My second case study is regarding “Does Public Urban Transport Substitute the Car” which this article is written by RocíoRomán on September 25th of 2012. This article focuses on how people should use public transport instead of using automobiles. Firstly, substitute goods are goods that can be used to replace the other goods. It is also known as goods for which an increase in demand for goods leads to a fall in demand for the other goods, or vice versa. Basically this means that when a demand of one increase, the other good experiences a fall of demand. We can take air-conditioner and fan as example of this study case. For instance, if the price of an air-conditioner goes up, the quantity of fans demanded will increase and vice versa. Therefore based on this article, the subjects of this case are public transportations and personal cars.
In my own personal opinion, I do agree that the public transport can substitute the usage of cars. Driving a personal car has more disadvantages than advantages. For example, if everyone in this country drives their own car, the quantity of vehicles on the roads would increase dramatically. This situation will cause the traffic to be congested at all times especially during the peak hours and we will have to spend more time on the road rather than spending time at our destinations. Higher quantity of vehicles on the road will also cause the rate of air pollution to increase and it will cause the people to suffer from heart and lungs diseases. Other than that, the prices of a car are expensive and not every family can afford it.
Prices in most markets are free to rise and fall to their equilibrium levels, no matter how high or low those prices can be. However, government may not satisfy with the market prices set by the supplier, so government may place a legal limit on how high or low a price may go. Somehow, it may not be a good idea, because when the government sets a maximum legal price a seller may charge for a product or service, shortage may occurs although government intention is to make sure everyone is allocated the same amount of goods and services.
The factors that may affect the demand of public transportation are expected future prices of cars, current income of consumers, expected future income and credit of consumers, the population, and prices of related goods. Firstly, if the expected future price of a car rises, consumers will use public transportation in the future or if the future prices of petrol increase, consumers will tend to avoid purchasing a car. Next, if the consumers’ income is not sufficient, then they will tend to use public transportation instead of buying a car. Moreover, when consumers expected future income increases or when credit is easy to obtain, the demand of cars might increase now however if the consumers find that using public transportation is more efficient and effective, they will continue on using the public transport. It actually depends on the consumer’s priorities. In addition, the larger the population, the greater is the demand for all goods. This also includes the demand of public transportation. Lastly, the price of related goods also affects the demand for public transportation. This is because a substitute is a good that can be used in place of another good for example cars and public transportation. Therefore, when the price of car rises or when the price of a complement of a car rises which is petrol, then the demand for the substitute of a car which is public transportation will increase.
The main factors that change supply of a car are the prices of factors of production, the prices of related goods produced, expected future prices and technology. The first factor is the prices of factors of production used to produce a good rises, the minimum price that a supplier is willing to accept for producing each quantity of that good rises so a rise in the price of a factor of production decreases supply and shifts the supply curve leftward. Other than that, expected future prices of a car rises, the supply of the car today decrease and the supply curve shifts leftward. Moreover, the number of suppliers is also one of the factors. The larger the number of suppliers of a car, the greater is the supply of the car. An increase in the number of suppliers shifts the supply curve rightward. Technology, the advances in technology create new products and lower the cost of producing existing products. So advances in technology increase supply and shift the supply curve rightward.
In conclusion, I personally think that public transportations can definitely substitute the usage of cars as they have much more advantages than the disadvantages. Some of the advantages are reducing the traffic jam, as Kuala Lumpur always facing traffic conjunction, which produce air and sound pollution. Consumers also can save their money for filling petrol and government also can reduce cost to build new roads but increase more public transport. In my opinion, these can also affect the demand and supply.
Siti Zulaika
Sunday, 28 October 2012
Sugar : It’s Not That “Sweet” After All…
My first case study is regarding the current sugar issue about the reduction of subsidy on sugar by 20 cents per kilogram in the budget 2013. Subsidy is defined as a financial aid supplied by the government, as to industry for reasons of public welfare, the balance of payments and many more. Therefore, subsidy simply means an assistance or help by the government to the public, financially. The government announced that the reduction of the subsidy on sugar will be effective on the 29th of September 2012. According to an article in the New Straits Times entitled “Sugar Subsidy Reduced For People’s Good”, the price of sugar has been fluctuating since January 2010. In January 2010, the price of sugar has been increased by 20 cents per kg. It continued to increase by 20 cents more in May 2011 bringing the current retail price to RM 2.30.
