Supply and Demand- a Case Study Milk Price

Topics: Supply and demand, Microeconomics, Consumer theory Pages: 9 (1894 words) Published: November 23, 2012
The market supply and demand curve above shows the milk price support problem. In order to solve the milk surpluses in the market, the government should take the steps to increase the market demand to the milk products by exploring overseas markets. For instance, the government should export the milk surpluses abroad. This would cut the cost of storage for milk products and encourages the local dairy farmers continue in dairy business.

b. The small dairy farmers would prefer the proposal 4 because it benefits them the most through the buyout program. This program encourages small dairy farmers to switch from dairy business to another business. The rewards from government can be used as capital to start a new business.

c. For consumers, they would prefer the proposal 2. Since the consumers are also the taxpayers, the dairy price support program is very costing to taxpayers. By eliminating the price support program, the consumers can enjoy the lower price of milk and the taxes to purchase unsold milk products can used to support other domestics goods that would be more benefits the consumers.

d. The member of Congress who is concern about the welfare of community will look with favor on the proposal 2. Since they investigated that the market for milk is a competitive market. Without the government intervention, the market equilibrium price for milk is set by the market demand and supply. For the benefits of consumers and taxpayers, they would enjoy a lower milk price than price floor. The problem of the farmers can be solved by increase the demand for dairy products, such as exports the milk surpluses abroad and promote the local brand of milk products to consumers.

Question 2
a. When YED = 2,
Income Elasticity of Demand, YED= Percentae change in quantity demandedPercentage change in income 2= ∆ Qd %12%

∆ Qd %=24 %
The quantity demanded for personal computer increases 24% as the customer’s income have risen by 12%. So, in order to meet my current inventory to the increase of quantity demanded by 24%, the price of personal computer should be increased. When PED = 0.5,

Price Elasticity of Demand, PED= Percentage change in quantity demandedPercentage change in Price 0.5= 24 %∆ Price %

∆ Price %=48 %
∴ The price of personal computer should be increase by 48% so that the quantity demanded will approximately equal my current inventory. b. i. To determine the price elasticity of demand,
PED= ∆ Qd %∆ Price %

PED=4.3 %0.25/1.25×100

PED=4.3 %20%

∴ When the price increased $0.25 to $1.50, an increase of 20%, the quantity demanded declined 4.3%, the price elasticity of demand for subway rides is 0.125. The elasticity is less than 1, so that the quantity demanded moves proportionately less than the price, demand is said to be inelastic.

ii. Since the demand can be considered as the inelastic, the riders are less sensitive to the fare rises and there would probably because of no substitute way for riders in short period. Hence, the Transit Authority’s revenue increases as the fare rises.

iii. From the estimation, the demand for subway rides is inelastic in short run. The estimation might be unreliable because of the data gathered is only first month after the fare rises. After a longer period, the riders may choose not to use subway and find another way of transportation which is more economical to them. The switch of riders to substitute way of transportation means the quantity demanded for subway decreases. So, when the fare rises, the quantity demanded declines gradually, the price elasticity of demand would be higher and more elastic.

c. As a clever entrepreneur, it is important to measure how much the quantity demanded of a good responds to changes in consumer’s income. During the prosperity periods, the consumer’s income is higher, they would demand for normal goods and less demand for inferior goods. In periods of depression, the consumer’s income decreases...

References: Smith, 2007. Chapter 6 answers (Online)
Available From :
(Accessed : 16 July 2011)
Wmich. Edu. 2010. Assignments In Class (Online)
Available From :
(Accessed : 16 July 2011)
Mankiw, N. Gregory. (2007). Principles of Economics, 4th Edition. USA: Thomson South - Western. pp97-99, 559-562
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