Read the given excerpts from the article ‘Glut to blame for farm-gate milk price falls not big supermarkets’ by John Durie published in the Australian and answer all the below problems.
Glut to blame for farm-gate milk price falls, not big supermarkets:
VICTORIAN dairy giant Murray Goulbourn has cut farm-gate milk prices by 8.5 % to $4.50 per kilogram which leaves farmers at break-even levels due to the glut of milk on world markets.
Milk prices have fallen by 20 per cent over the last year so the 8.5 % cut from Murray Goulburn is relatively good but that is not much comfort for struggling farmers.
Please answer the given problems by using suitable diagrams. Be sure to describe your answers thoroughly.
problem 1: Suppose that milk operates in a perfectly competitive market, use a well labeled demand and supply model to describe how market equilibrium price of milk is being determined.
problem 2: By using the same model, describe and illustrate the impact of the glut of milk on the market. Clearly describe the equilibrating process.
problem 3: If you were the Minister for Agriculture in the Victorian Government and the Victorian Dairy Farmers Association asked you to support their members by imposing a legal minimum price, would you support or refuse their request. Use an economic model to describe why you reached your decision.
problem 4: With the help of suitable diagrams, what possible alternative programs could the government implement to raise the prices farmers receive in the market? How does your answer compare with problem 3 above? Describe.