Decomposition of Milk Supply Response into Technology and Price‐Induced Effects

An economically relevant aggregate production function and an aggregate profit function are used to decompose milk supply response into technology and price effects. Decomposing milk supply response in this way provides insights into dairy industry efficiency and its impact on the effectiveness of price support programs as well as the extent to which aggregate milk production will expand despite prices motivating supply curtailment. An empirical analysis of supply response decomposition for the state of Washington is presented. Expected market price effects were obtained but were overwhelmed by technology effects resulting in milk output expansion when price signals motivated supply reduction.