In a wonderful Chip Bok cartoon, a child starts by asking, “Why are gas prices so high?” and is told, “Turmoil in the Mid East.” Then, asking about the turmoil, he is told the source is “High Food Prices.” The reason for high food prices? The cartoon concludes with, “Because we use our corn for gas.”
The cartoon summarized what economist Timothy Taylor says is a race between supply and demand. If supply lags (Mid East oil), then price rises. Also though, when demand pulls ahead (corn and biofuels), prices go up. You can see then, for lower prices, we need demand to pull back and supply to surge ahead.
The Economic Lesson
On the supply side, we could consider the impact of Egyptian turmoil on Suez Canal oil tanker traffic and of drought in Russia on wheat prices. Meanwhile though, new technology could increase yield.
As for demand, in the U.S., a biofuel initiative has led to rising demand for corn. In addition, more affluence in China, India and other developing nations has meant more consumers who eat more meat which means animals who eat more grain. Factor in world population growth and demand could surge.
Whenever supply accelerates and increases productivity, then the upward sloping supply curve moves to the right and crosses the demand curve at a lower price. However, if demand takes the lead in the race, the downward sloping demand curve shifts to the right and price rises.