Editor’s note: You may have heard that before Price theory needs a revival. We agree. The economic mindset has lately been immersed in mathematical analysis without intuition. Fortunately, professor Bryan Cutsinger is here to help. We would like to present this as the first in what will happen [for now] be a monthly series in which Cutsinger presents price theory questions for consideration.
Professor Cutsinger will be available for feedback in the Comments section for two weeks so you can ‘solve’ any problem. We can’t wait to see your reactions!
Question 1:
In his book, Basic economicsThomas Sowell (2015) writes, “the price a producer is willing to pay for a given ingredient becomes the price other producers are forced to pay for that same ingredient” (p. 20). With that quote in mind, consider the following scenario:
The demand for drinking milk is increasing while the demand for milk in the form of cheese, ice cream and yoghurt remains the same. Assume that the supply of milk is completely inelastic. Explain why the elasticity of demand for milk from these other uses determines how much milk from these uses will be reallocated for direct consumption.