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PRICE ELASTICITY
OF
DEMAND
OF
MILK AND MILK PRODUCTS
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 EXECUTIVE SUMMARY

Consumption of milk and dairy products has been increasing on a global level as a result
of both a growing population and increases in per capita consumption.
This part of the report presents the results of an analysis of the responsiveness of home
consumption of a variety of foods to variations in prices of milk and milk products. The
various milk products considered in the study are: curd, cheese, ghee, butter and ice-
cream. At an initial stage an effort has been put in to understand the consumer
preferences related to milk and milk products with the help of a questionnaire. This
sample was addressed to a sample of size 30. On the basis of the information provided by
the respondents in the questionnaire the price elasticities of milk, curd, cheese and butter
have been computed. The underlying assumption while computing the price elasticities
was that the demand is being affected only by the change in price of the commodity
whereas all the other factors are constant.
The computed values of own price elasticities have then been tested for their significance
using t-test. The secondary data used for this purpose has been obtained from the
National Dairy Development Board.
Further, the cross price elasticities between various products have been computed. These
computed values have again been tested for their significance with the help of a t-test.
The results show that the demand of milk is highly inelastic i.e. it does not change with a
change in price, though the demand of curd, cheese and butter are more price elastic than
milk.

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INTRODUCTION TO PRICE ELASTICITY

The price elasticity of demand (PED) is an elasticity that measures the nature and
degree of the relationship between changes in quantity demanded of a good and changes
in its price. It measures the responsiveness of a change in quantity demanded for a good
or service to a change in price.
Mathematically, the PED is the ratio of the relative (or percent) change in quantity
demanded to the relative change in price. When the PED of a good is greater than one in
absolute value, the demand is said to be elastic; it is highly responsive to changes in
price. Demands with an elasticity less than one in absolute value are inelastic; the
demand is weakly responsive to price changes.

FACTORS AFFECTING CONSUMER DEMAND

Consumption of milk and dairy products has been increasing in India which is a result of
both a growing population and increase in per capita consumption. While Indian food
demand (especially in developing countries) increases with income, the total share of a
household’s budget spent on food generally falls as incomes rise, while the budget share
spent on services rises. In addition, changes in income also affect the composition of
demand.
The relative price of dairy products to other competing (i.e. substitute) or complementary
products is an important factor affecting demand. For example, other drinks provide a
substitute for liquid milk, margarine provides a substitute for butter and meat provides a
protein substitute for cheese. Thus the relative prices for substitute products greatly affect
the purchasing behavior of consumers. There are also a number of complementary food
products, where a change in price will have a direct impact on the demand for certain
dairy products. For example, bread and butter, breakfast cereals and milk and pizzas and
cheese are all complementary products.

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Secondary factors, other than population growth, income and price, have also affected per
capita consumption. These include demographic and socio-economic factors (such as
ageing population, decreasing household sizes, urbanization, increase in the number of
working women, etc.) and food preferences and consumer attitudes (including health and
nutritional issues, food safety, quality (e.g. freshness, taste, branding), production ethics
(e.g. environment, animal welfare), etc.

FACTORS AFFECTING PRICE ELASTICITY OF

DEMAND
1. Nature of the commodity: - The demand of a product is more inelastic if it is a
necessity for the consumers. In the case of our study, milk is still considered as a nutrient
by the customers and is hence indispensable which makes its demand inelastic. Other
milk products like cheese and butter are more price elastic as they are considered to be
fattening and relate to various health issues.
2. Availability of substitutes: - The size of the price elasticity of demand is larger the
closer and the greater is the number of available substitutes for the commodity. In our
case milk products have few substitutes and that too not very close. This factor has major
implications on the values of the price elasticities calculated in the study.
3. Long run or Short run: - The price elasticity of demand is larger the longer is the
time period allowed for consumers to respond to the change in commodity price. Thus in
our case also if price of milk falls then its demand will not increase at a much faster rate
as consumers take time to find new ways to consume milk as a substitute to other
products. Thus in long run its demand would be more elastic than in the short run.

OBJECTIVES OF STUDY
1. To study the current consumer preferences related to products in the dairy sector.
2. To calculate the own price elasticity of milk and milk products in the dairy sector.
3. To obtain the cross price elasticities of:
i. Milk and sugar
ii. Milk and tea

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 iii. Milk and coffee
iv. Butter and cheese
4. To test the significance of the values of own and cross price elasticities obtained, with
the help of t-test.
Assumption : for the computation of price elasticities of the products under
consideration, we have assumed that all the other factors such as population, consumer
tastes etc are constant.

