AAVIN milk Company

Milk is an important market in India and it has got a very huge market since the population of India is grown up to 1250 million. India has got 15% of the milk production of the total world’s milk production. AAVIN Company has been taken for this case study. In the year 1958, by the Tamil Nadu state government in India has started company called Tamil Nadu cooperative milk producer’s Federation Limited and in the year 1981, it is formerly known as AAVIN. AAVIN located in various parts of India, they have milk production units in Ambattur Chennai, Madhavaram Chennai, Ambattur industrial estate and Shollinganallur Chennai. Moreover, total size of the milk production by the AAVIN is 14.588 million liters of milk produced per day. They have plan to produce 26.83 million liters of milk per day. AAVIN has produce lot of dairy products but for this case study only milk products. There are the milk products of AAVIN such as full Cream Milk, doubled toned milk, toned milk and standardized milk. (AAVINmilk, 2002)

India has got huge potential for cultivation of milk but still it is not properly done with their capacity of productions. Farmers has poorer infrastructure to store milk and make effective supply of milk. AAVIN has come up with different strategy to collect the milk and make necessary step to store the milk till get delivery to the AAVIN milk company. AAVIN has installed 90 bulk milk coolers to solve this issue.

The following are the microeconomics concept in the area of AAVIN production and business. Resources are the major element in the process of productions (Thomas, 2011, Pg142). The good flow of resources would ensure the continuous productions without any idle time. There are four of the resources to collect the milk from the milk farmers such as local farmer, 17 district cooperative milk producer’s union, 1210 women milk producer’s cooperative societies and local milk vendor.

Procedure of milk by AAVIN (figure in hundred thousand)

Source: http://www.aavinmilk.com/organisation.html
The estimated procurement of milk for the year 2012 – 2013 is 26.83 hundred thousand of milk with the various sources available to AAVIN.

The short run output curve will explain the company’s production of goods and services in the short run and explains the various cost like fixed cost and various cost involved (Bernheim, 2011, Pg87). Short run production curve for the AAVIN follows:

Source: http://www.oswego.edu/~atri/e101ch910.html
Pricing strategy decide the profitable of the organization and pricing strategy of AAVIN is totally controlled by the Tamil Nadu state government. The Tamil Nadu government do not have objectives of making huge profit by selling the milk product so they have followed least cost leadership pricing strategy.
Short run production of AAVIN

a.     AAVIN production branch in Ambattur has the short run production of 400, 000 liters per day

b.     AAVIN production branch in Shollinganallur has the short run production of 400, 000 liters per day

c.     AAVIN production head branch in Madhavarun has the short run production of 300, 000 liters per day

In other hand, long run output curve will explain the company’s production of goods and services in the long run and explains the various cost like long run average fixed cost and long run average various cost involved but in long run the average fixed cost is considered has average variable cost (Irvin, 2010, Pg 138). Long run production curve for the AAVIN follows:

Source: http://www.oswego.edu/~atri/e101ch910.html
AAVIN Company follows the economies of scale so it fixed price where it can achieve the market equilibrium. Long run productions of AAVIN as follows:

a.     AAVIN production branch in Ambattur has the long run production of 146,000, 000 liters per year

b.     AAVIN production branch in Shollinganallur has the long run production of 146,000, 000 liters per year

c.     AAVIN production head branch in Madhavarun has the long run production of 109,500,000 liters per year

 

Supply means making available of product in the market for to the demand of the consumer (Robert, 2011, Pg164) at reasonable price the supply of milk product in India as follows:

Source: http://www.nddb.org/English/Statistics/Pages/Milk-Production.aspx

India is a country always supply met the demand which means there is always equilibrium between the supply of milk with the demand of milk at equilibrium price (Alan, 2011, Pg172).

Equilibrium price of milk

Source:http://espin086.wordpress.com/2010/04/09/supply-and-demand-partial-equilibrium-market-model-in-matrix-form/
The AAVIN fixes the price in such a way that the Tamil Nadu market can able to meet the demand of milk is equal to supply of demand. Equilibrium pricing of AAVIN milk as follows for their various products:

1.     Full Cream Milk price per liter is Rs 17.50 (Indian Rupees)

2.     Doubled toned milk price per liter is Rs 12 (Indian Rupees)

3.     Toned milk price per liter is Rs 27 (Indian Rupees)

4.     Standardized milk price per liter is Rs 15.50 (Indian Rupees)

Average milk pricing of AAVIN = 17.50 + 12 + 27 + 15.50 = Rs. 18  (Indian Rupees)

Moreover, AAVIN has the pricing strategy of least cost leadership method where it sell its products at lowest cost in the market so as to benefit the weaker section of the society. The procurement cost of AAVIN milk is cow milk varies from Indian Rupees 18 to 20 and buffalo’s milk varies from Indian rupees 26 to 28. The average sales of AAVIN is Rs.18 so it is clearly indicates that they sell their products at least price in the market which means below the market price.

