summation of these two linear demand functions. The resuhing demand 

 functions are shown in Figure 5. By horizontally summing these two 

 demand functions, the classified pricing provisions are neglected and a 

 single price for both fluid and manufacturing milk is as?umed. This 

 assumption is not representative of the market in the Northeast. 



Regional Price-Quantity Disappearance Curve 

 Under Classified Pricing 



Where most milk produced and sold in the Northeast is included 

 under either a Federal or State market order, a price-quantity relation- 

 ship reflecting this market structure would he more meaningful than 

 the combined linear demand function. 



A price-quantity relation which reflects the existing classified pric- 

 ing system was developed. The regional demand function for fluid milk 

 was used to represent the demand for fluid milk for the region. An 

 infinitely elastic demand curve was assumed for manufacturing milk. 

 In other words, an unlimited quantity of milk could be sold at the 

 manufacturing price and the quantity of manufacturing milk pro- 

 duced in the Northeast would have no influence on its price. 



Under the classified pricing structure there exists a demand func- 

 tion similar to that assumed for fluid milk. A price for fluid milk is set 

 in each market under the market order by a milk control board ( or as 

 determined at hearings or some method of formula pricing I . llcncc, the 

 price paid farmers for fluid milk is determined by administrative decree. 

 The quantity sold is determined by the quantity of milk consumers are 

 willing to purchase at this administratively established price. 



Support for a perfectly elastic demand for manufactin-cd milk can 

 be found in the performance of the manufactured milk market. This 

 market is national in scope. The Northeast supplies a very small portion 

 of the total quantity. In fact, the Northeast is a substantial deficit area; 

 it imports about one-third of the manufactured products ( in whole milk 

 equivalents) consumed. Thus, the Northeast output of manufactured 

 milk has ncgligi])le influence on the price. 



Two more points about the price of manufactured milk -hould be 

 made. First, the price of manufactured milk ii^ also administratively 

 determined in many Northeastern markets and is frequently based on 

 the U.S. average manufacturing milk price. Second, the Federal Govern- 

 ment price support activities for milk products effectively establishes a 

 price floor for manufactured milk. If the fluid demand and manufactur- 

 mz demand functions described above are cAaliiated using a luilk price 

 blend foruuila, a line resembling ABC, Figure 6, can be traced. Curve 

 ABC represents the price that farmers would receive if various quan- 

 tities of milk were produced. 



36 



