Economic Concepts Behind Dairy Market Structure in Australia

Running head: ECONOMICS
Economics
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ECONOMICS
Introduction
The dairy market in Australia is facing a challenge of making substantial profit for a
feasible existence due to drought and low prices of milk. As reported by Wahlquist (2019), the
Australian dairy farmers are facing huge losses in the recent months due to the drought that took
place in Australia in 2018. At the same time, the increase in the imports of milk solids has
increased the supply of milk in the market. The retail giants, such as, Coles and Woolworths,
have captured the market by selling milk at a price as low as $1 a liter, which is creating big
losses for the domestic producers. This essay will highlight the economic concepts behind the
dairy market structure, its short run and long run profit conditions, elasticity of demand and price
flooring to help the local milk farmers, which will be based on the analysis of the news article.
Discussion
Milk market is likely to be a perfectly competitive market due to the following aspects:
the product, that is, milk is homogenous; there are large number of buyers and sellers; everyone
in the market system has perfect knowledge or information about the product and prices; there is
no barrier to entry and exit for the firms, the market price is determined from the balance
between the market forces of demand and supply and the sellers must accept the market price
(Pindyck and Rubinfeld 2015). Hence, the sellers are price takers and not price makers. A single
seller cannot influence the price. As the product is identical, the consumers have many sellers to
choose from. In Australia, the number of dairy firms is around 5,669 as of 2018, which has
reduced from 7,511 in 2010 (Wahlquist 2019) and for a market, it is a large number. Hence, a
single farmer is not able to influence the market price.

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ECONOMICS
In any market structure, the goal of the firms is to maximize profit. Profit is maximized at
the equilibrium point, and this profit is known as the supernormal or economic profit. The short
run of production is defined as the time period where one or more than one factor of production
can be kept fixed, that is, there are both fixed and variable factors of production in the short run.
On the other hand, in the long run, all the factors of production are variable (Cowell 2018). Thus,
in the short run, the firms will produce to the point where profit is maximized or the loss is
lowest. However, it is possible to incur loss or earn negative economic profit in the short run, but
in the long run, there is only normal profit and no economic profit. Hence, in the short run, a
milk farmer should remain in the dairy industry if its price is more than its average variable cost
even if the economic profit is negative (Dwivedi 2016). The farmer should leave the industry
only if its price is lower than its average variable cost.
In perfect competition, there is no barrier to entry or exit for the producers, hence, in the
long run, if there is positive economic profit, more firms will enter the market. This will shift the
market supply curve to the right and the price of the product falls due to increase in supply (Karl
et al. 2019). As a result, the economic profits decrease until it becomes zero. Thus, in the long
run, if some milk farmers earn negative profit, that is, loss, which indicates their price to be less
than average total cost, which indicates the farmers producing under their break-even point, then
those farmers will leave the dairy industry. The farmers will continue to exit the industry until
the remaining farmers make normal profit once again (Kreps 2019). This will reduce the market
supply, that is, shift the supply curve to the left and the price of milk will rise.