In other hand, Tamil Nadu government has the strong hold in the pricing fixation of AAVIN milk since the company wholly owned by the state enterprise. Tamil Nadu government started this company to benefit the weaker section of the society by providing cheaper rate of milk. Government intervene at two level ( subsidies pricing and price ceiling) as follows are the average pricing of AAVIN is Indian Rupees 18 and average procurement pricing of milk is Rupees 24 so there is difference of Indian Rupees of 6 will be contributed by the Tamil Nadu Government. Beside that, AAVIN Company has to follow the price ceiling strategy. Price ceiling policy means the company has the limited liberty to fix the price with the ceiling of the government (Anne, 2011, Pg56). For examples the government instruct to fix the price of milk in a ceiling of Indian Rupee of 25 means no company has the rights to fix the price of milk more than 25 Indian rupees.

Price is the money fixed by the seller to the buyer (Wolfram, 2012, Pg107). Price elasticity of demand will explain the variation of demand by influences of price changes.

Source:http://www.tutor2u.net/economics/revision-notes/as-markets-price-elasticity-of-demand.html
AAVIN pricing strategy influenced by the relatively inelastic demand of pricing. Relatively inelastic demand means there won’t be any biggest changes can be noticed in the demand of the product even though there is huge changes in the pricing. The milk comes under the essential commodity of the customer so the pricing changes would not influences the amount of demand generated by the customers.

Beside that, price elasticity of supply will explain the variation of demand by influences of price changes (N. Gregory Mankiw, 2011,Pg 107).

Source: http://www.tutor2u.net/economics/content/topics/elasticity/elasticity_of_supply.htm
Milk supply influences by the pricing strategy, in India AAVIN wants to increase the supply of milk than they have increase the procurement price of milk from their vendors. It can evidences that there will be huge change in the supply of milk by increasing the price of milk.

In conclusion, AAVIN have been back up by the state government so it has long way to go in the business of selling diary products. AAVIN is one of the major Milk selling company in India but still it do not have huge profit margin and profit is necessary for any company to stay in market for long time. AAVIN requires to have autonomy in deciding the pricing for milk, which will give the brighter future in the business of Milk in Tamil Nadu.

 

References list:

AAVINmilk (2002) organisation. Available from:< http://www.aavinmilk.com/organisation.html> [Accessed 22 October 2013]

 

AAVINmilk (2002) product. Available from:< http://www.aavinmilk.com/products.html > [Accessed 22 October 2013]

 

 Alan, S. B (2011) Microeconomics: Principles and Policy, Cengage Learning.

 

Anne, C. S (2011) Microeconomics for Public Decisions, askmar publishing.

 

Bernheim (2011) Microeconomics, Tata McGraw-Hill Education.

 

Irvin, B. T (2010) Microeconomics for Today, Cengage Learning.

 

N. Gregory Mankiw (2011) Microeconomics, Cengage Learning.

 

NationalDairyDevelopmentBoard (2012) Milk production in india . Available from:<http://www.nddb.org/English/Statistics/Pages/Milk-Production.aspx>[Accessed 22 october 2013]

 

Robert, L. S (2011) Exploring Microeconomics, Cengage Learning.

 

Thomas, J. N (2011) Microeconomics: An Intuitive Approach with Calculus, Cengage Learning.

 

 

Tutor2u(2011) price elasticity of supply. Available from:<http://www.tutor2u.net/economics/content/topics/elasticity/elasticity_of_supply.htm>[Accessed 23 October 2013]

 

Wolfram Elsner (2012) Microeconomics of Interactive Economies: Evolutionary, Institutional, and Complexity Perspectives. a 'non-Toxic' Intermediate Textbook, Edward Elgar Publishing.

 

Worldpress (2010) Quantitative and Applied Economics. Available from:<http://espin086.wordpress.com/2010/04/09/supply-and-demand-partial-equilibrium-market-model-in-matrix-form>[Accessed 22 October 2013]