Demand versus supply of cornCorn is considered to be a commodity, just like tea, coffee or rubber. Also called ‘yellow gold’ corn is widely used in making food products like cereals, snacks, soft drinks, sweeteners and many others. Recently there has been a considerable increase of corn prices across the globe due to the decrease in supply. The prices have increased by 74 per cent within one year.

Decrease in supply of corn for food is due to weather conditions in USA. High corn prices were the draught in the United States. The United States produces 40 per cent of the world’s corn supplies and is responsible for half of the world’s corn export. The draught that has hit in the United States this year has affected the corn growing areas resulting in its high prices. Another reason for a decrease in supply is due to the use of Ethanol. Ethanol is considered to be a viable source of alternative energy and corn is the primary feedstock used in ethanol production, which makes the price of corn to increase in the international market.

The graph above shows an inelastic supply and an inelastic demand. Price elasticity of supply (PES) measures the relationship between change in quantity supplied and a change in price. You can measure this using the formula: (Percentage change in quantity supplied / by the percentage change in price). In this case The PES (Price Elasticity of Supply) for corn is <1, this means firms find it hard to change production in a given time period because of time lag. This is because growing corn takes time. On the other hand, Price elasticity of demand (PED) measures the responsiveness of demand after a change in price (Percentage change in quantity demanded / by the percentage change in price). In this case the PED (Price Elasticity of Demand) for corn is < 1, this means that it is relatively inelastic because it is a necessity and thus Demand is not sensitive to price change.

In the graph above we can see a shift in supply to the left due to the Weather conditions in the USA. This result in a decrease in the quantity supplied from Qe to Q1 and increase in price from Pe (Price equilibrium) to P1. However at that point we have an excess demand, thus a shortage in supply. The demand then shift to the right, this occurs because of the use of ethanol as a substitute for fossil fuels. Thus the quantity increase from Q1 to Q2 and the price increase from P1 to P2 creating a new equilibrium. Since both PES and PED are inelastic we can see a small change in the quantity supplied and demanded in relation to price change.

Moreover, this increase in corn price affects the price of other goods globally. This is because corn is used in wide range of food such as tortillas, which is widely consumed in Mexico. This general increase in price of global goods might have an effect on inflation, which is the general increase in average price level that leads to the decrease in purchasing power of money. Particularly this might result in Cost-push inflation, which occurs when businesses respond to rising production costs, by raising prices in order to maintain their profit margins. 

Nevertheless, ethanol is used as a substitute good for oil and fossil fuel. Substitutes are goods in competitive demand and act as replacements for another product. Since ethanol is used instead of oil and fossil fuel it will result in the reduction of negative externalities. This is because using other renewable energy will result in a decrease in pollution and thus in the long run a reduction in global warming. Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur outside of the market. This means that they affect people who are not directly involved in the production and/or consumption of a good or service. On the other hand, there are negative externalities because of the increase in price of corn for poor people such as in Mexico. Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid. This can be shown in the graph below: