Assignment:
a) Draw a Supply and Demand graph for the milk market (the milk market is a free and competitive market). The price of milk must be measured on the vertical axis and the quantity of milk must be measured on the horizontal axis. Label the Supply Curve as S1 and the Demand Curve D1. Label the vertical axis P for Price. Label the horizontal axis Q for Quantity Supplied and Quantity Demanded.
b) On your graph label on the horizontal axis the equilibrium quantity of milk to be 2,000 gallons and label on the vertical axis the equilibrium price to be $10 per gallon.
c) Now, draw a new Demand Curve that would put this market into a surplus situation at a price per gallon of $10 per gallon. Label this new Demand Curve as D2.
d) Define a surplus situation for any market.
e) After Demand has changed to D2, show the quantity supplied on the horizontal axis at the price $10 by labeling the quantity supplied Qs.
f) Estimate a number of gallons for this Qs at price $10 (state what the number of gallons looks like on your graph).
g) After Demand has changed to D2, show the quantity demanded on the horizontal axis at the price $10 by labeling the quantity demanded Qd.
h) Estimate a number of gallons for this Qd at price $10 (state what the number of gallons looks like on your graph).
i) Explain clearly how you know that your market is currently showing a surplus (you must use the numbers you estimated above in your answer).
j) Now explain clearly what will now happen in this market currently in a surplus situation, assuming that this is a free and competitive market. Make sure you include all the steps involved and put the steps in the correct order.