In general, the reduction of subsidy on sugar has its pro’s and con’s. According to the article shown, in Budget 2013 the Government’s proposal on reducing sugar subsidy by 20 cents per kilogram is one of the moves in creating a healthier Malaysia. The Government’s biggest concern is that 2.6 million Malaysians are diabetic and more than 98% with type 2 diabetes because of their high consumption of sugar in their food and drinks daily. On the other hand, when the subsidy on sugar is reduced, as sugar is a normal good, the price of sugar will increase and this will result in the decrease in demand. Therefore, consumers will consume less sugar so it will indirectly reduce the number of diabetics in Malaysia and creating healthier Malaysia citizens.
In general, the reduction of subsidy on sugar has its pro’s and con’s. According to the article shown, in Budget 2013 the Government’s proposal on reducing sugar subsidy by 20 cents per kilogram is one of the moves in creating a healthier Malaysia. The Government’s biggest concern is that 2.6 million Malaysians are diabetic and more than 98% with type 2 diabetes because of their high consumption of sugar in their food and drinks daily. On the other hand, when the subsidy on sugar is reduced, as sugar is a normal good, the price of sugar will increase and this will result in the decrease in demand. Therefore, consumers will consume less sugar so it will indirectly reduce the number of diabetics in Malaysia and creating healthier Malaysia citizens.
From the diagram above, with a subsidy of X, the supply would increase from S to S1. At S1, the quantity demanded would be Q1, the price that consumers pay would be P1 while the price that producers receive would be P*. Therefore, with a subsidy, the consumers pay less without affecting the producer’s profit as they still receive price of P* with the help of the government.
In addition to that, in my opinion I believe that by reducing the subsidy on sugar, it will help the nation to be more independent. Furthermore, by reducing the subsidy, the government could use the money that was used to subsidies sugar to improve our economic condition such as improving our public transportation, education system in remote areas, reduce the amount of poverty in the country and many more. Besides that, our Government should also reduce subsidies not only on sugar but on other unhealthy food such as food with high contents of oil and salt and instead continue to support the local farmers and their farms by subsidising the production of fruits and vegetables. This method would help and assist the lower-income group to substitute their unhealthy food with healthier and fresher food in an affordable way. Thus, their health care costs will decrease and improve their quality of life.
As we can see, there are also cons of reducing the subsidy on sugar. According to an article in the New Straits Times entitled “Sugar Subsidy Reduced For People’s Good”, Domestic Trade, Cooperatives and Consumerism Deputy Minister, Datuk Tan Lian Hoe said that "Sugar subsidy reduction should be no excuse for traders and operators of eateries to increase prices of goods" and she also said that "Errant trader could face legal action under the price control and Anti-Profiteering Act 2010 for indiscriminately raising prices." Honestly in my opinion, I disagree in this because the subsidy of sugar has been reduced before and the prices of food and drinks are still increased and not much action was taken from this. This is because there is lack of enforcement to assure that traders will not increase prices of goods unnecessarily. Corruption is another issue that might deter effective enforcement to curb traders from violating the law. For example, based on the basic calculations, the cost of the main ingredient in a cup of Milo and Teh Tarik is about 45 cents and 28 cents respectively, but these drinks are sold at RM 1.20 and RM 1.00 respectively. Thus, I agree with the citizens of Malaysia as a big number of them predicted that sooner or later the price of food at restaurants and stalls will increase in conjunction of reducing the subsidy on sugar. It might not be immediately, but slowly and surely the price of food will creep up. The traders would have a strong excuse now. As the government raises the prices, they will eventually have to raise their prices too. Can you argue with that? No.
On the other hand, according to the article from The Star Online on “Sugar Subsidy Reduced”, Muslim Consumer Association of Malaysia secretary-general Datuk Dr Ma’amor Osman said “The reduction of the sugar subsidy would encourage Malaysians to practice a healthier lifestyle.” In my opinion, besides removing the subsidy on sugar, I think that another option to reduce the consumption of sugar among the citizens are by educating the consumers on the dangers of excessive sugar consumption through the media such as advertisements on the television, health advices through the radio and press. Furthermore, the government should also educate school children on the dangers of excessive sugar intake through health education, home science, cookery lessons and many more. They could also encourage children to avoid drinks with high sugar level by providing drinking water in water dispensers around school premises and sweet drinks should not be allowed in school canteens. The government should start cultivating good values in a very early age. An English equivalent is “Strike the iron while it’s hot.”
Siti Zulaika
Price of Sugar Increased
According to the news on star newspaper, the price of coarse and fine sugar is increased by 20 cents to RM2.30 per kilo, said Domestic Trade, Cooperatives and Consumerism Ministry. In my opinion, sugar is something that a human being needs in their daily life.
