4:40 PV EYo LTE ll 87%IThe ethanol bubble_Gro... OMoreAplia Econ BlogNews for Econ StudentsMONDAY, NOOVEMBER 05, 2007The Ethanol Bubble?by William ChiuThe New York Times reports that in less than one year, ethanol priceshave plummeted over 30%. As a result, there is even talk of a governmentbailout for ethanol producers in case the price of ethanol falls too low!So, why did price spikes in last year's ethanol market give way to fallingprices this year? To understand the price fluctuations, we need to knowhow the short-run behavior of firms in competitive industries (such asethanol) differs from their long-run behavior. In the textbook model ofperfectly competitive industries, an increase in demand causes theequilibrium price of ethanol to increase in the short run-from P1 to P2 inthe diagram below. In the short run, higher ethanol prices leadprofits for ethanol producers.higherPRICE OF ETHANOLPRICE OF ETHANOLMC ATCPROFIT0242MARKET QUANTITY OF ETHANOLFIRM QUANTITY OF ETHANOLIn the long run, the lure of profits attracts new ethanol producers. Thelong-run entry of additional ethanol producers expands the supply ofethanol, causing the price to fall back to its initial level:PRICE OF ETHANOLPRICE OF ETHANOLMC ATCPIMARKET QUANTITY OF ETHANOLFIRM QUANTITY OF ETHANOLNotice that economic profits converge to zero in the long run. As inedby most textbooks, zero economic profit does not mean that eeconblog.aplia.com/2007/11/ethanol-bubble.html?showComments=false 4:40LEI E ll 87% iThe ethanol bubble_Gro... O0/24/2020Aplia Econ Blog: News for Economics Students: The Ethandproducers barely have enough to eat. Zero economic profit means thatethanol producers are earning incomes that compensate them for the nextbest salary they had to give up to go into producing ethanol.Ultimately, in competitive environments, a surge in demand causes aninitial spike in prices, but the equilibrium price gradually falls back towardinitial levels. In the end, the long-run price of ethanol may not evenchange, but more ethanol will be produced than before.PRICE OF ETHANOLGUANTITY OF ETHANOLTIMEDiscussion Questions1. Referring to the diagram on the left above, why does it take only a shortperiod for prices to spike, but a long period for prices to fall again?2. Referring to the diagram on the right above, why is the quantity ofethanol fixed for a period in the very short run?3. Corn is a key ingredient to the production of ethanol. The New YorkTimes article points out that corn prices have remained high over the pastyear even as the price of ethanol has declined. How might developments inthe ethanol market have contributed to the rising price of corn?Labels: Perfect Competition, Price-taker, Resource Allocation,Supply and Demand10:00 AM | Permalink | Comments | Assign Aplia ReadingO Comments:Post a Comment<< Home

Short period is such a period in which increasing / decreasing production is only possible but in…

PRICE OF ETAND QUANTITY OF ETHANO LA TIME TIME Discussion Questions 1. Referring to the diagram on the left above, why does it take only a short period for prices to spike, but a long period for prices to fall again? 2. Referring to the diagram on the right above, why is the quantity of ethanol fixed for a period in the very short run? 3. Corn is a key ingredient to the production of ethanol. The New York Times article points out that corn prices have remained high over the past year even as the price of ethanol has declined. How might developments in the ethanol market have contributed to the rising price of corn?

PRICE OF ETAND QUANTITY OF ETHANO LA TIME TIME Discussion Questions 1. Referring to the diagram on the left above, why does it take only a short period for prices to spike, but a long period for prices to fall again? 2. Referring to the diagram on the right above, why is the quantity of ethanol fixed for a period in the very short run? 3. Corn is a key ingredient to the production of ethanol. The New York Times article points out that corn prices have remained high over the past year even as the price of ethanol has declined. How might developments in the ethanol market have contributed to the rising price of corn?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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