Summary Of The Article

The main focus of the article I have chosen is to demonstrate the current overview of the
dairy market in Oceania. Reportedly the production of milk has slowed down this year. The
production however is still higher than the previous years, with an increase of 5.4%. Australia
experienced good weather conditions mostly, with only some regions facing drought like
conditions. However, production was not affected by this situation, the naturally lower farm
level prices triggered many farmers in New Zealand to cull low producing cows. Farmers
eventually find it difficult to sustain at current price level. Further, due to yearly calving
production also increased slightly. This triggered the value of exports for July 2015 to
increase by 8.4% from July 2014. Dairy Australia reported dairy product exports for July
2015 totalled approximately 52.9 thousand metric tons. Average prices of the dairy products
also ranged from 4% lower to 30% higher form prior events. Some changes in price averages
of certain products measured in US dollars per metric tons were (butter, $2,746, +8.1%),
(buttermilk powders, $1,829+30.0%), (lactose, $483,-4.0%), (cheddar cheese, $2,913,
+4.7%), (butter, $2,746, +8.1%).So mainly, it could be concluded that there is good
production of milk in Oceania and farmers are able to enjoy economies of scale and
experience a decrease in price. Though due to high production level lower prices have to be
charged which is not viable for farmers.

Application of microeconomics concept

Initially, Production this year was higher compared to prior years. So it can be understood
that the supply of milk would increase in the market. Hence, the market equilibrium theory
can be put to application (Sharpe 1964). Market equilibrium refers to the interaction of the

demand and the supply curve. The intersection point determines the price to be set and
quantity to be produced. In this case due to high production levels the supply of milk and
other dairy products in the market is high. Due to economies of scale, the reduction in the
unit cost of production as the capacity of production increases (Study.com 2013-2015) the
price charged in the market is less. According to the article farmers find it difficult to sustain
at such low prices. If the market was in equilibrium the price set for the dairy products would
be higher and the quantity supplied would have to be less than it is. Due to the high
production levels, the quantity supplied in the market is more and the price charged
decreases, due to farmers gaining cost advantages. This is not beneficial for the farmers as the
price they earn now is comparatively less to what they could have gained if production levels
were in equilibrium. Hence there is a deadweight loss and farmers have to endure the
negative impacts.

Secondly, according to the article, elasticity of demand and supply can be applied to the
news item. We can see from the article there are quite a few substitutes for milk such as skim
milk powder and buttermilk powder. So when the price of milk decreases, due to many
substitutes being present, its price elasticity of demand, which is the measure of the
responsiveness to the change in quantity, demanded in terms of the change in price o demand
(EconomicsHelp.org 2015) will be high. This indicates that change of demand is greater than
change of price and the result will eventually be more than 1. In this case it can also be
perceived, changes in price will not have any significant effect on the demand for the dairy
products. The dairy products are essential for living. People tend to choose milk as an
important source of nutrient in their daily lives. So even though prices increased, exports
were still rose as people still preferred to buy dairy products with high prices. In case of price

elasticity of supply, which is the measure of the responsiveness to a change in quantity

supplied in terms of the change in price, is inelastic. This year due to the high production as
mentioned in the article the supply of dairy products to the market would be inelastic. Cost of
inputs was also kept low as farmers tended cows in cost effective manners. Farmers hence
eventually enjoyed minimum cost of production for which the price they had to charge in the
market was low. Further to cope up with the demand in the market the farmers had to supply
more and had to sustain with lower price levels.
So in summation, it can be arbitrated that Price elasticity of demand & supply for milk is
inelastic due to the explanations mentioned above.

Lastly, from the article the market structure of the dairy industry can be identified or
inferred as in perfect competition. All the firms in the industry would be basically selling
identical products such as skim milk powder, buttermilk powder and cheddar cheese. There
will be many firms in the market supplying the various dairy products, exclusively this year
as production was high and availability of the products would also be more. Firms can easily
enter the industry as there is no barrier to entry. There is no one firm dominating the industry.
Also according to the article the firms are price takers, they do not have control over the
market price of the product. The price is set by the market; firms are unable to charge higher
prices in order to cover any extra costs. The firms in the market have relatively small market
share, which provides the consumers with many options. So firms tend to charge lower prices
in order to increase sales and also due to more production this year. Milk and other dairy
products are perishable, so firms tend to charge reasonable prices in the market in order to
increase sales and reduce stocks.

So mainly, it can be established that dairy product sellers in Oceania are in a perfectly
competitive market and have to supply dairy products in high amounts, this year it was
undoubtedly possible due to the high production of milk.

Illustration With Diagram

Price
S1
S2

P1
P2

D1

Q1

Q2

Quantity Demanded

Figure: The Demand & Supply of Milk

As it can be interpreted from the diagram, when the demand curve intersects with the supply
curve S, the price which is set in the market is P1 and quantity the farmers have to have
supply is Q1. At the current demand level D, farmers find it more convenient to supply milk
to the market. The quantity the farmers need to supply is less and price they can earn from
selling each unit of milk product is also high. Farmers are able to sustain well at current price
levels. The cost incurred to produce milk is easily covered due to the relatively high prices
charged.

This initial scenario as shown in the diagram, where the market is in equilibrium, is rather
an advantageous one for the farmers in Oceania due to clarifications stated above.
It can also be inferred from the diagram, this year due to high production levels the supply
of the milk increased. There is a noticeable increase in supply from S1 to S2. This situation
lead to an increase in the quantity demanded from Q1 to Q2. Farmers have to supply more
quantity of milk products in the market. Farmers are easily able to supply the extra quantity
of milk products this current year. The increase in the quantity demanded and the supply of
milk eventually led to a decrease in the price of milk in the market. Prices decreased from P1
to P2, falling below the equilibrium price. This mainly occurred to farmers gaining
economies of scale, for which the price they could charge is less than the market price. So
producers had to supply more quantity of milk products to cope up with the increase in
quantity demand from Q1 to Q2. Farmers find it discouraging to continue rearing cattles due
to this disequilibrium in the market. Though farmers are still able to cover costs of production
to some extent at price of P1 by supplying at S2 as the demanded for milk is inelastic. There
are various reasons for the change of the supply of milk from S1 to S2. Oceanias dairy
industry may have been encouraged to provide better technological contributions to help in
increasing production, which as we can refer from the diagram has been fruitful. Further, fair
amount of competition in the market also triggered dairy farmers to figure out efficient
production techniques, which is reflected in the diagram.
So generally, due to a rise in production, there was an increase in the quantity demanded and
a fall in the price of the dairy products, which caused the market to be in disequilibrium. This
was rather disadvantageous to the producers due to the explanations mentioned above.