Market researchers have studied the market for milk, and...

Market researchers have studied the market for milk, and their estimates for the supply of and the demand for milk per month are as follows: $$ \begin{array}{|ccc|} \hline \begin{array}{l} \text { Price per } \\ \text { Gallon } \end{array} & \begin{array}{l} \text { Quantity Demanded } \\ \text { (millions of gallons) } \end{array} & \begin{array}{c} \text { Quantity Supplied } \\ \text { (millions of gallons) } \end{array} \\ \$ 10.50 & 100 & 500 \\ 8.00 & 200 & 400 \\ 6.50 & 300 & 300 \\ 4.00 & 400 & 200 \\ 2.50 & 500 & 100 \\ \hline \end{array} $$ a. Using the above data, graph the demand for and the supply of milk. Identify the equilibrium point as $E$, and use dotted lines to connect $E$ to the equilibrium price on the price axis and the equilibrium quantity on the quantity axis. b. Suppose the government enacts a milk price support of $$\$ 8$$ per gallon. Indicate this action on your graph, and explain the effect on the milk market. Why would the government establish such a price support? c. Now assume the government decides to set a price ceiling of $$\$ 4$$ per gallon. Show and explain how this legal price affects your graph of the milk market. What objective could the government be trying to achieve by establishing such a price ceiling?

Market researchers have studied the market for milk, and their estimates for the supply of and the demand for milk per month are as follows:
$$
\begin{array}{|ccc|}
\hline \begin{array}{l}
\text { Price per } \\
\text { Gallon }
\end{array} & \begin{array}{l}
\text { Quantity Demanded } \\
\text { (millions of gallons) }
\end{array} & \begin{array}{c}
\text { Quantity Supplied } \\
\text { (millions of gallons) }
\end{array} \\
\$ 10.50 & 100 & 500 \\
8.00 & 200 & 400 \\
6.50 & 300 & 300 \\
4.00 & 400 & 200 \\
2.50 & 500 & 100 \\
\hline
\end{array}
$$
a. Using the above data, graph the demand for and the supply of milk. Identify the equilibrium point as $E$, and use dotted lines to connect $E$ to the equilibrium price on the price axis and the equilibrium quantity on the quantity axis.
b. Suppose the government enacts a milk price support of $$\$ 8$$ per gallon. Indicate this action on your graph, and explain the effect on the milk market. Why would the government establish such a price support?
c. Now assume the government decides to set a price ceiling of $$\$ 4$$ per gallon. Show and explain how this legal price affects your graph of the milk market. What objective could the government be trying to achieve by establishing such a price ceiling?

Key Concepts

Market Equilibrium

Market equilibrium occurs when the quantity demanded by consumers equals the quantity supplied by producers, resulting in a stable market price and quantity. It is represented graphically as the intersection of the supply and demand curves, where no inherent pressure exists for price or quantity to change unless an external force (like government intervention) affects the market.

Supply and Demand Curves

The supply and demand curves are fundamental tools in economics. The demand curve shows the relationship between the price of a good and the quantity that consumers are willing to buy, typically downward sloping, while the supply curve displays the relationship between the price and the quantity that producers are willing to offer, usually upward sloping. Their interaction determines the market equilibrium.

Price Support

A price support, or price floor, is a government policy that sets a minimum price for a good, often above the natural market equilibrium, to ensure that producers receive a sufficient income. While intended to support producer income, if set too high, it can lead to a surplus where the quantity supplied exceeds the quantity demanded.

Price Ceiling

A price ceiling is a government-imposed limit on how high a price can be charged for a product, typically set below the market equilibrium price to make the good more affordable to consumers. This intervention, however, tends to create shortages by reducing the incentive for producers to supply the product, leading to a gap between quantity demanded and quantity supplied.

Transcript

00:01 Okay, so for this question, let's first agree this question a bit.

00:05 So first we know that at originally, the demand curve is d and the supply curve is s1.

00:13 So the market achieved an equivalent with the price of 250 and with the quantity of 45.

00:20 But now because there's some decrease in supply, supply curve shipped from s1 to s2.

00:26 So basically, part a say that if there's no price selling, how will be the equivalent price now? so the new equivalent price is what we need to find the crosspoint of the supply curve and demand curve.

00:43 So basically, the new equivalent price will see p star prime equals 350 and the quantity q star prime equals $350 and the quantity q star prime equals 40.

00:56 40 and because it is at the equivalent quantity demanded equals quantity supplied okay and if now there is a price ceiling the price selling is set to 250 but there's no black market so if that's a case the new price should be let's say price third double prime equals 250 because this price selling is lower than the equivalent price okay and the quantity demanded q star prime prime as a qd equals at 250 qd equals 45 and qs equals 30 so the amount of shortage equals 15 okay the difference between the quality demand and quantity supplied and part b saying that if the price ceiling is important and there's no black market.

02:03 No black market means that the market price for the gas is always 250, is set by the government.

02:11 Okay, so there's no black market to show the area representing consumer surplus, producer surplus, and that weight loss.

02:19 So basically, we know that the quality demand is 45, the quantity supplied is only 30.

02:25 So the total quantity that is available in the market is only 30.

02:28 So if we'll try to find consumer surplus, it should be this area.

02:38 This large area here will be the consumer surplus.

02:42 And producer surplus should be this lower triangle, producer surplus, and the dead weight loss should be this triangle here.

02:53 This is dead weight loss.

02:56 Okay, so this is for the case when there's no black market.

02:59 This is part b.

03:00 Part c say that if there is a black market.

03:05 And we need to reread this question.

03:07 We say that the price of the gas raised to the maximum that consumers are willing to pay for the amount supplied by producer at 250.

03:17 So firstly, we need to know that at 250, what is the total amount that is willing to be supplied by the producer? at 250, the quantity supplied is 30.

03:33 And say that the price of gas raised to the maximum that consumers are willing to pay.

03:40 So that means at the quantity of 30, actually consumers are willing to pay 550.

03:47 So the price selling equals 250 that is set by the garment.

03:53 But now, because there is black market available...

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