3 Answers | Add Yours
Price elasticity of demand is the change in the quantity demanded for a unit increase in the price. For regular products the price elasticity of demand is negative which indicates that the quantity demanded decreases as the price is increased.
As the magnitude of the price elasticity of demand increases there is a larger impact on the demand for the same increase in the price. This is the case where the product is not a necessity or for which many substitutes are available. In the opposite scenario, the magnitude of price elasticity of demand is smaller.
The quantity of corn oil demanded would decrease by a large extent for a unit increase in the price if the substitutes for corn oil are easily available and are relatively inexpensive. This would also decrease the revenue earned by sellers of corn oil.
On the other hand, if it is difficult to substitute corn oil with another product or the substitute remains more expensive when compared to corn oil, the decrease in demand for a unit increase in price is small. The impact on the revenues of sellers would also be small.
If the price elasticity for demand is high, if the price of corn oil changes, then demand will be greatly affected.
If the price elasicity for demand is low, the change in price of corn oil will not affect the demand.
If a product has a high price elasticity, revenues will greatly decrease in the price of corn oil goes up. Revenues will also greatly increase if the price of corn oil decreases.
Let me talk about PED with referrence to Corn Oil as others have already explained the theory part.
The PED of Corn Oil is decided by:
1.Availabily and price of substitutes like Palm oil,cotton seed oil etc.
If Corn Oil price is high compared to the substitutes,the demand for Corn oil could fall.In such situation Corn Oil will have an elastic demand(PED more then ONE).If the substitutes are of poor quality,an increase in price of Corn Oil will bring in more revenue to the sellers as the demand then become more inelastic.
2.Health! Of late people are more health concious and if they believe that Corn Oil is better than the substitutes(Cholostrol),then PEd for Corn Oil will become Less elastic .This will bring in more revenue to the sellers as the buyers will still buy Corn Oil even if price is raised.
3.%of income spent on ediable oil will also affect PED.In poor countries as most consumers are poor a slight increase in price in Corn Oil will force consumers to look for cheaper substitutes and in such situation if price of Corn Oil is raised the sell will loose revenue!
4.Taste and Habbit also play an important part in deciding the PED of Corn Oil.If consumers are used to the taste of Corn Oil and if price goes up, most of them still buy Corn Oil.
5.Number of uses. If Corn Oil is used for various purposes like as a cooking medium and for the production of ethnol or as a substitute for petrol (Energy) then ,it complicate the whole issue!
For example If The U S Goverment gives subsidy to Corn Farmers ,a lot of land will be diverted for the cultivation of crops which used in the production of Biofuel.
This will create a lot of issues in the market for Corn. It will affect the Cattle/Pig farmers as they also use Corn as feed!
I leave that matter to some other experts who will find time to explain that aspect!
We’ve answered 331,100 questions. We can answer yours, too.Ask a question