Economics formal task

Term 2
Grade 10

Research
Market forms with specific reference to
the south African milk market




Sinoxolo jaza
Grade 10 d
St christophers private school



Introduction

In ordinary language, a market means a place where things are bought and sold. But in Economics a
different meaning has been given to the term. Professor Chapman says Economically interpreted the
term market refers not to a place but to a commodity or commodities and buyers and sellers of the
same who are in direct competition with one another. Thus we speak of cotton market, share market
etc. There is a market for every commodity that has buyers and sellers, even though there is no
specified place where they meet. All that is required to constitute a market therefore is a commodity
that can be bought and sold some are willing to buy and others are willing to sell.

The buyers and the sellers can communicate with one another by words of mouth, by letter, telephone,
cable, internet or by wireless, the method or place does not matter. The definition of the market points
out two main features of an economic market. Firstly there must be a free competition among buyers
and sellers. Secondly, as a result of this competition there must be competitive price. The more
organized a market is, the greater is the tendency to the same price for the same thing at the same time
through out the market, even if it is worldwide.

Perfect and Imperfect Market
On the basis of competition between the sellers and buyers of a commodity, market may be classified
into two categories, namely Perfect Market and Imperfect Market.

Perfect market implies the following conditions:
(a) A large number of sellers and buyers
(b) Buyers know the prices charged by the different sellers of the commodity
(c) Only one price prevails in the market due to the competition between buyers and sellers.

But these conditions rarely exist in reality. The number of sellers or of buyers may be small and as a
result the competition between them may not be free or perfect. When there are a small number of
sellers, they can influence the price by selling more or less of the commodity. The buyers may also be
smaller in number and they can also influence the purchase price by purchasing more or less of the
thing. Different sellers may sell at different prices because each seller controls a large part of the total
supply. The same is the true of the big purchasers. The buyers may be ignorant of the prices charged by
the sellers or buyers may have preference for particular sellers. As a result the sellers can sell at
different price than others. These conditions make market imperfect.





Government Intervention in the Market?

According to a National Department of Agriculture policy document, the role of the Government in
agriculture is to create an enabling environment for the development of the sector in such a way that
the overall economic, social and environmental objectives described above can be achieved. There are
three aspects to this approach:
establishing principles for Government support for agriculture
building partnerships with the private sector and farmer organisations
establishing accountability for services.
The role of the Government in regulating the market and determining agricultural product prices has
been greatly reduced, which clearly enhances the competitiveness and efficiency of the sector.
However, failures still occur in the ways in which some markets operate, which affect small scale
farmers in particular, and their access to production requirements and credit as well as to markets for
their produce.
The direct subsidisation of the costs of farm inputs and of loans will not be Government policy. Such
subsidies have distorting effects and cannot provide a basis for sustainable incomes from farming. Only
in exceptional cases will the Government consider providing financial support to farmers. In such cases
assistance will be provided to fulfill clearly defined objectives, will be carefully targeted and will have
time limits. For example, selective support to encourage new investments in agriculture among land
reform beneficiaries and other small scale producers could be considered.

According to Mr Derek Hannekom (former Minister of Agriculture), The effects of market failures may
include, among others:
The private sector under-investing in some goods and services which are needed for sustained
growth, such as basic research and infrastructure.
Buyers of seed or agro-chemicals running the risk of buying sub-standard items.
In such cases of market failure, Government may intervene in several ways including:
Investing in rural infrastructure
Assisting with funding research into untraded or non-hybrid crops or into farming systems or
resource conservation where private sector organisations find it difficult to realise a return
Reducing anti-competitive behaviour
Regulating the risk by imposing price ceilings

The Marketing of Agricultural Products Act, 1996 (Act No. 47 of 1996)

The Act, which came into effect in January 1997, is based on the view that state intervention in
agricultural markets should be the exception rather than the rule. The Act does provide for a certain
number of limited interventions, which include the collection of levies, the conducting of pools, the
keeping of records and returns, export controls and compulsory registration. However, when any
intervention is proposed, it must be demonstrated that one or more of the aims of the Act will be
promoted without food security or employment being affected negatively. Furthermore, any proposed
intervention in terms of the Act must be subjected to a consultative process involving the National
Agricultural Marketing Council (NAMC). By early 1998, the control boards dealing with maize, sorghum,
oilseeds, wool, meat, wheat, cotton, mohair, Lucerne, citrus, deciduous fruit, dried fruit, milk and
canned fruit had all been closed (except for residual legal and technical functions).

Brief summary of Government Intervention

It is quite clear then that government intervention exists, albeit, at a very small scale and only under
certain conditions. It is clear that there needs to be intervention to ensure that the broader agricultural
market remains solvent, in a general sense. Lack of any intervention at all would lead to chaos, much like
if the staff members of St Christophers Private School were to leave scholars to figure out the school
market themselves and see no intervention.
The different methods of intervention will not be repeated here as they have been mentioned above. In
the next paragraph, I shall proceed to demonstrate the effect of government intervention from an
economic perspective utilizing graphical presentations.

The effect?

Theoretically, if left alone, a market will naturally settle into equilibrium: the equilibrium price ensures
that all sellers who are willing to sell at that price, and all buyers who are willing to buy at that price will
get what they want. At equilibrium, supply is exactly equal to demand. However, in some cases, the
government will interfere with the market, putting in price ceilings or price floors, charging taxes, or
using other measures to reshape the economy.

