Case- 2 Supply and demand: Markets, Prices and price setting - Essay Example

Currently, people have become health conscious and they are inclined to consume those things which can either provide them good health or beneficial to them. It is assumed that ‘a scientific study that finds milk does a body good’ is widely published and read by a large section of the society. Unless it is read by a good many people and believed into its findings, its consumption is not likely to increase by a significant amount. So the assumption that it is read and believed by too many people would boost its demand as everyone is interested in doing their body good.

With the increase in its demand, the milk price would go up in immediate terms. The reason is that in the short span supply of milk cannot be increased; however, seeing the high price of milk many producers would try to increase its production so that they could exploit the market situation and earn higher revenue. End Result: The consumption of milk would increase causing the milk price to go up in the short-term when milk supply remains the same. More demand with the supply remaining the same would cause price to rise.

Outbreak of mad cow disease will create a panic amongst people and consumers of the milk. A large section of the society would be doubtful about the milk quality with the fear that they might get affected from the disease. They would not like to consume milk; consequently, demand of the milk would fall. At this juncture, it is quite fairly being assumed that supply of the milk remains the same; the law of demand and supply of economics comes into play and cause milk prices to fall as producers would like to dispose off their milk before it is of no use.

If this continues for a long period of time, producers also reduce their production of milk to keep a check on falling milk prices. Market is said to be in equilibrium when the quantity demanded is matched by