Questions for Essay Australia 2022

QUESTION FOUR ESSAY 1
QUESTION FOUR ESSAY
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QUESTION FOUR ESSAY 2
The Australian milk market is likely to be a perfectly competitive market where no single
seller can affect the market price (Azevedo and Gottlieb 2017, p.67). A perfectively competitive
market structure describes a market which has a vast number of buyers and sellers trading
products which are homogeneous at a single price set in the entire market. The following features
suggest a perfectly competitive market structure for the Australian milk market. Firstly, the
market is made up of a vast number of sellers. From the article, the Australian milk market
currently has 5669 dairy firms which is quite a huge number but it’s still a decrease as compared
with the year 2010 where the number of dairy farms was high at 7511. Secondly, the Australian
milk market involves the buying and selling of homogeneous products (that is milk) (Mirman,
Salgueiro and Santugini 2015). This therefore means that consumers are indifferent when it
comes to buying the Australian milk market products and they end up purchasing the product
which is sold cheaply. It therefore calls for production efficiency among the Australian dairy
farms in order to minimize production costs and maximize profits. Thirdly, the milk market
involves price taking by the dairy farmers. The Australian dairy farmers have to accept the price
offered for sale in the market by the processors and supermarkets (for example “Murray
Goulburn, Fonterra and Coles and Woolworths”). The dairy farmers have little bargaining power
in the market and therefore they have to accept the prevailing market price or else risk not selling
their milk at all. Fourthly, the Australian milk market is free for entry and exit (Geroski and
Jacquemin 2013) by dairy farmers. Dairy farmers are free to enter the industry if they can bear
the competition and leave if they make unsustainable losses. For instance, from the article, since
2010, the Australian dairy farms have exited the market due to losses decreasing the number of
Australian dairy farms from 7511 in 2010 to 5669 currently. Fifthly, the milk market involves a
perfect knowledge about the prevailing market prices by both the buyers and sellers. From the

QUESTION FOUR ESSAY 3
article, the Australian dairy farms and customers know supermarkets sell a litre of milk for $1
and buyers know their expected return from the sale. Lastly, the Australian milk market is free
from government intervention since it has been deregulated for the last two decades. The absence
of government intervention is a strong feature of the perfectly competitive market structure and
hence the Australian milk market is likely to be a perfectly competitive market.
A milk farmer may decide to stay in the industry even if they make a loss. In the short-
run period, the total business cost is made up of the variable and fixed costs and the business
must pay its fixed costs whether it operates or not. If a business is making losses in the short-run
but its revenue is greater than its average variable costs, then it means it can pay its variable costs
and use the remaining revenue to pay all or part of its fixed costs (Mas-Colell 2014). This
therefore means, a milk farmer’s revenue exceeds his or her average variable costs and therefore
he or she can pay the variable costs and all or part of the fixed costs and therefore, he or she can
stay in the market since in the long-run he or she may end covering all the costs and even make a
profit.
Since the Australian milk market is likely to be a perfectly competitive market structure,
the graph for an individual milk farm and the milk industry has been used to explain that the exit
of some milk farmers from the industry in the long-run period will lead to an increase in milk
price. When some farmers exit the industry in the long-run period, the supply of milk in the
industry will decrease and as a result the supply curve will shift from S0 to S1 towards the left
direction. This will decrease the quantity of milk in the milk market from Q0 to Q1. As a result,
the demand for milk in the market will increase and push milk prices upwards from P0 to P1 as
indicated in the diagram below.