Markets, Prices and Price Setting

Introduction The relationship between supply and demand, in terms of markets, prices and price setting, is closely intertwined, a change in one variable results into a corresponding change in other variables.Advertising We will write a custom essay sample on Markets, Prices and Price Setting specifically for you for only $16.05 $11/page Learn More For instance, an increase in price of a commodity in the market might result in a decrease in the demand for that particular item. With decrease in demand, the supply will possibly be affected (Supply and demand, n.d.). If the opposite happens, and the price of a commodity is reduced, the demand and supply will increase. The general relationship between these variables, specifically in the market for milk, is the subject of discussion in this paper. The Market for Milk This paper discusses the market for milk in various market scenarios. Like any other product in the market, milk could either be negatively or p ositively affected by existing conditions, particularly in terms of its supply and demand. Below are some of the events and how they might affect the price and demand for milk. Scientific study finds milk does a body good In the event that a scientific research results indicate that milk has a variety of benefits to the body, the demand for milk will increase significantly hence shifting the demand curve to the right. At the same time, people will buy more milk in order to obtain the said benefits hence this will result in significant increase in the quantity of milk demanded. The supply of milk will also increase due to the increased demand. However, as the demand increases, the quantity of milk supplied will not be sufficient since the people will be purchasing more milk.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More There is an outbreak of mad cow disease Since mad cow disease is not t ransmitted through the consumption of milk or utilization of milk products (National Milk Producers Federation, 2012), the outbreak of this disease will not, in any way, affect the supply and demand of milk. Therefore, the demand, quantity demanded, the supply and quantity supplied will remain the same. The price of milk decreases In the event that the price of milk decreases, the demand will increase resulting in increase in the quantity demanded and the shift of demand curve to the right. At the same time, the supply will increase leading to a corresponding increase in the quantity supplied. The government decides to implement a price ceiling on milk Implementing a price ceiling on milk will affect the supply and demand for milk in various ways depending on price ceiling adopted by the government. If the price ceiling adopted by the government is higher compared to the existing price of milk, then the demand for milk will decrease. This will lead to a decrease in the quantity of m ilk demanded. On the other hand, if the government adopts a price ceiling that is lower than the existing price, then the demand, quantity demanded, the supply and quantity supplied will increase. Determinants of the price elasticity of demand There are three major determinants of the price elasticity of demand. These include availability of alternatives or substitutes, time and the item’s importance on the household budgets. They mainly influence the quantity demanded in the event that the price is either increased or decreased. Their influence on the quantity demanded is discussed below.Advertising We will write a custom essay sample on Markets, Prices and Price Setting specifically for you for only $16.05 $11/page Learn More Availability of alternatives or substitutes- when a good or service has many alternatives or substitutes, the price elasticity of its demand is expected to be greater since the customers can easily respond to the price in crease by shifting to other available substitutes. For instance, in the event that the price of cow meat goes up, the customers can shift to mutton, chicken or fish. Hence, since cow meat has many close substitutes, this may result in more price elasticity. Milk is a good example of items without close substitutes hence its demand is less price elastic. Time- when there’s a change in price of a particular item and the consumers are allowed so much time to respond, the absolute value of price elasticity of demand will be greater. For example, if the price of milk is increased today, the response will be much greater if consumers are given two months to respond and very small if they are given two days to respond. The item’s importance in the household budgets- depending on how great the item’s importance is to the household budgets, the change in price will have an effect on the quantity demanded. For instance, the change in the price of soap will not affect the quantity demanded, while the change in the price of chairs will most likely affect the quantity demanded. This is because, despite the change in price, soap (either for washing or bathing) will remain a basic necessity in the house and is more important compared to chairs. Incase you had planned to buy six chairs then the price increase is suddenly effected, you might decide to buy four chairs. But, in the case of soap, you can hardly make any adjustments since this is a consumable item that is required on a day to day basis. Type of elasticity of milk The demand for milk is price inelastic. This is because the change in the price of milk will have little or no significant effect on the quantity demanded since there are not many alternatives or substitutes to milk. Even if we consider various forms of milk, that is, whole, skimmed or organic, the change in price of one form will definitely affect the prices of all other forms. Relationship between price elasticity of demand and tot al revenue Since the price of milk is inelastic, the total revenue generated will automatically move towards the direction of the price change. In this case, the increase in the price of milk will lead to increase in total revenue. For example, assuming that the current price of milk is $1 per liter and the consumption is 1,700 liters per day, the total revenue is currently $1,700 per day. However, if the price is increased to $1.20 per liter and the consumption reduces to 1,500 liters per day as a result of this increase in price, the total revenue will be $1,800 per day. Therefore, the total revenue generated as a result of increase in the price of milk moves towards the direction of the price change. There is an additional $100 ($1,800 – $1,700) resulting from the increase in price. Conclusion From the discussion in this document, several conclusions can be made. First, various market scenarios affect both the demand for milk and the quantity demanded.Advertising Looking for essay on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Secondly, the determinants of price elasticity of demand include time, importance of the item in the household budgets, and availability of substitutes. Finally, the demand for milk is price inelastic hence the total revenue generated moves towards the direction of the price change. 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