Free «Price Elasticity of Demand» Essay
If the demand for corn is increased due to its use as an alternative source of energy, its price will increase. This will cause the demand for soybeans to rise as consumers will shift taking corn to soybeans which has a relatively low price. The supply for soybeans will therefore increase meet the new demand that has been occasioned by the high demand for it.
Due to high prices of corn, consumers will shift from consuming it and instead start consuming more soybeans; the farmer will therefore have to increase the supply for soybeans. This means therefore that less farm will be used to produce corn which has since attracted low demand due to its high prices caused by its initial high demand. (Obstfelg, 2008)
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Due to high responsiveness to price changes (price elasticity of demand) of corn oil, its price will decrease has as result of decrease in the price of its substitute good (soybeans).This because its demand will reduce in the long run forcing its prices to reduce in order to compete with the substitute in the market which is selling cheaply compared to corn (Obstfelg, 2008)
The end result for is that the revenue collected from corn will reduce. This is due to the inverse nature of relationship between price and quantity demanded whereby the percentage change in total revenue is equal to the percentage change in quantity demanded plus the percentage change in price. For substitute like corn and soybeans which exhibit perfect elasticity of demand, any increase in price no matter how small it is, will cause demand for the good to drop hence total revenue will fall. This can be illustrated using the graph below.
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The above revenue increases at a decreasing rate with decreasing price elasticity of demand. Initially the revenue collected from corn will increase due to due increase in the quality demanded (more volume of corn are sold) with a relatively higher price per unit. After sometime when its demand decreases due to customers shifting their consumption to soybeans, the revenue generated starts reducing due to competition from substitute good. This is illustrated in the second graph above (Harris, 2001)