Introduction to Microeconomics Essay Example | Topics and Well Written Essays - 500 words - 2

Introduction to Microeconomics - Essay Example Figure 1 shows the pattern of farm gate prices: In 2004-2005, UK still remained as the lowest farm gate priced dairy producer for the 7th consecutive year. Comparing prices, the UK has a 37% gap as compared to Italy who receive a milk price of 35.8 euros/100kg compared to UK at 25.9. The reasons that were deemed to have caused this low farm gate price are the industries poor selling systems, bad forward contracts, excess profits up the dairy food chain, too much spring milk and currency effect or the  £ / Euro relationship. However, even with the loss of farmers, the UK milk and dairy industry has grown gradually but steadily since 1998 and the total value of the market increased by 2.9% to  £7.23bn in 2002 (DEFRA, 2006b).Why then in spite of the loss of producers, is the industry thriving? A September 2005 report by the Milk Development Council revealed that there was a discrepancy between the profits received by sectors of the supply chain. That is, some of them are earning excessive profits at the expense of the others. The report showed that supermarket, retail and processor gross margins on dairy products have increased over the past 10 years. Farm gate prices were also higher on average during 2004 as compared to 2003 but this increase was minimal as can be seen by the figure below: The problem now becomes apparent. The farm gate prices being low, it is expected that local and international sales of the product would be high. This is because low production costs usually mean low sales price. However, because of the high margin imposed on the product by businessmen, the products total production costs becomes much larger leading to higher sales price. This translates to lower sales volume because there is an inverse relationship between price and demand. This unfair share of profits and the low farm gate are what caused Scottish dairy farmers to conduct a blockade over the countrys major milk