Milk+price+hikes+leave+many+feeling+sour+by+I+Hyun

EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE:
For the last couple of years, Shanghai has been through a dramatic increase in food and beverage prices. Milk is no exception, and consumers are upset about another recent hike in milk prices of Bright Dairy & Food Co Ltd. This company takes up 80% of the fresh milk industry in Shanghai, so it can be considered an oligopoly that dominates a large portion of the industry. Therefore, an increase in the price of Bright Dairy & Food Co Ltd can have a significant impact on consumers of the product. The price increase can be explained in terms of one of the non-price determinants of supply, the cost of factors of production. There was an increase in the cost of the labor (wages) and management (bigger and more complicated management team) sector of the factors of production, which increased the firm’s costs, meaning that they could supply less. Consequently, the supply curve shifted to the left (as shown in the diagram). Because the demand stayed the same, there was a significant increase in price. Additionally, the price elasticity of Bright Dairy milk product contributes to the significant increase in price. The product has an inelastic demand because as a consumer said, they have “no choice but to accept it because [they] really don’t think another milk company can give [them] home delivery in Shanghai”. Therefore, even if the price increases significantly, the consumers have no choice but to continue buying the product. Many consumers in Shanghai are now being forced to buy expensive milk by adjusting their little income. Some, on the other hand, are finding substitutes for the product by visiting wholesale markets.

Demand: quantity of a good or service that consumers are willing and able to purchase at all prices at a given time period Supply: The quantity of a good or service that producers are willing and able to produce at all prices at a given time period Oligopoly: a type of market structure where a few firms dominate an industry Substitute: a good or service that can easily replace another Factors of production: resources that allow an economy to produce its output Labor: human factor, the physical and mental contribution of the existing workforce to production Management (entrepreneurship): organizing and risk-taking factor of production; entrepreneurs organize the other factors of production (land, labor, capital) to produce goods and services Subsidy: amount of money paid by the government to a firm, per unit of output Price elasticity of demand: measure of how much the quantity demanded of a product changes when there is a change in the price of the product Inelastic demand: a change in the price of the product leads to a proportionally smaller change in the quantity demanded of it Elastic demand: a change in the price of the product leads to a proportionally bigger change in the quantity demanded of it Opportunity cost: the next best alternative foregone when a economic decision is made
 * VOCABULARY TERMS AND DEFINITIONS:**

Supply and demand curve for Bright Dairy milk products
 * DIAGRAMS:**

Subsidy for Bright Dairy milk products The price hike for milk products can be a burden to consumers, and there are several ways to fix this problem. The first is to find a substitute product for Bright Dairy milk, such as a rival company. When this happens, two hypothetical situations arise: the demand might fall (demand curve will shift left) and the price of the Bright Dairy milk decreases, or the price elasticity of demand for Bright Dairy milk will become more elastic, and an increase in price will lead to a proportionally bigger decrease in the quantity demanded. This means that the producers cannot hike up the prices too much or else their demand will fall significantly. Either way, the producers of Bright Dairy will now have to consider the consumers’ preferences to compete with other substitute product companies. Another strategy is to increase the supply, and the government can intervene here by providing a subsidy for the Bright Dairy Company. A subsidy is a fairly good choice because it will benefit both the producers and consumers. As shown in the diagram, a subsidy will move the supply curve down, creating a new, lower price (P1). Because the government will pay for some of the costs of production for the firm, the firm will actually gain more revenue (blue part). The consumers will also see a decrease in their total expenditure. This is because the demand for Bright Dairy products are inelastic, so the fall in expenditure due to price (pink) is larger than the increase in expenditure due to increase in quantity demanded (purple). However, the government needs to consider the opportunity cost of the subsidy; the money used could be used for other needs such as education, social policies and other essential goods.
 * EVALUATION:**