Demand and supply is the foundation of any economic analysis as the interaction of the two forms a market. The law of demand and supply works in divergent ways in the sense that, when prices of commodities changes, demand and supply will change in opposite direction holding other factors constant. This will depend on the nature of goods as forces demand and supply will be dictated by the type of good in question. For instance, demand or supply for some goods will respond more than changes in price as compared to others. This brings us to the concept of elasticity of goods. In addition it is not only price that affects demand and supply of goods, there are other factors that would affect the market such as changes in technology, taste and preferences, favorable climatic conditions and many other factors (Rittenberg & Tregarthen, 2009). This paper explores demand and supply of milk as a commodity in diverse conditions.
With the recent information concerning behavior of milk in the market as put across by Dohery Regan (2007), demand of milk stays strong despite high prices in the market. This can be attributed to the fact that milk is a necessity to the growing population across the globe and it is also cheaper source of protein. Therefore, we can say that the demand for milk is not responsive to changes in price due to the well-built demand, that is, perfectly inelastic. The demand curve (DD1) will take a vertical shape as shown below. The supply curve (SS1) will take an upwards sloping curve, ceteris paribus, as shown below in figure 1.0.
In the event that more people start to consume soy milk, assume that all other factors that affect demand are constant; this would imply that there would be an increase in demand. The demand curve would shift outwards to a new level say DD2 from the original level DD1. This outwards shift of the demand curve would exert an upward force on prices, that is, from the original level P1 to the new level P2. In addition the increase in prices would cause an outward movement (increase) along the supply curve, as shown in figure 1.1 below. This would imply that more goods would have to be supplied to meet the increased demand so as to maintain the market at equilibrium.
A mad cow diseases outbreak would impact on supply. The disease outbreak would lead to reduction in the supply of milk produced, ceteris paribus. This would cause an inward shift of supply curve say from SS1 to SS2. This shift would make prices increase say from P1 to P2. There would be no change in demand as can be seen in figure1.2 below. This is because the demand for milk is not responsive to changes in price.
In the third scenario where the price of milk changes, there would be an outwards movement in both the supply and the demand curve as seen in figure 1.3 below, ceteris paribus. The quantity demanded would remain constant, however, the quantity supplied would increase say from Q1 to Q2. In addition we see a condition of disequilibrium in the market as quantity supplies exceeds the quantity demanded.
A price ceiling is the maximum price which the supplier can charge. This is normally set at a price lower than the equilibrium price. From figure 1.4, the equilibrium price and quantity is at P1 and Q1 respectively. If the government imposes a price ceiling at say P2, there would be an inwards movement along the supply curve. The new quantity supplied would be Q2. The quantity demanded would not change. We therefore see a scenario of an excess demand (shortage) of milk in the market. With time, the shortage will push the prices up leading to increase in price hence the equilibrium would be restored.
Elasticity is a measure of responsiveness of demand or supply to changes in market condition. Price elasticity of demand is a measure of responsiveness of quantity demanded of a good to changes in price of that good. However, this measure of elasticity of demand of a commodity is subject to some inadequacies. First, it ignores the presence of other related goods in the market such as close substitutes and compliments as changes in prices or demand of these goods would affect the elasticity of the good in question. It also ignores the type of good in question as necessities and luxuries would have different elasticities (Dohery, 2007). Demand for luxuries tends to be more elastic. In addition, this measure overlooks time horizons. Goods tend to be more elastic over a longer period of time. Finally, elasticity depends on how well a market condition is defined. Goods will tend to be elastic in a more narrowly defined market.
From above analysis, milk is not responsive to changes in price. As pointed out earlier by Dohery, 2007, demand of milk stays strong despite high prices in the market. This would imply that demand for milk is perfectly inelastic; the price elasticity would be zero. Total revenue is considered to be the total amount received by suppliers from sale to buyers. It is computed by multiplying price by the quantity sold. As seen above, demand for milk is price inelastic, an increase in price would not change the quantity demanded, there would be no reduction in demand as can be experienced with other products with different elasticities (Arnold, 2007). Therefore, an increase in price would lead to an increase in total revenue.
In summary, the concept of demand and supply is the key to any economic analysis as demand and supply are the bricks of any equilibrium or market. It is not only prices that affect the market condition of a good. There are other factors such as price of related good, changes in technology among others. Goods can be classified as normal, inferior, necessities and luxuries among others. These goods have different equilibrium conditions. In addition analysis of goods in the market also depend on how responsive can the demand or supply of that commodity change with changes in price of that good, price and demand of related goods and changes in other factors such as income. Market analysis of a commodity is achievable with one or two variables while others are held constant.
Arnold, W. (2007). A Thirst for Milk Bred by New Wealth Sends Prices Soaring. New York Times.
Dohery, R. (2007). Milk Demand Stays Strong Despite High Prices. Reuters.
Rittenberg, L & Tregarthen, T. (2009). Elasticity and A Measure of Response. Principles of Microeconomics, New York: pp.58-88.