Market Equilibration

Market Equilibrium

Jaleesa Thomas

ECON/561

February 10, 2014

Professor Harry Dzakwasi

Market Equilibrium

In 2012, the United States experienced a severe drought in the Midwest. The impact of the drought affected the most widely grown grain crop in the U.S.; corn. According to the World Agriculture Supply and Demand Estimates (WASDE), the U.S.D.A.’s initial forecast of a record high 14,790 million bushels of 2012 corn crop declined 12% to 12,970 million bushels (2012, p. 12). The decrease in corn supply has caused the prices per bushel to sky rocket. Since producers utilize corn in a variety of goods, it has caused a ripple effect of higher prices in food, other commodities, and energy. In this paper, I will discuss how the drought led to a change between two equilibrium states in corn prices. Also, how the change in corn’s market equilibrium affected supply and demand.

Law of Demand and Supply

The law of demand states that there is an inverse relationship between price and quantity demanded (McConnell, Brue, & Flynn, 2009). The determinants of demand are consumer’s preferences, the number of buyers in the market, consumer’s income, the prices of related goods, and consumer expectations (McConnell, Brue, & Flynn, 2009). The number of buyers has increased in the corn market, because of ethanol. Today, the market for ethanol is growing, and with ethanol containing 35% of U.S. corn, the demand for corn has risen (Sterk, 2012).

According the law of supply as prices increase, the amount supplied rises; as prices fall, the quantity supplied falls (McConnell, Brue, & Flynn, 2009). The determinants of supply are resource prices, technology, taxes and subsidies, prices of other goods, producer expectation, and the number of sellers in the market. According to the August WASDE, the yield per acre was 152.8 bushels in 2011 and decreased in 2012 to 147.2 bushels per acre (2012). Usually when the supply is low the price would fall; however, the shortage in...