Question

The demand for corn is made up of three broad groups:

• From food processors for use in making foods such as breakfast cereals
• From processors who turn corn into a vital ingredient for making biofuels. Biofuels can be mixed in with petroleum products to make a product similar to gasoline
• From cattle farms who use corn as a way to feed their cattle.

In addition, assume:

• NO ONE EATS CORN. It is an input into the three product groups above.
• Corn-based foods biofuels and beef are all normal goods.

Show an analysis of:

• What was happening to the corn price and why.
• What was probably happening to quantity of corn consumed and why

Use supply and demand diagrams, explain movements shown in those diagrams when you illustrate a particular event.

Scenario:

1. In 2015, very dry weather and fires in Russia, one of the world’s major producers, destroyed a third of the Russian corn crop.

Answer 1

It has been provided that very dry weather and fires in Russia, one of the world's major producers, destroyed a third of the Russian corn crop.

This destruction of corn crop will result in a decrease in supply of corn crop.

This decrease in supply of corn will shift the supply curve of corn to the left.

Following is the required graph -

The above graph shows that initially the market for corn was in equilibrium at point E, where demand curve for corn, D, was intersecting the supply curve of corn, S. The equilibrium price was P and the equilibrium quantity consumed of corn was Q.

Due to destruction of corn crop, the supply of corn has decreased. Due to this, supply of corn has shifted to the left from S to S1.

New equilibrium is attained at point, E1, where demand curve for corn, D, is intersecting the new supply curve of corn, S1.

The new equilibrium price is P1 and the new equilibrium quantity is Q1.

Thus,

This decrease in supply has resulted in an increase in price and decrease in the quantity of corn consumed.