Week 2 Assignment

Economics
Juana Laura Castillo
Econ312ACCT
Ms. Sheikh
January 15, 2011
The following graphs and charts explain supply and demand, shift in demand and result of
shifts in supply and demand…

“On this graph, there is only one price level at which quantity demanded is in balance with
the quantity supplied, and the price is the point at which the supply and demand curves
cross.” (NetMBA, 2002-2010)

“In this example, the positive shift in demand results in a new supply-demand equilibrium
point that in higher in both quantity and price. For each possible shift in the supply or
demand curve, a similar graph can be constructed showing the effect on equilibrium price and
quantity. The following table summarizes the results that would occur from shifts in supply,
demand and combinations of the two.” (NetMBA, 2002-2010)
 Results of Shifts in Supply and Demand
Equilibrium Equilibrium
Demand Supply Price Quantity

+ + +

- - -

+ - +

- + -

+ + ? +

- - ? -

+ - + ?

- + - ?

“In the above table, “+” represents an increase, “-“ represents a decrease, a blank represents
no change, and a question mark indicates that the net change cannot be determined without
knowing the magnitude of the shift in supply and demand. If these results are not
immediately obvious, drawing a graph for each will facilitate the analysis.” (NetMBA, 2002-
2010)
1.) If the demand for corn increases due to its use as an alternative energy source, what
will happen to the supply of corn's substitute such as soybean? Explain, in economic
terms, why this is so.

“With the increase in demand for corn, the supply of its substitute –soybean will decrease.
This is because suppliers will use available land to plant corn instead of soybean in order to
increase level of profits[ CITATION Pha10 \l 1033 ].

The supply of corn's substitute will decrease because farmers seeing the increase in demand
for corn will devote more land to planting corn instead of its substitute. With less land
devoted to the plantation of the substitute, supply will decrease[ CITATION Pha10 \l 1033 ].

This is consistent with the law of supply. As the price of good increases, suppliers will
attempt to maximize profits by increasing the quantity of the product sold. When demand for
corn increases, price of corn will increase as well, hence suppliers will want to supply more
of corn instead of the substitute (“Supply and Demand”)[ CITATION Pha10 \l 1033 ].

2.) What will happen to the price of corn oil?

The price of corn oil will increase. This is because more corn will be allocated to the
production of energy. As such, the decrease in supply of corn for production of corn oil will
decrease. This will result in a decline in production of corn oil. When supply decreases and
demand remains constant, price of the product will increase[ CITATION Pha10 \l 1033 ].

Again, this is consistent with the law of supply. As the price of good increases, suppliers will
attempt to maximize profits by increasing the quantity of the product sold. In this case,
producers will want to sell corn to alternative energy producers since they offer a higher price
than corn oil producers. This will result in a decline in supply of corn for production of corn
oil. As such, this will result in an upward pressure on prices (“Supply and Demand”)
[ CITATION Pha10 \l 1033 ].

3.) How does the price elasticity of demand for corn oil influence the quantity-
demanded of corn oil and the Total Revenue earned by sellers of corn oil? Explain,
using economic terms, why this is so.

The price elasticity of demand for corn oil will influence the quantity-demanded of corn oil
when there is a change in price. As such, this will influence the total revenue earned by
sellers of corn oil. First, corn oil can be considered a price elastic product for there are many
substitutes available in the market. As such, an increase in price will lead to a more than
proportionate decrease in demand for consumers will switch to using other cheaper
substitutes such as olive oil. Therefore, this will result in a decline in total revenue earned by
sellers of corn oil “[ CITATION Pha10 \l 1033 ].
References: Retrieved in its entirety from the following…

NetMBA. (2002-2010). Retrieved January 15, 2011, from NetMBA.com:

http://www.netmba.com/econ/micro/supply-demand/

Pharry. (2010, May 2). Student of Fortune. Retrieved January 15, 2011, from student of
fortune.com: studentoffortune.com