¶ … Price and Quantity of Milk
A Scientific Study Declares Milk Good for the Human Body
In such a case, the quantity of milk demanded will increase. The increase in the quantity of milk demanded in this scenario can be attributed to the change in customer preferences. Here, the number of customers demanding the product (for its declared benefits) will increase. Further, it is also likely that the existing consumers of milk will increase their consumption of the same. The demand curve in this case will shift to the right.
Outbreak of the Mad Cow Disease
In this scenario, the quantity of milk demanded will not change. The reason for this has got to do with the fact that so far, there is no evidence linking the consumption of milk from cows having the mad cow disease with any adverse health effects on those who consume such milk. The key assumption here is that the public is well informed that such milk is harmless. However, should we replace milk with beef in this scenario, things will be different. Research has in the past indicated that the consumption of beef from a cow suffering from the mad cow disease has adverse effects on the health of human beings. Hence in the case of beef, the outbreak of the mad cow disease would decrease the quantity of beef demanded hence shifting the demand curve of beef to the left. Such an occurrence would take place as people increase their demand for substitute products such as mutton.
c. A Decrease in the Price of Milk
A decrease in the price of milk will bring about an increase in the demand for the same. It is important to note that in this case, rather than the demand curve shifting, movements will be experienced along the demand curve. The decrease in the price of milk could also bring about a decrease...
The assumption in this case is that suppliers would rather preserve, pack and store the milk in anticipation of better prices in the near future or quit dairy farming altogether. The decrease in the price of milk in this case may also trigger an increase in the demand for cookies (as a complement to milk). The decrease in the price of milk could be as a result of a decrease in the demand for cookies consequently pushing down the demand for milk.
d. A Price Ceiling on Milk is implemented by the Government
The effect this will have will depend on whether the price ceiling implemented on milk by the government is above or below the equilibrium price. According to Lipsey and Chrystal (2007), when the maximum price set for a certain commodity happens to be above the equilibrium price, then such a move does not have any effect. Thus in our case, if the government sets the price ceiling of milk above the equilibrium price of the same, then such a move will have no effect on both the demand and supply of the product. However, as Lipsey and Chrystal (2007) point out, "if the maximum price is set below the equilibrium price, a shortage will develop…" In our case, a shortage of milk will push up the demand for the same. On the other hand, the supply of milk will decrease as dairy farmers seek to avoid the low prices of the product in the market. Those in dairy farming may opt to pursue other income generating activities like wheat farming and give up dairy farming altogether. This is what will bring about a decrease in the supply of milk.
Part 2: Determinants of Price Elasticity of Demand
Price elasticity of demand according to Gillespie (2007),…