Supply and demand is one of the key concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or service is required by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The connection between price and how much of a good or service is supplied to the market is known as the supply relationship. Therefore, the price is a reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the distribution of resources. In market economy theories, demand and supply theory will distribute resources in the most efficient way.
One of the elements that affect demand is expectation of price that will be in the future. If buyers have expected the price will increase, they would have purchase more before it raises the price. Thus, the demand for sugar will increase. It wouldn't have any effects on household because a family will not consume as much sugar as someone who is doing business which related to sugar. For those who own business like bakery shop, coffee shop, and dessert shop are forced to pay a higher price for sugar. Whereas for the law of supply, it simply means that the suppliers are willing to produce more products at a higher price compare to a lower price. When the price is increasing and the quantity of demand is decreasing, there will be more suppliers and the quantity supplied will be higher. The suppliers try to produce more in that period so that they can increase the profits that they earned. For example, when the price of sugar is increasing, the quantity of supply will be increased while the quantity of demand will be decreased.
The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price. There are three types of elastic demands which are perfectly inelastic demand, unit elastic demand and inelastic demand. In this situation it is the inelastic demand. Basically, inelastic is a situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price. From the supplier's viewpoint, this is a highly desirable situation because price and total revenue are directly related; an increase in price increases total revenue despite a fall in the quantity demanded. For example, the changes of price of sugar are inelastic to consumers because most of them only spend a very small amount of income, almost zero elastic demand.
So how can sugar be placed in inelastic demand? The answer is the complementary goods. For example, if the price of sugar rises, the demand for bubble tea will be decreased. It is because bubble tea is not a daily need in life for human being. Therefore, the demand curve for bubble tea shifts to the left. Besides that, there are some other causes that are affecting elasticity such as the density of substitutes and the amount of income spent on sugar. Firstly, it is the density of substitutes. Sugar is a good that is necessary for daily needs in life and it has weak substitutes so it can be consider as inelastic demand. Secondly, it is the amount of income spent on sugar. A household spends a little amount of money on sugar every month. This is why sugar is placed in inelastic demand.
When the price of sugar is higher, the quantity of supply will be higher because supplier can earn more profit while the quantity of demand is low. This will cause a surplus in the graph. A surplus is being more than or in excess of what is needed or required. On a supply and demand curve a surplus is represented by points above the equilibrium price. When a surplus exists buyers have an oversupply of product to choose from and will probably pay less for goods and services. For sellers, they are competing with other supplier for customers and their prices will fall, as will their sales.
Last but not least, I think that government is using the concept of price ceiling to control the market of sugar. There are few reasons that the government uses price ceiling in the sugar market. Firstly is to avoid black market is an illegal business of buying or selling goods or currency in violation of restrictions such as price controls or rationing. For example, some suppliers might be selling the sugar with the price that higher than the government set to them.
Yeo Ee Ling
Supply and demand is one of the key concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or service is required by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The connection between price and how much of a good or service is supplied to the market is known as the supply relationship. Therefore, the price is a reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the distribution of resources. In market economy theories, demand and supply theory will distribute resources in the most efficient way.
One of the elements that affect demand is expectation of price that will be in the future. If buyers have expected the price will increase, they would have purchase more before it raises the price. Thus, the demand for sugar will increase. It wouldn't have any effects on household because a family will not consume as much sugar as someone who is doing business which related to sugar. For those who own business like bakery shop, coffee shop, and dessert shop are forced to pay a higher price for sugar. Whereas for the law of supply, it simply means that the suppliers are willing to produce more products at a higher price compare to a lower price. When the price is increasing and the quantity of demand is decreasing, there will be more suppliers and the quantity supplied will be higher. The suppliers try to produce more in that period so that they can increase the profits that they earned. For example, when the price of sugar is increasing, the quantity of supply will be increased while the quantity of demand will be decreased.
The price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price. There are three types of elastic demands which are perfectly inelastic demand, unit elastic demand and inelastic demand. In this situation it is the inelastic demand. Basically, inelastic is a situation in which the demand for a product does not increase or decrease correspondingly with a fall or rise in its price. From the supplier's viewpoint, this is a highly desirable situation because price and total revenue are directly related; an increase in price increases total revenue despite a fall in the quantity demanded. For example, the changes of price of sugar are inelastic to consumers because most of them only spend a very small amount of income, almost zero elastic demand.
