Macroeconomic concepts and models application to the raised issues on biofuels.


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Macroeconomic concepts and models application to the raised issues on biofuels

                   PART A

  • The biofuel has brought a huge impact to the economic world based on various sectors. This perhaps could have been due to it its great usage over the recent years after the farmers have taken a step on improved farming skills hence coming to more exploration on biofuels. Some of this impacts which have been brought about by the biofuels includes; The recent rise in corn price has brought a huge losses to the processors of the biofuels since they have to incur other expenses as they convert to a finished product. Therefore this has also led to an increase in a final price to the consumer. Some of the impacts which has brought about more use of the biofuel in the current world has led to the replacement of the liquid oil from 1-2% recently[1]. 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 great exploration it has brought about its huge demand in the market and this has lead to increase in its price to rise up to 16-40%.Lastly it has brought about its use since it was explored unlike beginning before it came into it’s full use. This has shown that 12% of the corn output was in biofuels.[2]


  • The developments in agriculture and conversion technology might influence the impacts of increased demand for biofuels on the demand for and price of crops such as corn because of the same forces which has brought about the increase in demand for fuel and food. The low output by the personnel in charge for in production may bring about price escalation due to high demand of fuel with less 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 lead to price increase due to competition by the consumers rushing for the less stock in the market[3].



  • Some of the effects which have been brought about by the increased competition between the participants and in the oil market on the impacts of increased demand for biofuels on the demand for and price of crops such as corn has enhanced several changes. For instance, it has brought huge impacts on food prices which have been accumulating over the period. It has brought a shortage which has led to decline in supply hence enhancing a push in prices effects. Slight different changes in supply could have led to tremendous effect due to pressure relieve. Moreover, it is attributed that there has been an increase in biofuel from 16-40% since it has come to existence[4]




















  • An increase in price of crops and a decrease in the price of fuel on a low income person who spends most of her income on food derived from crops will force the consumer to for gore the fuels and go for the food. This will make the consumer to substantiate the amount of money he normally uses on fuel to derive more 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 hence creating an increase in food price. This will cause a shift in demand curve of the food to a higher level and this will also result in movement of supply of food demanded towards the origin point of the x-axis. All this is due to the fact that the consumer will not bother much on biofuels since he has to give the first preference to the food before the everything else[5]. 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 the investing in food crop would be another way of cutting down the cost since he is not in a position to incur much on biofuel which he may not need it at all[6].

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 vary still. 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 consumer[7]. This therefore does not limit him in purchasing the good regardless of the price increase. Though he will have to cut down the consumption of biofuel so as to compensate the cost he will have to incur in food price increase. This will bring a slight change in demand curve of biofuel hence a decrease in it but the demand of food will remain the same. The supply of biofuel will decrease in the mean time before the consumer adjusts to the normal equilibrium[8]. This is all achieved by the introduction of the equivalent variation which will bring the consumer back to the original consumption point in the equilibrium level. But on the other side of it, the same person who is spending less amount of income in food will spend most of his income in plating fuel crops like corn in return. This is due to higher rate of return in investing in biofuel rather than planting more food crops which is of less economical value to him.Genarally, the person of high income will invest on biofuel not on food crops[9].












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 A and B could help to solve some  of this problems encountered by the consumers or the producers in one way or the other. Some of these issues affect all the people within the system of biofuel starting from the farmer to the final consumer without neglecting the processers and the middle distribution personnel. The farmers may either be affected by the climate change or drought occurring within a given period of time hence lowering the production of corn in that specific period. This will lead to less supply in the market and by so will cause the price of food to go up in the market. This will force the consumers to carry the burden which it has to be incurred by the processors during the processing stages all the way to be a finished product than a consumer can consumer. [10]

The cost of producing the corn by the farmer and selling it to the processers still will have to bear a huge cost since during the low production season, the farmer will have to sell them at a high price hence forcing the middle producers to shoot 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 of which should be able to make profit at the end of the period[11]. This is because 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. Generally the farmer has to push the cost of production to the next level may be due to increase in fertilizer and oil used by tractors in ploughing the farm[12]

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 country[13]. The other factor is due to increased production of ethanol which requires more of the 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 less land to be used in production of food crops.According to the United States Department of Agriculture; it indicated that 35% of the corn is used in ethanol plant. Moreover, World Trade Organization showed that 8% of the world corn is used in production of ethanol.

Some off all this issues can be responded by the government in by trying to reduce or closing the gap so that the consumers and the producers are not oppressed that much since the work of the government is to gather for the welfare of its citizens. Some of these policies that can be introduced by the government is to make sure that there is increase in food availability and biofuels that can sustain the whole population basing on the market demand. This will address the need of the final consumer and this can only be managed by the fact that the government must negotiate with the oil producing countries so that the oil prices be stabilize. This will enable the farmers to meet the reasonable price in production and this in return will enhance the final consumers the pay for the friendly price in the market.

The last policy is that the government should invest much on technology which will enhance good production of food and as well as the biofuel crops. This will balance the market demand and the supply demand in the market. All this policies will meet the interest of the people regardless of the income level.

[1] David, Zilberman,Deepak, Rajagopal,Steven, Sexton and Gal, Hochman. Biofuel and the New Economics Of Agriculture. Presented at Farm foundation Workshop Berkeley July 28 2008


[2][2] Alan Kirman. “The Intrinsic Limits of Modern Economic Theory: The Emperor has No Clothes”, The Economic Journal, V. 99, N. 395, (1989): pp. 127


[3] Heinberg, Richard. The party’s over oil, war and the fate of industrial societies.( Gabriola, B.C.: New Society Publisher, 2003) pg 40

[4] Brittaine, Richard, and NeBambi Lutaladio. Jatropha: a smallholder bioenergy crop : the potential for pro-poor development, (Rome: Food and Agriculture Organization of the United Nations.2010), pg 78


[5] Kotler, Philip, and Waldemar A. Pförtsch. B2B brand management with 7 tables.( Berlin: Springer 2006) pg 299

6James 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) pg 46

       [8] Cohen, M.J., C. Tirado, N.-L. Aberman and B. Thompson. Impact of Climate Change on Bioenergy and Nutrition, International Food Policy            Research Institute and FAO, (Washington, DC and Rome. 2008). Pg 128


[9] Wrobel, Paulo, and Alberto Luiz Pinto Coelho Fonseca. Clean energy the brazilian ethanol experience. (London: Embassy of Brazil 2006).pg 56

10 Kelvin, Bullis. Record Food Prices Linked to Biofuels.2011.Retrived on 16 June 2012 from


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


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


[13] Hawken, Paul, Amory B. Lovins, and L. Hunter Lovins. Natural capitalism: The Next Industrial Revolution.( London: Earthscan.2005) pg 84

Keeley, Brian, and Patrick LOVE. From Crisis to Recovery The Causes, Course and Consequences of the Great Recession. (Paris: OECD.2010) pg 46



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