Using data about the U.S. milk market to explain changes in milk prices - part 2

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 three graphics from the USDA which show how dairy production, consumption, 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 alternative explanations for the counterintuitive observation that an increase in domestic supply is accompanied by generally rising prices are most plausible. 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. One possible explanation is that demand is also increasing and more so than supply is increasing, however the data presented here is inconsistent with that as well.

Expected Student Learning Outcomes

- Explain how markets determine prices.
- Interpret data presented in graphical and tabular form.

Information Given to Students

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 follow up to another AE because this one builds on the data presented in the other one. Here is the link to part 1 of this AE: XXX.

milk S & D data (Excel 2007 (.xlsx) 15kB Aug1 18)

Facilitation Guide

Prefatory remarks:

It's ideal if this AE follows the one where they are to consider only supply and price data, where they should 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. In the warm up AE, they did not have data on demand, but once they see the additional demand data presented here, they see that demand is increasing at the same time, but that the prices do not always move as the supply and demand model predicts based on the relative size of the supply and demand shifts. You could also present students with additional data downloaded from the websites where the graphics were generated, and combining it into a chart like the attached spreadsheet. It is clear that in some cases the data is consistent with the predictions of the basic supply and demand model, and in some cases it is not.

milk S & D data (Excel 2007 (.xlsx) 15kB Aug1 18)

Debriefing notes, including discussion questions:

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.

Closing remarks:

This exercise should be useful to illustrate to students how they can use the supply and demand model to explain different changes in prices, and in particular, some of the things we hold constant when analyzing a particular market. It uses real world data to make the problem more significant for students.

This AE is best fit within a unit on supply and demand. Any assessments used for such topics would be effective here.