Economics For Decision Making

Demand and supply is the most important driving force of the free market that enables the price to work as an invisible hand. The demand schedule shows the willingness to buy for each of the customers of the market corresponding to the quantity. The supply schedule maps the quantity supplied corresponding to each of the price levels of the market.  The demand and supply together interact in the free market structure that eventually sets the equilibrium level of price and quantities sold in the market. The global milk market is also showing the characteristics of a free competitive market where the demand from the customers and the supply from the producers interact to reach an equilibrium level. The study assumes that milk is a normal good demand for which increases when the price falls. This also explains the downward sloping demand curve in the global milk market. Likewise, it is assumed that sellers would supply more when the price of milk is high in the market and vice versa.

Since the year 2000, the global milk market has changed a lot. Australia has been a prime exporter of dairy product in Asian markets. The increase in the middle-income group in the Asian region also resulted in a higher demand for the dairy product (Dairyaustralia.com.au,) 2018). The complete depletion of the global surplus products due to an increase in the demand for dairy products changed the supply-demand equilibrium in the international market. Initially, there were only a few exporters in Asia that dominated the market. However, the removal of production quota in March 2015, allowed European companies to expand their production process. That means the sellers of EU could use economies of scale and produce more than their existing capacities. Economies of scale allow the producer to produce at a lower average cost as it reduces with the increase in the production. Ketter and Hume (2018) highlighted that The economies of scale allows the seller to use a more technology-intensive manufacturing process that helps in the expansion and cost-cutting simultaneously. In addition to that, the removal of quota also allowed the European producers to sell their products in other parts of the world including Asia. Under the quota system, the export of the European Dairy companies doubled during the year 2000 to 2013. The removal of the quota increased the supply of dairy products in the international market. As a result, the supply in the global dairy market increased. The supply curve shifted to the right keeping the demand curve unchanged. The demand curve of the global dairy market did not increase as the expansion of production of the producers had no direct influence over the demand.

Apart from Europe, the USA also showed some of the changes in the supply side economy. Due to changes in the policies of the country, the feed costs of the livestock started to reduce since the year 2013. Gargiulo et al. (2018) noted that one of the major components of dairy products of the USA is the feed cost. This reduction in the feed cost resulted in a significant reduction in the production cost of dairy in the USA. According to the theory of supply and demand, this pushed the supply curve to the right side. That means, at a given price, the producers of the USA were now supplying more quantities of dairy products in the global market. The large-scale production also influenced the producers in the USA as well. The large-scale production led to reducing oil prices. This eventually reduced the prices of corn, which is used as one of the major foods for the livestock. Consequently, the producers of dairy products experienced a decrease in the production cost. The decrease in the production cost allows the seller of the market to sell more quantity of dairy product in the market at a given price point.

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Figure 1: The changes in the price of the dairy market

(Source: Brim, 2017)

The two events of removal of quotas in Europe and the reduction in the production cost in the USA led to increased supply in the global market. As the theory of demand and supply says, any external factor such as the number of sellers may shift the supply curve to the right. This increased number of European and American dairy firms shifted the supply curve to the right. With an unchanged demand curve, this increased supply in the international market, the prices for the dairy product reduced. Along with the reduction of the prices, the equilibrium quantity sold in the market increased. Therefore, it is the increased number of sellers in the international market that led the prices for dairy producers to go up.

The competitive market is a market structure where a large number of buyers and sellers co-exist in the market. In this market structure, the price works as an invisible hand that helps in the allocation of resources. The efficiency of any market structure or method is judged by how it influences the social welfare. Now the social welfare is divided into three parts which are consumer surplus, producers’ surplus, and the governments’ surplus or tax revenue. If any method reduces the social surplus is regarded as inefficient. Now, the competitive market structure allows the price to operate and decide the level of supply and demand in the market. The equilibrium price is where the demand curve and the supply curve intersect each other.

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Figure 2: the consumers and producers surplus in a competitive market

(Source: Rochlin et al. 2016)

The consumer surplus is the area above the price level and below the demand curve. On the other hand, the producers’ surplus is the area above the supply curve and below the price level. When a single price is decided by the market each of the sellers and buyers transacts with a single price. The area shown in red in figure 2 is the consumer surplus of consumers whereas the area highlighted in green depicts the producers’ surplus. The sellers have no power over the prices of the products and hence cannot extract the consumer surplus in order to increase the profit (Wright et al. 2017). If a single seller charges a higher price than the equilibrium, the customers will buy from the other sellers of the market that will keep their surplus intact. Thus, there is no loss of social surplus and hence the completive market is the most efficient when it comes to the case of resource allocation.

However, the competitive market system has some drawbacks such as it leads to unequal distribution and social exclusion. In a competitive market set up, the customers with higher willingness to pay gains more from the market compared to the customers having a low willingness to pay (Okun, 2015). The methods such as the command economy system can help in the equal allocation of resources. In this process, the government instead of price decides the level of production and employment. However, one of the biggest problems of this system is that productivity of the resources is largely compromised. Another method that can improve the diversity from the competitive market is the first come first serve method (Fang et al. 2015). That will not benefit the customers with higher willingness to pay only and hence the distribution will be better. However, the same as the command economy, the productivity of the resources in this market setting is very low.

