Major dairy exporter New Zealand has joined a growing list of agricultural countries being sucked dry by a drought - its worst in 30 years - with the government warning of higher global milk prices.
Market for milk when drought occurs in New Zealand
1. There are higher global milk prices. Due to drought in New Zealand crops that are produce for cow is sucked dry. Higher prices of crops will result in higher cost of maintaining cows and therefore cost of production will increase. Thus, the less profit the producer will make at any price. As costs rise, firm will cut back on production. Thus, the supply curve will shift to the left (From S to S2 as shown in the diagram above) , because the cost of production has risen and producers are less willing to supply with higher costs. Therefore the new market equilibrium is established at a higher price (From PE0 to PE1 as shown in the diagram above) and at lower quantity(From EQ0 to EQ1 as shown in the diagram above). Therefore, the global milk price increases.
World market for milk
2. Increase in price of milk will not affect consumption. Milk is an important meal which people need to purchase (E.g babies or elderly which needed high calcium intake). If price rises demand won’t fall that much as it is needed. Likewise if price falls demand won’t raise that much as people are already buying it at the higher price so the lower price isn’t an incentive to them to buy more. Milk is a product that goes stale if kept for long so people will only purchase as much as they can consume. Milk is an ingredient in a lot of foods and there really isn't a perfect substitute for milk which makes it inelastic. Therefore, the price in milk increases will not affect the consumption.
Economic growth of New Zealand
3. Exports in New Zealand decrease. New Zealand is quite a key dairy exporter, and the vast majority of production is exported. Therefore...