Using data about the U.S. milk market to explain changes in milk prices - part 1

This AE is probably best for a principles of microeconomics course, but could be used in higher level courses as well. Students should understand the basic supply and demand model and how changes in supply and/or demand lead to changes in equilibrium prices and quantities. This is a relatively short AE and should be able to be completed in a single class period with time to spare. It is a nice warm up to another AE which builds on the data presented in this one. Here is the link to part 2 of this AE: XXX

Overview

The point of this exercise is for students to think critically and use actual data and relate observed prices and quantities to the predictions of the supply and demand model. It also requires them to understand and interpret data presented in a visual format. Students are presented with two graphics from the USDA which show how dairy production and prices received by dairy producers in the U.S. have changed over several years. They are asked to relate that data to the basic supply and demand model, and determine which changes in supply and/or demand are consistent with the data presented. They will need to recognize that the domestic supply has generally increased at the same time that prices have also generally increased. They will need to determine that an increase in supply by itself is inconsistent with the generally rising prices over this time frame, so something else must be at work here. It would be ideal if students can recognize that perhaps both supply and demand are increasing, and the increase in demand is more than the increase in supply, which is driving up the prices in the milk market. There is a second part to this AE where they will learn that in fact, the domestic demand was not generally increasing over the entire period, so there might be other explanations of what is happening here.

Expected Student Learning Outcomes

- Explain how changes in BOTH market supply and market demand contribute to the determination of market prices.
- Interpret data presented in graphical form.

Information Given to Students

Prices in the market are determined by the interaction of supply and demand. Changes in either supply or demand can change the equilibrium price and quantity in a market, but sometimes it is not as clear what will happen because both supply and demand are shifting simultaneously. Consider the market for milk in the United States. You are provided with information about the U.S. milk market, including U.S. production of milk, and prices received by milk producers over several recent years. Analyze the data presented to you, and consider the following questions to help explain the movement of prices over time:

1. How has the domestic supply of milk in the U.S. changed from 2009-2017?

2. How have the prices received by milk producers in the U.S. changed from 2009-2017?

Which supply and demand events could explain the observed patterns in price and output?

A. Supply increases.

B. Supply decreases.

C. Demand increases.

D. Demand decreases.

Resources (article, video, etc.)
Refer to the following tables and graphs to answer the question. (See uploaded files)

This graphic can be generated at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home/statsByCountry. Select dairy, North America, United States, and Production, then click on get stats.

This chart can be found at https://www.nass.usda.gov/Charts_and_Maps/Agricultural_Prices/pricemk.php

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Dairy - Production for U.S.

Provenance: This graphic can be generated at https://apps.fas.usda.gov/psdonline/app/index.html#/app/home/statsByCountry. Select dairy, North America, United States, and Production, then click on get stats.
Reuse: This item is in the public domain and maybe reused freely without restriction.

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U.S. milk prices

Provenance: This chart can be found at https://www.nass.usda.gov/Charts_and_Maps/Agricultural_Prices/pricemk.php.
Reuse: This item is in the public domain and maybe reused freely without restriction.

Facilitation Guide

Prefatory remarks:

The point of this exercise is for students to think about how simultaneous changes in supply and demand change equilibrium prices, especially when they have competing effects. In this case, the data provided suggests an increase in supply while prices are generally rising over most of the time frame. If they draw the appropriate supply and demand graphs for each of the alternative choices in the question presented, they should determine that supply increasing alone is not consistent with the simultaneous increase in prices. If demand increases (even if supply also increases, but demand increases by more than supply does), then they can arrive at something consistent with the price data presented.

Note that general trends can be observed, but the data here is not a complete picture because there are other parts for both supply and demand for milk in the U.S. For example, some milk production might be exported or used in production of other goods besides fluid milk beverages (such as cheese production). Students should be encouraged to think about the limitations of the data – perhaps by viewing the documentation page for the data at https://www.ers.usda.gov/data-products/dairy-data/documentation/. A follow up AE can encourage students to think more about such alternative explanations.

This exercise should be useful to illustrate to students how simultaneous shifts in supply and demand can lead to different changes in prices, depending upon which curve has a larger relative shift. It uses real world data to make the problem more significant for students.