Jason Lee 12HT 26th November 2007
Supply & Demand: Applying the Theory
“In a growing world, milk is the new oil”
The purpose of this report is to analyze and interpret the article “In a growing world, milk is the new oil”, to determine the effect of different economic factors on supply and demand, and how that can affect the equilibrium price.
“There’s a world shortage of milk”, states Philip Goode, and this is due to the rising incomes “from China and India to Latin America to the Middle East.” As people become wealthier, they are willing to buy a higher quantity of milk. “The average person in China now consumes more than 25 liters…up from 9 liters in 2000.” This results in a shift of the demand curve to the right (Figure 1), which causes disequilibrium and leads to a shortage (Q2 - Qe), since people now demand more quantity Q2 than the market can supply at the time, Qe. This shortage pushes up the price of milk, for at the originally supplied quantity Qe, people are actually willing to pay price Pe2 on the new demand curve.