Read the subsequent excerpts from the article "Glut to blame for farm-gate milk price falls not big supermarkets" by John Durie published in the Australian on June 28th 2012.
Glut to blame for farm-gate milk price falls, not big supermarkets
VICTORIAN dairy giant Murray Goulbourn has cut farm-gate milk prices by 8.5 per cent to $4.50 per kilogram which leaves farmers at break-even levels due to the glut of milk on world markets.
Milk prices have fallen by 20 per cent over the last year so the 8.5 per cent cut from Murray Goulburn is relatively good but that isn't much comfort for struggling farmers.
Please answer the subsequent questions using appropriate diagrams.
1. Consider that milk operates in a perfectly competitive market, use a well labeled demand and supply model to Illustrate how market equilibrium price of milk is being determined.
2. Using the same model, explain and illustrate the impact of the glut of milk on the market. Clearly explain the equilibrating process.
3. If you were the Minister for Agriculture in the Victorian Government, and the Victorian Dairy Farmers Association asked you to support their members by imposing a legal minimum price, could you support or reject their request. Use an economic model to illustrate why you reached your decision.
4. With the aid of appropriate diagrams, what possible alternative programs would the government implement to increase the prices farmers receive in the market?