Increasing demand from China has made New Zealand the world's biggest exporter of dairy products. Its exports of milk to China increased by 45% in 2013. More than 300000 hectares of land in New Zealand have been transferred to dairy use from other forms of farming and forestry use since 2000. The increase in milk production has caused the average cost of its production to fall and changes in production methods have affected the price elasticity of supply of milk.

Mark scheme

Marking points from the official mark scheme (May/June 2016). The mark or mark type is shown in brackets.

1. [1] Opportunity cost is the cost of the (next) best alternative foregone.
2. [1] Land / resources used for growing wheat may be used to keep cows
3. [1] reducing the amount of wheat that can be produced
4. [1] It may take time to produce the product
5. [1] this means that it will take time to adjust supply in response to a change in price / example of a product that it takes time to produce
6. [1] It may not be possible to store the product
7. [1] this means that it cannot be taken out of storage when price rises / products cannot be put into storage when price falls
8. [1] It may be costly to adjust supply
9. [1] e.g. it might be necessary to build new factories and this may discourage firms from adjusting supply
10. [1] The supply of a natural resource may become limited
11. [1] e.g. gold maybe close to depletion
12. [1] An increase in exports may mean a higher total demand.
13. [1] Higher demand may encourage firms to increase their output
14. [1] to produce more products firms may take on more workers
15. [1] reducing cyclical unemployment
16. [1] Higher demand may cause demand-pull inflation.
17. [1] A higher demand for workers may push up wages.
18. [1] Higher demand for raw materials may push up the price of raw materials.
19. [1] Costs of production may increase
20. [1] causing cost-push inflation
21. [1] The firm may experience economies of scale
22. [1] total cost will rise by less than total output
23. [1] (long run average cost may fall as output increases)
24. [1] The firm may experience buying/purchasing economies of scale
25. [1] may be offered a discount price when buying raw materials in bulk
26. [1] The firm may experience technical economies of scale
27. [1] larger, more cost efficient technological equipment may be purchased to produce a higher output
28. [1] The firm may experience managerial economies of scale
29. [1] specialist staff may be employed when output is high
30. [1] The firm may experience financial economies of scale
31. [1] as output increases, it may be able to borrow more cheaply / or sell its shares at a lower price
32. [1] The firm may experience R & D economies of scale
33. [1] the R & D expenditure can be spread over a higher output
34. [1] The industry may also be growing in size
35. [1] enabling advantage to be taken of external economies of scale
36. [1] The firm may experience diseconomies of scale
37. [1] total cost may rise by more than total output
38. [1] (long run average cost may increase as output increases)
39. [1] The firm may experience diseconomies of scale
40. [1] this may make the firm slower to respond to changing market conditions / more difficult to keep costs down
41. [1] The firm may experience communication problems
42. [1] ideas may not be communicated or may be misunderstood
43. [1] The firm may experience poor industrial relations
44. [1] e.g. strikes may increase costs of production
45. [1] External diseconomies of scale may occur
46. [1] e.g. pushing up the costs of production
47. [2] Allow up to 2 marks for a correctly labelled average cost diagram which shows economies and diseconomies of scale as an alternative to describing average costs rising / falling as output increases