What happens when you have a good or service and due to unforeseen circumstances the demand increases? What happens if the price increases? How does this change affect your goods and or services? The Price of Elasticity of Demand can help determine each of these situations and calculate whether the price should be raised or dropped due to cost and demand of a product. Explanation is key; we will use these examples and explain how Price of Elasticity of Demand is used: If the demand for corn increases due to its use as an alternative energy source, what will happen to the supply of corn's substitute such as soybean? What will happen to the price of corn oil? How does the price elasticity of…show more content… Then you have to take into consideration the elasticity of demand. What is this alternative energy source trying to replace? Is it trying to replace gasoline? If so there are many other factors to take into consideration.
Now a new question arises, what will happen to the price of corn oil? I believe that the cost of corn oil will rise. For a couple of reasons, one you will still have to meet your yearly demand for corn oil before turning it into a alternative fuel. Then you have to come up with the alternative energy source that corn will use. This is what you would call a Unit-Elastic-any change in price causes an equal proportion change in quantity. Hopefully you have a Elastic Demand when the quantity demanded changes by a larger percentage than price, so that the total revenue increases as price decreases.
I have come to the conclusion that you would need a lot more information to really complete and give a valuable answer. There are too many angles and variables that can change the outcome of this example. Overall, you can see how important these decisions are.
Walters, C.W. (2009, October 13). Corn and soybean supply and demand and harvest progress update [Web log