Essay on "Price and Quantity of Milk in Different"

Essay 14 pages (4351 words) Sources: 14

[EXCERPT] . . . .

price and quantity of milk in different situations where they are influenced by different factors. The second section of the paper describes the factors that determine price elasticity of demand. The third section analyzes the type of elasticity of milk, based on its determinant factors. The paper continues with a section that analyzes total revenues in case the price of milk increases.

A) Cereal and milk are complementary goods. This means that if more people start eating cereal for breakfast, these people are likely to start drinking milk with these cereals. In other words, the demand for milk will increase. However, the people that start eating cereals can include people that were already drinking milk for breakfast and that will not modify the quantity of milk they drink, they will only modify how they drink it. This category of customers cannot affect the demand for milk. If milk demand and supply increase, the price of milk is likely to remain constant. If milk demand increases and supply remains constant, the price of milk increases.

b) in case there is a mad cow epidemic the milk demand is likely to significantly decrease. But the milk supply remains constant, leading to milk supply surplus. This means that milk prices are likely to significantly reduce as a result of reduced demand. As a consequence, this leads to increased demand for substitute products, like powder milk.

c) if the price of milk increases, this could lead to reduced demand for this product. In addition to this, the demand for complementary products like cereals can decrease also. Another effect of price of milk increasing is that products with milk as an ingredient can increase their price, which can determine reduced demand for such products (Investopedia, 2012).

d) if the government decides to implement a price ceiling on milk, this refers to establishing the maximum price that sellers can charge for milk. In this case, sellers are not as interested in this product, leading to reduced supply. The milk supply would be smaller than the milk demand, leading to a shortage in this product.

2. The price elasticity of demand is an indicator used in order to determine the reaction of the quantity demanded from a certain product to a change in the price of that product. Rice elasticity of demand can be relatively elastic or relatively inelastic. Relatively elastic products are those where price elasticity of demand is greater than 1. Relatively inelastic products are those where price elasticity of demand is less than 1.

There are several factors that influence the price elasticity of demand of a product. These factors are represented by the number of substitutes, degree of necessity, and the price of that product in comparison with the income. Regarding the number of substitutes, if there are numerous substitute products on the market of a certain product, this will increase the possibility and access of households of switching to these products in the situation in which the price of the product in case increases. The price elasticity of demand is proportional to the number of substitutes of the product in case. In other words, elastic products are those with a larger number of substitutes.

Regarding the degree of necessity, if the product in case is something of necessity, it is likely that its demand will not change in accordance with price variations. Therefore, an increase of the price will not determine a reduction of the demand as it would normally do in the case of other products (Rittenberg & Tregarthen, 2009). In other words, necessity products have inelastic price elasticity of demand.

The price of the product as a proportion of the income is another factor that determines the price elasticity of demand. This is because products that hold a high proportion of customers' income are rather elastic. In these cases, customers can easier identify the modifications in the prices of such products. Important price modifications of expensive products can determine customers to reduce their demand of such products.

3. In order to determine the type of elasticity of milk, it is important to analyze the product in accordance with the factors that determine products' price elasticity of demand. Regarding the number of substitutes, milk has little substitute products. These are represented by powder and condensed milk. However, it is rather unlikely that such substitute products can significantly influence the milk demand. Therefore, from this point-of-view, milk can be considered a rather inelastic product.

There are several situations that must be taken into consideration when analyzing the price elasticity of demand in the case of milk regarding the degree of necessity. These situations refer to regions with high consumptions of milk and regions with low consumption of milk. In Northern European countries that report high consumption of milk, this product is a necessity and is inelastic. In poor countries, the consumption of milk is lower, and there are lower numbers of customers that frequently purchase milk. In such countries, milk can be considered elastic rather than inelastic. The same situation can be applied to rural areas where people make their own milk, and only some of them have to purchase it.

Regarding the price of milk as a proportion of customers' income, there are also certain differences between different regions. In countries with higher GDP people have higher incomes, and the price of milk represents a smaller proportion of these incomes (Schenk, 2009). Therefore, these customers are less aware of price modifications in the case of milk. This means that milk can be considered an inelastic product. But in countries with lower GDP the price of milk represents a larger proportion of the income of customers in these countries, making them more aware of price modifications.

4. If the price of milk increases, its demand will remain constant because milk is considered an inelastic product. This means that modifications in its price are not likely to determine modifications in the milk quantity demanded by customers. In this situation, if the price of milk increases, total revenue will also increase. Total revenue is determined by multiplying the price of the product with the demanded quantity of that product.

In the case of inelastic products, the demanded quantity remains constant if the price increases, leading to increased total revenue. Therefore, in case the price of milk increases, the quantity demanded will be the same, determining increased total revenue of sellers. This situation is determined by the fact that milk is an inelastic product.

However, other situations must also be taken into consideration, even if they do not represent the rule. These situations refer the cases where milk can be considered an elastic product. Prices adjust to different economic factors that determine them (Roberts, 2007). If the price of milk increases in regions where milk has a stronger price elasticity of demand than this can lead to reduced demand of milk. This is because customers in these regions are more sensitive to price modifications.

In other words, they might not be willing to pay more in order to purchase the same quantity of milk. Instead, they could prefer to purchase less milk for the same amount of money. In this case, it is expected that total revenue will be reduced because the demanded quantity reduces. However, each situation is different. This means that total revenue can increase or remain constant if the demanded quantity is reduced, depending on the value of the increased price. Therefore, it is important to determine the issues that influence the intentions of customers in buying different products.

Reference list:

1. Demand and Supply (2012). Investopedia. Retrieved March 6, 2012 from http://www.investopedia.com/university/economics/economics3.asp#axzz1oMkwb73V.

2. Rittenberg, L. & Tregarthen, T. (2009). Principles of Microeconomics. Retrieved March 7, 2012 from http://catalog.flatworldknowledge.com/bookhub/reader/21?e=rittenberg-chab.

3. Schenk, R. (2009). Overview: Elasticity and Revenue. Retrieved March 7, 2012 from http://ingrimayne.com/econ/elasticity/OverviewEl.html.

4. Roberts, R. (2007). Where Do Prices Come From? Library of Economics and Liberty. Retrieved March 7, 2012 from http://www.econlib.org/library/Columns/y2007/Robertsprices.html.

Micro Economics MOD 2 SLP

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