Question

1. Suppose you are currently working as an economic advisor for the Texas Corn Producers Association. Recently, there has been a string of published health reports and national campaigns documenting the negative health impacts of consuming products made with corn syrup. At the same time, suppose there have been significant advancements in both seed technology and harvesting techniques that have significantly reduced the cost of producing corn. You have been tasked with preparing a brief report about what is going to happen in the wholesale market for corn as the market adjust over the next few years. Your answer should include a discussion about what is going to happen to the supply and demand for corn, and what is expected to be the resulting effect on corn pieces and aggregate output levels

Answer 1

Negative health report on consumption of corn syrup will reduce the demand for corn syrup, in turn reducing the demand for corn (an input to syrup). Demand curve for corn will shift to left, decreasing both price and quantity of corn. At the same time, technological improvement will increase the supply for corn, shifting its supply curve rightward, decreasing price and increasing quantity. The net effect is a definite decrease in price, but effect on quantity is uncertain.

In following graph, D0 and S0 are initial demand and supply curves intersecting at point A with initial price P0 and quantity Q0. When D0 shifts left to D1 and S0 shifts right to S1, they intersect at point B with lower price P1 and new quantity Q1.

In the AD-AS framework, lower demand for corn will decrease aggregate demand, shifting AD curve leftward, decreasing both price level and output. Higher supply of corn will increase aggregate supply, shifting AS curve rightward, decreasing price level and increasing output. So net effect is a definite decrease in price level, but effect on aggregate output is uncertain.

In following graph, AD0 and AS0 are initial aggregate demand and aggregate supply curves intersecting at point A with initial price level P0 and output Y0. When AD0 shifts left to AD1 and AS0 shifts right to AS1, they intersect at point B with lower price level P1 and new output Y1.