Chapter 12, Problem 1.1P

To determine

The effect of changes in price of oil along with subsidy on the price of corn, wheat, and farmland.

Explanation of Solution

The effect of changes in price of oil along with subsidy on the price of corn is depicted in Figure 1 using the demand and supply model.

In Figure 1, the horizontal axis represents the quantity of corn, whereas the vertical axis denotes the price of corn.

The effect of changes in price of oil along with subsidy on the price of farmland is depicted in Figure 2 using the demand and supply model.

In Figure 2, the horizontal axis represents the quantity of farmland, whereas the vertical axis denotes the price of farmland.

The effect of changes in price of oil along with subsidy on the price of other agricultural products such as wheat is depicted in Figure 3 using the demand and supply model.

In Figure 3, the horizontal axis represents the quantity of wheat, whereas the vertical axis denotes the price of wheat.

When the oil prices increase simultaneously with the rolling out of subsidy in ethanol production, the demand for ethanol will increase. As the demand for ethanol increases, the demand for corn used for its production also increases. This shifts the demand curve of corn to the right from D₀ to D₁ as in Figure 1. This increases the price of the corn.

As a result of it, the market value of farmland will increase due to the increase in demand for land as depicted in Figure 2 causing the rightward shift of the demand for land from D₀ to D₁ as in figure 2.

From now, more of the farmland would be devoted to the production of corn; less of it would be available for the production of other agricultural products such as wheat. This implies that the supply of wheat would decrease causing a leftward shift of the supply curve from S₀ to S₁ as in Figure 3, thereby increasing the price of wheat.

When the oil prices decreases, the demand for ethanol will decrease. As the demand for ethanol decreases, the demand for corn used for its production also decreases. This shifts the demand curve of corn to the left from D₁ to D₀ as in Figure 1. This decreases the price of the corn.

As a result of it, the market value of farmland will decrease due to the decrease in demand for land for corn production as depicted in Figure 2 causing the leftward shift of the demand for land from D₁ to D₀ as in Figure 2. This decreases the price of the farmland.

From now, less of the farmland would be devoted to the production of corn; more of it would be available for the production of other agricultural products such as wheat. This implies that the supply of wheat would increase causing a rightward shift of the supply curve from S₁ to S₀ as in figure 3, thereby decreasing the price of wheat.

Economics Concept Introduction

Demand: Demand is the quantity of goods and services that people are willing and able to buy at different prices in a given period of time.

Supply: Supply is the quantity of goods and services that people are willing to sell at different prices in a given period of time.