All fertilizers are costly to produce and use

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ide and sodium chloride that are found 900 meters or deeper underground, and energy is required to bring the material to the surface and more energy is used to separate the chemicals and turn them into fertilizer. All energy sources are substitutes, so the rise in the price of oil has increased the prices of all other energy sources. Consequently, the energy cost of producing fertilizers has risen. This higher cost of production has decreased the supply of fertilizers. The increase in demand and the decrease in supply combine to raise the price. The increase in demand has been greater than the decrease in supply, so the quantity of fertilizer has increased. Figure 3 illustrates the market for fertilizers. 350 300 Rise in incomes in China and India and increase in use of corn to make biofuel increase the demand for corn Drought and rise in price of fertilizer decrease the supply of corn S2008 S2006 240 200 150 D2008 Price of corn rises D2006 100 0 650 700 Increase in demand exceeds decrease in supply, so quantity increases 750 780 850 900 Quantity (millions of tons per year) Figure 2 The Market for Corn Price (percentage of 2006 price) Fertilizers Price (dollars per ton) Corn 300 Increase in grain production increases the demand for fertilizer S2008 S2006 250 Rise in the price of oil raises the cost of producing fertilizer and decreases its supply 200 150 100 50 0 200 D2008 Price of fertilizer rises D2006 225 Increase in demand exceeds decrease in supply, so quantity increases 275 300 325 250 Quantity (millions of tons per year) Figure 3 The Market for Fertilizer 9160335_CH03_p053-080.qxd 6/22/09 8:56 AM Page 70 CHAPTER 3 Demand and Supply Supply 3.00 2.50 2.00 Equilibrium 1.50 2.50 2.00 Demand (new) 1.50 1.00 Demand Demand (original) 0.50 10 15 20 Quantity (millions of bars) (b) Increase in demand Price (dollars per bar) Supply (original) 2.50 Supply (new) 2.00 Supply (new) 2.50 2.00 1.50 1.00 Demand Supply (original) 3.00 2.50 Supply (new) 2.00 1.50 ? Demand (new) 0.50 10 15 20 Quantity (millions of bars) 10 15 20 Quantity (millions of bars) Demand (original) 10 0.50...
View Full Document

This note was uploaded on 04/04/2012 for the course ECON 251 taught by Professor Blanchard during the Spring '08 term at Purdue University-West Lafayette.

Ask a homework question - tutors are online