(College/University)
Milk Price War This case brings out the issue of price war among the milk retailers and the farmers. The concern is that some retailers feel comfortable to reduce the price of milk without considering the effect of the same to their profit and their suppliers. Many farmers are on the view that they should stop daily Farming simply because it does not bring value to their lives as an investment. However, some milk retailers and the top in the industry say Coles believe that reducing the price of milk will help them chase more consumers relative to their competitors who wish to raise their milk prices higher. Basing argument on economics such a move does not obey the law of supply and demand neither does it follow the theory of production (Nicole, 2011). Generally the main issue overruling this case is price wars within the daily industry. The price war is between the two big supermarket chain Coles and Woolworths milk and the processor branded milk. It is ironical for the Coles to slash down the price of its milk brand when actually it has not considered other factors which may be affected by the move. For instance, it does not consider the effect on their suppliers and also the cost of production. Coles believes that this is a good move to gain competitive advantage in the daily industry. They also hold that the cost of reducing its milk price will be absorbed by the business. On the other hand, Woolworths has also taken the same move of slashing their milk prices not because it wants to but because it’s close competitor Coles has adopted the same. It believes that slashing the milk prices will affect their profits and also will pass the cost to the farmers (Nicole, 2011). Following this move adopted by the retailers, many daily farmers will pull out of the investment since no profits at all. As a result, the retailers like Coles will incur a loss on milk sale. Nevertheless, according to the law of supply if the demand remains the same and the supply of a product decreases then there occurs a shortage thus leading to high equilibrium price of a product. This means that if these farmers pull out the market, then the supply of milk will go down thus they will be demand cost push for the product. This will automatically lead to increased prices for the milk product and both the retailers and their customers will suffer (Rebecca, 2012). Slashing the price of milk by the two chains imply that the cost of drop will be passed to the farmers. This is to mean that farmers will be the most negatively impacted by the move. It is ironical just as the president of daily farmers argues that the price of commodities in the world is rising and so is the farmers cost while the price of milk is going down. The end result will see farmers pull out of this investment something which will reduce the supply of milk. Since the demand will remain unchanged then the price of milk will automatically rise up (Nicole, 2011). Theory of supply The theory of supply is evidenced in this case. The theory holds that, the quantity supplied is directly proportional to the price of the product. This is to imply that when the supply of a product increases the price also increases holding all factors constant. The main determinant of the supply is the cost of production, number of suppliers and firm’s expectations about future prices. Basing argument on the case in hand, the theory of supply has not been followed. This is because the daily farmers are experiencing high cost of production while the marketers are selling the milk at a low price. There is a great need for the two Australia chain supermarkets to consider the law of supply which can be illustrated as shown by the diagram below
Supply Curve
Price (P)
P2
P1
Q1 Q2
Quantity of milk supplied
This idea can be explained using the illustration of the price of milk against the quantity demanded as represented below.
Price
P1
P2
D
Q1 Q2
Quantity of Milk Demanded
References
Krugman, P. R., & Wells, R. (2006). Economics. New York: Worth Publishers.
Nicole Eckersley (2011). Coles leads slash in milk prices; farmers fear. Retrieved from www.ausfoodnews.com.au/2011/01/27/coles-leads-slash-in-milk-prices-farmers- fear.html
Rebecca Dollery (2012). Milk price war driving dairy farmers out. Retrieved from http://www.abc.net.au/news/2012-03-09/milk-price-war-driving-farmers-out- feature/3880578
Smith, P. (2006). Advanced economics. Deddington: Philip Allan Updates.
