Butter Shortage

Economics; Butter Shortage
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In the article under consideration, there exists a shortage of butter. Such a deficit in Australia is likely to affect the consumers as well as the suppliers. Macro and microeconomic concepts deal with the interaction between supply and demand as well as other market forces. Consumers play a vital role in the economy by buying the goods they need as well as informing the production decisions. The suppliers may also set the prices within the market as well as determine the amount of goods that will be available to the consumers.
Taking into account a purely competitive market, there will be a substantial number of firms within the market that produce standardized products. This means that the companies are allowed to compete with each other favorably depending on the existing market forces. In pure competition, the market prices are set by the consumer demand (Parkin and Bade, 2015). This ensures that the suppliers do not have control over the existing market prices and they can be described as price takers. The large number of entities in such a market is occasioned by the low barriers to entry. New firms can offer substitutes in the market and can force better prices in the market which may force other entities to follow suit.
Assuming that the butter market in Australia is pure competition, one can come up with a demand and supply graph to illustrate the market.

In the chart above the demand curve is created by considering the amount of goods that the consumers are willing and able to buy at a specific price. The supply curve is generated by examining the quantities supplied in the market at the existing market prices. In the case of butter, the demand and supply curves can be derived by focusing on quantity supplied, quantity demanded, and the butter prices. The equilibrium point in the graph shows the point at which the aggregate demand is equal to the aggregate supply (Parkin and Bade, 2015). This means that in perfect competition the quantity demanded by the consumers is the same as the quantity provided by the suppliers. In a supply and demand diagram for pure competition, the concept of ceteris paribus is prevalent. An increase in price is accompanied by a reduction in quantity demand, and the vice versa is also true with all other factors being held constant (ceteris paribus). The concept of ceteris paribus considers demand, supply, and pricing holding all other factors constant such as government regulations or technological advances.
The butter shortage reported in Australia may be influenced by factors such as lack of proper planning, natural disasters, technological advancements, and government policies such as price fixing. The suppliers in the country may have made mistakes in forecasting changes in demand. Natural disasters that affect butter production may be prevalent in the country hence affecting the output (Parkin and Bade, 2015). The government may also contribute to the shortage by fixing prices at a level where the suppliers are unable to offer the needed quantities in the market. For example, the government may set the low rates in a bid to protect the consumers and the butter companies may not be in a position to produce at the existing prices.
The butter shortage in Australia will create excess demand within the country. The excess demand arises from the fact that the quantity demand is higher than the quantity being offered by suppliers. The shortage has resulted in an increase in prices for items such as cakes and pies. The rise in prices will see the consumers demand less of the product. The increase in prices may also result in the consumers looking for alternatives such as full cream milk. The shortage is also blamed on changing trends with consumers opting for alternatives. The changes in price may decrease demand and will cause a movement along the demand curve (Parkin and Bade, 2015). The movement along the demand curve will not affect the equilibrium point but will result in lesser quantities being demanded. A shift in the demand curve may be influenced by factors such as an increase in income, changes in the price of substitutes, seasonality. A change in the demand curve will result in a new equilibrium point with a shortage leading low demand shifting the demand curve to the left. This would reduce the equilibrium price and equilibrium quantity.

Price elasticity of demand is determined by a number of factors such as the number of substitutes, the income levels, and the prices. Commodities that have close substitutes offer more varieties to the consumers resulting in demand being elastic. With the consumers having more options to choose from they are likely to shift to substitutes once the price of a particular commodity increases (Parkin and Bade, 2015). The level of income also plays a crucial role with a higher level of income being used to buy a product and resulting in high elasticity. In terms of price, elasticity is measured by considering the how the quantity demanded responds to changes in prices. The demand for butter can be termed as elastic with the quantity demanded shifting with the increase in prices. The consumers also have substitutes such as full cream milk and that has been preferred by most consumers during the shortage.
Under the assumption that the market for baked goods is inelastic, a study of the consumer expenditure is crucial. Price inelasticity of demand means that the quality demanded does not change as the market price changes. The butter shortage has increased the prices by140% in the last eighteen months which may lead to a decrease in the quantity. The consumers may not be willing and able to pay the existing prices for the butter. The shortage has also seen an increase in the production costs which are then passed on to the consumers. With the demand being price inelastic, the consumers will keep up the existing demand at the increased prices (Parkin and Bade, 2015). Higher rates will result in increased consumer expenditure since the customers have to pay more to get the butter. Assuming that the consumers are not exposed to substitutes at lower prices, they will have to spend more on the butter. The increase in the prices will also result in increased revenues for the suppliers.
The market in Australia cannot be termed as purely competitive, and market structures such as oligopoly and monopoly may apply. Under oligopoly, there exist few firms that control a substantial portion of the market while in a monopoly there is one firm that controls the market. In both markets, there are barriers to entry which ensures the existing firm’s control market forces such as pricing (Parkin and Bade, 2015). The two markets make up the imperfect competition, and their demand and supply curves can be illustrated as shown below.

In a situation where there is a shortage in an oligopoly or a monopoly, the suppliers may control the prices. The consumers are not exposed to substitutes resulting in an increase in consumer expenditures. In an oligopoly and a monopoly, the firms can grow their profits (Pe-Pn) by reducing the quantity supplied (Qe-Qn). The reduction in the amount supplied results in an increase in the prices which is indicated by the produce surplus. The butter shortage would result in higher rates being charged in an oligopoly as well as in a monopoly. The quantity demanded reduces with the increase in price and the suppliers may have to reduce the quantity supplied into the market (Parkin and Bade, 2015). The reduction in supply will result in a decrease in the equilibrium quantity and will increase the equilibrium price.
The equilibrium prices and output in imperfect competition and pure competition differ depending on the number of firms in the market. In pure competition, the firms are allowed to join the market at any time hence the consumers are exposed to substitute products. This means that changes in pricing can be addressed by shifting to substitutes. In imperfect competition, the firms may be limited (oligopoly), or only one business may be operating in the market (monopoly). The number of substitutes is limited hence the businesses can increase the prices at will. Some consumers may opt to avoid the products due to exorbitant pricing, but for normal goods, the consumer expenditure is likely to grow (Parkin and Bade, 2015). In imperfect competition, some of the producer surplus might be lost due to a few suppliers. The suppliers might not be in a position to provide the needed quantity to satisfy the market demand.
Reference List
Parkin, M. and Bade, R. (2015). Microeconomics. 1st ed. Pearson Australia.