Q1.

In a perfectly competitive market it is assumed that all other things remain equal. In this perfectly competitive market there will be a single price at which the demand of milk from the consumer and the supply of milk to the market are balanced. It is at this price that the exact quantity of milk supplied will be consumed. This being the market equilibrium price of milk.

The market equilibrium price of milk is shown graphically in figure 1.1 'the intersection of the down sloping demand curve DD and the up slopping supply curve SS indicates the equilibrium price and quantity' as stated by Bajada et al. (2012, p.46). At this point of intersection demand and supply of milk are balanced.

Any price above the market equilibrium price shown in figure 1.1 will result in a surplus of milk as the quantity supplied will exceed the quantity in demand, the higher the price the greater the surplus. As a result the market prices would be reduced to move the excess milk. The lower prices would encourage an increase in the quantity in demand from the consumer. The price of the excess milk would continue to decrease until supply and demand were again balanced.

Any price below the market equilibrium price shown in figure 1.1 will result in a milk shortage. The quantity supplied will not meet the quantity in demand from the consumer, the lower the price the greater the shortage. This would lead to consumers eventually having to pay higher prices for milk resultant from the lack of supply. The increase in milk prices would in turn lead to an increase in quantity supplied, this would continue until market equilibrium price was again achieved.

Q2.

Durie (2012) Stated 'Glut to blame for farm-gate milk price falls, not big supermarkets'

The above statement sums up the impact of surplus product in the market.

Excess supply