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2 DEMAND AND SUPPLY ANALYSIS CHAPTER Corn is one of the most important agricultural products in the United States. It is used to make many food and industrial products we encounter in our daily lives, such as corn oil, sweeteners, and alcohol. In recent years, especially with increasing prices of gasoline and oil, it has attracted increasing attention because it may be used to produce the fuel ethanol. What Gives with the Price of Corn? 2.1 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM APPLICATION 2.1 The Valentine’s Day Effect APPLICATION 2.2 A Chicken in Every Pot 2.2 PRICE ELASTICITY OF DEMAND APPLICATION 2.3 How People Buy Cars: The Importance of Brands 2.3 OTHER ELASTICITIES APPLICATION 2.4 How People Buy Cars: The Importance of Price APPLICATION 2.5 Coke versus Pepsi 2.4 ELASTICITY IN THE LONG RUN VERSUS THE SHORT RUN APPLICATION 2.6 Crude Oil: Price and Demand APPLICATION 2.7 The DRAM Price Collapse of 1996 2.5 BACK-OF-THE-ENVELOPE CALCULATIONS APPLICATION 2.8 The Price of Pepper APPLICATION 2.9 The California Energy Crisis Appendix PRICE ELASTICITY OF DEMAND ALONG A CONSTANT ELASTICITY DEMAND CURVE c02.qxd 7/17/07 2:50 PM Page 22
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In the first half of the 1990s, the price of corn hovered around $2.50 per bushel. But in the mid- 1990s, as Figure 2.1 shows, the scenario changed. In late 1995, corn prices topped $3.00 per bushel, and by July 1996, prices were averaging nearly $4.50 per bushel! The upheaval created by rising corn prices was so great that experienced commodities traders warned investors to stay away from corn futures because prices had become too volatile. 1 Yet, as the 1990s came to a close, most news accounts of the corn market focused not on unprecedented high prices for corn, but on record low prices! 2 After peaking in July 1996, corn prices fell consistently until they reached $1.52 in August 2003, a price only one-third the level in 1996. Since then prices have continued to fluctuate, ranging between nearly $2.89 in 2004 and $1.77 in late 2005. This story illustrates the vagaries of prices in a competitive market. Prices rise and fall in seemingly unpredictable ways, and there is little that individual participants (e.g., corn farmers, grain elevators, commodity traders) can do about it. However, we can understand why prices in the market change as they do. In the case of corn, the pattern of prices shown in Figure 2.1 can be traced to the interaction of some important changes in supply and demand conditions in the corn market in the 1990s. In the early 1990s, several years of bad weather devastated U.S. corn harvests. By early 1996, the amount of corn in storage for sales in future years had reached a record low. With the Asian economy booming and several countries around the world experiencing significant crop failures in 1996, demand for corn from overseas rose sharply and unexpectedly. With demand for U.S. corn up and the available supply in storage down, corn prices rose dramat- ically in the early summer of 1996.
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This note was uploaded on 11/18/2010 for the course ECO 300 taught by Professor Zhao during the Spring '10 term at SUNY Albany.

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ch02 text - c02.qxd 7/17/07 2:50 PM Page 22 2 2.1 2.2 2.3...

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