Economics for Business: Factors Influencing Wool Demand and Supply

This report provides an economic analysis of the Australian wool market, focusing on the factors influencing demand and supply. It examines the significance of the agricultural sector and the livestock export industry, particularly wool. The report explores the essence of the market, highlighting the impact of exchange rates, innovation, and export demand on wool prices. It utilizes economic theories of demand and supply to analyze the market dynamics, identifying factors responsible for growing wool demand, such as exchange rates, innovation, and the price of substitutes. The report also addresses factors affecting the supply of wool and offers recommendations for market expansion, emphasizing the need for increased production to meet rising demand. The analysis includes figures illustrating the effects of increased demand and the relationship between demand and supply growth. The conclusion summarizes the key findings, emphasizing the increasing demand for Australian wool and the importance of addressing supply shortages. The report also includes a list of references to support its analysis.

Running Head: ECONOMICS FOR BUSINESS
Economics for Business
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1ECONOMICS FOR BUSINESS
Table of Contents
Introduction......................................................................................................................................2
Essence of the story.........................................................................................................................2
Article analysis: economic theories and concept.............................................................................3
Factors responsible for growing wool demand............................................................................3
Factor affecting supply of wool...................................................................................................5
Recommendation.............................................................................................................................6
Conclusion.......................................................................................................................................6
References........................................................................................................................................8

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Introduction
The agricultural sector is regarded as one of the important component of the economy.
Agricultural output has a significant contribution in Australian GDP. The sector not only
important for providing basic necessities to Australian native but also is important for meeting
global demand. In the Australian agriculture, the livestock export industry holds an important
position. Wool holds the most important in the livestock industry. Australia accounts for nearly
25 percent of the total greasy wool sold globally. In 2015-16, the exported wool from Australia
valued 70 billion (agriculture.gov.au 2018). In recent years, the wool farmers in Australia are
enjoying an advantageous position because of growing demand for wool in different countries.
Essence of the story
The sheep farmers in Australia are expected to experience a considerable flow of cash
income generated from a high return from livestock farming. The farmers will continue to face a
high price because of huge pressure on demand side. In the international market, Australian wool
is valued in terms of Australian dollar. The stability of exchange rate thus plays a crucial role in
determining international demand. The exchange rate has remained at a favorable position in the
last few years. The exchange rate averaged around 74 US cents (farmweekly.com.au 2018). The
fairly stable international price of wool helps to sustain steady demand side growth. The growth
in demand being less than that of supply growth ensures a good time for farmers.
In the traditional wool industry innovation of new variety of wool product helps to
capture a much wider export market. In just five years (2015-2020) the China’s market of
wool’s sportswear is expected to become double. The Rural Bank forecasts that the demand for
new variety of wool product further increases demand by more than its supply. The Australian

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growers are likely to face less competition in the finer micron market. This is due to the fact that
wool producers in New Zealand shifted their attention to the broader micron wool. The price of
traditional natural fibres such as cotton is experiencing an upsurge. This limits any price related
fluctuation in the mixed cheaper fabrics. The farmers’ income in the financial year has accounted
a 35 percent increase from the previous year. The cash income of farmers measures the amount
of fund generated from investment made by firms after accounting for all the cost of production
in farming. The cash income is thus used as an indicator of farm’s performances. In wool export
has risen both in terms of volume and value (Bell, Moore and Kirkegaard 2014). Accordingly,
sheep businesses in Australia have expanded, worth almost $100 million.
The growing production of wool however mostly come from Eastern Australia. The
Western Australia in contrast is expected to face a decline in yield because of unfavorable
weather condition. Potential decline in production in WA however can be offset with a higher
wool price.
Article analysis: economic theories and concept
The tools of demand and supply can be used to understand the article insight. The
dynamics of market depends on the condition of demand and supply. These two acting forces
determine state of equilibrium in the market. Demand and supply scenarios change based upon
different factors influencing demand and supply. Any change in demand and supply is reflected
in equilibrium price. The wool growers in Australia are experiencing an increase in cash income
brought by the high price (Meredith 2015). High price in the wool market is the result of a
demand growth far exceeding the potential supply growth.
Factors responsible for growing wool demand

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Exchange rate
In determining export demand, exchange rate plays an important role. A depreciated
currency increases export demand by reducing price of exported item. The exchange rate with
United State in the past five years has shown stable trend (Berry 2016). As Australian wool in
the international market is priced in terms of dollar, the international price stability helps to boost
demand for wool.
Innovation
With innovation firms are able to produce a variety of products. Innovation by enabling
new features to the existing product helps to attract attention of buyers and thus contributes to an
increase in demand. Innovation in the new wool products continue to boost demand of Australian
wool in the international market (Arrow 2015).
Export demand
In the export market, Australia continues to gain momentum. China has recorded a 24
percent increases in the imported wool from Australia. Italy has also accounted an increases in its
import demand by 40 percent.
Price of substitute
The most common substitute of wool is cotton. The high price of cotton reduces relative
price of wool further enhancing demand.

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Figure 1: Effect of an increased demand of wool
(Source: as created by Author)
Factor affecting supply of wool
The high demand encourages wool growers to increase wool production. With a steady
and median forecasted rain fall the production of wool has accounted three successive years of
growth. The supply growth however is slower than growth of demand (Hill and Schiller 2015).
Hence, prices continue to increase.

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Figure 2: Demand growth outweighs supply growth
(Source: as created by Author)
Recommendation
As discussed in the article, wool growers in Australia in recent years are enjoying an
increase in their cash income. This opens up a scope of market expansion. Till now, wool is
placed in the third important place next to veal and beef combined and cereals like wheat.
Realizing the brighter prospect of wool market, the nation should give more focus to expand
production.
The growth of supply is lagging behind the demand. In some state like Western Australia
has even recorded a decline in yield. The growers need to put more effort to raise production to
meet the increased demand (Mochrie 2015).
Conclusion
Agricultural export especially livestock product in Australia has increased day by day.
The continuous increase in demand especially from China and Italy pushing wool prices in the

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international market. The innovation in new product line helps to boost demand of Australian
wool. The reduced competition from growers in New Zealand and a high price of cotton further
stimulate demand for wool. With an average rainfall and growing demand, production has
increased as well. The farmers should give more focus to increases production to eliminate any
supply shortage.

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References
Agriculture.gov.au. (2018). Department of Agriculture and Water Resources Wool. [online]
Available at: http://www.agriculture.gov.au/ag-farm-food/meat-wool-dairy/wool [Accessed 30
Apr. 2018].
Arrow, K., 2015. Microeconomics and operations research: Their interactions and
differences. Information Systems Frontiers, 17(1), pp.3-9.
Bell, L.W., Moore, A.D. and Kirkegaard, J.A., 2014. Evolution in crop–livestock integration
systems that improve farm productivity and environmental performance in Australia. European
Journal of Agronomy, 57, pp.10-20.
Berry, P., 2016. Sheep meat and wool. Agricultural Commodities, 6(3), p.83.
Farmweekly.com.au. (2018). Strong demand tipped to continue - Agriculture - Sheep - General
News - Farm Weekly. [online] Available at:
http://www.farmweekly.com.au/news/agriculture/sheep/general-news/strong-demand-tipped-to-
continue/2757042.aspx?storypage=3 [Accessed 30 Apr. 2018].
Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.
Meredith, D., 2015. Why Australia Prospered: The Shifting Sources of Economic Growth, by Ian
W. McLean. The English Historical Review, 130(543), pp.485-487.
Mochrie, R., 2015. Intermediate microeconomics. Palgrave Macmillan.