So how can sugar be placed in inelastic demand? The answer is the complementary goods. For example, if the price of sugar rises, the demand for bubble tea will be decreased. It is because bubble tea is not a daily need in life for human being. Therefore, the demand curve for bubble tea shifts to the left. Besides that, there are some other causes that are affecting elasticity such as the density of substitutes and the amount of income spent on sugar. Firstly, it is the density of substitutes. Sugar is a good that is necessary for daily needs in life and it has weak substitutes so it can be consider as inelastic demand. Secondly, it is the amount of income spent on sugar. A household spends a little amount of money on sugar every month. This is why sugar is placed in inelastic demand.
When the price of sugar is higher, the quantity of supply will be higher because supplier can earn more profit while the quantity of demand is low. This will cause a surplus in the graph. A surplus is being more than or in excess of what is needed or required. On a supply and demand curve a surplus is represented by points above the equilibrium price. When a surplus exists buyers have an oversupply of product to choose from and will probably pay less for goods and services. For sellers, they are competing with other supplier for customers and their prices will fall, as will their sales.
Last but not least, I think that government is using the concept of price ceiling to control the market of sugar. There are few reasons that the government uses price ceiling in the sugar market. Firstly is to avoid black market is an illegal business of buying or selling goods or currency in violation of restrictions such as price controls or rationing. For example, some suppliers might be selling the sugar with the price that higher than the government set to them.
Yeo Ee Ling
The Demand of The Umbrella Will Increases
Supply and demand is one of the key concepts of economics and it is the backbone of a market economy. Demand refers to how much quantity of a product or servece is required by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The connection between price and how much of a good or service is a reflection of supply and demand.
The relationship between demand and supply underlie the forces behind the distribution of resounces. In market economy theories, demand and supply theory will distribute resounces in the most efficient way.
The relationship between demand and supply underlie the forces behind the distribution of resounces. In market economy theories, demand and supply theory will distribute resounces in the most efficient way.
The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price increases, so does the opportunity cost of buying that certain good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope.
A, B and C are points on the demand curve. Each point on the curve reflects a direct distribution between quantities demanded (Q) and price (P). At point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C). The weather forecast (October 2012) listed that it is a rainy season. During this season, umbrellas are the product that will be in great demand. Therefore, the quantity demanded is high whereas the price will be low.
Like the law of demand, the law of supply illustrates the quantities that will be sold at a certain price. But opposite of the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at higher price increases revenue.
A, B and C are points on the supply curve. Each point on the curve reflects a direct distribution between quantities supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. Suppliers know it is a rainy season and they may want to increase the price of the good so that they are able to make more money. If price of the umbrellas increase, buyers will not have a choice but they would still purchase the good due to the weather.
The supply relationship is a factor of time. Time is important to supply because suppliers must but cannot always react quickly to a change in demand or price. It is very important to try and determine whether a price change that is caused by demand will be temporary or permanent.
Example, there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season. Suppliers may simply hold the demand by using their production equipment more intensively. If there is a climate change, and the population will need umbrellas all year round, the change in demand and price will be expected to be long term. Suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand.
Imagine that a special edition umbrella of popular cartoon such as Hello Kitty is released for RM100. Because the record company's previous analysis showed that consumers will not demand umbrellas at a price higher than RM60, only a few pieces of umbrellas were released because the opportunity cost is too high for suppliers to produce more. However, if 10 special editions of umbrellas are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. It means that the rise in price should prompt more umbrellas to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If there are 30 umbrellas produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their purchases, the price of the leftover umbrellas may decreases as producers attempt to sell the remaining umbrellas. The lower price will then make the umbrella more available to people who had not bought it yet.
When supply and demand are equal and intersect on each other, the situation can be defined as equilibrium. At this point, the distribution of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Everyone will be satisfied with the economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. In the rainy season, suppliers will supply umbrellas at a reasonable price and buyers will satisfy and tend to purchase more goods.
Equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocate inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity.
The conclusion is if the price of umbrella decreases, the demand of it will increases. At the same time, consumers will tend to purchase more in the rainy season. If the price of umbrella increases, consumers will still purchase but they will not purchase them in a large amount.
