper:
Supply and Demand in the Market for Corn Oil (2013, May 16) Retrieved September 15, 2019, from https://www.academon.com/term-paper/supply-and-demand-in-the-market-for-corn-oil-153284/
"Supply and Demand in the Market for Corn Oil" 16 May 2013. Web. 15 September. 2019. <https://www.academon.com/term-paper/supply-and-demand-in-the-market-for-corn-oil-153284/>