The Milk Market

1226 Words5 Pages
1a. The market for milk is almost always subject to some sort of government interference, but for these example, it is assumed that the market for milk is free from price controls, minimum prices, agricultural subsidies, etc. If more people start eating cereal for breakfast, the demand for milk will increase. This will increase the price in the short-run (Heakal, 2012). In the long-run, farmers will increase production of milk, and this will increase supply. As supply increases, the price will start to come down into a new equilibrium point. b. I have no idea if mad cow affects milk, but most other people do not either. Thus, people are likely to decrease consumption of milk, reducing demand. This will bring the price down as farmers try to get rid of their existing supply. The lower prices will force out the less efficient producers, so that the supply will eventually decline. c. If the price increases, then the price of milk will go up. There is, after all, a strong relationship between the price of milk and the price of milk. This will bring new suppliers into the market, or convince existing suppliers to increase their production. As a result, the supply of milk will increase. d. The effect of the price ceiling on milk will depend on where that price ceiling is set. If the ceiling is so high that it has no bearing on the existing market, there will be no effect. If the ceiling is low enough that it changes the existing market, then this will have the same
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