Yeo Ee Ling
Saturday, 27 October 2012
The article “Gobbling Up a Good Deal” taken from the Soloman Economics News Sites mainly focused on monopolistic competition. The model of monopolistic competition describes a general market structure in which firms have many competitors, but each one sells a slightly different product. Many small businesses work under conditions of monopolistic competition, as well as separately owned and operated high-street stores and restaurants. In the case of restaurants, each one offers something different and consists an element of rareness, but all are basically competing for the same customers. Each firm makes independent decisions about price and making, based on its product, its market, and its production. Knowledge is usually spread between participants, but it is not likely to be perfect. For example, diners can review all the menus available from restaurants in a town, before they make their choice. Once inside the restaurant, they can view the menu again, before ordering. However, they cannot fully appreciate the restaurant or the meal until after they have dined. The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision making. There is freedom to enter or leave the market, as there are no major barriers to entry or exit. A central feature of monopolistic competition is that products are differentiated.
There are four main types of differentiations. Physical product differentiation, where firms use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. Marketing differentiation, where firms try to differentiate their product by distinctive packaging and other promotional techniques. For example, breakfast cereals can easily be differentiated through packing. Human capital differentiation, where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on. Differentiation through distribution, including distribution via mail order or through internet shopping, such as Amazon.com, which differentiates itself from traditional bookstores by selling online.
There are four main types of differentiations. Physical product differentiation, where firms use size, design, colour, shape, performance, and features to make their products different. For example, consumer electronics can easily be physically differentiated. Marketing differentiation, where firms try to differentiate their product by distinctive packaging and other promotional techniques. For example, breakfast cereals can easily be differentiated through packing. Human capital differentiation, where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms, and so on. Differentiation through distribution, including distribution via mail order or through internet shopping, such as Amazon.com, which differentiates itself from traditional bookstores by selling online.
Firms are price makers and are faced with a downward sloping demand curve. Because each firm makes a unique product, it can charge a higher or lower price than its rivals. The firm can set its own price and does not have to ‘take' it from the industry as a whole, though the industry price may be a guideline, or becomes a constraint. This also means that the demand curve will slope downwards. Firms operating under monopolistic competition usually have to engage in advertising. Firms are often in fierce competition with other (local) firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences. Common methods of advertising for these firms are through local press and radio, local cinema, posters, leaflets and special promotions. Monopolistically competitive firms are assumed to be profit maximisers because firms tend to be small with entrepreneurs actively involved in managing the business. There are usually a large numbers of independent firms competing in the market.
In the short run supernormal profits are possible, but in the long run new firms are attracted into the industry, because of low barriers to entry, good knowledge and an opportunity to differentiate. At profit maximization, MC = MR, and output is Q and price P. Given that price (AR) is above ATC at Q, supernormal profits are possible (area PABC).
As new firms enter the market, demand for the existing firm’s products becomes more elastic and the demand curve shifts to the left, driving down price. Eventually, all super-normal profits are eroded away. Super-normal profits attract in new entrants, which shifts the demand curve for existing firm to the left. New entrants continue until only normal profit is available. At this point, firms have reached their long run equilibrium.
Clearly, the firm benefits most when it is in its short run and will try to stay in the short run by innovating, and further product differentiation.
Examples of monopolistic competition can be found in every high street. Monopolistically competitive firms are most common in industries where differentiation is possible, such as the restaurant business, hotels and pubs, general specialist retailing, consumer services, such as hairdressing and so on. The existence of monopolistic competition partly explains the survival of small firms in modern economies. The majority of small firms in the real world operate in markets that could be said to be monopolistically competitive. Monopolistic competition can bring the following advantages. There are no significant barriers to entry; therefore markets are relatively contestable. Differentiation creates diversity, choice and utility. For example, a typical high street in any town will have a number of different restaurants from which to choose. The market is more efficient than monopoly but less efficient than perfect competition less allocatively and less productively efficient. However, they may be dynamically efficient, innovative in terms of new production processes or new products. For example, retailers often constantly have to develop new ways to attract and retain local custom.
There are also several potential disadvantages associated with monopolistic competition. Some differentiation does not create utility but generates unnecessary waste, such as excess packaging. Advertising may also be considered wasteful, though most is informative rather than persuasive.
As the diagram illustrates, assuming profit maximization, there is allocate inefficiency in both the long and short run. This is because price is above marginal cost in both cases. In the long run the firm is less allocatively inefficient, but it is still inefficient. The firm is allocatively and productively inefficient in both the long and short run.
There is a tendency for excess capacity because firms can never fully exploit their fixed factors because mass production is difficult. This means they are productively inefficient in both the long and short run. However, this is may be outweighed by the advantages of diversity and choice. As an economic model of competition, monopolistic competition is more realistic than perfect competition - many familiar and commonplace markets have many of the characteristics of this model.
