Supply and demand: Markets, Prices and price setting - Admission/Application Essay Example

2. There is a mad cow disease epidemic. The scare of getting affected by mad cow disease epidemic will result to people avoiding milk. Because of the scare, people get a substitute which is soya milk. The affected part of the equation is the reduction in supply and the increased cost of milk as shown in fig. a.    In fig. b, a rightward curve is created because of scare such that there will be glut of unwanted milk coupled by low price of milk. c. The price of milk increases. There are two ways that demand will be affected by the price of milk increases.

The first is that demand may be affected by the increase in price so that consumers will look for a substitute. However, it is also possible that the price of milk will not affect demand like when there is a need for it. For instance, demand for babies milk will be the same or even higher because of babies need. Adults cannot substitute milk with other concoctions because of health requirement. In the figure below, there is a rightward shift that means there is a new demand for the product, that at all possible prices, demand for milk will be greater than before.

From DA a new demand for milk is created that is DC even when the price of milk increases. Fig 3. Change in the price of milk Price of milk d. The government decides to implement a price ceiling on milk. B. Taylor, 2006 defines price ceiling as a government policy that “puts a limit on how high a price of a product can be. Taylor said that a price ceiling is always set below the market equilibrium to become successful. A price ceiling is not always advisable as it creates a shortage in the market.

Let us look at the graph to know what happens when a price ceiling is set. Source: B. Taylor, 2006. http://economics.fundamentalfinance.com/price-ceiling.php We see here that the equilibrium price of supply and demand is P1 and Q1. P* is the price ceiling imposed by the government to control the prices of milk. As you see the price ceiling is below the equilibrium price of P1 and Q1. At P* the quantity demanded becomes higher to P* and Qdem. But the supplier will only deliver at P*and Q*sup. This creates a shortage of supply that shows price ceiling is not always a good policy.

A shortage increases the price because of the demand which in the long run defeats the price ceiling of the government. II. Price elasticity 1. What are some of the determinants of the price elasticity of demand? Rittenber & Tregathen (2009) and B iz/Ed cited reasons for the price elasticity of demand. First is the availability of substitutes. If the number of substitutes are available easily, consumers can easily find substitutes when the price increase, thus it is described as an elastic demand.

Second, the degree of necessity also determines elasticity of demand because when the good is anecessity then the demand will not change even if the price increases. For instance, mothers will still buy infant milk even if the price changes because it is needed by their babies. This means that infant milk have price inelasticity of demand. Third, is the price of good as a share of income. Biz/Led said that goods that account for the large proportion of disposable income are elastic. Reason for this is that consumers weigh the 3.

What type of elasticity (elastic, inelastic, zero, etc.) do you think milk has based on your answer above. Explain. In Fig. C we see a price change from $10 to $14, to determine the type of