Effects of Drought on Corn and Soybean Market, Essay Example

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Essay

In economics, the supply and demand theory is the most helpful tool in determining the relationship between production and consumption. Economists bases their analysis of production and consumption on supply and demand models. A comprehensive analysis of such a situation facilitates objective appraisal of the matter and enables economists to make predictions concerning the expected changes. Supply and demand model operate with some basic principles which emphasizes the fact that there is a relationship between the quantity supplied to the market, and the prevailing price of the goods supplied. This theory asserts that, in any free market economy, the price of goods in a market varies until it reaches equilibrium where the quantity of products provided in the market equals the quantity supplied by the producers (Akila 64).

In the context of US corn and soybean market, shortage of each commodity results in a corresponding change in other factors associated with the supply and demand model. In this case, drought resulted in the shortage of corn and soybean supplied to the market. This means that the other factor, which is the price of the two commodities, must shift towards equilibrium (Akila 72). Drought causes a market situation whereby the quantity demanded exceeds the quantity supplied. In this regard, the market will be out of equilibrium. In this context, the commodity price is unsustainable. In order to attain equilibrium, the commodity price must be raised. This means that shortage of corn and soybean results in the rise of price of these two commodities in the market.

On the other hand, the quantity supplied by producers in the market may exceed the quantity demanded by the consumers. With respect to the supply and demand model, excess supply results in an unstable equilibrium. Such a case results in surplus, whereby at the current price, the amount of commodity supplied exceeds the market demand. In the context of mandatory ban on ethanol use, there will be excess supply of corn in the market. This means that consumers will not absorb all the corn supplied to the market (Guisan 54). As a result, price will adjust in order to bring the equilibrium back to the place. Therefore, corn price must be dropped in order for the equilibrium to be attained.

Works Cited

Guisan, Maria. Macro-Economics Models: The Role of Supply and Demand. New York: ICFAI Books, 2010. Print.

Akila, John. Principles of Economics. California: Cangage Learning, 2011. Print.

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