Suppose the model of Supply and Demand is used to make predictions about changes in the equilibrium price and the equilibrium quantity of corn.
Interpret market scenarios: Within the corn market, predict the impact of changes in the determinants of demand or supply. In each scenario, identify the correct function (either corn supply or corn demand) and the appropriate direction of change (increase or decrease), for each situation below. Then use the analysis to predict the impacts of the change on the equilibrium corn price and equilibrium quantity of corn. Illustrate each answer with a simple graph. Remember, some complex analyses can produce the end-result of an “indeterminate change” in either the equilibrium price or quantity. Then, in a short paragraph, explain why the change in the market equilibriums occurred, and whether they “make sense” in comparison to outcomes in the real world market for corn. Treat each scenario as a separate event.
A. Suppose above-normal growing conditions (near-perfect weather, ideal soil moisture, no pest infestations, etc.) create a “bumper crop” of corn. Use supply-and-demand to predict the impact of the bumper crop on the equilibrium price and equilibrium quantity of corn.
When you perform this analysis, compare the market reaction as the corn-growing production conditions change from normal to above-normal growing conditions.
Are the predicted results of the model consistent with what typically happens in commodity markets when above-normal growing conditions impact agricultural production? Why is it important that the predicted results of a model be consistent with reality?
B. Suppose corn is a viewed as a “normal good” from the consumer household income perspective. If a worldwide recession reduces household consumer incomes on global scale, use supply-and-demand to predict the impact of decreased consumer income on the equilibrium price and equilibrium quantity of corn.
C. Suppose the corn market is impacted by multiple forces, and a complex supply and demand analysis is required.In this scenario, suppose that an increased number of corn consumers enter the corn market because they are purchasing corn to meet a growing demand for corn-based ethanol.
Simultaneously, the US Department of Agriculture increases subsidies for corn production, in an effort to support/stabilize farm income.
Apply the supply-and-demand model to predict the impact of these two changes on the equilibrium price and equilibrium quantity of corn.
D. Suppose corn producers can readily change-over their operations to produce soybeans instead. Assume it is simple for a producer to grow corn or soybeans on a piece of land – the producer simply decides to change the crop in the next growing season.
Assume there is a notable increase in both the price and profitability of soybean production.
What will be the predicted impact on the corn market, because of the producer’s reaction to better profits growing soybeans?
Does the supply or the demand for corn change in this scenario? Why? What is the impact of this change on the equilibrium price and equilibrium quantity of corn? Is this predicted result consistent with real-world market outcomes? Explain.