Q 1: Assume that milk operates in a perfectly competitive market, use a well labeled demand and supply model to explain how market equilibrium price of milk is being determined.
Assuming that milk operates in a perfectly competitive market is known as equilibrium; this is where we have neither surplus of milk nor a shortage. The supply curve shown in red and the demand curve shown in green is a graphical representation of the relationship between price and quantity. The supply and demand of a product is balanced, and only occurs when people (buyers) are willing to pay the price that matches the quantity that the sellers are willing to sell.
The model below is showing equilibrium between the price of milk and the quantity of milk supplied. The intersection at the supply curve and the demand curve is the intersection of equilibrium, where price and quantity are balanced. Anything outside this is known as disequilibrium. [pic]
Disequilibrium is where we have surplus or a shortage in a product. If we have an increase in milk supplied to the market and this exceeds the current price that people are willing to pay, we will end up with a surplus of product on the market, where as if the quantity exceeds the price of a product we will end up with a shortage of milk supplied. [pic]
Q 2: Using the same model, explain and illustrate the impact of the glut of milk on the market. Clearly explain the equilibrating process. [pic]
Supply is the amount of product that producers are able to and are willing to put on the market for sale. A glut of milk is an oversupply of milk on the market, the reason for an oversupply can be caused by many reasons, as mentioned in (Bajada et all, (2012)) the basic determinants of supply are: • Resource price
• Prices of other goods
• Expectations about future prices and economic activity • The number of sellers in the market.
How could have these determinants affected the supply of milk; we...
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