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Unformatted text preview: future price
decreases supply S2006 135 100
25 0 D2008 Price of oil rises
remains the same
75 80 D2006
Quantity (millions of barrels per day) Figure 1 The Market for Crude Oil 9160335_CH03_p053-080.qxd 6/22/09 8:56 AM Page 69 P redicting Changes in Price and Quantity 69 Corn is used as food, animal feed, and a source of
ethanol. Global corn production increased during
the past few years, but the price also increased.
The story of the production and price of corn, like
the story of the price of oil, begins in China and
India. Greater production and higher incomes in
these countries have increased the demand for corn.
Some of the increase in demand is for corn as
food. But more of the increase is for corn as cattle
feed, driven by an increased demand for beef—it
takes 7 pounds of corn to produce 1 pound of beef.
In addition, mandated targets for ethanol production (see Chapter 2, pp. 34 and 46–47) have
increased the demand for corn as a source of biofuel.
While the demand for corn has increased, the supply
has decreased. Drought in several parts of the world cut
production and decreased supply. Higher fertilizer
prices increased the cost of growing corn, which also
So the demand for corn increased and the supply
of corn decreased. This combination of changes in
demand and supply raised the price of corn. Also, the
increase in demand was greater than the decrease in
supply, so the quantity of corn increased.
Figure 2 provides a summary of the events that
we’ve just described in the market for corn. Nitrogen, potassium, and potash are not on your
daily shopping list, but you consume them many
times each day. They are the reason why our farms
are so productive. And like the prices of oil and
corn, the prices of fertilizers have gone skyward.
The increase in the global production of corn and
other grains as food and sources of biofuels has
increased the demand for fertilizers.
All fertilizers are costly to produce and use energyintensive processes. Nitrogen is particularly energy
intensive and uses natural gas. Potash is made from
deposits of chlor...
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