Essay: Market for Milk

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Market for Milk

If more people start eating cereal for breakfast, the following things will happen. Some people will use soy milk or other milk substitutes, but the vast majority of people will use milk on their cereal. As a consequence, the demand for milk will increase if more people start eating cereal for breakfast. If it is assumed that there is no slack demand in the milk industry, then the suppliers of milk will not be able to increase supply right away. They will instead be constrained by the need to buy cows and equipment. Thus, in the short-run, the demand for milk will rise and the supply of milk would not. If we assume that the market for milk is not regulated (in many countries it is heavily regulated, with price floors and other constraints) then an increase in demand without a corresponding increase in supply will result in an increase in price. This will increase profits to producers, encouraging more producers to enter the industry (or existing producers to add capacity) and this will increase the long-run supply of milk in the economy.

b. If there is a mad cow epidemic, it should be expected that demand for milk would decrease. Consumers would either cut back on milk consumption, eliminate it altogether, or seek out substitutes. The quantity of milk demanded would decline in the short run. In the short run, producers would not be able to reduce production immediately. The reason for this is that investments in cattle would already have been made. With decreased quantity demanded and no change in supply, there would be a short-run surplus of milk. This issue would be compounded by the fact that in the event of a mad cow outbreak, other nations would close their borders to American milk. This would mean that producers would not be able to sell milk anywhere else. The result would be a glut of milk on the market, and the consequence of this is that prices would have to fall in order to producers to sell all of the milk they made. In the long-run, the combination of low demand and low prices would force many producers out of the market. Thus, in the long-run, the quantity of milk supplied in the market would decline.

c. If the price of milk increases, the quantity demanded with decrease. However, milk is a staple product and for most people it is not easily substituted. As a result, the demand for milk is not going to fall that far even with a price increase. Under this scenario, the quantity demanded will only fall a short way. Producers are likely going to see a net increase in profit. They will sell a slightly lower amount of milk and make small adjustments to their supply as a result, but they will earn more on each gallon of milk produced and therefore will see total profits rise.

d. If the government implements a price ceiling on milk, one assumes this would be so that consumers could be able to afford milk. However, the costs associated with producing milk would not be subject to price ceilings. In the short-run, if the price ceiling is halfway reasonable, there will not be much change in the milk market. Consumers will demand the same as before, producers will produce the same as before. There will come a point in the future, however, when the price of milk hits that price ceiling. Producers will see their profits reduced, because as their costs increase their ability to recoup those cost increases no longer exists. Profits for milk producers will decrease under this scenario, and over the long-run some producers will leave the market. The producers that remain will be those that can produce efficiently, and therefore… [END OF PREVIEW]

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