Macroeconomic Concepts and Models Application Essay

The biofuel has brought a large impact to the economic world based on various sectors. This perhaps could have been due to its broad usage over the recent years. This is especially after the farmers took a step on improved farming skills to come up with significant exploration on biofuels. Some of this impacts brought about by the biofuels are numerous.

The recent rise in corn price has brought massive losses to the processors of the biofuels since they have to incur other expenses as they convert to a finished product. Therefore, this has resulted in increased final price to the consumer. Some of the impacts that have brought about more use of the biofuel in the current world have led to the replacement of the liquid oil from 1-2% recently¹.

Secondly, it has reduced price expenses with a range between 2-4%, which is due to its stiff competition with the other oil fuels. Thirdly, it has saved the consumers by approximately $60 billion globally. This is due to its reduced cost which has enabled the consumers to save more than what they have been incurring before the price reduction.

Fourthly, after its magnificent exploration it has brought about its large demand in the market. Essentially, this resulted in price increase of between 16-40%. Lastly, it brought about its use since it was explored unlike beginning before it came into its full use. This has shown that 12% of the corn output was in biofuels².

The developments in agriculture and conversion technology might influence the demand for biofuels. This is because of the same forces which bring about an increase in demand for fuel and food. The low output by the personnel in charge of production may bring about price escalation.

This is due to high fuel demand with reduced production, which cannot sustain the market demand. Moreover, when there is low stock in the market and there demand is outweighing the supply; it also leads to price increase. This is because of competition by the consumers rushing for the limited stock in the market³.

Some of the effects that have been brought about by the increased competition in the oil market include increased demand for biofuels. This also led to increases demand and price of crops such as corn. This has brought huge impacts on food prices, which have been accumulating over the period.

It has brought a shortage leading to a decline in supply hence enhancing a push in prices. Slight changes in supply could have led to tremendous effects. Moreover, it is noted that the use of biofuel has increased from 16 % to 40% inception⁴.

An increase in price of crops and a decrease in the price of fuel on a low income person will force the consumer to forego the fuel and go for food. This will make the consumer substantiate the amount of money used in buying fuel to derive utility on food due to increase in food prices. The consumer will tend to have less demand on fuel, but the demand of the food will shoot up creating an increase in food price.

This will cause a shift in the demand curve of food to a higher level. Also, it will result in movement of supply of food demanded towards the origin point of the X-axis. All this is because the consumer will not bother on biofuels. This is because consumers will have to give the first preference to the food before everything else⁵.

This will shift the equilibrium upwards due to food demand increase effect. This indicates that the person on a low income level would prefer to invest in food crop rather than the biofuel crops like corn. This is because the person may feel that investing in food crop would reduce the cost. This is because the individual is not in a position to incur much on biofuel which he or she may not need it at all⁶.

Basing on the same models and concepts relating to a person who spends a relatively small portion of her income on food, the consequences of the changes in the price levels will still vary. This is brought about by the fact that the person has no problem in buying food. This is due to high income level exhibited by the consumer⁷.

Therefore, this does not limit the consumer in purchasing the good regardless of the price increase. Nonetheless, the consumer will have to cut down the consumption of biofuel so as to compensate the cost incurred due to food price increase. This will bring a slight change in the demand curve of biofuel.

In this case, biofuel demand will decrease, but the demand for food will remain unchanged. The supply of biofuel will decrease in the mean time before the consumer adjusts to the normal equilibrium⁸.

This is all achieved by the introduction of equivalent variation that will bring the consumer back to the original consumption point in the equilibrium level. On the other hand, the same person who is spending little amount on food will spend most of his or her income in plating fuel crops like corn in return.

This is due to a high rate of return while investing in biofuel rather than planting food crops of limited economic value to the individual. In a general sense, the person of high income will invest on biofuel, and not on food crops⁹.

The price will change from Po to P1 due to the Quantity change from Q0 to Q1.

The possible government policy response to the raised issues in parts A and B could help solve some of these problems encountered by consumers or the producers. Some of these issues affect all people within the system of biofuel. This includes the farmer and the final consumer without neglecting the processers and the middle distribution personnel.

The farmers may be affected by the climate change or drought hence lowering the production of corn. This will lead to limited supply in the market. In this case, the price of food in the market will go up. This will force the consumers to carry the burden incurred by the processors during the processing stages.¹⁰

The cost of producing corn by the farmer, and selling it to the processers will still have to bear a huge cost. This is because during the low production season, the farmer will have to sell them at a high price. In this regard, the middle producers will increase the price of the biofuel in case they were converting it to a fuel.

This is because of the raw materials scarcity in the market, which requires them to assemble their output before they convert to the final output.¹¹ Notably, in each and every organization, profit is given the first preference.

At last, the consumer will have to bear all the burden cost incurred by the farmers and the final producers in between before it reached them. The farmer has to push the cost of production to the next level due to increase in fertilizer and oil used by tractors in preparing the farm¹².