G.Kavitha Gunasekaran
G.Kavitha Gunasekaran
The article “Worst Cocoa Shortage for 40 Years Fuels Chocolate Price
Rise Fears” taken from Daily Mail Reporter on 24th September 2009
reflects that the Ivory Coast, the major
exporter of cocoa, has experience the worst harvest in years due to El Nino
phenomenon. As a result, “the price of cocoa in London rose to 2,055 pounds a
ton this week, the highest since 1985.” The major chocolate bar producers will
have inevitable choice of raising the price of their product. In addition, the
demand from a new market such as China and India has increased by 3 percent.
Also putting the upward pressure or price, the price mechanism explains this.
The surge in price of cocoa is due to the theory of price mechanism. There are several factors that affect demand and supply. Before that, what’s the relationship between demand and supply? In order to understand better, it is essential to know what supply and demand means. Supply is the quantified measure of a product or service that is made available in the market by sellers whereas demand is the quantified measure of a product or service that is required by buyers in the market. The relationship between supply and demand has a great deal of influence on the price of goods and services.
The law of supply states that, all other factors being equal, the higher the price of a service or good, the more it will be supplied. As people expect more profits from a product, they naturally produce more of that product. However, there is a lot of disparity between theory and real life. There are a lot of shift factors which might influence the laws of supply and demand. Such shift factors include the income of people, general market sentiment, and ever-changing preference of some goods over the others and etc.
The law of demand states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.
Now back to the several factors that affect demand and supply, Natural disaster affects supply curve to shift leftward. As illustrated in the diagram, there has been a sharp decrease in the supply of cocoa (S1 to S2). The price of cocoa has surged significantly. To make matter worse, the demand has increased 3 percent (D1 to D2) due to China and India’s high demand. This increased price even higher (P1 to P2). China and India’s change in taste has affected the demand curve to shift rightward. The consumer’s change in preference also affects the demand curve. Also, the increase in demand by China and India could be said that the market size for cocoa has increased.
Notice the steepness of demand curves. They are steep compared to other demand curves such as those of luxury goods. As cocoa do not occupy a large portion in people’s income, this sudden surge in price do not affect people’s consumption of cocoa to decrease significantly. In other words, these demand curves have income inelastic quality. There is another factor making chocolate to have inelastic quality. It is its addictiveness. Many chocolate lovers will have difficult time cutting off their chocolate consumption just because of the increase in price. The elasticity theory states that higher the addictiveness of the product, there will be low elasticity of the product.
The supply will not be able to react fast as demand to sudden increase in price. The theory for supply states that when the price of a product goes up, the suppliers are willing to supply more of the product to make high profit. However, the supplier will not be able to increase the number of their product supplied in the market. There are several obstacles preventing suppliers to supply more in short period of time. As there has been a sharp decrease in cocoa produced, suppliers will have difficult time finding cocoa. Also, the suppliers might have storage of cocoa; however, the suppliers did not expect this sudden decrease in cocoa. So the supplier would not have a lot of cocoa in their storage to satisfy the shortage in the market.
As cocoa are considered inelastic, it is expected that there will not be a sharp decrease in demand. However, if the El Nino weather phenomenon continues to affect the supply of cocoa, it is inevitable that there will be a decrease in demand eventually. Then the suppliers will have to lower the price of cocoa, which will settle the new price or equilibrium point for cocoa.
To evaluate, there will be a slight impact on chocolate industry. If the El Nino phenomenon stops in near future, it will actually have positive impact on chocolate industries. As price increase, chocolate industries will see an increase in their revenue with same amount of demand. However, if the El Nino phenomenon does not stop affecting the supply of cocoa, then chocolate industries would experience a decrease in their revenue. The demand will decrease because the price of cocoa starts to become a large portion of people’s income.
In conclusion, the impact on chocolate industries depends on the duration of this surge in price. If this is just a temporary phenomenon, it will have positive impact on chocolate industries as cocoa are income inelastic. However, if this surge in price does not stop, the chocolate industries will have negative impact on their revenue. Also, the supply of cocoa will decrease, decreasing the availability of chocolate for many consumers.
G.Kavitha Gunasekaran
The surge in price of cocoa is due to the theory of price mechanism. There are several factors that affect demand and supply. Before that, what’s the relationship between demand and supply? In order to understand better, it is essential to know what supply and demand means. Supply is the quantified measure of a product or service that is made available in the market by sellers whereas demand is the quantified measure of a product or service that is required by buyers in the market. The relationship between supply and demand has a great deal of influence on the price of goods and services.
