Impact Of Investment In Defence And Advanced Manufacturing Industry, Free Trade Agreements, Taxation And Infrastructure Spending On The Australian Economy

Demand and Supply Analysis of Meat Markets in India

We will employ basic Microeconomic theory of demand and supply to answer the questions in this part.  On the X axis we have quantity of the commodity we are interested in, while its price is on the Y axis. The demand curve shifts downwards, and the supply curve slopes upwards. Equilibrium is at the point demand equals supply. Any event that happens will affect either of these curves. A shift in the appropriate curve will lead to a new equilibrium. Our analysis lies in identifying the curve that is affected and is consequences on price and quantity.

Q1

The commodity is –LIVE CATTLE. In the figure below, the initial equilibrium is at E1 where demand DD1 equals supply SS1. The crackdown on cattle smugglers and slaughter houses will affect the slaughter of live cattle – they will no longer be killed. This automatically means that their numbers will swell- the supply of live cattle will increase. This is shown by a right shift of the supply curve, creating new curve  SS2. The new equilibrium is at E2, with lower price and higher quantity of live cattle.    

Q2.

This question needs buffalo meat to be analysed . Meat is the result of slaughter of cattle. If we crackdown on slaughter houses that are responsible for slaughter ten the supply of meat will be affected. The lower supply is shown as upward shift of supply curve. The new equilibrium changes to E3 from E1, with higher price and lesser quantity of meat consumed.

Q3

The next commodity under analysis is –MUTTON  (or sheep meat). Let us remind ourselves that  meat from cattle and sheep are substitutes of each other. If cattle meat is unavailable or more costly as shown in question 2 above, then users of meat will shift to cheaper options like mutton.  These users of meat include eateries who serve non –veg dishes. Higher demand for mutton is reflected by a rightward movement of demand curve DD1 of mutton. The new equilibrium is at E4, which has higher quantity and higher price as compared to original equilibrium at E1.

Q4. MARKET FORMS:

The theory of the firm, which is part of Microeconomics, provides us with parameters that can be used to segregate different market forms. This segregation allows us to understand the equilibrium conditions and other facets of the market. Some of the parameters include: the number of agents in the market, extent of government interference through rules, fines, the ease of entry and exit, degree of cooperation (formal/informal) among firms, and the presence of product differentiation among products sold by the firms.   ‘The interaction and differences between these aspects allow for the existence of several market structures’ (Policonomics.com n.d.) ,ranging from perfect competition to monopoly, at the two extremes of the spectrum of market structures. In perfect competition, we have many sellers (each of them is individually insignificant) while a monopoly has only 1 seller.

In our opinion the market for buffalo meat resembles is like monopolistic market, for the following reasons.

• There are  large numbers of sellers , unlike a single seller in monopoly. Each seller enjoys limited monopoly over his product. But beyond a price all monopoly is lost and it resembles more of a competitive structure. Each seller enjoys a small share of the market, buy this share is insignificant enough to disallow him to control prices.
• It is easy to enter or exit this business of setting up a slaughter house. There are no patents or exclusive agreements.
• This structure ‘relaxes product homogeneity ’ (Cess.nyu.edu, n d ) as it allows producers/sellers to differentiate their product on the basis of small differences using personal contact with consumers or advertising. Each seller can claim better and cleaner meat quality, allowing him to charge differently from other sellers. But as the basic good remains meat, all their products fall in a ‘product group’.     

Analysis of Market Forms for Buffalo Meat

Q5

If we assume that the buffalo meat market is a monopolistic structure then we can proceed to evaluate how the rising price of meat will affect the meat producer. The price rise is equivalent to arise in input costs for the meat producer, as meat is bought from the buffalo meat market for processing. Note that our answer depends on the time period we choose- short run or long run. CASE 1: If we assume the short run, then it is possible that each producer was making some profit. As price rises  his profits will shrink, which can continue till we reach long run and he makes only normal profits. If price rises by a large amount then it can push him into losses and shut down.

CASE 2:  If the meat producing industry is in long run, then it is making only normal profits. Any increase in input costs will lead to losses and shut down for the firm.

We illustrate the first case below. We begin with diagram 1 that shows profits made in short run in red. The price in equilibrium ( where MR=MC) is P*, so that profits = (P*-AC)*(Q*)

Input costs of meat are variable costs, so that a rise in buffalo meat price will cause Average Variable Cost and Average Cost, along with Marginal Cost to rise. The next diagram shows these shifts. MC and AC rise, so that the new and quantity is Q**.

Profits are still in red but they are reduced than before. Any more rise in input costs can cause profits to be wiped off, even allowing losses which cause a shutdown of the firm.