Apart from the production cost, there are also other factors like transport cost in oil to the required places. The transportation of oil from the point of production to the consumers will have to be factored in by sellers. This will also bring about the huge burden to the consumers. This might be due to the country based on does not produce the oil within the country¹³.

The other factor is due to increased production of ethanol which requires more of corn to be used as the main raw material. This boosted a great competition in food production hence encouraging high income people to venture much on it. This has also brought about limited land to be used in production of food crops¹⁴.

The government can intervene to reduce or close the gap so that consumers and the producers are not oppressed. The government should make sure that there is an increase in food availability and biofuels to sustain the whole population basing on the market demand.

This will address the needs of the final consumer. This will enable the farmers to meet the reasonable price in production, and ensure the final consumers pay reasonable price in the market. The last policy is that the government should invest in improving technology to enhance production of food and biofuel crops. This will balance the demand and supply in the market.

Bibliography

Bethune, Pete. Earthrace: Futuristic Adventures On The High Seas. North Shore, N.Z.: Hodder Moa/Hachette Livre, 2007.

Brittaine, Richard and NeBambi Lutaladio. Jatropha: a smallholder bioenergy crop. 2010. Web.

Buchanan, James M. The Demand and Supply of Public Goods, Indianapolis: Library of Economics and Liberty, 2012.

Bullis, Kelvin. Record Food Prices Linked to Biofuels. 2011. Web.

Cohen, Marc J., Cristina Tirado, Noora-Lisa Aberman and Brian Thompson. Impact of Climate Change on Bioenergy and Nutrition. n.d. Web.

Hawken, Paul, Amory B. Lovins and Hunter Lovins. Natural capitalism: The Next Industrial Revolution. London: Earthscan, 2005.

Heinberg, Richard. The party’s over oil, war and the fate of industrial societies, Gabriola, B.C.: New Society Publisher, 2003.

International Council of Shopping Centers. Retail Space Europe: Year book 2008, [S.l.]: International Council of Shopping Centers, 2008.

Keeley, Brian and Patrick Love. From Crisis to Recovery The Causes, Course and Consequences of the Great Recession. Paris: OECD, 2010.

Kirman, Alan. “The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes”, The Economic Journal, V. 99, N. 395, (1989): pp 126-139

Kotler, Philip and Waldemar A. Pförtsch. B2B brand management with 7 tables, Berlin: Springer, 2006.

Mitchell, Donald. Biofuels in Africa opportunities, prospects, and challenges, Washington, D.C: World Bank, 2011.

Wrobel, Paulo and Alberto Luiz Pinto Coelho Fonseca. Clean Energy The Brazilian Ethanol Experience. London: Embassy of Brazil, 2006.

Zilberman, David, Deepak Rajagopal, Steven Sexton and Gal Hochman. Biofuel and the New Economics Of Agriculture. 2008. Web.

Footnotes

1. Zilberman, David; Deepak Rajagopal; Steven Sexton and Gal Hochman. Biofuel and the New Economics Of Agriculture. 2008.
2. Alan Kirman. “The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes”, The Economic Journal, V. 99, N. 395, (1989), p. 127.
3. Richard Heinberg. The party’s over oil, war and the fate of industrial societies,(Gabriola, B.C.: New Society Publisher, 2003), p. 40.
4. Richard Brittaine and NeBambi Lutaladio. Jatropha: a smallholder bioenergy crop. 2010.
5. Philip Kotler and Waldemar A. Pförtsch. B2B brand management with 7 tables,(Berlin: Springer, 2006), p. 299.
6. James M Buchanan. The Demand and Supply of Public Goods, (Indianapolis: Library of Economics and Liberty, 2012), p. 14.
7. International Council of Shopping Centers. Retail Space Europe: Year book 2008.([S.l.]: International Council of Shopping Centers, 2008), p. 46.
8. Cohen, Marc J., Cristina Tirado, Noora-Lisa Aberman and Brian Thompson. Impact of Climate Change on Bioenergy and Nutrition. n.d.
9. Paulo, Wrobel and Alberto Luiz Pinto Coelho Fonseca. Clean energy the Brazilian ethanol experience, (London: Embassy of Brazil 2006), p. 56.
10. Bullis, Kelvin. Record Food Prices Linked to Biofuels. 2011.
11. Pete Bethune. Earthrace: Futuristic Adventures On The High Seas, (North Shore, N.Z.: Hodder Moa/Hachette Livre, 2007), p. 35.
12. Donald Mitchell. Biofuels in Africa opportunities, prospects, and challenges, (Washington, D.C :World Bank, 2011), p. 76.
13. Paul, Hawken, Amory B. Lovins, and L. Hunter Lovins. Natural capitalism: The Next Industrial Revolution, (London: Earthscan, 2005), p. 84.
14. Brian Keeley and Patrick Love. From Crisis to Recovery the Causes, Course and Consequences of the Great Recession. (Paris: OECD, 2010), p. 46.