The law of supply states that, all other factors being equal, the higher the price of a service or good, the more it will be supplied. As people expect more profits from a product, they naturally produce more of that product. However, there is a lot of disparity between theory and real life. There are a lot of shift factors which might influence the laws of supply and demand. Such shift factors include the income of people, general market sentiment, and ever-changing preference of some goods over the others and etc.
The law of demand states that, all other factors being equal, as the price of a good or service increases, consumer demand for the good or service will decrease and vice versa.
Now back to the several factors that affect demand and supply, Natural disaster affects supply curve to shift leftward. As illustrated in the diagram, there has been a sharp decrease in the supply of cocoa (S1 to S2). The price of cocoa has surged significantly. To make matter worse, the demand has increased 3 percent (D1 to D2) due to China and India’s high demand. This increased price even higher (P1 to P2). China and India’s change in taste has affected the demand curve to shift rightward. The consumer’s change in preference also affects the demand curve. Also, the increase in demand by China and India could be said that the market size for cocoa has increased.
Notice the steepness of demand curves. They are steep compared to other demand curves such as those of luxury goods. As cocoa do not occupy a large portion in people’s income, this sudden surge in price do not affect people’s consumption of cocoa to decrease significantly. In other words, these demand curves have income inelastic quality. There is another factor making chocolate to have inelastic quality. It is its addictiveness. Many chocolate lovers will have difficult time cutting off their chocolate consumption just because of the increase in price. The elasticity theory states that higher the addictiveness of the product, there will be low elasticity of the product.
The supply will not be able to react fast as demand to sudden increase in price. The theory for supply states that when the price of a product goes up, the suppliers are willing to supply more of the product to make high profit. However, the supplier will not be able to increase the number of their product supplied in the market. There are several obstacles preventing suppliers to supply more in short period of time. As there has been a sharp decrease in cocoa produced, suppliers will have difficult time finding cocoa. Also, the suppliers might have storage of cocoa; however, the suppliers did not expect this sudden decrease in cocoa. So the supplier would not have a lot of cocoa in their storage to satisfy the shortage in the market.
As cocoa are considered inelastic, it is expected that there will not be a sharp decrease in demand. However, if the El Nino weather phenomenon continues to affect the supply of cocoa, it is inevitable that there will be a decrease in demand eventually. Then the suppliers will have to lower the price of cocoa, which will settle the new price or equilibrium point for cocoa.
To evaluate, there will be a slight impact on chocolate industry. If the El Nino phenomenon stops in near future, it will actually have positive impact on chocolate industries. As price increase, chocolate industries will see an increase in their revenue with same amount of demand. However, if the El Nino phenomenon does not stop affecting the supply of cocoa, then chocolate industries would experience a decrease in their revenue. The demand will decrease because the price of cocoa starts to become a large portion of people’s income.
In conclusion, the impact on chocolate industries depends on the duration of this surge in price. If this is just a temporary phenomenon, it will have positive impact on chocolate industries as cocoa are income inelastic. However, if this surge in price does not stop, the chocolate industries will have negative impact on their revenue. Also, the supply of cocoa will decrease, decreasing the availability of chocolate for many consumers.
G.Kavitha Gunasekaran
The Influence of Minimum Wage Rate
The labor market is the market that influences
the jobs we get and the wages we earn. It is very important to all of us, as we
need money to fulfill our needs. The firms will need to decide how much of
labor to demand. Besides that, the lower the wage rate, the more the quantity
of labor demanded. While the households need to decide how much of labor they
need to supply and the higher the wage rate, the more is the quantity supplied.
The importance of wage rate is to balance the quantity of labor demanded and
the quantity supplied.
Government tends to imposed rules and regulations and makes it illegal to charge a price that is lower than a certain level. This situation is called as a price floor that is applied to a labor market. When the minimum wage is set above the equilibrium, it will occur unemployment. At the equilibrium price, it means that the quantity demanded and supplied of labor is equal. But, when the wage rate is above the equilibrium, unemployment occurs. This is because the quantity supplied of labor is more than the quantity demanded. This causes a surplus of labor.
There is an example of our Prime Minister Najib Tun Razak has set a minimum wage was fixed at RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak. This minimum wage is eligible for the cleaners and contract workers.
