Price Elasticity of Demand Assignment Example | Topics and Well Written Essays - 500 words

Price Elasticity of Demand - Assignment Example If more farmers decide to produce corn, the demand will be met. The price of soybean in relation to corn also matters. The increase in the price of corn prompts demand for soybean but demand for soybean also depends on tastes and preference and income. Although the price of soybean decreases, it does not result to increase in its demand since preference is on corn which has multipurpose use hence income will be spent on corn and buyers will incur the opportunity cost of buying soybean. Since both kinds of cereal use same raw materials, farmers will shift production factors from a production of soybean to corn production hence reducing acreage on soybean for planting more corn. The price of commodities is determined by forces of demand and supply. As long as the quantity of corn oil produced is equal to quantity demanded, the market will be at equilibrium price and quantity. Since the demand for corn is up it means demand for corn oil is also up hence quantity demanded is higher than quantity supplied. The buyers will compete for the available corn oil hence pushes the prices up. Baumol & Blinder (2009 p 57) argues that quantity demanded is also dependent on; income, tastes, the price of other products and population size. If the price of corn oil goes up, buyers in response to price change will cut a quantity of demand of corn oil to alternative sources of energy which are cheaper especially if the price elasticity of demand of corn is high. If buyers have increased income and have high-income elasticity they buy more corn oil thus increasing demand and pushing prices up. PEoD is used to measure the response of consumers demand to price changes all factors held constant (Moffat, 2010). It’s the proportionate change in quantity demanded over a proportionate change in price. PEoD is affected by factors such as; substitutes, a degree of luxury, time period and price points (Bochholz, 1996). The higher the price elasticity, the more sensitive consumers are to price changes (Moffat, 2010).  Ã‚