ECO402 Micro Economics GDB Solution Fall 2012

New Zealand is the world’s largest wool producer and one of the biggest exporters of wool in the international market. In recent years, the wool industry has continued to contract due to unfavorable market conditions. Fluctuations of wool prices in the international market strongly influence the economy of New Zealand because wool is a main exporting product of New Zealand. It’s just a fact of life that China has become the strongest bidder of the wool, pay the most for the wool, make the cheapest garments, take the smallest margins and earn maximum revenue. According to a report, china and European Union had 47% and 31% market shares of this commodity respectively while Australia had only 1% market shares of this commodity. Keeping in mind the given situation, Government of New Zealand has taken two serious decisions for this industry. Firstly, government has subsidized the agricultural sector. Secondly, veterinary medicines for cattle are provided to the farmers at lower prices.



Being a student of economics, discuss how these decisions will affect demand and supply of wool in the market of New Zealand. Secondly, discuss either this policy will be in favor of china or not.


Demand In Market

Supply of New Zealand

China:              47%

European:       31%

Australia:         01%

Other:               21%

1). Provide the subsidy to the agricultural.

2). Provide veterinary medicines.


Part A: Effect of Demand and Supply of wool in the market of New Zealand.

Famous Economics Sermon “Supply Creates its own demand” & “Demand created its own supply”

Supply Factor:

No doubt Wool is the main exporting product of New Zealand. So Government of New Zealand will be conscious in this case. So they take decision that provide subsidy to the agriculture sector. Due to this agriculture produce high quality food being using latest technology and fertilizer. Cattles eat food and produce healthy wool. Secondly New Zealand government provide veterinary medicine to the cattle. Due to this death of cattle will reduce and care of cattle will automatically increase. So due to all scenarios will increase the supply of cattle.

Demand Factor:

We know that: China and European Union had a 47% and 31% market share respectively. New Zealand provides the quality wools because they use high quality food and take proper care of cattle. So China purchases the high quality and quantity wools from New Zealand and produces the cheapest garments.



Part B: Policy will be favor in china or not.

Yes policy will be favorable for the china. When any government provide the subsidy to any sector then following benefit raise:

  • Increases the production
  • Increase Quality
  • Reduce Cost

So China will buy high quality wool at low price and produce the garments. His profit margin raise automatically. Unemployment will decrease and profit margin will automatically rise.