Government tends to imposed rules and regulations and makes it illegal to charge a price that is lower than a certain level. This situation is called as a price floor that is applied to a labor market. When the minimum wage is set above the equilibrium, it will occur unemployment. At the equilibrium price, it means that the quantity demanded and supplied of labor is equal. But, when the wage rate is above the equilibrium, unemployment occurs. This is because the quantity supplied of labor is more than the quantity demanded. This causes a surplus of labor.
There is an example of our Prime Minister Najib Tun Razak has set a minimum wage was fixed at RM900 for Peninsular Malaysia and RM800 for Sabah and Sarawak. This minimum wage is eligible for the cleaners and contract workers.
From the graph above, we can see that the minimum wage rate is set at RM900 for Peninsular Malaysia. Any wage that is set below
RM900 is illegal. We estimate that before the government set the wage rate, it
was RM700, and there are 21 millions of people are hired. But when the wage
rate has increased to RM900, 21 millions are hired, but there are 24 millions
are available. The numbers of employment are 3 millions.
The Human Resources Minister Datuk Seri Dr S. Subramaniam said a
minimum wage will encourage employers to hire Malaysians. By having a minimum
wage, employers do not need to pay levies and agency fees. Besides that, the minimum
wage can reduce the dependency on foreign workers in the long term. He also
hoped that it would change the perception of some Malaysians towards some jobs,
like the construction sector.
Minimum wages can also
benefits in many ways. First of all, the higher the wage rate, the more the
workforce will benefit from it. It will also be a boost to economy. Next, the
higher the wage will also benefit the workers as the higher contributions to
the Employees Provident Fund (EPF) and there will be extra saving for
retirement in Malaysia. Additionally, a higher wage rate can also allow workers
to enjoy a higher base salary. The increased incomes will satisfy the
requirements of bank under the new reading guidelines. Banks will look at the
salary and depends whether the person can afford the loan.
In my opinion, minimum wage can also help
families. This is because people work to fulfill their needs and also to take care
of their own family. Without a minimum wage, all these workers might forces to
work for less money and they cannot take the responsibility to take care their
families. Besides, minimum wage can also help businesses to plan their budget.
Without minimum wage, it might be difficult for companies to plan the budget
that they need to pay for their employees.
Furthermore, it can also increase our countries
economic. For example, if there is no minimum wage, the employees can only get
RM700. This will cause them to spend very carefully. They need to consider more
before they spend their money. But if the government imposed the wage rate to
RM900, consumers will tend to spend more, because they have a higher wage. This
can increase the purchasing power, while the country’s economy will also
increase.
Apart from the benefits, there are also
disadvantages of minimum wage. The major reason will be increasing the
unemployment rate. This is because when the government increases the wage rate,
there are more workers willing to work for a higher wage rate. But
unfortunately, there are only limited workers for employers to employ. This
will cause unemployment. Next, it is harder for those workers that do not have
skills. This will cause them to be difficult to complete with those skilled
workers. Minimum wage can also lead to more black markets in the country. It is
because employers tend to avoid the minimum payments to the employees. For
example, if a small company cannot afford to pay the minimum wage that set by
the government, they might need to find someone that willing to work below the
minimum wage. This is an illegal activity, but they might do it secretly, as
the report of the wages will not be reported.
The poor people do not get any benefits from the
minimum wage too. The limitation of minimum wage does not increase the incomes
for the lower income group. The reason is because they used to rely on
benefits, therefore they are not affected by it.
The minimum wage is not fair for Sarawak. This is
because the cost of living in Sarawak was 15% to 25% higher than Peninsular
Malaysia. It emphasized that the rate of Sarawak is tower because the employers
have lower ability to pay than those in Peninsular Malaysia.
The minimum wage also encourages teenagers to
drop out. Most people always think that teenagers should always be in school,
colleges or universities. They shouldn't be working at this age. But there are
students that stop studying after their high school, as their parents do not
have enough savings to allow them to continue their study. That is why minimum
wage should also set for students so that it is fair for them.
Recently, there is an example in Milwaukee,
ow-wage workers, union members and community activists joined a National Day of
Action to raise the minimum wage. It stated that women also deserve to have an
acceptable and higher wage. This is because they need to take care of their own
families and even pay the bills. It is unfair for them to have such a low wage
rate.
In conclusion, it is important to have minimum
wage so that the workers can get an acceptable wage rate between their working
hours. But, the minimum wage can also cause problems like unemployment, unfair
to the unskilled workers and more. That is why government should consider
wisely on how to impose the minimum wage and create fairness to everyone.
Serene Phua Sweet Ling
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