A) Effect of innovation on the equilibrium price and quantity of milk

In microeconomics, a technological innovation will reduce the cost of producing a good. In this scenario, the self-milking cow machine is a technological innovation that allows cows to be milked more frequently, three times per day instead of two, and at a lower operational cost, as no human assistance is needed. We will also assume that milk is an elastic demand and supply. As more milk can be produced at a lower cost, the supply of milk will increase. However, the demand for milk remains unchanged.

The Y axis measures the price of milk, and the X axis measures the quantity of milk. When we increase the supply of milk from S1 to S2, the new equilibrium price falls from P1 to P2. This is illustrated in Figure 1.

B) Effect on equilibrium price and quantity of apple juice

Milk and apple juice are substitutes and both have an elastic supply and demand. Due to the fall in price of milk, more people will choose to buy milk instead of apple juice, and the demand for apple juice will fall. However, the supply of apple juice remains unchanged.

When we decrease the demand for apple juice from D1 to D2, the new equilibrium price falls from P1 to P2 and the quantity of apple juiced produced falls from Q1 to Q2. This is illustrated in Figure 2.

Conclusion

The technological innovation of the self-milking cow machine will increase the supply of milk, which will lower the equilibrium price of milk. As milk and apple juice are substitutes, and the equilibrium price of milk is now lower, more people will purchase milk, and the demand for apple juice will fall. Due to the fall in demand for apple juice, the new equilibrium price of apple juice will also fall, as will the quantity.

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a) Effect of the Innovation of the Self-Milking Cow Machine on the Demand and Supply Curve of Milk (use the diagram on the left)

Assuming that milk has elastic demand and supply, the curves will be straight, as shown in the figure on the left. Any changes in the supply of milk will lead to a reduction in the equilibrium price from P1 to P2 and an increase in the equilibrium quantity from Q1 to Q2. This change is caused by a shift in the supply curve from S1 to S2. The equilibrium point also shifts from E1.

b) Effect on Equilibrium Price and Quantity of Apple Juice (use the figure on the right)

Since milk is a substitute for apple juice, an increase in the demand of one item leads to a decline in the demand of the other.

Assuming that apple juice also has an elastic demand and supply, the curves will be straight (see figure on the right). The demand for apple juice decreases because consumers prefer the less pricey milk. As a result, the equilibrium price reduces from P1 to P2, while the equilibrium quantity goes down from Q1 to Q2. This change is attributed to a shift in the demand curve from D1 to D2. The equilibrium point also changes from E1 to E2.

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This particular example is a bit weird, but the basic idea is that technological advancement has reduced the cost of supplying some good.

This will shift the supply curve to the right—we can produce a higher quantity for the same price.

Assuming that demand and supply are both moderately elastic (neither is perfectly elastic nor perfectly inelastic), this will increase the quantity of milk sold and decrease the price at which it is sold. I've shown that in figure 1.

Now we consider what happens to a substitute good, apple juice. The supply of apple juice is unaffected by this technology, but since milk is a substitute and the price of milk has decreased, this means the demand for apple juice will decrease, shifting the demand curve to the left—people will buy a smaller quantity for the same price. Again, if both supply and demand are moderately elastic, the price will go down, but the quantity sold will still go down in this example. This I've shown in figure 2.

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