Demand can be defined as the amount of goods or services that the buyers are willing and able to buy in a specific duration of time (Rittenberg, 2008, p. 58). The quantity demanded can be determined by various factors. In most cases, consumer’s choice to consume a particular product is determined by their preferences and tastes for particular products as well as the prices. On the other hand, the quantity supplied is the amount of goods or services that buyers are willing and able to supply in the market in a specific time. In this study, we are considering the market for milk.
The main aim for an organization to conduct an advertisement is to increase the level of sales. An advert plays a role of enticing consumers to buy a certain good or service. Advertisement also has a purpose of creating top of mind awareness. This offers a form of branding which attracts customers.
An advert informing potential buyers on its significance in weight loss will entice new customers who may not have been consuming milk to switch into milk consumption. This will lead to an increase in the quantity of milk demanded.
An advert informing customers on scientific discovery indicating the importance of milk in weight loss may also encourage the existing buyers to increase their levels of consumption. This will also lead to an increase in the level of milk sales.
As already seen, an advertisement increases the level of the quantity demanded. With time, the level of demand may exceed the quantity supplied. This will lead to an increase in prices. This is based on the assumption that all other factors are held constant. There are other factors which affects the quantity demanded for milk. For instance, an increase in the level of households’ income increases the quantity of milk demanded. For instance, an increase in the level of the household’s income in China and the surrounding regions has significantly led to an increase in milk prices (Arnold, not dated, par 4). Prices increases as a result of high demand for milk which is as a result of high household incomes.
A mad cow disease has various effects on the milk market. It can lead to a decrease in the level of quantity supplied in the market. The affected animals reduce the level of production. If the disease persists, the level of quantity demanded will exceed the level of quantity supplied. This will lead to rising in milk prices. This is under the assumption that other factors are held constant.
According to the law of demand, the prices and the quantity of product demanded are moves in opposite direction. That is, when the prices increase, the quantity demanded decreases. This conclusion is based on the assumption that other factors which affect milk market are held constant. Therefore, a decrease in the prices of milk leads to an increase in the quantity of milk demanded.
A price ceiling is a form of government intervention to protect consumers. Through a price ceiling, a government sets price limits over which the prices of a particular commodity should not exceed. In order for a price ceiling to have any effect to the consumers, it must be set below the market equilibrium. Otherwise it will be ineffective.
A price ceiling on the prices of milk will lead to a lower milk price below the market equilibrium price. This will lead to an increase in the quantity of milk demanded.
Compliment goods are goods which are used in conjunction with each other. Therefore, we expect an increase in level of demand in one of these to induce an increase in the level of demand for the other good.
For instance, it is assumed that cookies are used in conjunction with milk. Therefore, a change in demand in one of these will lead to changes in the quantity of milk demanded. Therefore, an increase in prices of cookies leads to an increase in the quantity of milk demanded.
Price control is the attempt by the government to control the prices of goods and services in the market. This is usually aimed at maintaining availability of basic needs to the customers.
One of the main advantages is that it maintains the affordability of basic goods and services. For instance, a price ceiling lowers the prices of milk below the market levels. At lower prices, more people can afford milk and this will maintain a healthy nation.
There are several drawbacks associated with price controls. Price control leads to shortages. When the government puts demands the producer to provide prices below the market prices, the amount of the product demanded will exceed the quantity supplied in the market. The level of demand increases to the point where supply cannot be kept up. These shortages can lead to black markets as people try to find a solution for shortages (Anonymous, 2008, par 2).
Elasticity of demand can be defined as the percentage change in the level of quantity demanded of a particular good or service divided by the percentage change in the prices of that particular good or services all other things held constant (Rittenberg, 2008, p. 115).
In the case of inelastic goods, consumers are less responsive to changes in prices. In this case, the elasticity of demand is less than one. That is, e<1.
In the milk market, consumers are less responsive to changes in prices. This is because milk is a basic good. Also, there are no close substitutes for milk. Therefore, the demand for milk is inelastic. Consequently, people may continue to consume milk despite of increase in prices. However, there may be slight changes in quantity demanded.
There are several determinants of elasticity of demand. These include the availability of substitutes, time or availability of households’ budget. In the case of milk, there are no close substitutes; therefore the demand is likely to be inelastic.
Total revenue is the amount of money received from the sale of goods and services. That is, TR=QP. In the case of elastic demand, any change in price has a significant impact on the quantity demanded. Since the demand for milk is inelastic, changes in price will lead to a small change in the level of revenue. Therefore, the total revenue will change with a small percentage.
Anonymous (2008). Price Controls – Advantages and Disadvantages. Retrieved from http://www.economicshelp.org/blog/economics/price-controls-advantages-and-disadvantages
Arnold, A. (n.d.). Thirst for Milk Bred by New Wealth Sends Prices Soaring. Retrieved from http://www.nytimes.com/2007/09/04/business/worldbusiness/04milk.html?_r=2
Rittenberg, L. (2008). Principles of Microeconomics. New York: Flat World Knowledge.