METHODOLOGY
For the purpose of this study a survey on consumer preferences for various milk and milk
products had been conducted (sample of the questionnaire addressed is attached in the
appendix). The sample size chosen for the purpose of our study was 30. The respondents
were chosen from different socio-cultural backgrounds. The responses from these
respondents helped us evaluate and understand the consumer preferences and calculate
the price elasticity of the products. The figures obtained were tested for their significance
from the secondary data available.

CURRENT DAIRY DEMAND PATTERNS AND TRENDS

In India, per capita consumption of dairy products is largely being fuelled by high
population and income growth, but also the impact of urbanization and the development
of fast food, changes in lifestyles, and expansion of cold storage facilities and improved
product shelf life.
Overall demand for dairy products within India has generally matured, with some of the
consumption of traditional dairy products (such as liquid milk, butter and condensed
milk) being replaced by growing demand for innovative value-added products (such as
certain cheeses, yoghurt and fermented products). This trend is characteristic of the
demand in developing countries as consumer purchasing decisions are driven more by
demographic and socio-economic characteristics and food preferences and consumer
attitudes relative to income and price.

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A.PRICES OF VARIOUS PRODUCTS (Used in the Study)
Milk:
Double Tone- Rs.19 per litre (source- Mother dairy)
Single Tone- Rs. 17 per litre (source- Mother dairy)
Full Cream- Rs.26 per litre (source- Mother dairy)
Flavored Milk- Rs. 20 per half litre (source- Mother dairy)
Butter:
Rs. 18 per 100 gms (source- Amul)
Rs. 72 per 500 gms (source- Amul)
Cheese:
Spread- Rs. 37 per 200 grams (source- Amul)
Yoghurt:
Plain- Rs. 25 per 400gms
Ghee:
Rs 160 (1 ltr)

B. FOOD PREFERENCES AND CONSUMER ATTITUDES

Food preferences and consumer attitudes are progressively gaining in importance as a
significant determinant of demand for milk and dairy products, particularly in India as
consumers are becoming more affluent and more educated.
Health and nutritional issues have become important factors in determining the overall
demand as well as the compositional of demand for milk and dairy products. Demand
is progressively becoming orientated towards more natural products; with a reduction
in the demand for products which are perceived to be ‘unhealthy’ (e.g. fats). The
study conducted also provided justification for this point as people were seen shifting

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 from full cream to single toned or from single toned to double toned due to health
issues like obesity, heart problems etc.
Quality (including factors such as taste, freshness, branding and packaging) is an
important factor driving purchasing decisions for milk and dairy products,
particularly as consumers become more affluent and educated. This drive towards
quality products has tended to result in a shift in demand from commodity type
products to value added products. Our study on consumer preferences with the help of
the questionnaire designed validated this point as we saw consumers went in for
Amul or Mother Dairy products that were advertised and had a good name in the
market.
Figure 1: Figure showing the number of consumers for various milk and milk
products

As per the data obtained from a sample of 30 respondents, we see that milk is a highly
consumed product and is consumed by everyone. Around 76% of the people like to
consume cheese and 84% consume butter. The corresponding figures for curd, ghee, ice-
cream and lassi are 56%, 60%, 72% and 56% respectively.

Figure 2: Figure showing the percentages of the sample preferring different types of
milk

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We see that cow milk is highly preferred by the consumers followed by the tetra packed
milk, token milk and buffalo milk.
Figure 3: Figure showing the percentages of the sample preferring different types of
curd

We see that most of the consumers prefer homemade curd which also highlights the issue
of hygiene and safe food. This figure is followed by that of the packed curd available in
the market. Very few consumers prefer curd available in the local shops.

Figure 4: Figure showing the percentages of the sample preferring different types of
butter

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We see that three-fourth of the sample prefers packed butter made available by Amul,
Britannia etc and very few prefer to consume homemade butter.

Figure 6: Figure showing the percentages of the sample preferring different types of
cheese

We see that most of the consumers prefer cheese spread. A lesser number of consumers
like sliced cheese while an equal percentage of them prefer grated and cubed cheese.

Figure 7: Figure showing the percentages of the the consumers preferring different
products as substitutes of milk

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We notice that majority of the consumers would prefer to substitute their milk
consumption with juices (fresh or packed). Around 22% of the consumers would like to
consume flavored milk instead of plain milk, 17% would indulge in cold-drinks and 13%
will go in for an ice-cream. However, 9% of the sample studied felt that there does not
exist any substitute of milk for them.

