Supply and Demand Principles

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

A scientific study shows that the consumption of milk is beneficial for healthy bones.

If a scientific study shows that the consumption of milk is beneficial for healthy bones, the demand for the commodity will increase in the market. The purchasing behavior of the consumers would be influenced by this study, and more people would be willing to consume milk to benefit from its effect on bones. If the supply of milk remains constant, the increase in demand could lead to a shortage of milk and a subsequent increase in the price of the commodity (Andreyeva, Long, and Brownell 216). Scientist reports that prove the importance of a given product act as marketing strategies for the associated products; hence, they influence higher demand for the commodities.

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There is an outbreak of mad cow disease

If there is an outbreak of mad cow disease, consumer behavior would change, and the demand for milk would decrease. It is because most consumers would associate drinking milk with the disease. It would lead to an increase in the amount of milk available in the market, and its price would go down in response to the surplus. Consumer behavior is greatly affected by the market reviews of a product; hence, associating a product with the spread of a serious disease like a mad cow can have a significant negative effect on its sales (Mills and Law 76). It is possible to have zero sales of milk in this situation.

The price of almond milk decreases

If the price of almond milk was to decrease, it would provide a viable alternative to cow milk, and its health properties would lure more customers to shift from cow milk. It would ultimately lead to a decrease in the demand for cow milk, and it might lead to a decrease in the price of cow milk as stores look to increase its demand. The availability of cheaper quality alternatives to different products increases competition with the associated products.

The purchasing power of consumers affects their behavior in consumption. Almond milk is a healthier alternative to cow milk, but its price is significantly higher because its supply is low (Aaalami, Moghaddam, and Yousefi 243). If the price of almond milk were to fall within the purchasing power of most consumers of cow milk, they would prefer buying the almond milk.

To promote healthy families, a price ceiling on milk is implemented

Implementing a price ceiling for cow milk would have different effects based on the relationship between the price ceiling and the market price of the product. If the price ceiling is below the market price, the demand for cow milk would increase exponentially, resulting in shortages of the commodity. Conversely, if the price ceiling of cow milk is above the market price of the commodity, it would not have any direct effect on the demand and supply of milk.

Price ceilings are implemented to ensure the price of the associated commodity does not go beyond a certain point. This regulation in price affects demand and supply curves directly if the price ceiling is set below the immediate market price of the product (Engelmann and Muller 291). In such a situation, more customers would afford the product; thus, raising its demand while reducing its supply. Despite the supply going lower, the price of the product is held below the ceiling; hence, the price of the product remains constant.

Suppose Johnny drinks 4 cups of milk every day no matter what the price. What kind of elasticity does it have?

If Johnny drinks 4 cups of milk every day, regardless of the price of milk, this is an example of perfectly inelastic demand for the product. With this type of demand, the price of the commodity does not affect consumer behavior. Customers continue demanding the same number of units of a commodity, whether the price increases or decreases (Andreyeva, Long, and Brownell 216). Most of the products that have a perfectly inelastic demand are basic needs for consumers; hence, they have to purchase the same number of units of the commodities regardless of the price. In most cases, these commodities do not have alternative products that can give consumers the choice for a cheaper purchase. In Johhny’s case, he seems to have limited choices; hence, he has to purchase the same amount of milk, whether the price increases or reduces.

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Suppose that when the price of milk increases by 40%, the percentage change in quantity demanded by consumers is reduced by 10%. Calculate the elasticity.

The elasticity of demand is calculated by dividing the percentage change in quantity demanded by the percentage change in the price of the associated commodity. The elasticity of demand = -10%/ 40% = -0.25; hence, the elasticity of demand is 0.25 when considering that the quantity demanded by consumers and the price move in opposite directions. It is an elastic demand (Rios, McConnell, and Brue 34).

What happens to total revenue when the price of milk is increased. Why?

Seeing that an increase in the price of milk results in a reduction in its demand, revenue would decrease. The stores would lose 10% of their milk customers with every 40% increase in price, assuming that every subsequent increase in price leads to the same reduction in demand. As the price goes higher, the demand decreases, meaning that milk producers and distributors would make lower sales (“Market Effects: Change in Demand” par. 1).

It would ultimately lead to a surplus in the supply of milk in the market. The supply curve would shift to the right, whereas the demand curve would shift to the left. Assuming that the shift in demand and supply curves does not affect the price, a higher increase in price would lead to a relatively low amount of revenue in the milk business because more customers would not afford to purchase the product.

Changes in the market price always lead to a shift in the demand and supply of the associated products; hence, a reduction in the demand for milk would result in lower sales from the production level of milk to the stores. Revenue is generated through the sale of commodities, and a decrease in the sales of milk would hurt the profit margins of the producers and the stores distributing the product.

Assuming that Milk is a complement for a complimentary product like cereal, the decrease in demand for milk would possibly result in a decrease in the demand for some of its complementary products like cereal. Consumers would not need cereal if they cannot afford milk. It would further lead to a decrease in revenue. Any product that is associated with milk would face lower demand in the stores if the demand for milk reduces significantly.

The shift of the demand curve to the right for the associated products would subsequently lead to a decrease in their respective prices and an increase in their supply. The calculated elasticity of demand gives the absolute value of -0.25, which is less than -1, which means that milk is an elastic product. When the price of milk increases. The total revenue is bound to decrease because the product would affect the sales of its complements.

Works Cited

Aalami, H. A., M. Parsa Moghaddam, and G. R. Yousefi. “Demand response modeling considering interruptible/curtailable loads and capacity market programs.” Applied Energy 87.1 (2010): 243-250. Print.

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Andreyeva, Tatiana, Michael W. Long, and Kelly D. Brownell. “The impact of food prices on consumption: a systematic review of research on the price elasticity of demand for food.” American journal of public health 100.2 (2010): 216. Print.

Engelmann, Dirk, and Wieland Muller. “Collusion through price ceilings? In search of a focal-point effect.” Journal of Economic Behavior & Organization79.3 (2011): 291-302. Print.

Market Effects: Change in Demand 2015. Web.

Mills, Juline, and Rob Law. Handbook of consumer behavior, tourism, and the Internet. London: Routledge, 2013. Print.

Rios, Manuel C., Campbell R. McConnell, and Stanley L. Brue. Economics: Principles, problems, and policies. New York: McGraw-Hill, 2013. Print.

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