ECO201 – Supply and Demand: Markets, Prices and Price Setting – Milk Market

ECO201 – Microeconomics – Supply and demand: Markets, Prices and price setting

 The Market for Milk:

Using the concepts from the background reading, please write a 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.)

  • Explain what happens to price and quantity of milk when the following events occur:
    • More people start eating cereal for breakfast.
    • There is a mad cow disease epidemic.
    • The price of milk increases.
    • 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.

  • Read section 1 and 2 of Chapter 5. What are some of the determinants of the price elasticity of demand?
  • What type of elasticity (elastic, inelastic, zero, etc.) do you think milk has based on your answer above. Explain.
  • Based on your answer above, what happens to total revenue when the price of milk is increased. Why?
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