Summary
Based on the article which prepared by University of Missouri Extension,
the author claimed that the current milk prices in 2015 are foreseeable to be
lower than previous year, 2014. The milk prices are said to be around $6 a
hundredweight lower. Furthermore, dairy prices are supposed to be increasing
year by year for 3 consecutive years; however, they have been facing a downfall
in price for almost 3 years, 2015 being the third continuous year. This
benefited them in so many ways especially in term of profit. Due to the fall of
feed prices, they were able to attain a huge profit in the year 2014; not only
that but they had a good milk prices at the farm stages and in return it profit
the dairymen by earning them a lot of money. As the producers get a hold of
this information, this is a cease the opportunity for them to earn more money
by increasing the amount of cows as well as the milk production from each
individual cow. As the supply increases, the market equilibrium price
automatically decreases in almost all the grocery.
Market Equilibrium
In economics, market equilibrium exists when the demand is exactly equal
to quantity demanded in a market.(Geoff Riley, 2014) Equilibrium price defines
as the price of a good or service when the quantity supplied of the good or
services is exactly equal to the demand for it in the market place. In this
article, the quantity demanded and quantity supplied will be affected by the price
instead of others factors. When the amount quantity supplied is more than
quantity demanded, surplus exists in this situation.
Based on the article, the producer of dairy milk foreseeable sort of
profitability in future, so they tend to increase number of cows as well as
milk production per cow. Horner had investigated cow numbers in year 2015 are
0.9% higher than previous year, 2014 whereas production of milk per cow has
increased by 2.4% from year 2014 to year 2015. Since the producers in this market
have more cows to produce more milk per cow therefore in US market, milk
production abruptly growing by 3.4%. In this case, it is about twice that US
markets are able to consume, so prices will fall over time.
Equilibrium
Price
How the price is increased after the
subsidy cuts? How will it affect the equilibrium price?
SQD- Stable/Steady quantity demand
Prediction of price falls = 4.5,
5.5
Ie- Initial Equilibrium
New e- New Equilibrium
Based
on the article, the increase of the number of cows lead to an increase in milk production,
this shift the supply curve from S0 to S1 (left to right). When the number of
supplies is now exceeding the number of demand, surplus exists in the market.
This causes the price of the dairy milk drop from P1 to P0 in order to attract
more buyers, and hence the quantity demanded has increased from Q0 to Q1. New
equilibrium point is formed.
Elasticity
In
microeconomic, elasticity defines as measurement of any variable’s sensitivity
towards a change in another variable. (Mike Moffatt, 2015). In this case, it
measures the responsiveness of the quantity demand of dairy milk to the change
in price of dairy milk. In this article, pure dairy milk is considered as a
need instead of want to a human being. Milk is a need of a human as we started
to consume it when we were still a baby. Milk provides calcium which is needed
to our body, calcium absorption is very important to maintain our bone stay
strong. In general, the whole milk industry is a need which has a relatively inelastic
demand because regardless of how expensive it is, consumer will still continue
to consume it. Inelastic demand can be explained by the percentage of market’s
demand is lower than the percentage changes in price for specific
goods/services. For instance, a price of a specific goods rises for 30% but
then their demand only drops by 2%, demand is said to be inelastic. The Price
elasticity of demand is inelastic means the sensitivity of quantity demanded
for dairy milk is low to the price of the dairy milk.
Inelastic curve for
dairy milk
From
the figure 1.2, we can conclude that the portion of changes in the price of
dairy milk is bigger than the portion of changes in quantity demanded. Although
there is an increment of RM0.4 of dairy milk price, there is just little impact
on the quantity demanded of consumer. An inelastic supplier like dairy milk
supplier will always supply the average amount of milks, regardless of the
changes in price. This part is mainly discussed about the whole pure dairy milk
industry instead of milk brand/firm. Elasticity of dairy milk is inelastic
because it has no any close substitute product to replace the milk industry.
Market Structure
The
third microeconomic concept that I would like to explain based on my graph is
related to market structure. There are few types of market structure which is
perfect competition, oligopoly, monopolistic competition and monopoly
competition. Dairy milk is classified into perfectly competitive market. In
perfect competition, they are many buyers and sellers in the markets. Moreover,
all the firms sell homogeneous products and there are no entry barriers for new
firms to enter milk production market. The sellers/firms of this market are
price taker which they are unable to affect the market price. This is due to
they are too many of sellers sell the exactly same product as everyone.
Firm’s demand curve for
perfect competition
Prediction of price milk = 6
Based on the
figure 1.3 above, we can see that in a perfectly competitive market, demand
curve for firm is a perfectly horizontal line which is equal to the price of
equilibrium for the entire market. It indicates in the elasticity of demand for
milk of firm is perfectly elastic. In this perfect competition, its mainly
discuss about milk firm’s demand instead of the whole milk industry. The milk
distributor is large in the market as compared to milk firm in dairy farm in
village. For instance, Nestle is one of the milk distributors. If a milk firm
is trying to mark up the price of dairy milk in order to raise their revenue,
they would find company to collect for their milk in that particular time but
--unwilling to purchase with them in long term. One individual farmer in milk
production has no ability to affect the milk’s price for entire market. They
are not possible to affect the consumption of milk in the market so they don’t
need to advertise their milk production. Unlike large milk distributor like Nestle
need lots of advertise to promote effectually. (Jon Petroff, 1989 & 2002).
Figure 1.4
The graph
above, marginal revenue is the extra amount of revenue acquired
by every unit of sold whereas marginal cost is the additional cost by one extra
item of a product. (David Ingram, 2015). In the graph, we can obviously see
that the marginal revenue is a horizontal line which is constant for perfective
competition market. An individual milk firm maximizes their profit at total
level of total output at which marginal revenue equals to marginal cost.
In the conclusion, I have learned that the economic concepts I
have learned in class are applicable to the real life situations. The economic
situation is very complex; a tiny change of a certain determinants will cause a
huge change in the market. I have understood that price changes might due to
many factors, but it is mainly based on the demand and supply. The responsiveness of the people towards the
price represents the price elasticity of the demand in the market. Finally, I
have learned that dairy milk as a whole is inelastic product because there is
no other goods can replace it. However, if u looks at the other side, dairy
milk can be categorised as perfectly competitive market as everyone can sell
dairy milk by just buying a single cow. This means that everyone will need to
buy dairy milk because it is a necessity but they have the choice to choose who
they want to buy from based on the price of each seller.
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