Demand and Supply of Milk and Factors

Question: Discuss about the Demand and Supply of Milk and Factors. Answer: Introduction: Demand and Supply are the primary factors that decide the price of a product in a market. The price mechanism analysis is an important economic tool that is used to decide the price of a product using the demand and supply factors taking place in the market. On the other hand, demand and supply of a commodity is influenced by several other factors that prevail in the market (Smithers and Augustin, 2012). Hence, to observe the pattern of change in the price, it is important to understand the changes in the factors that influence the demand and supply of the product. Hence, the paper has been developed to analyse the factors that influence the demand and supply of Milk in the Australian market and explain the current issues of price going on in the Milk industry of the country (Sajadieh and Akbari Jokar, 2009). Lockhart, Donaghy and Gow (2016) found that a structural change in the global diary industry has been evident during the 2015 that acted as a perfect storm to shatter the price of milk in the country. The coincidence of technology, events and policy changes in significant dairy producing countries including Australia has resulted in a long run reset of the diary economics all around the world. The cooperatives Fonterra and Murray Goulburn have reduced the prices that are offered to the dairy farmers that resulted in a backlash from the milk producers in the country (Marini, 2007). Hence, the primary objective of the study is to observe the incidents that resulted in the changes in demand and supply of milk products in the Australian market. Along with that, the study focuses on explaining how these changes in the demand and supply impacted the price of the necessary commodity. Furthermore, the paper explains the demand side factors and supply side factors that influence the aggregate demand and supply of milk in the Australian market. Due to the structural change in the global dairy industry, the demand and supply scenario of milk have been reset. In the study article, the current status of the Australian dairy sector has been described showing the supply and demand side features. Understandably, long-term reforms and policy of the dairy market at the global stage has contributed to the dramatic changes of milk price (Yang et al., 2013). At the existing market scenario, a decline in prices of milk has been one of the major issues for the dairy farmers operate in the Australian dairy sector. Dramatical changes occurred in the global dairy economics can be termed as the primary reason for a price reduction. Moreover, there are other contributory factors as well, to say the least. Australia, one of the major dairy producing countries of the global economy has seen higher milk prices (Chin, 2015). Currently, the short-term oversupply of milk has been blamed as the most convincing reason for price dropdown. Admittedly, reduction of demand for milk has fuelled the situation of oversupply in the Australian market. As a result of the scenario, the biggest cooperatives of Australia i.e. Murray Goulburn and Fonterra have offered reduced milk prices to the dairy farmers (Lockhart, Donaghy and Gow, 2016). In the underlying section, the oversupply scenario and its impact on demand and price of milk have been stated. An excessive quantity of milk has generated a massive gap between aggregated supply and aggregated demand in the Australian dairy sector. As the short-term demand for milk has reduced in compared to the supply flow, the surplus has become the evident result. Due to sluggish demand for milk from China and Russia, the global dairy sector has faced significant challenges. Major dairy producing countries such as Australia has ignored the reduction in demand at the global stage to produce a massive amount of milk (Eilon, 2013). As a result of the scenario, Australia has to face issues such as oversupply of milk. As shown in the given figure, at the initial stage of the supply phase, the demand for milk was at Qs at price P1. As the demand is reduced due to global changes in the dairy industry to Qd, the price has revised to P. Meanwhile, during the period of the time, supply has been increased at the same rate resulted in oversupply as marked in the graph. In the contemporary market scenario, the global surplus of milk has contributed to the short-term decline in demand and price of milk in Australian dairy sector. Meanwhile, the downturn in the US dairy sector may restore the demand and supply of global dairy industry (Thom, 2011). Currently, the supply situation of the United States of America has significantly contributed to the low price of milk. Such international factors have added extra pressure to the domestic Australian milk producing farmers (Hodgson, 2013). Currently, profitability margins of domestic farmers have hit badly, to say the least, due to the surplus scenario of dairy products. Decisively, the dairy market policy of Australia may have been questioned in this context. During the global