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Economics : Price Floor in Australian Wool Market

In: Business and Management

Submitted By clawless
Words 1586
Pages 7
1.1 Introduction
Australia’s known to produce the best wool in the world; hence it has dominance in the worlds market of Merino wool of 50% and greasy wool of 27% as of June 2001 (ABS, 2007). In the early 1970’s to stabilise the declining price of wool, the Australian Wool Council (AWC) implemented a minimum price floor scheme to protect the Australian wool producers. The price floor for wool began in 1974 and ended in 1991 as “there was no plan to cope with the sharp reversal in the supply-demand situation.” (Clancy, The reason wool was knocked to the floor, 2011).
1.2 Price floor
Price floor refers to the minimum price level in which a commodity can be sold in the market (Hubbard, Garnet, Lewis, & O'brien, 2010). It is usually illegal to sell the commodity below the stipulated price. This is a price that is higher than the equilibrium price that the market is prepared to pay for that commodity (Taylor, 2006). In the 1990s the Australian government imposed a price floor in the wool market with the view of protecting sheep farmers and providing them the assurance that they would not be affected by the price fluctuations in the global wool market. The move was aimed at facilitating growth in the industry, creating jobs and improving the standard of living of Australian farmers. In addition, the price floor prevented market from getting into price competition (Bardsley, 1994)
Following diagram (Figure 1) shows the demand curve of a commodity that has price floor.
Price of Wool FIGURE 1

D S

Q1 QC Q2 Quantity of Wool
P1 is the price determined by the market based on the demand for wool and the supply available. The Australian government set P2 as the floor price. It created an increase in wool quantity. However, due to the increase in price, the quantity demand for Australian wool decreased. As a result, there was a permanent…...

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