Question

Use the model of perfect competition to explain the rise in corn prices from \(\$ 1\) per bushel in 2004 to \(\$ 6\) per bushel in \(2011 .\)

Short answer

Short Answer: The rise in corn prices from $1 per bushel in 2004 to $6 per bushel in 2011 can be explained using the perfect competition model by examining the factors affecting both demand and supply in the corn market. Key factors include increased demand for biofuels, population growth, unfavorable weather conditions, and increased costs of production inputs. These factors collectively led to a shift in the demand curve to the right and the supply curve to the left, which resulted in a new market equilibrium at a higher price.

Step-by-step solution

Introduction to Perfect Competition Model

The perfect competition model is an economic model that describes a market where there are many buyers and sellers of a homogeneous product, and no single buyer or seller can influence the price of the product. Under these conditions, the market is said to be in a state of perfect competition. In this model, the equilibrium price and quantity are determined by the intersection of the supply and demand curves.

Demand Factors

In the corn market, the demand for corn is influenced by factors such as population growth, the needs of the food and feed industry, the demand for biofuels, and government policies. If any of these factors lead to an increase in the demand for corn, the demand curve will shift to the right. This will lead to a higher market price, as buyers are willing to pay more to secure the limited quantity of corn available.

Supply Factors

On the supply side, factors that impact the production of corn include weather conditions, the availability of arable land, the cost of production inputs (such as seeds, fertilizers, and fuel), and government policies. If any of these factors lead to a reduction or limitation in the supply of corn, the supply curve will shift to the left. This will also lead to a higher market price, as less corn is available to meet existing demand.

Market Equilibrium and Price Increase

Given the factors affecting demand and supply, we can now explain how the perfect competition model can be used to understand the increase in corn prices from \(1 per bushel in 2004 to \)6 per bushel in 2011. There could have been a combination of factors causing both an increase in demand and a decrease in supply. This would result in a rightward shift of the demand curve and a leftward shift of the supply curve, leading to a new market equilibrium at a higher price. For instance, there was increased demand for biofuels during this period, primarily as a result of government subsidies and policies aimed at promoting renewable energy. This led to higher demand for corn as an input for biofuel production, shifting the demand curve to the right. At the same time, factors such as unfavorable weather conditions and increased costs of production inputs might have negatively impacted the supply of corn, shifting the supply curve to the left.

Conclusion

In conclusion, the model of perfect competition can be used to explain the rise in corn prices from \(1 per bushel in 2004 to \)6 per bushel in 2011 by analyzing the changes in demand and supply factors during this period. The factors that could have led to this increase include increased demand for biofuels, population growth, unfavorable weather conditions, and increased costs of production inputs. These factors collectively caused a shift in the equilibrium price in the corn market, resulting in a significant increase in corn prices.