surplus, production of milk must be reduced to control the scenario at the earlier stages. As a result of a poor form of policy measures, the value of marginal production has majorly hit. Significant aggregated demand and supply term s must be developed by the third largest milk producer in the global market to improve the existing scenario of the surplus of milk (Smithers and Augustin, 2012). Now, in order to understand the primary reason for the changes in price of milk in the Australian market, the demand side factors and supply side factors must be analysed. The demand and supply side factors that influence the quantity demanded and supplied of dairy products in the Australian market are discussed herein below: Demand Side Factors The demand side factors are those aspects that influence the quantity demanded of milk in the Australian market. The demand side factors are presented herein below: Number of buyers: Considering the global dairy market, the demand of dairy products for export from Australia has decreased due to the emergence of new producers in the Asian market. Along with that, the high level of investment by the Chinese investors in Australia has also reduced the demand of Australian producers in the global market (Lockhart, Donaghy and Gow, 2016). Tastes and Preferences: The taste and preferences of customers have changed. The consumption of dairy products has reduced due to health consciousness and contents of fat in the milk products (Whitehead, 2010). On the other hand, the price of milk rises if it is processed to reduce the level of fat. Hence, it reduces the demand of dairy products in the Australian market. Price of related goods: The price of related products such as butter, cheese, and processed milk has risen due to innovative technology that further reduces the demand for dairy products (Whitehead, 2010). Hence, it can be seen from the above diagram that the demand of milk reduces that results in the leftward shift of the demand curve from D1 to D2 that further results in the fall of milk price from P1 to P2 in the Australian market (Parker, 2006). Supply side Factors The supply side factors are those aspects that influence the quantity supplied of milk in the Australian market. The supply side factors are presented herein below: Number of sellers: The number of milk producers has increase in Australia that results in the rise of production of dairy products in the country. The new investment made by the Chinese and Asian investors has directly increased the supply of milk in Australia (Lockhart, Donaghy and Gow, 2016). Technology: The implementation of innovative technology in the dairy industry has resulted in increase in the production of milk products (Lockhart, Donaghy and Gow, 2016). On the other hand, the new technology also increases the production cost. Expectations of producers: The expectation of the milk producers have failed due to immense fall in the demand for milk products in the global market (Xavier Malcata, 2009). It has resulted in oversupply of milk in the country that has further resulted in the fall of price of the product. It can be seen from the above diagram that the rise in the quantity supplied of milk has resulted in a rightward shift of the supply curve from S1 to S2. It has further resulted in the fall of the price of milk products in the market from P1 to P2 (Parker, 2006). Hence, it can be seen that supply, demand, and pricing have been thoroughly interlinked with each other. Meanwhile, the article has described the impact of global changing trends of the dairy industry. In Australia, a short-term surplus of milk production has contributed the demand and pricing. Admittedly, the decline in demand for milk has reduced the price of milk at the same level. The analysis of the contributing factors of declining milk prices has identified the role of policies directed towards Australian dairy sector. Through the discussion of the events, it is quite clear that the poor set of policy measures has massively contributed towards the surplus scenario of milk. In order to improve the challenging scenario, Australian government must provide a subsidy to the major milk producing firms to improve the condition of farmers. Moreover, the global consequences have led to a surplus of milk. On economics perspective, a surplus of milk has contributed to disequilibrium of s upply and demand scenario. Hence, the price of milk has reduced to a significant level. Primarily, as the universal law of supply and demand has been changed during the change of global dairy industry, larger production leads to the short-time dropdown in price. Meanwhile, significant measures and change in the global scenario may develop the condition. References Cappiello, G. (2015). Price Policies, Over-Supply and Demand Bubbles.Symphonya. Emerging Issues in Management, (2). Chin, G. (2015). Differences in strategy across the globe.Science, 348(6241), pp.1328-1328. Eilon, S. (2013). Three price elasticities of demand.Omega, 11(5), pp.479-490. Hodgson, R. (2013). 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