1303AFE | Economics | The Long-term Economics Of Dairy Market
TASK 1: Against the backdrop of the above article, write an essay explaining the changes that occur in the market price of milk. Use appropriate economic model/s (both descriptively and with the use of diagram/s) in writing your answers, and include assumptions you have made in your economic analysis. Discuss comprehensively both the demand and supply forces which occur in the dairy market. In addition to the article provided, you should also refer to at least two additional articles which support your analysis.
Question 2 – Write an essay to address Tasks 2A, B and C below
“Economists argue that competitive markets provide the most effective system to allocate resources efficiently.”
TASK 2A: Explain the above statement with reference to appropriate economic model/s (both descriptively and with the use of diagram/s) whilst incorporating a discussion on consumer surplus and producer surplus. Moreover, discuss other methods of resource allocation apart from the market system which may improve diversity and inclusion.
“There are however diverse views on whether or not market would provide an outcome that will be fair to all members of the society.”
TASK 2B: Discuss the above statement with reference to how stakeholders with diverse identities, for example: age, socioeconomic, cultural, religious, gender or other background, may view and describe fairness in resource allocation. You are to research for at least two relevant articles and discuss them as examples in your essay.
TASK 2C: Following your analysis for Task 2B, discuss a number of policies which the government can utilize to better balance efficiency and fairness in the allocation of resources.
Answer:
1. As per the given article, it can be seen that global dairy markets has been going through a vast amount of change in the different sectors related to the dairy industry. Given article argues that over the years, there has been vast amount of change in the policies in milk market around the world and along with the same. Besides this, technological development has allowed the milk market to have higher amount of changes during the present years and considering the case of the Australian market, same scenario is observable (Deeth & Lewis, 2017). As per the long-term economics of dairy market around the world, it is observable that there is moderate amount of development in the different events. One of the main outcome of the event is reducing price of the dairy products and it is forcing the dairy farmers to leave the market. As per the report, it is noticeable that there are two large milk producers namely Fonterra and Cooperative Murray Goulburn who are absorbing the whole market of dairy and allied products reducing the price conversely. As the reason for the same it can be seen that price paid to the farmers by the aforementioned firms without understanding the operating economic framework behind dairy market (Kapaj & Deci, 2017). However, as of now as the present demand situation in the different market is fluctuating, it can be seen that price of the same is also falling.
Figure 1: Demand and supply framework
Source: (Lu et al., 2015)
As per the demand and supply model showcased above, it can be seen that there is a positive relation between the price and demand and when it comes to dairy products, same relation exists. With the fall in the demand (D1 to D2), there will be fall in the price (P1 to P2) as well and the same is happening as of now. As per the report “Substantial Improvement in Prices was Still Expected by mid-2016” highlighted the fact that global dairy producers has failed to recognise the global dairy market and as the firms are operating with individual interest without understanding the dairy economy, they failed to recognise the dairy market itself (Fuller & Beghin, 2015). During mid-2000, it can be seen that there has been surge in the demand of the milk and allied products in the Asian market due to the rapid growth in the middle class income that allowed the surplus stock of US and EU producers to deplete. This change in the demand and supply scenario brings dis-equilibrium within the milk economy and it has reduced the supply demand growth by 50% to 100% in different market. Under the high level of disequilibrium in the supply and demand market, large milk producers pay out higher money to the farmers, whereas, under the present situation, it can be seen that recent Gross Domestic Product (GDP) shocks have reduced the overall market structure intensely leading the income of the milk producers to fall (Borawski, 2015).
