Price dollars per barrel 68 62209 200 rise in incomes

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Unformatted text preview: future price decreases supply S2006 135 100 75 50 25 0 D2008 Price of oil rises but quantity remains the same 75 80 D2006 90 95 85 100 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 decreased supply. 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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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.

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