Question

Consider the market for corn. Say whether each of the following events will cause a shift in the demand curve or a movement along the curve. If it will cause a shift, specify the direction. [LO 3.3] a. A drought hits corn-growing regions, cutting the supply of corn. b. The government announces a new subsidy for biofuels made from corn. c. A global recession reduces the incomes of consumers in poor countries, who rely on corn as a staple food. d. A new hybrid variety of corn seed causes a 15 percent increase in the yield of corn per acre. e. An advertising campaign by the beef producers' association highlights the health benefits of corn-fed beef.

Short answer

Shifts: right (subsidy, advertising), left (recession); Movements: drought, new seed.

Step-by-step solution

Analyze the Drought Effect

A drought affects the supply of corn but does not change the demand from consumers. Therefore, this event results in a movement along the demand curve due to a change in price resulting from the cut in supply.

Implications of Government Subsidies

A government subsidy for biofuels made from corn increases the demand for corn as it becomes more valuable in producing biofuels. This causes a shift of the demand curve to the right.

Impact of Global Recession

A global recession leads to lower incomes in poor countries, negatively impacting the demand for corn since consumers have less purchasing power. This causes a leftward shift of the demand curve.

Effect of New Corn Seed Variety

A new hybrid seed that increases corn yield per acre affects the supply of corn but not the demand. Therefore, like the drought, this event will result in a movement along the demand curve due to a price change.

Result of Advertising Campaign

An advertising campaign promoting corn-fed beef may increase consumer interest in such beef. If it does, it indirectly increases the demand for corn used to feed cattle, causing a rightward shift of the demand curve for corn.

Key concepts

Demand Curve

The demand curve represents how much quantity of a good (in this case, corn) consumers are willing to purchase at different prices. Imagine it as a line on a graph that slopes downwards from left to right. This downward slope shows the inverse relationship between price and quantity demanded. When prices go down, the quantity demanded usually goes up, and vice versa. Factors that shift the demand curve include changes in consumer preferences, income, and the prices of related goods. In the exercises provided:

• An increase in subsidies for biofuels causes the demand curve for corn to shift to the right, indicating higher demand at all price levels.
• A global recession decreases consumer income, shifting the demand curve to the left, reflecting a lower demand for corn.
• Advertising campaigns that highlight benefits or create new trends can increase demand, causing the curve to shift rightward.

But remember, a shift in the demand curve is different from a movement along the curve, which is triggered by a change in the price of the good itself.

Supply Curve

Unlike the demand curve, the supply curve shows the relationship between the price of a good and the quantity suppliers are willing to produce and sell. This relationship is direct, meaning that if the price goes up, suppliers want to supply more, leading to an upward sloping curve. Factors that can shift the supply curve include changes in production costs, technological advancements, and natural conditions affecting production:

• A drought can reduce the supply of corn, as it makes production more difficult, leading to a leftward shift of the supply curve because suppliers have less to offer at any price.
• Conversely, a new seed variety that increases yield will shift the supply curve to the right, as more corn can be produced efficiently.

Just as with demand, a shift in the supply curve changes prices independently of changes in quantity demanded, unless demand itself shifts.

Market Equilibrium

Market equilibrium occurs where the demand and supply curves intersect. At this point, the quantity of corn consumers want to buy equals the quantity producers want to sell. This balance determines the market price and quantity sold. In practical terms, any change in demand or supply affects this equilibrium:

• If demand increases and supply remains constant, the equilibrium price and quantity will rise.
• Alternatively, if supply increases due to better production techniques, the equilibrium price will drop while the quantity rises.
• Conversely, a decrease in demand or supply can reduce equilibrium market prices and the quantity of corn sold.

Understanding shifts in equilibrium helps predict how markets react to changes such as policy interventions, global economic shifts, or technological advancements.

Price Elasticity

Price elasticity of demand measures how sensitive the quantity demanded of a good is to a change in its price. High elasticity means a small change in price leads to a large change in quantity demanded, while low elasticity indicates that quantity demanded is relatively insensitive to price changes. Substitute goods, necessity, and time frame affect elasticity:

• If corn has many substitutes, such as wheat or rice, the demand for corn will be elastic.
• If corn is a staple food with fewer substitutes, as in some developing countries, then demand will be inelastic.
• Long-term adjustments often provide more elasticity as consumers and producers find alternatives or adjust consumption patterns.

Producers and policymakers pay close attention to elasticity as it informs their decisions on pricing, taxation, and subsidies.