Determinant Factors of Demand in Dairy Food Market - Implications for Milk Production in Bangladesh

Topics: Supply and demand, Demand curve, Inflation Pages: 7 (2052 words) Published: May 29, 2010
Determinant factors of demand in dairy food market - Implications for milk production in Bangladesh


Dairy has emerged recently as an important sub-sector in agriculture with profound implications for human health, livelihoods and the environment. Milk production in Bangladesh has increased during the past two decades. Improvement of high yielding crossbreed dairy and veterinary facility are the cogent factors for this partial success. But it is still far to achieve self-sufficiency in milk production. In order to head for self-sufficiency, issues on demand for milk are also becoming important. Although the declining rate of population growth has contributed partially towards self-sufficiency but the factors like urbanization and substitution have created the increasing demand for milk. Milk production in Bangladesh has increased at a rate (2.8 per cent) slightly higher than population growth (2.2 per cent) during the period from 1984 to 1996. Total supply of milk increased even slower than production because of elimination of imports with the growth in production. Although the milk production in Bangladesh has increased but the per capita supply of milk remained stagnant because of the population increase and substitution of imports with domestic production. The real price of milk has declined during the period, which caused a slower growth of milk production compared to its potential level. On the other hand, per capita income has grown during this period. The declining milk price, on the face of a stagnant supply and increasing income, warrants examining the factors affecting the demand and price of milk in Bangladesh.

The comparative static framework for milk market

In order to pursue the issue of causality in the falling milk prices the following conceptual framework embedded in the comparative static exposition of milk market is made. The demand and supply functions of milk can be as follows

QSit = f (Pit, Tt) ……………..(1)

QDit = f (Pit, Pjt, Zt, Yt) ………(2)

QSit = QDit ………………………………(3)

QSit = supply of milk in year t, t1 initial year, t2 final year; QDit = demand for milk in year t;
Pit = price of milk in year t;
Tt = state of technology in milk production in year t
Pjt = index of prices of consumers’ goods other than milk in year t Zt = demand shift due to change in urbanization
Yt = income level of consumers in year t.

The response of supply and demand to changes in the right-hand side variables is specified as follows:

δQSi / δPi * P/ QSi α1 ≥ 0 …………..(4)

δQSi / δT*T/ QSi α2 ≥ 0 ……………(5)

δQDi / δPi * Pi/ QDi e1 ≤ 0 ……………(6)

δQDj / δPj* Pj/ QDj e2 ≤ 0 …………….(7)

δQDi / δZ *Z/ QDi e3 ≥ 0 ………………(8)

δQDi / δY*Y/ QDi e4 ≥ 0 ……………..(9)

The deterministic exposition of the above relations is shown geometrically in Figure 1. The values of QS, QD, and Y are expressed in per capita terms in order to confound the effect of change in population. D1 and S1 are the respective demand and the supply curves in time 1, the initial year. Similarly, D2 and S2 are the respective curves in time 2, the final year. Dy is a hypothetical demand curve reflecting the effect of income growth, in isolation of other forces. The position of the D2 reflects the net shift, i.e., the effect of Y minus the effects of Z, and Pj, and income distribution. The way Dy has been drawn in the figure indicates that the combined effect of Z, Pj variables and income distribution is larger than the effect of Y in absolute terms. The effect of Z represents the effect of urbanization. For the sake of keeping close to the reality of Bangladesh, the effect of Z is shown to be positive. The position of D2 could be at the left of D1, just on D1 or at the right of D1 depending on whether this combined shift effect is greater than, equal to, or smaller than the shift due to increase in per capita income. There are two factual...
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