Page 53 - Microeconomics, Fourth Edition

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In the late 1990s and early 2000s, the price of corn hovered around $2 per bushel. But in the last
half of the 2000s, the scenario changed dramatically, as Figure 2.1 shows. In late 2006, the price of corn
began to rise, and by mid-2008, it exceeded $5 per bushel. Even though the price fell in the last half of
2008, by mid-2009, it was still around $4 per bushel, well above the historical norm. And even in the first
half of the decade, when prices were closer to the historical norm, there was still variation. In 2003–2004
the price of corn increased to almost $3 bushel, while in 2004–2005, the price dropped, falling below
$2 per bushel in late 2005.
Figure 2.1 illustrates the vagaries of prices in a competitive market. Prices rise and fall in seemingly
random ways, and there is little that individual market participants (e.g., corn farmers, operators of
grain elevators, commodity traders) can do about it. However, we can understand why prices in a mar-
ket change as they do. In the case of corn, the pattern of prices shown in Figure 2.1 can be traced to the
interaction of some important changes in supply and demand conditions in the corn market during the
2000s. The slight increase in the price of corn in 2002 and early 2003 reflect a decrease in the supply of
corn due to a drought in the corn-growing states in the United States in the summer of 2002. The falling
prices in 2004 and 2005 resulted from unexpectedly large U.S. corn crops during those years.

$6

$5

U.S. price of corn (dollars per bushel) $4

$3

$2

$1

$-
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Year
FIGURE 2.1 The Price of Corn in the United States, 2000–2009
The monthly price of corn received by farmers in the United States between January 2000
and June 2009; prices reached a peak of $5.47 per bushel in June 2008. Source: Economic
Research Service, Feed Grains Database, U.S. Department of Agriculture,
http://www.ers.usda.gov/data/feedgrains/ (accessed July 9, 2009).

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