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.
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.