Demand is an economic term used to refer to the quantity of goods or services a consumer is able and willing to purchase at a given price over a given time period (Todd, 2010, p.1). Supply is an economic terminology used to refer to goods or services a producer is able and willing to avail in the market at a given price over a given time period.
Demand and Supply Curve
- Y axis represents the price
- X axis represents the quantity
Substitute goods are those goods that can be used in place of the other, corn is a substitute of soybeans. Increase in the demand for corn leads to the decrease in the supply of soybeans. The farmer will substitute soybeans land for corn cultivation; this is due to the increased demand for the corn. This effect can be attributed to the determinant of demand, price of the other related goods. Due to the increased demand for corn, this will lead to a surplus demand.
As a result the price of corn will increase in order to stabilize the market and achieve equilibrium position. The market supply of corn will increase to satisfy the surplus demand; since the raw materials are fixed more will be allocated to the production of corn at the expense of soybeans. Land under soybeans cultivation will be reduced as the farmer allocates more land to corn in attempt to take advantage of the high prices in the corn farming.
Due to the determinant of supply, price of other related goods the price of the corn will increase (Abowd, 1999, p.1). This will result due to the deficit created by excess demand for corn. The demand will exceed the supply; and as a result the prices of corn will increase in the market. This will result in the decrease of the prices for soybeans due to the low demand and surplus supply for the soybeans. With time the supply for corn will increase significantly as more farmer cultivate it, this will lead to excess supply of corn. The market will react by corn prices declining and the soybeans increasing.
Price elasticity of demand refers to the responsiveness of the quantity demanded due to the changes in the price of the commodity itself. The value of the price elasticity of demand is always negative implying the inverse relationship between the price and the quantity demanded. Increase in the price result to a decline in the quantity demanded. The price elasticity of demand can be measured using the point elasticity of demand and arc elasticity of demand. Increase in the price of the corn will result to a decline in the quantity of the corn demanded while a decline in the price of corn will increase the quantity of corn demanded.
Application of price elasticity of a commodity is very important in determining the level of total revenue. If a commodity is highly elastic, the price of the commodity should be lowered in order to increase the total revenue, while if the commodity has low elasticity the price should be increased in order to increase the total revenue (Todd, 2010, p.1). Corn has high price elasticity since it has a close substitute, to increase the revenue the price of corn should be lowered to increase the sales.
Demand and supply is very crucial in economic analysis, it help those involved in the business activities to understand the market trends. The Price elasticity measure is very essential in taxation, revenue determination and revaluation policies.
Abowd, J. (1999). The concept of Elasticity. Web.
Todd, B. (2010). Price Elasticity of Demand. Web.