If we look at case 2, then no producer will enter this industry in the long run as firms make only normal profits. Abnormal profits encourage entry of firms that depresses prices (due to rising supply). All entries are possible only in the short run.

PART 2

We employ the AD-AS approach to explain the consequences of each of the events mentioned below. This approach has two pillars- aggregate demand and aggregate supply

Aggregate Demand or AD is a simple sum of all types of demand by economic agents in an economy. Each agent is responsible for a particular demand- demand from households/ final consumers, demand made by businesses as investment, demand made by government in its welfare role, and finally demand for domestic goods by foreigners. We also need to deduct the demand we place on foreign goods instead of domestic goods( or imports), which leads to net exports = [exports – imports] as the relevant net demand.   In economic language we have

AD=C+I+G+X-M

‘AD slopes negatively’  (Pettinger (2015)) which is graphically shown as downsloping curve.  

 ‘A shift of the AD curve to the right means that at least one of these components increased so that a greater amount of total spending would occur at every price level’. (philschatz.com . Shifts in Aggregate Demand).

The AS is the sum of all goods and services that producers are willing to sell at given price. It is an upward sloping curve, greater supply is forthcoming at higher price. But this supply is limited by the resource level in an economy.  Once an economy reaches full employment level no more supply is possible, which makes AS vertical at this level. We assume in this question that AS is positively sloped allowing for underused resources.

In each question below we identify the curve that is affected by the event mentioned. The effect is graphically demonstrated to identify changes in price and GDP.

Q1

AD = C + I + G + NX

Increased investment (I) will lead to a right shift of the AD curve. The new equilibrium at E1, shows that GDP and prices are both higher. This will cause unemployment to fall as investing firms (defence and manufacturing) increase production. (figure 1)

Q2

Exports is part of NX – the difference between exports and imports. If imports are unchanged then higher exports will raise NX. This is the same effect as in Q1 above.

For  2016, ‘Australia’s top exports were ores, slag, ash and mineral fuels’ (Worldstopexports.com, Australias-top-10-exports)that account for 50% of total exports. Accordingly, the jobs in these industries will grow, contributing to lower unemployment in the country.

Q3

Taxes are not a component of AD or AS. We need to find indirect routes that allow taxes to affect Ad or AS.  Higher taxes implies lower disposable incomes, which are the main determinant of consumption demand. Lower C will lower AD, shown as a left shift of the AD curve. The new GDP level is lower than before- economy has contracted, as shown at point E3 in figure 2.

Q4

Infrastructure spending can be part of AD if government spends. In the short run this shows up as a right shift of AD. The result is higher GDP and price levels as we move from E to E1.  (figure 3)

In the long run, such spending affects AS also. The productivity of existing resources can rise with better infrastructure, so that long run AS (vertical part) will shift to right ( AS new).

If we look at new AD and new As then we are at E3 where GDP is higher than it was in short run, while prices are lowered. Thus we need to look at both long and short run to map the effects of infrastructure spending. The economy gains from higher income and lower price level.

References

Shifts in Aggregate Demand, n d , retrieved from https://philschatz.com/economics-book/contents/m48745.html  

Keynesian aggregate Supply curve. , n d , Retrieved from https://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=Keynesian+aggregate+supply+curve

Classical aggregate supply curve,  n d , retrieved from https://www.economicsdiscussion.net/demand/aggregate-demand-its-meaning-and-components-economics/721 

Pettinger. T Components of AD (May 16. 2012) retrieved from  https://www.economicshelp.org/blog/5301/economics/components-of-aggregate-demand/

Australia’s top exports, n d , retrieved from https://www.worldstopexports.com/australias-top-10-exports/ 

Whelan. J and Msefer. K. (1999), Economic demand and supply retrieved from https://ocw.mit.edu/courses/sloan-school-of-management/15-988-system-dynamics-self-study-fall-1998-spring-1999/readings/economics.pdf 

Supply and demand, n d ,retrieved from https://geneseo.edu/~stone/perloff2.pdf 

Demand, supply and equilibrium, n, d ,retrieved from  https://cobe.boisestate.edu/lreynol/WEB/PDF/Demand_supply_ans.pdf 

Supply and demand , n d, retrieved from https://www.ssc.wisc.edu/~scholz/Teaching_101/Lecture3.pdf 

Market structures: Definition, n d, retrieved from https://policonomics.com/lp-market-structures-market-structure/ 

Chapter 10: Monopolistic Competition and Oligipoly, n d, retrieved from https://cess.nyu.edu/sev/wp-content/uploads/2014/06/Chapter-10.pdf