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Price and Quantity of Milk when Events Occur

4-5 page essay that addresses the following questions on the market for milk. (for this case, keep it simple, don't worry about whether the milk is organic, 2%, whole, skim etc.)

1. Explain what happens to price and quantity of milk when the following events occur:

a. More people start drinking soy milk.

b. There is a mad cow disease epidemic.

c. The price of milk increases.

d. The government decides to implement a price ceiling on milk.

For each event, you must specify how it effects either demand, quantity demanded, supply, or quantity demanded. It is also important to demonstrate how the change will affect the market demand or supply curve. Also, be sure to state any assumption you are making regarding the relationship of the event and milk.

e.g. There is a sale on cookies.

Assume that cookies are a complement to milk. If cookies are cheaper, then the consumer will increase quantity demanded of cookies. If consumers buy more cookies, then there will be a need for more milk to go with the cookies so the demand for milk will increase. This event causes a shift of the demand curve to the right. The shift will cause price and quantity of milk to increase.

2. What are some of the determinants of the price elasticity of demand?

3. Read section 1 and 2 of Chapter 5. What type of elasticity (elastic, inelastic, zero, etc.) do you think milk has based on your answer above. Explain.

4. Based on your answer above, what happens to total revenue when the price of milk is increased. Why?

Recall from the powerpoint presentation:

Inelastic goods (goods in which consumers are less responsive to changes in price): e < 1

Elastic goods (goods in which consumers are more responsive to changes in price): e >1

In this course, we use the absolute value of elasticity. It is always a calculated value of -1 due to the law of demand.

Case Assignment Expectations:

Use concepts from the modular background readings as well as any good quality resources you can find from the cyberlibrary or other internet search engines. Pleas be sure to cite all sources within the text and provide a reference list at the end of the paper.

Length: 4-5 pages double spaced and typed.

The following items will be assessed in particular:

Your ability to understand an application of supply and demand.

Some in-text references to the modular background material (APA formatting not required).

The essay should address each element of the assignment. Remember to support your answers with solid references including the case readings.

Solution Preview

Please refer to the attached file for the response.

PRICE, DEMAND, AND ELASTICITY: MILK PRODUCT

1. Effects on price and quantity of milk when the following events occur:

a. More people start drinking soy milk.
When people are shifting to soy milk, assuming that these are also the people who have been drinking milk and that milk is not a basic necessity for them, there will be less demand for milk. This would shift the demand curve to the left. This will bring about a downward pressure to the price of milk. Decrease in price of milk would discourage producers and sellers of milk; hence, they may decide to decrease their volume of supply. This would result to a decrease in quantity supplied for milk.

b. There is a mad cow disease epidemic.
This situation will have a psychological effect. People would think that the quality of milk was adversely affected by the disease. As such, milk would be less attractive to them. This will result to a decrease in demand for milk and consequently a decrease in price. A decrease in price would discourage the sellers/producers to sell more, bringing about a decrease in quantity supplied.

c. The price of milk increases.
Assuming that all other factors are held constant (e.g. income and taste and preference of buyers and also that price of milk responds too much to a given change in price); people would feel that the product would have become too expensive for buyers. This would result to a lower demand for milk. According to Pindyck and Rubinfeld (2001), demand for goods depends not only to price but also on ...

Solution Summary

The price and quantity of milk when events occur is determined.

$2.19