The Milk Industry

1
The Milk Industry
2
Outline

• Cameron Blanks Nature of the Firm, Supply,
  Federal Marketing Orders, Price Floor
• Dave Lewandowski Utility
• Sean Boone Advertising, Corporations,
  Transaction Costs, Monopoly, Oligopoly, Stock
  Information
• Angelo Minella Pareto Improvement, Economic
  Efficiency, Profit Maximization
• Amanda Nicastro Wage Rates, Specialization,
  Technology

3
The Nature of the Firm

• The nature of a firm shows and explains how a
  firm specializes in the production of a certain
  good. Production is defined as the process of
  combining inputs to make outputs to sell for
  profit.

4
Supply

• The supply of Deans milk products are the
  specific amount of milk products the company
  chooses to sell over a certain period of time.
  Due to the price floor of Milk it protects the
  milk industry from the law of supply that states
  as the price of a good increases, the quantity
  supplied increases.

5
Federal Milk Marketing Orders

• Government sets minimum milk price
• Assures farmers reasonable price
• Assures consumers adequate supply

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Price Floor

• A price floor is established in order to create a
  surplus of a good. In order to maintain this
  price floor, it is up to the government to
  prevent the created surplus from causing a drop
  in the market price. The government can keep the
  market price at a stable level by purchasing the
  surplus itself.

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Milk Utility

• From the year 1970 to the year 2000 Americans
  have changed their views on health. Many have
  switched from whole milk to two percent because
  of the entire health craze.
• Alone from 1947 to 1951 there was a 300 percent
  increase for the demand of skim milk
• From 1970 to 2000 the typical American consumed
  90 kg to a mere 20 kg of whole milk.
• The opposite is for skim milk with an increasing
  demand of 30 kg per person to 50 and leveled off.
• Applying to economics, individual utility has
  increased significantly from 20 to 50 but due to
  the fact of law of diminishing marginal utility
  it has leveled off at 50 kg.
• Companies have seen a rise in the demand for
  lower fat milk and have risen the prices of low
  fat milk over the years, because they know that
  with a higher demand for health they will pay the
  extra money to stay healthy.

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Graphs for Milk Utility
As you Can See, Utility to be more healthy has
show a increase of reduced fat milk (2) from
12.4 billion pounds to 24.2 over two years
And the demand for whole milk has gone from 36.2
billion to 18 billion

• Increase in demand increase in price
• San Francisco whole milk 2.67 and one percent is
  3.01

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got milk?

• Created In 1993
• Increase Demand For Milk
• Educate About Benefits Of Milk
• Help Milk Industry Stay Competitive

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Milk Corporations

• Most major milk suppliers are large corporations
• i.e. Alaskan Milk Corp, Deans, Turner
• The reason behind a corporation is limited
  liability

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Lower Transaction Costs

• Firms also produce and supply services inside the
  company and maintain raw materials so they dont
  have to hassle with other companies for materials
  or labor. This saves transaction costs, and time
• The Alaskan Milk Corp does the manufacturing,
  distributing, and selling of their products

12
New York Milk Monopoly

• 2 major milk companies in New York Parmalat USA
  and Dean Foods
• Parmalat USA files for bankruptcy in 2004
• Dean Foods attempts to purchase two bottling
  plants
• Parmalat USA decides to restructure rather than
  sell
• "Competition is what keeps prices fair and anyone
  who makes a living on a dairy farm or buys milk,
  cheese, or ice cream for their family dodged a
  bullet today. We're not out of the woods yet, but
  it looks like a major hurdle that could have hit
  us has been cleared."
  -Senator
  Charles E. Schumer

13
Milk Oligopoly

• 1998- 3 major dairy companies Suiza Foods,
  Southern Food Group, and Dean Foods
• 2000- Dean Foods merges Suiza Foods who had
  earlier purchased Southern Food Group
• Dean Foods sells 8.1 billion in dairy products
  while the next closest company sells 4.1 billion
  

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Financial Information of Dean Foods

• Stock Quote November 29th, 2006
• Symbol DF
• Price 42.43
• Change () ? .63 (1.51)
• Volume 568,600
• 52 Week High 43.27
• 52 Week Low 34.66

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Pareto Improvement
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• Pareto Improvement Example
• Girl makes boy better off by giving him her
  unwanted milk

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Economic Efficiency

• Achieved when every possible Pareto
• Improvement has been exploited
• Producer cant benefit without harming another

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Profit Maximization

• How to find the
• greatest possible profit!

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MR and MC

• MR gt MC ? raises profit
• MR MC ? profit
  maximized
• MR lt MC ? lowers profit

• In order to find profit-
• maximizing output
• level increase output
• when MR gt MC and
• decrease when
• MR lt MC

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Farm LaborAnnual Average Wage Rates
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Specialization

• Specialization that enhances efficiency and
  profitability of the milk industry
• Custom Services
• Labor Use
• Division of Labor

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Technology in the Milk Industry

• Advancements that Shift the Labor Demand Curve
• Mechanized Milking
• Agricultural Science

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THE END!