supply and demand ECO

timer Asked: Jul 14th, 2015

Question Description

(For this Case, keep it simple; don't worry about different brands, etc.)

  1. Explain what happens to price and quantity of milk when the following events occur (you do not need to analyze the event itself but rather determine the effect of the event on supply and demand of milk):
    1. A scientific study shows that consumption of milk is beneficial for healthy bones.
    2. There is an outbreak of mad cow disease.
    3. The price of almond milk decreases.
    4. In order to promote healthy families, a price ceiling on milk is implemented.
  2. Suppose Johnny drinks 4 cups of milk every day no matter what the price. What kind of elasticity does it have?
  3. Suppose that when the price of milk increases by 40%, the percentage change in quantity demanded by consumer is reduced by 10%. Calculate the elasticity.
  4. Based on your answer to Question 3, What happens to total revenue when the price of milk is increased. Why?

Some helpful suggestions on completing the assignment:

For each event, you must specify how it effects either demand, quantity demanded, supply, or quantity supplied. 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.

Here is an example of the best way to answer question #1 above:

Event: Price of cereal decreases.

Assume that cereal is a complement for complement. If cereal is cheaper, then the consumer will increase quantity demanded of cereal. If consumers buy more cereal, then there will be an increased demand for milk because it is its complement. This event causes a shift of the demand curve to the right. The shift will cause price and quantity of milk to increase.

Here is also some helpful information on how to address the elasticity questions:

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. The price elasticity of demand is always calculated as a negative value due to the law of demand (inverse relationship between price and quantity).

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