Government regulations are one of the main factors that drives the market driven economy during present date and in case of the dairy products, same situation is visible. As per the general economic theories, it is visible that governmental intervention has always restricted the market growth and it is same in case of the milk market too. As it can be seen from the government policies from New Zealand and Australia, there is short term volatility in the market of the state coupled with moderate amount of GDP shock in the supply and demand imbalance, overall market of the dairy products has been facing vast amount of fluctuation too (Sinclair et al., 2015). On the other hand, it is also true that supply in the world dairy product market is under control and regulation by few producers and a small change in their supply can bring in a vast amount of change in the overall progress of the market scenario. To be specific, it can be seen that out of total milk production in world, only 7% is traded and large amount of the market is being controlled by the Australia, New Zealand and EU member nations that highlights the significance and precarious situation of the present world milk market (Lockhart, Donaghy & Gow, 2016). On the other hand, it can also be seen that, there is increased value of the milk market during 2012 to 2015 and it has enhanced the value of marginal production of milk and milk related products highlighting the fact that there is moderate amount of change in the market demand. As the possibilities of the future growth of the better demand scenario, it is recognisable that there is higher amount of export promotion strategies taken by the farmers to enhance their market and allow their production to be sold in different part of the world rather than limiting their operation to the local firms (Sinclair et al. 2014). Though the Australia and New Zealand government is not welcoming it, yet it producers are arguably focusing on globalisation through moving out of their domestic region for better gain for their operation.
2.a. The term perfect competition refers to a market structure where there are large number of buyers and sellers. In this type of market, the sellers sell homogeneous products and there exists no barrier to the entry or exit in the market. The sellers in this market are price takers. The market equilibrium for a perfectly competitive market occurs at the point where price is equal to marginal cost (Scitovsky, 2013). Resources or factors of production are inputs that are required to produce any goods and services. The limited availability of resources is the main concern for an economy. Therefore, these resources needs to be allocated efficiently. In case of perfect competition the resources are allocated in the most efficient way. The consumer and producer surplus occurring out of the perfectly competitive market are highest as compared to any other market structures. In the diagram below a discussion has been made on the consumer and producer surplus of a competitive market.
(Figure 1: Consumer and Producer Surplus in Competitive Market)
(Source: Author’s own creation in MS Paint)
The above figure shows that the equilibrium in the market occurs at Q1 and Q2. The area shaded in yellow colour is the consumer surplus and that in green colour in the producer surplus. The deadweight loss occurring to the market is zero. Thus, social welfare is maximized in case of a perfectly competitive market structure. Based on this competitive market structure a production possibility frontier is constructed. The production possibility frontier is a curve showing the opportunity cost of producing two goods or services (Chacholiades, 2017). The term allocative efficiency refers to the points in the production possibility curve that are socially preferred. As discussed in a competitive market, price equals marginal cost. The price that is paid is basically the social benefit received for the good. The marginal cost is the social cost of producing the commodity. When, the social benefits received by the consumers are equal to the social cost then the social welfare of the market is maximized. At this point, consumer surplus as well as the producer surpluses is also maximized. Somehow, if the social benefit is less than the social costs then there is inefficient allocation and if social benefit is more than social cost then the also there is inefficient allocation of resources. Therefore, only at the competitive market equilibrium there exists efficient allocation of resources.
Other factors other than competitive market strategy that can be implemented for effective allocation of resources are equal sharing of the resources. When resources are shared equally then each person gets the same amount of the resource. Another method that can be implemented is first come and first serve method of resource allocation. This method works best when the scarce resources serve one person at a time. For efficient allocation, no malpractices can be implemented in this case like bribes to get the first position. Majority rule is another technique that can be used for efficient allocation. However, this method works best when the self-interest of some people are oppressed and the decision affects the majority of the population.
2.b. In an economy there might exist perfect allocation of resources, however, the fairness of the allocation of these resources are of a major concern. The scenario might be that the economy is not fair due to diverse identities. Every economy is diverse in nature with different religions, caste, race, gender and other socio economic factors. There might exist a situation where resources are not properly allocated among different members of the country despite of having a perfectly competitive market structure. Chen, Yin & Xie, (2014) researches such a case that exists in the allocation of health care resources in China. The urban and rural areas of China often face inefficient allocation of resources with respect to healthcare. The number of healthcare facilities, beds, and healthcare personals are inefficiently allocated. The gap between the rural and urban areas is growing continuously. The healthcare expenditure varies greatly, in comparison to the rural areas the urban areas health costs were more than double. The cost for health care was nearly 2176 yen for urban and 562 yen for rural in 2009. The number of healthcare institutes and beds had declined drastically from 49229 to 37836 from 2000 to 2010 in the urban areas. For the urban areas the same has increased to 648424 in 2010. The number of beds has decreased in case of rural areas by 79 percent and has increased by 250 percent in the urban areas. The number of health care professionals available per 1000 people is 7.62 for the urban areas and 3.04 for the rural areas. The quality of the health care facilities was poor in the rural areas.
