Determinants of demand and supply in the milk market

¶ … 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 in the amount of the same supplied as suppliers engage in other farming activities deemed more profitable than dairy farming. 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.

Part 2: Determinants of Price Elasticity of Demand

Price elasticity of demand according to Gillespie (2007), "measures the change in the quantity demanded relative to a change in price." In this section, I highlight some of the primary determinants of price elasticity of demand. To begin with, substitute availability is one of the main determinants of price elasticity of demand. In this case a commodity's price elasticity of demand is said to be high when such a commodity has a given close substitute. As Gillespie (2007) points out, when clients are aware of the availability of similar commodities in the marketplace, existing differences in the prices of such commodities is likely to make them switch between the same. For instance, when it comes to butter and margarine which are close substitutes, an increase in the price of one would bring about a significant increase in the demand for the other.

Yet another determinant of price elasticity of demand in this case is a given commodity's nature. In broad terms, products can be seen as being either necessities, luxuries etc. With that in mind, it can be noted that the demand for luxury products including but not limited to private jets, costly music systems etc., is deemed to be more elastic in comparison to that of products regarded as necessities. In the opinion of Gillespie (2007), the demand for those commodities considered necessities is inelastic. Necessities include but they are not limited to clothes and food. It is impossible to postpone the consumption of products considered necessities i.e. food even if their prices are increased. Addictive products behave in the same way as necessities. For instance, the demand for cigarettes is largely inelastic (Gillespie, 2007).

Lastly, the individual paying the bill according to Gillespie (2007) is yet another determinant of price elasticity of demand. In the author's opinion, an individual paying the bill for him or herself is more likely to be sensitive to price changes than an individual having his or her bill settled by another individual. For instance, if a company settles the fueling expenses of the marketing manager, such a manager is likely to be insensitive to the price of fuel. Such an individual may not be so much concerned about an increase in fuel prices.

Part 3: The Type of Elasticity Milk Has

Based on the discussion in the section above, the demand for milk can be said to be relatively inelastic. My assertion in this case is founded on two considerations. To begin with, in comparison to soft drinks, milk can be regarded a necessity. Unlike the consumption of a soft drink, the consumption of milk to some extent cannot be postponed if and when its price is increased. Thus in any consumer's budget, milk remains an essential product. Secondly, it can be noted that milk cannot be said to have close substitutes. As I have already pointed out in the previous section, Gillespie (2007) is of the opinion that if similar products are priced differently, customers are more likely to switch between such products. When it comes to milk, this cannot be said to be the case. No close substitutes exist in this case.

Part 4: Increased Milk Price and its Impact on Total Revenue

If the price of milk is increased in this case, the total revenue is also likely to increase. As we have seen in the discussion above, this is largely because milk is an inelastic commodity. This is also consistent with Baumol and Blinder's (2011) assertion that "if demand is inelastic, a rise in price will raise total revenue."