The demand and supply schedules for milk are as follows:
Price Quantity Demanded Quantity Supplied
10 0 125
8 20 95
6 40 65
4 60 35
2 80 5
a. On the same graph, draw the demand and supply curves. What does the demand curve for a product describe? What does the supply curve for a product describe? (Be specific.)
b. Use your graph to identify the equilibrium price and quantity. Explain why this is an equilibrium point.
c. Suppose that the dairy program fixes the price at P 7.00. Explain, referring to your graph, what will happen to the milk market.
d. Suppose a welfare program increases demand for milk by 50 percent at all price levels. Graph the new demand curve. What is the new equilibrium? What happens to supply? What happens to the quantity supplied?
e. Genetic engineering has lead to the development of bovine growth hormone. This hormone is expected to dramatically increase the production of milk of each cow. How will this development affect (i) supply, (ii) demand, (iii) quantity supplied, and (iv) quantity demanded?
Problem 2
The disappearance of anchovies off the coast of Peru in 1972 caused a scramble for protein-rich substitutes, notably soybeans. Because soybeans are used in animal feed, higher soybean prices eventually were translated into higher cattle prices.
Use demand and supply diagrams to show what happened in the (i) anchovy, (ii) soybean, and (iii) cattle markets. Indicate which curves shifted in each instance, and show the effects on the equilibrium price and quantity in the relevant market.]
Problem 3
Suppose that the demand curve for cantaloups can be described by the equation P = 120 - 3Qd, where P is the price per pound (in cents) of cantaloups and Qd is the quantity demanded per year (in millions of pounds). Furthermore, suppose that the supply curve for cantaloups is P = 5Qs, where Qs is the quantity supplied per year (in millions of pounds).
What is the equilibrium price per pound for cantaloups? What is the equilibrium quantity of cantaloups produced?
a. To draw the demand and supply curves on a graph, we need to plot the price and quantity data given in the table. The demand curve represents the relationship between the price of a product and the quantity demanded by consumers. The supply curve represents the relationship between the price of a product and the quantity supplied by producers.
To draw the demand curve, we can plot the price on the vertical axis and the quantity demanded on the horizontal axis. Connect the points in the table to form a downward-sloping curve. This curve represents the demand schedule for milk, showing how the quantity demanded varies as the price changes.
To draw the supply curve, we can plot the price on the vertical axis and the quantity supplied on the horizontal axis. Connect the points in the table to form an upward-sloping curve. This curve represents the supply schedule for milk, showing how the quantity supplied varies as the price changes.
b. The equilibrium price and quantity are the point where the demand and supply curves intersect. On the graph, locate the point where the demand curve and supply curve cross. The price and quantity at this point represent the equilibrium price and quantity.
This is an equilibrium point because it is where the quantity demanded by consumers is equal to the quantity supplied by producers. At this price, there is no excess demand or excess supply in the market.
c. If the dairy program fixes the price at $7.00, it means that the price is no longer allowed to vary based on the market forces of supply and demand. Referring to the graph, this fixed price is above the equilibrium price. As a result, there will be a surplus of milk in the market because the quantity supplied (125) is greater than the quantity demanded (80). Producers are not able to sell all of their milk at the fixed price, leading to a surplus.
d. If a welfare program increases demand for milk by 50 percent at all price levels, the new demand curve will shift upwards. To graph the new demand curve, multiply all quantities demanded by 1.5. The new equilibrium is where the new demand curve intersects the original supply curve. The new equilibrium price and quantity will be determined by this intersection point.
The supply curve does not change because the welfare program only affects demand. The quantity supplied remains the same.
The quantity supplied remains the same because the welfare program does not affect the behavior of producers, only the behavior of consumers.
e. If genetic engineering leads to the development of bovine growth hormone, it is expected to dramatically increase the production of milk of each cow. This will affect:
(i) Supply: The increase in cow milk production will lead to an increase in the supply of milk. The supply curve will shift to the right, showing a higher quantity supplied at each price level.
(ii) Demand: The development of bovine growth hormone does not directly affect the demand for milk. It is possible that increased milk production could lead to lower prices, which could potentially stimulate higher demand, but this is not guaranteed.
(iii) Quantity supplied: The quantity supplied will increase due to the increased milk production from cows.
(iv) Quantity demanded: The quantity demanded may or may not change depending on factors such as price, consumer preferences, and market conditions. The development of bovine growth hormone does not directly impact the quantity demanded.