Another journal published by Antman, (2015) shows the effects of gender discrimination in the allocation of resources among the migrants. The study has been primarily conducted in Mexico. From the report it can be analysed that the allocation of resources is dependent on the male members of a family. When the heads of the family in Mexico migrate to the United States to earn a living, the female counterparts or the spouses take charge of the family. During this phase of time, resources within family are allocated giving priority to the girls. The girl child gets most of the investments as compared to the boy. However on returning of the head that is the father, the scenario changes. The allocation of resources within a family fully shifts to the boy child excluding the girl child. When the research conducted among the boys it was confirmed by the boys that the expenditure pattern changed with the arrival of their father. Thus, it can be clearly seen that there exists a discrimination, which is leading to misallocation of resources in a competitive market structure.
2.c. From the points discussed in the above answer it can be said that the government can play a major role in the in removing the inefficiencies and bring fairness in the allocation of resources. Policies must be aimed at promoting equality to all the members of the economy. An effective system of health care must be developed within the country. There must be expansion of health care centers in the urban areas. The hospitals must maintain their standards; the number of beds in the urban and rural areas must be increased. Further, the government can incorporate laws that would ensure that girls do not face any discrimination. Some fixed amount of resources should be allocated for the girls so that they do not face any discrimination. The government should also introduce various subsidy schemes for the girls like that in education, health care so that resources are allocated to them automatically. This would not require any assistance from the heads of the family members. The girls would be independent and have full right and enjoy a fair as well as an efficient allocation of resources. These are the few policy steps that can be taken by the government to ensure fair allocation of resources in an economy.
References:
Antman, F. M. (2015). Gender discrimination in the allocation of migrant household resources. Journal of population economics, 28(3), 565-592.
Borawski, P., Dunn, J.W. and Alter, T.R. (2015). Milk Market Development in the United States. Economic Science for Rural Development, p.24.
Chacholiades, M. (2017). The pure theory of international trade. Routledge.
Chen, Y., Yin, Z., & Xie, Q. (2014). Suggestions to ameliorate the inequity in urban/rural allocation of healthcare resources in China. International journal for equity in health, 13(1), 34.
Deeth, H.C. and Lewis, M.J. (2017). High Temperature Processing of Milk and Milk Products. John Wiley & Sons.
Fuller, F.H. and Beghin, J.C. (2015). China’s growing market for dairy products. Iowa Ag Review, 10(3), p.5.
Kapaj, A. and Deci, E. (2017). World Milk Production and Socio-Economic Factors Effecting Its Consumption. In Dairy in Human Health and Disease Across the Lifespan (pp. 107-115).
Lockhart, J., Donaghy, D. & Gow, H. (2016). Milk price cuts reflect the reality of sweeping changes in global dairy market. [Online] The Conversation. Available at: https://theconversation.com/milk-price-cuts-reflect-the-reality-of-sweeping-changes-in-global-dairy-market-59251 [Accessed 14 Sep. 2018].
Lu, Y., Adnan, M., Basak, K., Pereira, F. C., Carrion, C., Saber, V. H., ... & Ben-Akiva, M. E. (2015, January). Simmobility mid-term simulator: A state of the art integrated agent based demand and supply model. In 94th Annual Meeting of the Transportation Research Board, Washington, DC.
Scitovsky, T. (2013). Welfare & Competition. Routledge.
Sinclair, K., Curtis, A., Mendham, E. & Mitchell, M. (2015). Assessing the Efficacy of Transition Theory to Identify Industry Transformation: a case study examining the deregulation of Australia's dairy industry. Australian Geographer, 46(1), pp.113-129.
Sinclair, K., Curtis, A., Mendham, E. and Mitchell, M. (2014). Can resilience thinking provide useful insights for those examining efforts to transform contemporary agriculture?. Agriculture and Human Values, 31(3), pp.371-384.
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