Homework answers / question archive / ECON1101 Assignment Wheat and petrol: Consequences of the conflict in Ukraine on the Australian economy Australia is an exporter of wheat, supplying to the international market

ECON1101 Assignment Wheat and petrol: Consequences of the conflict in Ukraine on the Australian economy Australia is an exporter of wheat, supplying to the international market

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ECON1101 Assignment
Wheat and petrol: Consequences of the conflict in Ukraine on the Australian economy Australia is an exporter of wheat, supplying to the international market. However, we import most of  our petrol. Prepare an economic analysis of the market for wheat and petrol in Australia, addressing  the following questions:

1. Wheat and the welfare consequences of trade:

a. [Basic static analysis of trade] Construct a simple model of the (wholesale) market for wheat  globally, and in Australia. Provide a brief but clear explanation to accompany your  diagrams, and reflect on what access to international trade means for Australian farmers, food manufacturers (e.g. bakeries) and food consumers (i.e. households).

b. [Extended dynamic analysis] The market for wheat is affected by the recent unrest in Ukraine (“Ukraine war could send…”, 2022). Wheat prices are reported to have increased 55 per cent even before the invasion, just based on fears of sanctions and disrupted  supply, as Russia and Ukraine account for a large portion of global wheat supply. Russia is also a key supplier of fertilisers used by Australian farmers. How can we expect this to affect Australian wheat producers? What flow-on effects might we expect to see in the wider Australian economy?

2. Petrol and the welfare consequences of taxes:

a. [Basic static analysis of tax] Draw a simple model of the retail market for petrol in

Australia. Petrol is taxed in Australia (and in most other countries). Evaluate the welfare consequences of a tax on petrol. Is this an example of government failure or a consequence of market failure?

b. [Extended dynamic analysis and reflection] Petrol prices have recently jumped, and this appears to be directly linked to what’s happening in Ukraine (Hutchens, 2022). Explain what has occurred, and evaluate the likely effect on (i) consumer expenditure, (ii) revenue for petrol retailers, (iii) government revenue. Who, if anyone, stands to benefit from this price shock? Some argue that petrol is too expensive, and that the government should cut petrol taxes (Worthington, 2022). Is this justifiable, based on economic reasoning?

Helpful hints on diagrams for these questions:

1. (a) Draw two diagrams side-by-side and show how they are linked, treating Australian farmers as price-takers.

(b) It may be helpful to use a simplified version of your diagrams for (a) when modelling dynamics. Or, it is perfectly fine to just have one set of diagrams for (a) and (b). You can use colour to highlight the dynamics, e.g. black for the static analysis and blue for dynamics.

2. (a) In the retail market, supply consists of consists of petrol stations selling petrol to the

Australian public. These suppliers buy petrol on the wholesale petrol market, which is a different market where petrol stations constitute demand and companies which refine oil into petrol constitute supply. The while sale market for petrol is going to look similar to a standard trade model with imports. The retail market just has supply and demand, with

the wholesale price built into the domestic supply function.

(b) For the dynamic analysis, it can again be helpful to use a simplified version your

diagram for (a), otherwise the diagrams could get very crowded. There is potentially a lot

going on, so it needs to be clear what you focus on in (a) versus (b). It is again also perfectly fine to use one diagram for both (a) and (b) if you find this manageable. Use

colour to clearly illustrate dynamics (e.g. black: before change; blue: after change)

Relevant readings and references:

Ukraine war could send bread, noodle and livestock feed prices skyrocketing. (2022, March 7).

ABCNews Online (https://www.abc.net.au/news/2022-03-07/ukraine-war-food-supply/100889074)

Hutchens, G. (2022, March 4). ABCNews Online (https://www.abc.net.au/news/2022-03-04/ukraine[1]war-trade-sanctions-russia-australia-petrol-prices/100878972)

Worthington, B. (2022, March 14). ABCNews Online (https://www.abc.net.au/news/2022-03-

14/morrison-frydenberg-petrol-prices-excise-election-budget/100907380)