Price Elasticity of Demand, Essay Example

The principle of price elasticity of demand (PED) measures changes in the demand of a good or service in relationship to changes in the price of it.  Corn for example would be considered highly elastic if a small change in its price precipitated a significant change in demand for it.  There are numerous variables that affect PED including the number of competitors providing the good, changes in technology or consumer taste, the amount of money purchasers can afford to spend, and the availability of alternative or substitute goods.  These factors are called determinants.

In the case study provided, the availability of soybean oil as an alternative to meeting the increasing demand of corn oil would be the driving determinant in the PED of corn.  In that purchasers can switch from buying corn to buying soy to produce biodiesel, the purchase of corn for this purpose is not essential.  Elasticity is generally lower when an item is a necessity, therefore in the corn case, corn would be considered highly elastic (FAO, 2010).

For corn farmers to remain competitive with soy farmers, they would have to either hold the price-point of corn or reduce it.  Considering that the input demands (the cost of producing) are the same for both corn and soy, it would not be possible to drastically reduce the price-point of corn to retain market share in the biodiesel industry.

The very existence of soy as an alternative would tend to reduce the demand for corn based on other determinants such as transportation costs.  Even if corn and soy cost the same, a biodiesel plant accustomed to using corn might switch to soy because there are local soy fields and it costs less to transport the product.  Given the use of soy as an alternative, the demand for corn would decrease.

References

(FAO 2010 Determinants of demand and consumption)FAO. (2010). Determinants of demand and consumption. Retrieved from the Food and Agriculture Organization website: http://www.fao.org/docrep/w4388e/w4388e0t.htm