Microeconomic Factors Domestic and Global Market †Free Samples

Question: Discuss about the Microeconomic Factors Domestic and Global Market. Answer: Introduction Microeconomics is the branch of economics that deals with decision making of an individual, for single firm or a single market. Basic microeconomic factors help to understand economic scenario for domestic and global market. In the present paper, an article on grain price volatility is considered. There are three influencing factors affecting the price of grains. The article concerns what is happening in the international market and in the domestic market of Australia. Demand and Supply forces interact to determine price in the market. Price of wheat and barley has undergone with fluctuation for volatility in demand and supply side factors. Australia participates in export of grains. Therefore, global market conditions also affect decision in the domestic market. The article is discussed in detail using concepts of demand, supply and elasticity of demand. The article Dramatic impact on global grain prices is published by Agfarm; www.agfarm.com.au. The main concern of the article is price volatility of wheat and barley in the domestic and international market. In the year 2016/2017, harvesting experiences a low grain price that is lower in the extent of 10 years (farmweekly.com.au 2017). In contrast, in recent months of July and June, price has rallied up to the level of 30 percent. Three interlinked factors are indentified as driving forces behind the price rally. These are global weather condition, global supply and global demand. Starting with global weather, a comparatively drier and warmer season is experienced by producers in Europe and Black Sea. France, Italy, Spain and Australia as well experienced rainfall that is below yearly average. As a result, there is a global supply shortage leading to a price rise globally. Similar situation is faced in domestic market of Australia. This is in contrast to a situation as recorded in 2016/17 in Australia. The excess supply during this time had pushed prices down. The excess supply in the domestic market exported to fulfill international demand (smh.com.au 2017). When international demand raised, then it creates a shortage in domestic market and again leads to a rise in price. Australia faces an inelastic demand base for both domestic consumption and major export homes. The inelastic demand is required to be met before supplementary demand. A more competitive price is needed in order to achieve this fill. The varying elasticity affects Australias grain production and pricing decision. The microeconomic concepts that need to be evaluated for a complete analysis and understanding key insights are forces of demand and supply in determining price for both global and international market. Elastic or inelastic nature of demand is also crucial and hence need attention. Economic analysis of the article In economics, Supply refers to an amount of goods and services offered by the seller to the consumer given the price at a particular point in time. A positive relation is found to exist between supply and price (Fine 2016). This means when price rises then supply rises as well and vice versa. Consequently, there are movements along the supply curve because of any change in own price. Change in factors other than price causes a shift in the supply curve. When supply curve shifts a new equilibrium point is obtained and correspondingly a new market price and quantity. In crop harvesting, weather is an important factor influencing production. Insufficient rainfall results in an unfavorable weather condition for harvesting. In this year, there is an unusual warmer and drier season in Black Sea and Europe (northqueenslandregister.com.au 2017). France has experienced rainfall that is 75pc of average seasonal rainfall. Italy, during this season has 77pc of its average rainfall. Rainfall is even lower for Spain. It has 66 pc rainfalls than usual . The insufficient rainfall means a reduction in global production. As a result, the supply curve will shift leftward causing a rise in price and decline in quantity. This is explained in the figure given. In figure 1, DD depicts the global demand for grain. SS reflects supply or global production. E is the initial equilibrium point which gives P* and Q* as respective equilibrium price and quantity. When there is decrease in global production due to poor weather condition then supply curve shifts inward and S1S1 is new supply curve. When supply shrinks, then available supply fell short of the demand (Currie, Peel and Peters 2016). To ration the excess demand price has to be increased. Corresponding to this new supply curve E1 is the new equilibrium point indicating a high price P1. The condition of global weather hampered the world production of wheat and barley has experienced an unexpected decrease in production in the extent of five years. Buyers who really have demand for grains need to pay a premium price. Most of the cropping belts in Australia has experienced below average rainfall. This resulted in lower production per acres and yielding penalties. The contraction of supply in domestic market has a similar effect as that described in figure 1. In a sharp contrast to this situation, during 2016/17 the Australian Market is overflowed with grain supply. The excess supply is required to be rationed in the market with an increased demand; otherwise, the excess supplied quantity will be wasted. This pushed the price down to a low level not observed in the last ten years. When there is excess grain production, then supply curve will shift rightward. The situation is reverse as described in figure 1. The new equilibrium is E1 as obtained from the intersection of demand existing demand curve and new supply curve (Baumol and Blinder 2015). Unless there is an increase in demand price goes down as is happened in Australian market in 2016/17. In order to absorb the excess supply in the domestic market and escape from the low price Australia exported the excess produced grains. The low priced grain exported from Australia faced increased international demand. Now increased supply in association with increased demand helps to recover from low price and price increased gradually (Kolmar 2017). Change in any factors other than price causes a shift in the demand curve. Demand in the Australian grain market increases, because of an increased demand for export in the international market. This is shown by a rightward shift in the demand curve from initial DD to D1D1. Market equilibrium is at the joining point of new demand curve (D1D1) and new supply curve (S1S1) (Taylor 2014). Equilibrium is set at a high price (P**) and high quantity (Q**). The recorded quantity of grain exported from Australia lead to a complete absorption of stocks at the end of 2016/17 (weeklytimesnow.com.au 2017). The remaining stock has happened to be less than originally estimated. For wheat, the estimate is 8.5 million tones and for barley, it is 800 thousand. The overall impact on grain price is a hike in price by 30 pc. The forecast for wheat and barley demand is 21.mt and 7.7mt respectively for the season 2017/18. This puts an overall supply of 30mt and 8.5mt. Elasticity of demand and price determination Elasticity of demand signifies proportionate change in demand corresponding to a proportionate change in price. Pricing decision depends on responsiveness of demand when price changes because price and quantity together determines revenue (Rader 2014). Demand is considered as relatively inelastic in cases where change in demand is proportionately less than change in price. In case of relatively elastic demand, demand changes more than price. Depending on the nature of demand, price revision is taken into consideration (Bernanke, Antonovics and Frank 2015). In situation of an elastic demand, the demand curve is flatter is shape (Rode 2015). A small increase in price from P1 to P2 causes a much larger reduction in quantity from Q1 to Q2. DD shows a relatively inelastic demand curve (Arrow 2015). Here, a rise in price from P1 to P2 causes a smaller reduction in demand quantity from Q1 to Q2. Australia has an inelastic demand base for consumption in the domestic market and key export countries. The Australian forecast of domestic demand for wheat and barley is 8.4mt and 3.5 mt respectively, constituting an exportable surplus of 16mt and 3.5mt. However, even before passing half of year Australia already exported nearly 6mt of barley and 16mt of wheat absorbing the entire estimated surplus. With a reasonable grain price in the global market, more buyers now come in the global market pushing the prices up. Therefore, Australia no longer remains competitive into export market having elastic demand because in the phase high price demand reduced drastically (Cowen and Tabarrok 2015). It continues exporting in the inelastic export market. Conclusion The recent upsurge in price of wheat and barley market leads to enough decreases in demand such that it offsets the decrease in production because of an below average rainfalls in major supplier countries. This also ensures that inelastic export and domestic demand can be fulfilled in the coming season. In the Australian market, the grain growers face a double-edged sword. Given all other factors remain constant, price stays constant in the short term. Unless the region receives, sufficient rainfall or brighter weather prospect the production cannot be improved and so is the price. 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