Microeconomic Case

The purpose of this essay is analyzes the influence of biofuels production on economic markets on the economic markets. Definitions, assumptions and the models of the producer behaviors and consumer behaviors will be considered. In addition, the possible government policies will be elaborated.

Production technology is a practical way available to producers. The producers turn inputs, such as raw materials, labor and capital into outputs, such as computers and chairs (Pindyck and Rubinfeld 2009, 195). Economists assume that producers attempt to maximize profits. It means producers choose the combination of inputs to minimize cost under the production technology and cost constraints.

Biofuels are liquid fuels that produced from renewable organic materials. Assume that biofuels (B) are made from oil (o) and corn (c). Therefore, the production function would be indicated as B= f (O, C). The prices of oil and corn are denoted as Po and Pc respectively. The isocost/isoquant diagram of biofuel production is shown in Figure 1.

The isocost line is the combination of the possible purchases of oils and corns by producers for the same cost (Pindyck and Rubinfeld 2009, 236). The cost of biofuel production equals the total costs of oils and corns. It can produce from all corns or all oils. The relative price of the corns and the oils is represented by the slope of the isocost line. If the price of corn falls, isocost curve rotates outwards along the C axies, if the price of corns increases, isocost curve rotates inwards along the C axis.

The isoquant curve is a curve showing all the possible combination of corns and oils that yield the same output (Pindyck and Rubinfeld 2009, 208). The marginal rate of technical substitution (MRTS) of corns for oils is the maximum amount of one unit of oil can be reduced when one additional unit of corn is used, without changing output of biofuels, therefore the output of biofuels retain constant (Pindyck and Rubinfeld 2009, 210). The shape of isoquant is represented by the MRTS at each point on the isoquant. Isoquants do not intersect, in Figure 1, B2 is a higher biofuel isoquant than B1.

The producer minimizes costs of biofuels production at tangency point. In Figure 1, isocost curve is tangent to isoquant B1, shows that output

B1 can be produced at minimum cost with corn input C1 and oil input O1. Therefore, maximize their profit.

As the demand of biofuels is increased, it results in the higher level of biofuels production. In Figure 1, there will be higher isoquant curve and higher isocost curve. Specifically, the impacts of increase demand for biofuels on the price of corn is depicted in Figure 2. As the corn is one contribution of the biofuel production, the demand of corn will constitute the demand for food consumption (D1) and the demand growing from the biofuels production (D2). The supply of the corn is