Custom «Price Elasticity» Essay Paper Sample
Substitutes are described as goods that serve the same purpose; this means that one can be used as an alternative for the other. In this case, corn and soybean substitute each other as a source of food or they can be used for bio-oil production. One of the factors affecting demand and supply of goods is changes in the prices of related goods (Schenk, 2010). When the demand for corn increases as a result of its use an alternative source of energy, the implication will be its prices also increasing as more buyers will be competing to purchase the available corn.
If the supply of a substitute increases, more people tend to turn to the alternative that will fulfill the same purpose and consequently, corn will be sought after. As a result, the supply of corn will decrease due to its increased demand. Corn will provide consumers with an additional choice hence getting many consumers. Its price will also go up as a result of elevated demand. Additionally, both corn and soybeans require similar raw materials to be cultivated. For instance one will need farm land for their production (Basic Economics, 2010). The fact that demands for corn is high will increase its cultivation massively because farmers will want to maximize their profits due to increased prices. On the other hand, less land will be left for soybeans production, further reducing its supply. Some farmers producing soybeans are most likely to use their farms for corn production.
The prices of corn oil will be high because producers will be buying the corn from farmers at high prices. As a result, the charges to compensate for the cost of raw materials will be passed to consumers through high prices to cater for the costs of raw materials. In many occasions, when the raw materials for production of given product is acquired at a high price, it is the consumers who bears the burden through being highly priced.
"When the price of a good changes, there normally is an effect on the quantity demanded. In cases where this quantity changes greatly, the demand is said to be elastic hence stretches. When it changes only slightly, the demand is said to be inelastic and the quantity stretches just a little bit. The price elasticity of demand is equivalent to the quotient of percentage change in quantity demanded and percentage change in price" (Schenk, 2010). On the other hand, total revenue earned will be determined depending on price elasticity of demand for corn oil.
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It is expected that soybeans, being close substitute would make the prices in the market to be very elastic, as it is understood that the availability of substitute will make increase elasticity as more customers can easily switch to using soybeans instead of corn due to price change. This is the most likely scenario to happen because for consumers to have an option. As more corn is being used to produce bio-fuel, little will be left for production of corn oil hence its supply will be low, increasing its price in the market. The quantity demanded for corn oil will hence reduce and the shift will be towards using oil from soybeans.
The total revenue earned in relation to elasticity when prices increase can be affected in two different ways. The first is more revenue raised for every sold unit and secondly, fewer units could be sold. As already seen, the demand is elastic hence total revenue earned it will be affected to a larger extent by lower quantity and decreases when price increases. Therefore, to sum up the whole discussion the quantity demanded will decrease and total revenue earned also decrease.