COMPUTATION OF PRICE ELASTICITIES FROM

PRIMARY DATA
For the purpose of our study a survey on consumer preferences for various milk and milk
products had been conducted (sample of the questionnaire addressed is attached in the
appendix). The sample size chosen for the purpose of our study was 30. The respondents
were chosen from different socio-cultural backgrounds. Knowledge of the quantity
consumed by the consumers, the change in the quantity demanded due to the price
change and the initial and final prices helped us evaluate the price elasticity of various
products for each consumer. These values were then averaged to get an aggregate price
elasticity. The own price elasticities of milk and milk products have been tabulated
below:

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TABLE 7A-OWN PRICE ELASTICITIES OF MILK AND MILK PRODUCTS
PRODUCT PRICE ELASTICITY
MILK -0.399
CURD -0.967
CHEESE -2.3483
BUTTER -1.4784
The values indicate that the demand for milk is highly inelastic. The demand for curd is
also not very price elastic as consumers generally prefer homemade curd so the change in
prices in the market for this particular commodity does not influence the demand majorly.
Whereas the demand of cheese nad butter is more elastic.

TABLE 7B- CROSS PRICE ELASTICITIES OF VARIOUS MILK PRODUCTS

COMBINATION OF PRODUCTS PRICE ELASTICITY
TEA AND MILK -0.327
COFFEE AND MILK -0.425
MILK AND SUGAR -0.218
BUTTER AND CHEESE 0.788
BREAD AND BUTTER -0.675
BREAD AND CHEESE -0.587

PRICE ELASTICITIES FROM THE SECONDARY DATA

Once the values of the price elasticities for milk and milk products had been computed
there was a need to find out how significantly these values differed from the actual
values. The main assumption underlying price elasticity being the change in demand

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occurs only due to the change in price of the commodity while the other factors such as
population, consumer preferences remain constant, recent data on price elasticities for
these products could not be obtained. For the purpose of our study, we have taken data
from NDDB, India (figures for the year 2005) and these figures have been used to test the
various hypothesis as stated in the subsequent parts of our study.

TABLE 8A-OWN PRICE ELASTICITIES AND STANDARD ERROR OF MILK

AND MILK PRODUCTS

PRODUCT PRICE ELASTICITY STANDARD ERROR

MILK -0.36 0.13
CURD -0.92 0.18
CHEESE -2.31 0.15
BUTTER -1.42 0.19
(source- NDDB data and research paper on Income and Price Elasticities of Demand for
Foods Consumed in the Home)

TABLE 8B- CROSS PRICE ELASTICITIES OF VARIOUS MILK PRODUCTS

COMBINATION OF PRODUCTS PRICE ELASTICITY STANDARD ERROR
TEA AND MILK -0.27 0.19
COFFEE AND MILK -0.35 0.23
MILK AND SUGAR -0.17 0.17
BUTTER AND CHEESE 0.745 0.165
BREAD AND BUTTER -0.741 0.217
BREAD AND CHEESE -0.618 0.117
(source- research paper on Income and Price Elasticities of Demand for Foods Consumed
in the Home)
STATING AND TESTING THE STATISTICAL
HYPOTHESIS FOR OWN PRICE ELASTICITIES

t-test to test the statistical significance of own price elasticity of milk:

H01: The value of price elasticity of milk is not significantly different from -0.36.
H11: The value of price elasticity of milk is significantly different from -0.36.
Calculation of t-statistic-
t= │ (-0.399-(-0.36))/(0.13/√30) │ = 1.680227708

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Since the calculated value of the t-statistic is less than 1.70 (the tabulated value at 29
degrees of freedom and 10% level of significance) we can accept the null hypothesis at
10% level of significance and can conclude that the value of price elasticity of milk is not
significantly different from -0.36.

t-test to test the statistical significance of own price elasticity of curd:

H02: The value of price elasticity of curd is not significantly different from -0.92.
H12: The value of price elasticity of curd is significantly different from -0.92.
Calculation of t-statistic-
t= │ (-0.967-(-0.92))/(0.18/√30) │= 1.431411862
Since the calculated value of the t-statistic is less than 1.445 (the tabulated value at 29
degrees of freedom and 20% level of significance) we can accept the null hypothesis at
20% level of significance and can conclude that the value of price elasticity of curd is not
significantly different from -0.92.

t-test to test the statistical significance of own price elasticity of cheese:

H03: The value of price elasticity of cheese is not significantly different from -2.31.
H13: The value of price elasticity of cheese is significantly different from -2.31.
Calculation of t-statistic-
t= │ (-2.3483-(-2.31))/(0.15/√30) │ = 1.40171285
Since the calculated value of the t-statistic is less than 1.445 (the tabulated value at 29
degrees of freedom and 20% level of significance) we can accept the null hypothesis at
20% level of significance and can conclude that the value of price elasticity of cheese is
not significantly different from -2.31.

