The article chosen for this study is on price changes in a commodity that can be explained by shifts in supply and demand. Peled wrote the article ""Milk price reduction reflect the reality of major changes in the global dairy sector" (2016). The report includes a description of the chosen article as well as a brief analysis explaining the price change within the article using supply and demand ideas.
The article focuses on the global decrease in milk prices as a result of changes in technology, policy, and events in dairy producing countries. Milk prices in such countries have been dramatically decreased by companies. The low milk prices by companies have been attributed by the increased supply from farmers with reduced demand. Here, is clear that the oversupply coincides with a reduced demand of milk globally from China as well as Russia which are the largest milk consuming countries in the world. Some of the demand for milk began being fulfilled by Chinese investors in Australia and New Zealand. An increased demand for milk globally is said to solve the current problem of over-supply. There were also expectations of price improvement in mid-2016. The author depicts that milk prices will continue to go low in the long-term.
Analysis
From the mid-2000s, an increased demand of milk was experienced to completely deplete surplus in the EU and the US. The change in supply and demand resulted to a change in the equilibrium in dairy markers as demand outpaced supply in some of the markets. Usually, at equilibrium, demand and supply is usually equal and the graphs intersect at the center as shown below.
Figure 1: At Market Equilibrium
When there is oversupply, and a reduced demand, the equilibrium price reduces as indicated in the graph below.
Figure 2: Change in equilibrium price when there is oversupply and reduced demand
The imbalance in supply and demand was as a result of a few nations allowed to export dairy products all over the world. Milk prices increased but volatility occurred to shocks in GDP globally and the supply-demand imbalances for a short time. Therefore, when demand was more than supply, the market price increased. The figure below explains the shift in prices of milk when there is a balance of demand and supply.
Figure 3: A positive increase in price when there is a balance between supply and demand.
When demand increases and supply reduces, the price equilibrium increases as shown in the figure below
Figure 4: Increase in demand and reduction in supply
Removal of quotas in the EU for milk production increases the production of milk by farmers hence oversupply is happening. Usually, Transportation regulations of milk across borders have also been removed and led to growth in production.
Low priced feeds have also increased production of dairy products. These are among the reason why the over-supply of milk and decreased demand is anticipated in the long-term.
Reference
Peled, D. (2016). Milk price cuts reflect the reality of sweeping changes in global dairy market. The Conversation. Retrieved from http://theconversation.com/milk-price-cuts-reflect-the-reality-of-sweeping-changes-in-global-dairy-market-59251
