Glut to blame for farm-gate milk price falls, not big supermarkets.

Glut to blame for farm-gate milk price falls, not big supermarkets.

 

Introduction

The market is the real phenomenon of the basic economic life and it’s the foundation on which the central economic problem is based. It’s the device by which the main objective of equilibrium and the marginal relevance of all the exchangeable items are secured and well maintained. Equilibrium occurs when the commodity takes and occupies a similar place at the margin on the ranks of who possess it. The equilibrium price of any item is the price which ones it’s established and determined it would produce equilibrium without any fluctuations. The ideal equilibrium value determines and fixes the ideal market price; the estimates and figures formed  constitutes the actual price in the market any moment.

1. Assume that milk operates in a perfectly competitive market. Use a well-labeled demand and supply model to explain how market equilibrium price of milk is being determined.

 

In a perfect competition the number of buyers willing and ready to spend to buy the milk depends on the price and other factors that are constant. Also the amount of money the sellers are willing and ready and able to sell depends on the price and other factors i.e.

Qd =f (price, constraints) and Qs = g(price, constraints) , the model therefore is Qd =  Qs

Equilibrium exists if the amount and quantity the sellers are willing to sell is equal to the amount and quantity the buyers are willing to buy. For a supply curve to freely exist there must be a considerably large number of sellers in the market, also for the demand curve to freely exist, the buyers must be many. This high number in both instances ensures that none of the individual players can influence the price. The model of demand and supply demands that the buyers and sellers be in clearly defined groups. That’s sellers should not double up as consumers and vice versa. The buyers and sellers in the supply and demand model are assumed to have all the information needed on the products qualities and also availability.

 

1. Using the same model, explain and illustrate the impact of the glut of milk on the market. Clearly explain the equilibrating process.

The oversupply of milk caused the glut.

 

Overproduction is the total accumulation of unsalable stock in the businesses. Overproduction refers to the excessive and extra production over consumption. The nature of overproduction of commodities leads to collapse of capitalist economies. Overproduction leads to reduced production in order to remove or clear the excess inventories. These removal of excess production results in reduction of employment which in turn reduces consumption, these worsens the problem and creates a vicious circle where excess stock force companies to reduce production, and subsequently reduces employment which in turn reduces demand for excess stocks.

 

The glut milk represents excess production on the part of the producer. When production is high and the quantity supplied is in excess then the prices will definitely come down and the supply curve will move from right to left signifying that for a given quantity the supply will move away with a different price each time depending on the market forces. The demand for the goods will go down as the goods are readily available to anyone. Alternatively if the supply decreases the supply curve will move to the right and the prices will go up once more, as the demand will increase and customers will be chasing few goods with a lot of money.

1. If you were the Minister for Agriculture in the Victoria Government, and the Victorian Dairy farmers Association asked you to support their members by imposing a legal minimum price, would you support or reject their request. Use an economic model to explain why you reached your decision.

I certainly would reject it straight away. It would be great if it could work positively but in most cases it doesn’t. The main reason being that price controls interfere with the allocation of resources. Maximum prices or price ceilings cause shortages while minimum prices or floor prices cause surpluses, at least for some time. For instance, if the supply of milk and its demand are balanced at a certain equilibrium price and then a price is set by the government at a level slightly lower than the equilibrium price. The demand will increase and surpass the supply resulting in shortages in the market. A number of consumers will be fortunate to purchase enough milk for themselves and their families others will be forced to do without. This is because the consumers purchase value is increase i.e. for the same amount as before, they can purchase more quantities of milk. (Schultz, Aliber (eds), 1966) Also, if the price is set at price level higher than the equilibrium price then demand will decrease and the supply increase resulting in surpluses of milk. When prices increase to a level higher than the equilibrium price, the consumers purchase value is eroded and they can only afford a reduced quantity because of the increase in cost. When price controls are introduced in an economy, they interfere with the self regulating system of the equilibrium concept that rations the available supply naturally another mechanism must take over its role. ( Jonung, 1990)

1. With the aid of appropriate diagrams, what possible alternative programs could the government implement to increase the prices farmers receive in the market? How does your answer compare with question3 above? Explain.

The government should subsidize the cost of production so as to lower the final cost of the product. A subsidy is some amounts paid to the producer from the Government to encourage and motivate them to supply or produce more goods or service. A subsidy will certainly reduce the cost of production

 

It’s likely the producer will be motivated and encouraged to produce more goods and therefore the curve of supply shift to the right. It will most likely reduce the cost of product.

The government can also introduce taxes. These takes the form of a charge added on top of the cost of a good or service by the government.

 

A tax will increase the production cost to the producer. It makes the product to be more expensive. This will affect the production quantities of the product as they are expensive to produce; the producer will produce less therefore the supply curve will shift to the left. The cost of the product will also increase.

In question number three the government uses price control mechanism to regulate the market.  These are restrictions on commodity prices that can be placed on certain goods and services. The major objective of price controls is to maintain the average prices of essential goods. In reality however price controls lead to severe shortages of essential goods and services. They lead to the development of black market where the prices for similar goods exceed those in the uncontrolled market. (Capie, Wood, 2002)

In question number four the government tries to use other means available to control the high prices or low prices other than interfere with the prices of the goods and services. The use of taxes to raise the cost of basic commodities is a regular practice used by economists to control prices of essential goods. Also the government can use subsidies to influence the cost of basic commodities.

Reference.

Capie, F., Wood G. (2002). Price Controls in War and Peace: A Marshalling Conclusion.

 

Scottish Journal of Political Economy 49 (2002): 39–60.

 

Clinard, B. (1952) The Black Market: A Study of White Collar Crime. New York: Rinehart.

 

Galbraith, J. (974) A Theory of Price Control. Cambridge: Harvard University Press,

 

Grayson, C. (1974) Confessions of a Price Controller. Homewood, Ill.: Dow Jones–Irwin.

 

Jonung, L. (1990) The Political Economy of Price Controls: The Swedish Experience 1970–

 

7. Brookfield, Mass.: Avebury.

 

Schultz, P., and Aliber. Z. (eds) (1966) Guidelines: Informal Controls and the Market

 

Place. Chicago: University of Chicago Press.

 

Rockoff, H. (1984) Drastic Measures: A History of Wage and Price Controls in the United

 

States. New York: Cambridge University Press.

 

 

Taussig, W. (1919) “Price-Fixing as Seen by a Price-Fixer.” Quarterly Journal of Economics 33

 

205–241.

 

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