Fig 7. Demand and supply equilibrium associated with binding and non-binding milk quotas.

In Fig 7, the intersection of supply curves, S⁰, demand curve, D, and milk quota, S**, determine the initial equilibrium price, P₀*, and quantity supplied by the market, Q₀*. A decrease in milk production associated with Johne’s disease shifts the supply curve backward to S¹. In panel 1 the milk quota is binding before Johne’s because Q₀*> Q** (quantity associated with milk quota S**), but not binding after Johne’s because Q₁* < Q**, the price increases from P₀* to P_1,* above producer price, PP. In the case of binding milk quotas (panel 2), the equilibrium quantity supplied is restricted to Q** creating a new supply curve (S**), because Q₁* is above the binding milk quota, and fixed price, PP.