For this assignment you will find a news article (not a blog, not Wikipedia, not an opinion article, a news article) that describes a change in supply, demand or both in a real world market. The learning objective is to understand how supply and demand impacts markets and prices.
Begin by downloading and studying:
With oil prices reaching all-time highs, and the price of gasoline rising to the point where people are beginning to change their daily driving habits, the call for alternatives to gasoline is becoming increasingly louder.
The obvious choice is for a substitute for gasoline that burns in car engines and does not require extensive modifications or even replacement of the entire vehicle for one powered by, e.g., electricity.
Ethanol has been the focus of US government energy policy. President Bush has proposed a four-fold increase in the production and use of alternative fuels in the USA. Many believe that this will lead to significant increases in the prices of food crops, as ethanol producers increase demand for corn (Graph A: increased demand which increases market price and market quantity) and more farmers convert their crops to corn, in order to benefit from the higher prices, thereby reducing the amount of other crops that they grow (Graph D: decreased supply which increases market price and decreases market quantity)
“Corn is the main ingredient in ethanol, the primary alternative fuel in the United States and rising demand has sent supplies to their lowest levels in 34 years according to Phil Flynn, a senior market analyst at Alaron Trading in Chicago, a commodities trading firm.” (Hargreaves, 2007)
Rising corn prices affect the supply of any good, for which corn is an input, including beef and poultry (Graph D: decreased supply which increases market price and decreases market quantity), because as input prices rise, supply falls.
Whether we see sharp increases in the prices of corn, other food crops, and meat as a result of increasing demand for alternatives to petroleum remains to be seen. There are other alternatives, including liquid fuel from coal and cellulosic ethanol, which is made from plant matter other than food crops.
Nonetheless, markets are driven by expectations, and if commodities traders fear that fuel and food prices will rise in the future, they will bid up prices today, which could lead to a self-fulfilling prophesy.
Hargreaves, Steve (30 Jan. 2007). Calming ethanol-crazed corn prices. CNN [online]. Available: http://money.cnn.com/2007/01/30/news/economy/corn_ethanol/index.htm (26 Jul. 2008).Word Count : 322
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