Economic theory does not identify all the factors that directly or indirectly affect supply and demand. One of the main reasons for this is the assumption that economics tends to model the choices of individuals rather than represent reality, which is too complex for a theoretical representation. Consequently, it is possible to identify only five main factors affecting demand in most standard markets. They are income, prices, price expectations, correlation with prices for other goods, and tastes and preferences (Osman and Wohlgenant, 2017). In the case of supply analysis, the four factors are price level, technological advancement, governmental policy, and the number of suppliers. This essay aims to analyze the influence of different factors on the supply and demand of standard milk sold in supermarkets worldwide.
When analyzing supply factors, the milk market examination might be provided through the consequential discussion of the four most influential factors. Firstly, the price level of supply is maintained at a small margin and absolutely depends on the prices of logistics, electricity, and animal feed (Negi and Anand, 2018). Secondly, the rapid development of technology makes it possible to store certain types of milk for longer than a month without refrigeration (Bull, 2020). Such opportunity might be a significant advantage for many suppliers who produce long-term milk and increases the profitability of this product (Greenwood, 2017). Thirdly, the government, represented in the USA as a food and drug administration (FDA), strictly regulates the commercial production of milk, so the market develops within specific limitations (Center for Food Safety and Applied Nutrition, 2022). Finally, on this basis, many small suppliers tend to work with larger firms (Kennedy, 2021). This phenomenon might create some barriers to market entry and lowers the overall price on the demand side.
At the same time, the market’s demand is equally formed under the influence of the five market-driving factors. Firstly, total consumer income and a percentage of it devoted to the purchase of dairy products form a market volume above which firms are unlikely to gain profit (Desilver, 2022). Secondly, because of the highly competitive market and the small variety of milk types, almost all consumers are willing to accept prices within 5% of the equilibrium price for a specific milk type (Huffstutter, 2020). Thirdly, milk has no direct substitutes, but there are indirect substitutes, such as yogurt, and indirect complementarians, such as cookies or corn flakes.
In fact, changing the price of these products would not change milk consumption much since the market covers many more uses for this product beyond just drinking it and mixing it with corn flakes. Fourthly, since cows produce milk every day for 305 days, suppliers are constantly ready to saturate the market with this product, so there is no strong fluctuation in expectations of a decrease or increase in supply, and it is not an influential factor (Jacobs, 2020). Finally, the global milk market is difficult to analyze completely since, in some parts of the world, most people have lactose intolerance, and other individuals do not use milk due to the traditional lack of this product (D’Haene et al., 2019). However, the trend towards healthy lifestyles is a significant sub-factor of preferences, which strongly influences the demand for products in developed countries.
In conclusion, theoretically, only four factors influence the supply, and five factors affect the demand for milk in supermarkets. Their influence is differing, which forms the features of this market. For example, on the one hand, it is almost complete price independence of substitutes and complementarians. On the other hand, the appeal of small suppliers to developed organizations to establish a milk supply chain creates some barriers to entry into the market.
Reference List
Bull, M. (2020) ‘The Milk Situation,’ The New York times.
Center for Food Safety and Applied Nutrition (2022) Milk guidance documents & regulatory information, U.S. Food and Drug Administration.
Desilver, D. (2022) ’As inflation soars, a look at what’s inside the Consumer Price Index,’ Pew Research Center.
D’Haene, E. et al. (2019) ‘Religion, food choices, and demand seasonality: evidence from the Ethiopian milk market,’ Foods (Basel, Switzerland), 8(5), p. 167. doi: 10.3390/foods8050167.
Greenwood, V. (2017) ‘The milk that lasts for months,’ BBC, 3.
Huffstutter, P. J. (2020) ‘U.S. dairy farmers dump milk as pandemic upends food markets,’ Reuters.
Jacobs, A. (2020) ‘Is dairy farming cruel to cows?,’ The New York times.
Kennedy, J. (2021) ’Who are the big players in the EU dairy industry?,’ Farmersjournal.ie.
Negi, S. and Anand, N. (2018) ‘Factors leading to supply chain inefficiency in agribusiness: evidence from Asia’s largest wholesale market,’ International journal of value chain management, 9(3), p. 257. doi: 10.1504/ijvcm.2018.093890.
Osman, G. and Wohlgenant, M. (2017) ‘What are the factors affecting the consumers’ milk choices?’ Agricultural Economics, 63(6), pp. 271–282. doi: 10.17221/335/2015-agricecon.