Although competitive market helps in growing the total welfare of the society, it may not be fair to every member of the society. The customers with higher willingness to pay get the product before than the customers with lower willingness to pay. This allocation system will aim to increase the consumer surplus by allowing the customer with higher willingness to pay to buy the product at the lower equilibrium price. Therefore, a customer with a low income may find it impossible to get hold of the product even if he needs it. This can also be seen in the labour market as well. For example, the gender-specific pay gap that discriminates between the salaries of a male and a female worker. According to the data, a female worker earns 8% lower income per hour compared to her male counterpart. Apart from the market mechanism, there are other factors also that leads to the gender pay gap. These include the education level, work experiences, years out of the workforce and many more. The market mechanisms do not take into consideration this factors while establishing an equilibrium level and hence is not fair to all the members of the society at a time (Stevens, 2018). This outcome may increase the overall social surplus of the economy, however, at the cost of inequality and gender pay gap which is not desirable from the perspective of society. One of the most important sources of inequality is the segregation of workers by the management of the organisation. The segregation is done using the marginal cost and the marginal benefit theory. Therefore, this creates a gap in payment between male and female labours of the organisation (Wright et al. 2017). From the perspective of the society, an ideal scenario is when each of the members irrespective of the identity gets the fair share of the economic growth. The inequality in payment between male and female labours of the society can have deeper effects which eventually can harm the economy in the future. Therefore, the fairness of the allocation method may vary from one person to another person of the society depending on the identity and the position in the society (Woestenburg et al. 2018). While, the free allocation, to a male employee, may seem fair and powerful, to the women employee of the workforce, it may seem unfair. In this case, the government needs to intervene in order to maintain a balance between efficiency and fairness of the allocation system of a competitive market.

The competitive market may fail to establish fairness in the society. As discussed above, the competitive equilibrium allocates the resources of the economy efficiently but fails to distribute the gains fairly among the different members of the society. Nevertheless, there is a way to correct and assist the market mechanism so that both the efficiency and the fairness are maintained (Stiglitz and Rosengard, 2015). Firstly, the government can increase the awareness among the different industries regarding the gender-specific income gap. A better awareness regarding the ill effects of the inequality can fill the gap leading to a healthier social balance and fairness. The government can penalise the firms not adhering to the notifications and directions of the government.  In addition to that, the government can also necessitate the provision of paid maternity leaves in order to establish a balance in the distribution. This will allow the female workers of the workforce to have a similar package as the male counterpart. The government can discourage the companies in the industry to segregate among the workforce of the company (Platteau, 2015). The segregation may help the organisation to achieve short-term goals, however in the long term; the segregation disturbs the demand side of the economy leading to a loss of potential growth of the organisation and the economy as a whole. Lastly, the government may recommend the organisations to maintain a specific ration of male and female worker in the workforce as well. The government needs to be strict in correcting the market operation that may lead to an imbalance in the social structure. The main aim of the government needs to be to support the free market and correct the failures of the market. The complementary action of the invisible hand of the market force and government will be helpful in redistributing the gains of the economy in an economically sustainable way.

Brim, O., 2017. The economic theory of representative government. Routledge.

Dairyaustralia.com.au. (2018). Dairy Australia. [online] Available at: https://www.dairyaustralia.com.au/ [Accessed 8 Sep. 2018].

Fang, W., Filos-Ratsikas, A., Frederiksen, S.K.S., Tang, P. and Zuo, S., 2015, September. Randomized assignments for barter exchanges: Fairness vs. efficiency. In International Conference on Algorithmic decision theory (pp. 537-552). Springer, Cham.

Gargiulo, J.I., Eastwood, C.R., Garcia, S.C. and Lyons, N.A., 2018. Dairy farmers with larger herd sizes adopt more precision dairy technologies. Journal of dairy science, 101(6), pp.5466-5473.

Ketter, C. and Hume, J. (2018). Australia’s dairy industry: rebuilding trust and a fair market for farmers. Economics References Committee.

Okun, A.M., 2015. Equality and efficiency: The big tradeoff. Brookings Institution Press

Plateau, J.P., 2015. Institutions, social norms, and economic development. Routledge

Rochlin, I., Aumann, Y., Sarne, D. and Golosman, L., 2016. Efficiency and fairness in team search with self-interested agents. Autonomous Agents and Multi-Agent Systems30(3), pp.526-552.

Stevens, J.B., 2018. The economics of collective choice. Routledge

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the public sector: Fourth international student edition. WW Norton & Company.

Woestenburg, A.K., van der Krabben, E. and Spit, T.J., 2018. Land policy discretion in times of economic downturn: How local authorities adapt to a new reality. Land Use Policy77, pp.801-810.

Wright, C.F., Groutsis, D. and van den Broek, D., 2017. Employer-sponsored temporary labour migration schemes in Australia, Canada, and Sweden: enhancing efficiency, compromising fairness?. Journal of Ethnic and Migration Studies43(11), pp.1854-1872.

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