Australia is an exporter of wheat, supplying to the international market. However, we import most of our petrol. Show 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?

In part II, we zoom in on the individual firm in the Australian wheat market, to consider production, costs, and profits. Specifically:

a) Start with a model of the situation before the crisis in Ukraine. Draw a model of a representative individual firm in the market for wheat, i.e. an Australian wheat farmer who is a price-taker in the global market for wheat, in long-run equilibrium. Comment on the assumed market structure. Show and explain the amount of wheat the farmer will produce to the market, and explain revenue, costs and profits.

b) Now consider the short-run effects of the conflict in Ukraine from the perspective of the Australian wheat farmer. in two sequences, in the interests of clarity. i. First, consider the increase in the world price. Show how this affects quantity produced, costs, revenue and profit for the farmer. ii. Second, consider the increase in the price of fertiliser. Show how this now affects the quantity produced, costs, revenue and profit for the farmer. c) If the world price of wheat, and the price of fertiliser, remains high into the future, what would be the long-run effects on the Australian wheat market and for the individual Australian wheat farmer?