The Economic Environment of Business - Essay Example

Other market drivers for these milk products are the increased variety of products including flavoured milk, and also the increased advertising efforts by companies. Suppliers and processors of milk products have adopted measures that aid them to act on interest of consumers. However the market for milk products faced difficulties in the year 2001 to 2002 due to very low farm gate prices and the foot and mouth diseases that affected UK herds, UK milk quotas and the low farm gates has led to the prices being lower than the cost of production placing the farmers under great pressure and also extend on their limits.

2 Some of the major companies in the UK involved in the production of milk and milk products include; Robert Wiseman Dairies, Unilever Best foods UK Ltd, The Yeo Valley Organic Company Ltd, The Kerry gold Company, Kraft Foods UK Ltd, New Zealand Milk Product Ltd, Dairy Crest Group and the Muller Dairy company. 3 Milk and milk products producing firms assume an oligopoly market structure where there are restrictions or barriers to entry, these barriers to entry are associated with health issues and also the prevention of unhealthy competition, market prices are causing these firms to shut down and also the farmers are under pressure in the production of milk to these prices.

Market structure that exists:The market structure that exists in this industry is an oligopoly structure, an oligopoly market structure the market is usually dominated by a few firms, this type of market structure falls between a perfect competition and a pure monopoly. This type of market there are times when there is high competition while at other times the firms in an oligopoly may collude by fixing prices and dominate the market.4The firms in an oligopoly market are faced with a kinked demand curve and this is for the simple reason that if a firm raises the price of the product it is not followed by others.

On the other hand if it reduces its prices he is followed by the others, this is the reason why the demand curve at high prices of the product is quite elastic and at lower prices the demand curve is quite inelastic. 5This is diagrammatically illustrated below:Determination of price and quantityThe average revenue curve represent the demand curve which in this case is kinked, if a firm in this industry raises its price it is not followed by others, if it reduces its price it will be followed by others, therefore the price and quantity in this industry is determined by the price of others, one firm will not raise its prices without considering the decisions to be made by other firms.

6 However sometimes the firms may collude and dominate the market, therefore the price in this kind of market is determined by market forces and in this case they become price takers and sometimes the price is determined by the firms and this case they become the price makers.Barriers to entry Barriers of entry into the milk producing industry is necessary in that it helps in the prevention of