Land and labour. There are a lot of cows distributed across 15,300farms in the UK, cows need a lot of land to herd. Second is labour because dairy farming is traditional, a labour-intensive, family-base business and cows are milked two times each day so it needs lots of labour to receive milk. Also, the milk in glass bottles need milkman to deliver to school and residence. Q1b
Opportunity cost means highest-valued option forgone and the sacrifice of the next best alternatives in the production or consumption of a good, provided that rational choice is make. By this means that as a country produces more of one good it has to sacrifice ever-increasing amounts of the other. Since the different factors of production have different properties. As the diagram shows the phenomenon of increasing opportunity costs, the production possibility curve is not a straight line but a bowed outward curve. There are 3 movement of production from A to B then C, it means small farmer produced more wheat (the next alternatives)the lesser resources can be used to produce milk due to limited resources.Therefore, the amount of milk sacrificed rises for each additional unit of wheat produced. The opportunity cost of the fifth million units of wheat is 1 million units of milk. The opportunity cost of the sixth million units of wheat is 2 million units of milk.
Equilibrium price: at this price, quantity demanded equals quantity supplied. It is a situation that there is no intention to change. The price is that when the supply of goods in a particular market matches demand and the price that maximizes a product’s profitability for a producer. Equilibrium price and output can be revealed using demand and supply curves where the two curves intersect is the equilibrium point. There is no surplus and shortage.
There are two factors that affecting the movement of equilibrium price of raw milk. The first is the cost of inputs increased. Cost of production increased, it would lead to supply curve shifting to left because the supply of raw milk decreased(S1 to S2). The second one is the increase in real incomes in the fast-growing BRIC economies. The demand curve would shift to right(D1 to D2) because raw milk as a normal good, as income increased, the demand of raw milk would increase. Also, equilibrium price of raw milk would move up from i1 to i2. That is the reason why the price of raw milk has risen.
Income elasticity of demand(YED) is a measure to show the responsiveness of the demand for a good to a change in the income of the consumers demanding the good. The formula for YED is %change in demand divided by %change in income. A positive income elasticity of demand is linked to normal good which is an increase in income will lead to a rise in demand and if YED of a good is less than 1, it will define as a necessity good. Therefore, dairy products can be regarded as a normal good and also a necessity good. People will tend to buy more dairy products in the UK if consumer’s income is rise.
Price elasticity of supply is a measure of showing the responsiveness or elasticity of the quantity supplied of a good or service to change its price. The formula of PES is %change in quantity supplied over %change in price.
With regard to cheese, it is a milk-related product. In paragraph 2, there is an increase in the cost of inputs as the cost of production increases, which is a non-price determinant of supply in dairy industry. Therefore, the PES of cheese would be affected by the change in cost of inputs.
Profit maximizing output is linked to short run and long run process by which a firm determines the price and output level that returns the maximum profit. Profit maximizing output is found by equating its marginal revenue with its marginal cost. We can find the profit-maximizing output by using marginal curves. As the diagram 4 shown that the intersection X of MC and MR curves is the profit-maximizing