Editor’s note: You may have heard Price theory needs to be resurrectedI agree. Lately economic thinking has been reduced to mathematical analysis that lacks intuition. Fortunately, Professor Brian Katzinger is here to help. We’re excited to bring you this first in a monthly (for now) series in which Cutsinger poses questions about pricing theory for you to consider.
Professor Cutsinger will provide feedback in the comments section over the course of two weeks to help “solve” each problem. We look forward to hearing your responses!
Question 1:
In his book, Basic EconomicsThomas Sowell (2015) states that “the price that one producer is willing to pay for a particular raw material will become the price that other producers are forced to pay for that same raw material” (p. 20). With this quote in mind, consider the following scenario:
The demand for drinking milk increases, but the demand for milk in the form of cheese, ice cream, and yogurt remains unchanged. Assume that the supply of milk is perfectly inelastic. Explain why the elasticity of demand for milk for these other uses determines the amount of milk that is reallocated from these uses to direct consumption.
