Britain’s dairy farming industry is producing a large quantity of milk, and prices have fallen sharply in recent months. Economic losses have led many dairy farmers to exit the industry. Around 7,000 dairy farmers remain, including Kelly Seaton, a dairy farmer in Cheshire, who continues to operate despite losses.—economist.com
Some Data
The Questions
- Who is Kelly Seaton?
- What demand curve does Kelly face?
- Where does the price Kelly faces come from?
- How have the price and quantity changed in Britain’s milk market?
- Why has the price fallen and the quantity increased?
- Why has the supply of milk increased and the demand for milk decreased
- What happens at Kelly’s dairy farm?
- How have economic losses influenced the market?
The Answers
1. Who is Kelly Seaton?
Kelly Seaton is one of approximately 7,000 dairy farmers remaining in Britain. She is incurring an economic loss as the price of milk has fallen below her average total cost. While conditions were comfortable in 2025, dairy farmers like Kelly are incurring losses in 2026.
2. What demand curve does Kelly face?
Kelly faces a perfectly elastic (horizontal) demand curve at the market price. The market for milk is highly competitive If she charges a price above the market price, buyers switch to other suppliers and she sells nothing. If she charges a lower price, she earns less revenue because she can sell her entire output at the market price.
3. Where does the price Kelly faces come from?
The price Kelly faces is determined by the interaction of supply and demand. In Britain, some milk is sold to other countries, so demand is not limited to domestic demand.
4. How have the price and quantity changed in Britain’s milk market?
The data table shows that the price of milk has fallen from 40 pence per liter in 2025 to 34 pence per liter in the year ending March 2026. At the same time, the quantity has increased to approximately 13 billion liters, up from 12 billion liters in the same period.
5. Why has the price fallen and the quantity increased?
Figure 1 answers this question using the supply and demand model of a competitive market.
In 2025, the demand for milk was D2025 and the supply of milk was S2025. The equilibrium price was 40 pence per liter at the intersection of the 2025 demand and supply curves.
In 2026, the demand for milk deceased and the demand curve shifted leftward to D2026. The supply of milk increased and supply curve shifted rightward to S2026.
The price of milk fell to 34 pence per liter and the quantity increased to 13 billion liters.
The price fell because demand decreased and supply increased. And the quantity increased because supply increased by more than demand decreased.
6. Why has the supply of milk increased and the demand for milk decreased?
The supply of milk increased because dairy farmers started to use nutrient-rich feed and better fed cows produced more milk.
The demand for milk decreased because people shifted away from dairy products toward plant-based alternatives. People also shifted away from milk complements such as cereals.
7. What happens at Kelly’s dairy farm?
Figure 2 shows Kelly’s profit in 2025 and her loss in 2026.
In 2025, the market price is 40 pence per liter, so the demand curve for Kelly’s milk is D2025. She takes this price from the market and produces Q2025 where marginal revenue equals marginal cost (MC2025 = MC2025). At this output, price exceeds average total cost (ATC2025), so she earns an economic profit, shown by the blue rectangle.
In 2026, improved cow nutrition increases worker productivity and lowers production costs, shifting Kelly’s cost curves downward.
The increase in market supply shifts Kelly’s demand curve downward to D2026, lowering the price she takes from the market to 34 pence per liter. Price falls below ATC2026, leading to an economic loss, shown by the pink rectangle.
8. How have economic losses influenced the market?
Economic losses have led some farmers to exit the industry. Since 2019, the number of dairy farmers has decreased by about 20%, leaving around 7,000 remaining. But Kelly continues to operate because she expects her losses to be temporary. As farmers who view their losses as permanent exit the market, supply decreases, which raises the price and may allow Kelly to become profitable again.
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