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t-test to test the statistical significance of own price elasticity of butter:
H04: The value of price elasticity of butter is not significantly different from -1.42.
H14: The value of price elasticity of butter is significantly different from -1.42.
Calculation of t-statistic-
t= │(-1.4784-(-1.42))/(0.19/√30)│ = 1.684328
Since the calculated value of the t-statistic is less than 1.70 (the tabulated value at 29
degrees of freedom and 10% level of significance) we can accept the null hypothesis at
10% level of significance and can conclude that the value of price elasticity of butter is
not significantly different from -1.42.
(NOTE: The modulus value of the statistic is being taken into consideration as the
hypothesis is 2-tailed.)

STATING AND TESTING THE STATISTICAL

HYPOTHESIS FOR CROSS PRICE ELASTICITIES

t-test to test the statistical significance of cross price elasticity of milk and tea:
H01: The value of cross price elasticity of milk and tea is not significantly different from
-0.27.
H11: The value of cross price elasticity of milk and tea is significantly different from
-0.27.

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Calculation of t-statistic-
t= │ (-0.327-(-0.27))/(0.19/√30) │ = 1.69223468
Since the calculated value of the t-statistic is less than 1.70 (the tabulated value at 29
degrees of freedom and 10% level of significance) we can accept the null hypothesis at
10% level of significance and can conclude that the value of cross price elasticity of milk
and tea is not significantly different from -0.27.

t-test to test the statistical significance of cross price elasticity of milk and coffee:
H02: The value of cross price elasticity of milk and coffee is not significantly different
from -0.35.
H12: The value of cross price elasticity of milk and coffee is significantly different from
-0.35.
Calculation of t-statistic-
t= │ (-0.425-(-0.35))/(0.23/√30) │ = 1.690795721
Since the calculated value of the t-statistic is less than 1.70 (the tabulated value at 29
degrees of freedom and 10% level of significance) we can accept the null hypothesis at
10% level of significance and can conclude that the value of cross price elasticity of milk
and coffee is not significantly different from -0.35.

t-test to test the statistical significance of cross price elasticity of milk and sugar:
H03: The value of cross price elasticity of milk and sugar is not significantly different
from -0.17.
H13: The value of cross price elasticity of milk and sugar is significantly different from
-0.17.
Calculation of t-statistic-
t= │ (-0.218-(-0.17))/(0.17/√30) │ = 1.417634855
Since the calculated value of the t-statistic is less than 1.445 (the tabulated value at 29
degrees of freedom and 20% level of significance) we can accept the null hypothesis at

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20% level of significance and can conclude that the value of cross price elasticity of milk
and sugar is not significantly different from -0.17.

t-test to test the statistical significance of cross price elasticity of butter and cheese:
H04: The value of cross price elasticity of butter and cheese is not significantly different
from 0.745.
H14: The value of cross price elasticity of butter and cheese is significantly different from
0.745.
Calculation of t-statistic-
t= │ (0.788-0.745)/(0.165/√30) │ = 1.4271515
Since the calculated value of the t-statistic is less than 1.445 (the tabulated value at 29
degrees of freedom and 20% level of significance) we can accept the null hypothesis at
20% level of significance and can conclude that the value of cross price elasticity of
butter and cheese is not significantly different from -0.745.

t-test to test the statistical significance of cross price elasticity of butter and bread:
H05: The value of cross price elasticity of bread and butter is not significantly different
from -0.741.
H15: The value of cross price elasticity of bread and butter is significantly different from
-0.741.
Calculation of t-statistic-
t= │ (-0.675-(-0.741))/(0.217/√30) │ = 1.666666
Since the calculated value of the t-statistic is less than 1.70 (the tabulated value at 29
degrees of freedom and 10% level of significance) we can accept the null hypothesis at
10% level of significance and can conclude that the value of cross price elasticity of
bread and butter is not significantly different from -0.741.

t-test to test the statistical significance of cross price elasticity of bread and cheese:
H06: The value of cross price elasticity of bread and cheese is not significantly different
from -0.618.
H16: The value of cross price elasticity of bread and cheese is significantly different from

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-0.618.
Calculation of t-statistic-
t= │ (-0.587-(-0.618))/(0.117/√30) │ = 1.4355217
Since the calculated value of the t-statistic is less than 1.445 (the tabulated value at 29
degrees of freedom and 20% level of significance) we can accept the null hypothesis at
20% level of significance and can conclude that the value of cross price elasticity of
bread and cheese is not significantly different from -0.618.

CONCLUSION AND LEARNINGS

Demand for milk is highly inelastic, milk market being very close to perfect competition
thus, producers cannot charge exorbitant prices. Also, if a manufacturer increases its
prices then its sales will be negatively affected.
Tea and coffee are complementary products to milk i.e. Increase in price of milk may
affect their sales. We also found out that butter and cheese are high substitute goods.
Butter and cheese are complementary products to bread i.e. increase in their prices may
lead to decrease in the sales of bread.

REFERENCES

• Fisher and Yates table- tabulated values for t-test.

• http://www.nddb.org/statistics.html

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