Introduction:- In this assignment, I am going to write a report on Fonterra company which sells milk products in New Zealand as well as to other countries. I will discuss about the demand and supply of Fonterra products as well as equilibrium point of Fonterra. I will also discuss about a theory what can happen to Fonterra’s milk prices if other countries increase the price for milk products and discussion on the circular flow of model.
Executive summary:-This report explained about law of demand and law of supply and also illustrates equilibrium and how companies adjust towards the equilibrium point. This report also gives explanation on the given theory in the question and what will be the consequences of this theory.Morover, this report will also explain how to calculate the gross domestic product with expenditure approach as well how increased demand impact the exports of NZ dairy products worldwide and aggregate demand and price level. Circular flow model is used to know how much overseas sector generate to New Zealand economy.
Supply and demand:-Supply depends on the quantity of a product that a producer what to sell on different prices and demand depends on how much consumers want to buy on various prices.
Law of supply and demand:-The law of demand and the law of supply are very important laws in economics to understand. The law of supply tells about the quantity of a product supplied increases when the market price increase and decrease as the price decrease. On other hand, the law of demand says that the quantity of a product demanded decrease as the price of a product increase and when price decrease the quantity increase. (Ehrbar)
Equilibrium: -When supply and demand balances each other then there is an Equilibrium point, due to this price become stable. Oversupply of goods and services make price fall down, due to this reason demand increase. The balancing effect of supply and demand effects in a state of equilibrium.
The price of goods and services remains same when a market comes to the point of equilibrium. Equilibrium is a point where how much quantity consumers want and how much suppliers supply is equal. If demand and supply will change then there will be a different equilibrium price and quantity of the product will also change. (my accounting course)
Fonterra is a biggest company in the New Zealand which produces dairy products and it sells 95% of its production of milk products to the consumer’s worldwide. The company supplies around 40% of global dairy product exports. (Fonterra-by-the-numbers, 2013)
The given graph states that, Fonterra produce milk and creates an excess supply in the domestic market. The excess is exported to international market. Due to this, Producers get benefit but consumers will suffer. Producers get benefit from international trade and they sell products on higher prices.
According to the theory, there is a suggestion that milk supply should be tightened in china because of the dry weather of the country where the bulk milk is produced. Theory also shows how Fonterra increase the price for its products.Farmgate milk price raised 4.75/kg from $4.25/kg. Westland Milk price increased to $4.55-$4.95/k.g. (Gray, 2016)
The graph illustrates that if world price increase from pw1 to pw2 then the domestic demand QD will drop further from QD1 to QD2 and quantity of export which is equilibrium to excess supply would increase so its move from ES1 to ES2.It would increase to ES2 – ES1.
Dairy products are inelastic so little change in the price will not change the demand significantly. In the theory, they only considered the price and Demand factors but there are some other factors which make impact on the demand and supply of milk. Expiry date of milk products is very less so consumers cannot store it for many days. There are different flavours in milk. People can change their choice one particular to another one. Consumption is also making greater impact because people can consume a limited quantity of milk in a day.
This graph states about the price of milk and quantity how much people buy on different price. If price of milk bottle is $2 then the demand is high but when price of milk bottle increase by $1 then there is a slight drop in the quantity and demand of the milk. It decreases QD1 to QD2.So, this graph explains that demand of milk is inelastic and only change slightly if price rise because milk is our necessity.
TASK-3 Answer (a)
The circular Flow of Model: - The circular flow model states that how money flows in an economy. The model also indicates the circular flow of income among the individual sector and the business sector. Members of households provide labour to businesses through the resource market. (circular-flow-of-income-and-spending)
Direct investment:-Imports and exports came in direct investment. In export overseas producers buy goods and services and contribute in the NZ economy. In import New Zealand buy products and services from other countries which contribute to their economy. For example, New Zealand buys cars from the Japan because Japan has comparative advantage to produce cars but New Zealand has not.
Indirect investment:-Overseas producers pay indirect tax to the government of New Zealand when they export. It also gives more facilities to domestic producers such as capital, labour and land to generate more income.
NZ exports many goods and services to overseas such as dairy products, tourism, lamb, beef and so on. The exports generate the income to the country. However, NZ imports many goods from other countries these are cars, petrol, fruit etc. Due to this, money flow outside from the country. Money flows into NZ producers for exports called export receipts and money flow out of NZ to overseas suppliers as payment for our Imports called import payments.
When we minus the export receipts and import payments then we will get to know how much money is leaving New Zealand and how much money is entering New Zealand. The Balance of Payments records more exports and less imports then there will be surplus but if it is opposite then there will be a deficit.