Price Ceilings

A price ceiling is an upper limit for the price of a good: once a price ceiling has been put in, sellers
cannot charge more than that. In most cases,
price ceilings are below market price. If a price
ceiling is set at or above market price, there will
be no noticeable effect, and the ceiling is only a
preventative measure. If the ceiling is set below
market price, however, there will be a shortage
of goods. For instance, if the government thinks
1) that people need milk to live, and 2) that the
market price of milk is too high, then they might
install a price ceiling. Assume that the graph
represents the market for milk. At equilibrium, the price will be p*, and the quantity will be q*.

If the government puts in a price ceiling, we can see that the quantity demanded will exceed the
quantity supplied, meaning that not enough bread will be supplied to satisfy demand. Such a situation is
called a shortage. Because price ceilings are installed in the interests of the buyers, the government has
to decide which situation is preferable for the buyers: not being able to afford any bread, or not having
enough bread to go around.

Who Benefits from Market Intervention?

To illustrate the benefit or rather, pros & cons, I shall illustrate using two of the many ways in which
government can intervene. It should be borne in mind though that the focus is on price ceilings.

Maximum Prices Price cant rise above a certain level. EFFECT=This can reduce prices below the
market equilibrium price. The advantage is that it may lead to lower prices for consumers.
Diagram Maximum Price

The disadvantage is that it will lead to lower supply. There will also be a shortage, demand will exceed
supply; this leads to waiting lists and the emergence of black markets as people try to overcome the
shortage of the good and pay well above market price.
Example
1. Tickets for football prices and concerts are often set at a maximum price. (e.g. if left to the
market, equilibrium prices would be much higher). e.g. at current prices Orlando Pirates vs
Kaizer Chiefs could sell many more tickets than 80,000.
The advantage of setting this maximum prices is that it keeps football affordable for the average
football supporter. It is argued that if prices were set solely by market forces (no intervention), it
would be just the wealthy who could afford to go to games, or in this casedrink milk!!
The disadvantage is that it means some who want to go to the game cant because there is a
shortage of tickets. (short supply for consumers of milk)

Minimum Prices
Minimum prices are used to give producers a higher income. They are used to increase the income of
farmers producing goods.
For example, the EU had a Common Agricultural Policy (CAP). This increased the income of farmers by
setting minimum prices.
Diagram Minimum Prices

The Disadvantage of Minimum Prices
Higher prices for consumers. We had to pay more for food
Higher tariffs necessary on imports. The EU put tariffs on food to keep prices artificially high.
May encourage oversupply and inefficient. The CAP encouraged farmers to produce food that
no one actually wanted to eat.
We had over-supply (butter mountains, wine lakes)

Summary on the benefit?

Generally price controls distort the working of the market and lead to over supply or shortage. They can
exacerbate problems rather than solve them. Nevertheless there may be occasions when price controls
can help for example, with highly volatile agricultural prices.


Other possible interventions?

Government Taxes
Government taxes on a commodity raise prices paid by traders and consumers. In Kenya government
has put some taxes on cash crop commodities like sugar, tea and coffee. Such taxes affect the
competitiveness of such commodities in local, regional and international markets. Apart from imports,
maize being an essential commodity is not taxed.

Subsidies

Use of subsidies is another method of government intervention that affects price functions in a free
market. Government can give subsidy to farmers to reduce production costs and thereby act as
incentive for farmers to increase production of a given commodity. The Kenya Government has
successfully done this by subsidizing fertilizers to maize producers and the country is now a net exporter
of maize in the region. After the devastating drought of 2009, the Government of Kenya gave seed and
fertilizer subsidies to farmers and the result is the bumper harvest realized in 2010 to the extent that the
free market price of maize dropped to Ksh 700/= per bag. To cushion the farmers the Government
directed the NCPB to purchase maize at Ksh 1800/= per bag.

Subsidies can also be used to protect consumers at times of shortages either to ensure affordability by
the poor or to stimulate demand by encouraging buying or consumption. In Kenyas maize market the
NCPB is directed to sell maize below the free market price which normally gets very high in deficit
seasons. Indeed in extreme cases where people are starving, the government will buy the NCPB maize
below the free market price and distribute it as free relief food to areas badly affected by the maize
shortage.











Reccomendations

To recap, A price ceiling is a maximum price placed on a particular
good by the government. In other words, it is a limit to the price
at which an item can be sold. If the price ceiling is set above the
natural equilibrium price of the good, it is said to be not binding.
However, if the ceiling is placed below the free-market price, it
produces a binding price constraint and a shortage occurs.

The intended goal of price ceilings is to help out the poor by
making these goods available at a price they can afford. Despite
these good intentions, binding price ceilings actually make the poor, and everybody else, worse off.
Because of the resulting shortages, valuable resources, like time, will be wasted by waiting in lines for an
item. Producers of the item in demand find some way of dividing the good among the people who want
it. It is sometimes based on race, sex, or wealth status. This method is usually unfair because the item
might not get to the person who values it the most.
Binding price ceilings and shortages lead to the illegal practice of the black market. Black
markets exist because some people are willing to pay a higher price for a good to avoid waiting in line.
To the people who have a lot of money, the black market is a good thing. But to the people who dont
have enough money to skip the lines, the black market is a bad thing because it is taking the item away
from those waiting.
Very few economists would argue today that price controls generally are an effective means of
improving the economic well-being of any broad group of people. It is for the above reasons that I do
not think that price ceilings are good for improving the lives of ordinary South Africans. I cannot argue or
go against economists and politicians who have adopted to go with a non-interference stance.