Explain two factors that could increase the price of milk

AQA AS-Level Economics Paper 1 June 2018

Explain two factors that could increase the price of milk. (10 marks)

Markets are a place where buyers and sellers meet to exchange goods and services, such as milk. The market equilibrium is the price and quantity where demand and supply are equal. Demand is the quantity of goods and services that consumers are willing and able to buy at each given price. Supply is the quantity of goods and services that firms are willing and able to sell at each price.

One factor that could cause the price of milk to increase is a change in the price or availability of related goods. For example, if the price of teabags decreased, there would be an expansion in the demand for teabags. As a result, there would be an increase in the demand for milk as teabags and milk are complementary goods. Complements are a pair of goods that have a positive cross elasticity of demand (XED). The diagram shows a right shift in the demand for milk, which causes the price of milk to rise.

Another factor that could cause an increase in the price of milk is a decrease in productivity. Productivity can be measured as the output per hour from a given number of factors of production. For example, if workers are slower to package milk, then supply would decrease because firms would be willing and able to produce a smaller quantity of milk at each given price. This would therefore cause the price of milk to increase.

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