We can take the example of Fonterra Company. Fonterra selling milk products to overseas market due to this money flows in NZ economy and increase the aggregate income of New Zealand. Producers of Fonterra give households goods and services and households give Fonterra fiancé by paying for these goods and services. Households give resources (material and labour) to producers (Fonterra) and they give them income (salary).Government spend on farmers of Fonterra for example government can give subsidies to produce more.
GDP: -The value of goods and services with their final production between the boarders of a country in a particular time period is known as gross domestic product. In New Zealand, Gross domestic product is calculated quarterly in a year. For example in 2018,GDP of New Zealand is $72317 million, this means that this is the value of all new goods and services that were produced inside borders of New Zealand but excluding intermediate goods, in 2018. (Statistics Gross Domestic Product - M5)
Three different approaches can be used to analyse the GDP such as income approach, expenditure approach and value added approach. Here, we will explain about the expenditure approach according to the circular flow model.
Expenditures approach to GDP:-The expenditures approach divide the expenditures into five sections which are consumption, investment, government spending, exports, and imports: - Y=C+I+G+X-M. This formula is appropriate to calculate the GDP through expenditure approach.
Consumption(C):-When using the expenditures approach, “C” is the category of GDP that a country spent on households on final goods and services in a particular year but it does not include new housing.
Investment (I):-When using the expenditures approach, “I” is the category of GDP that states the spending companies do to produce goods and services Investment contains expenditure on capital goods such as tools, equipment and inventory.
Government spending (G):- “G” is the spending by government, how much money government spent on goods and services for example building roads and national protection. Transfer payments are not included in the government spending in GDP calculation; otherwise these are also part of government spending.
Exports (X):-Goods that a country produce and sell those goods to other countries for example New Zealand produce milk products and export these worldwide.
Imports (M):- Goods are produced in a different country but purchased by a different country because of the shortage of those goods or expensive to produce. For example, New Zealand imports Petroleum and petroleum products from Australia and China.
Net exports (X-M):-Spending on exports minus spending on imports’ “exports” is the price of goods that go out of a nation; “imports” is the price of the goods that come into a nation. If exports are higher than imports then there will be trade surplus. However, if a country export less and import more then they face the trade deficit.
The circular flow diagram
Gross domestic product can be signified by the circular flow diagram as a flow of income. Income can be seen moving in one direction but expenditures on goods, services, and resources moving to the opposite direction. The diagram below explains that households buy goods and services from firms and firms buy resources from households.
The circular flow model explains the similarity of the income approach and expenditures approach to calculating national income. In this diagram, goods, services, and resources move right-handed and capital moves anticlockwise.
Households buy goods and services from businesses and the money they spend go to firms. Businesses buy resources, such as labour from households, and the money they pay for these resources go to households. (The circular flow and gdp)
Exports impact only AD not AS because of some other factors like technological resources. When the price will increase then AD will also increase because there will be more demand for dairy products in overseas market.AD1 curve move to AD2 because of the increase in demand and price.
When AD increase then there will be more production of dairy products and need to hire more employees which lead to less unemployment. People have high income because they can spent more on dairy products, Due to this, consumption will also increase. Inflation will be also high because of the high income, high consumption and less unemployment.
- Fonterra-by-the-numbers. (2013, Aug 05). Retrieved from www.stuff.co.nz: http://www.stuff.co.nz/business/industries/9003972/Fonterra-by-the-numbers
- circular-flow-of-income-and-spending. (n.d.). Retrieved from www.tutor2u.net: https://www.tutor2u.net/economics/reference/circular-flow-of-income-and-spending
- Ehrbar, A. (n.d.). Supply.html. Retrieved from www.econlib.org: https://www.econlib.org/library/Enc/Supply.html
- Gray, J. (2016, sep 5). GDT dairy auction looks set for a 'scramble' to buy - ANZ. Retrieved from www.nzherald.co.nz: https://www.nzherald.co.nz/the-country/dairy%20industry/news/article.cfm?c_id=168&objectid=11703875
- my accounting course. (n.d.). Retrieved from www.myaccountingcourse.com: https://www.myaccountingcourse.com/accounting-dictionary/equilibrium
- Statistics Gross Domestic Product - M5. (n.d.). Retrieved from www.rbnz.govt.nz: https://www.rbnz.govt.nz/statistics/m5
- The circular flow and gdp. (n.d.). Retrieved from www.khanacademy.org: https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/economic-iondicators-and-the-business-cycle/21/a/the-circular-flow-and-gdp
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