First of all, to understand what is economic we will need to know what scarcity is. Economic is all about scarcity and came out with solutions to solve it. Basically, scarcity is the fundamental problems of economic; human wants are unlimited but the resources are limited. Therefore, we need to make decision and choices to choose the best option which can maximize our satisfaction. For an example, Andrew has RM 100 and he want to buy a shirt and a pair of shoes which both cost RM 100. He needs to make decision in choosing which one of it that can or bring more satisfaction to him. Then, he chooses the shoes as it bring more satisfaction to him. The shirt then became the second choices or item that left out.
Demand and Supply
In year 2006, there was a shortage of sugar in Malaysia due to smuggling (TheStar, 2006). The article mentioned that the smuggling happened because of the price of sugar in neighborhood country can reach RM2.60 per kg compare to RM1.40 here in Malaysia. Then, the shop keepers refuse to sell the sugar to public as the shortage in supply, so that they could sell at a higher price in black market. Months after that, the Government added 5% to the sugar supply to meet the demand and then plan to add 10% more sugar supply to wholesalers and retailers (TheStar, 2006). This caused the supply curve shift rightward as below:
If the Government deducts the sugar supply and the line S1 will shift left to S2. However, when the Government adds the sugar supply and it will cause the line S2 shift to S1 and the sugar supplier could supply more quantity of sugar from q2 to q1. After the increase in supply, the problems of shortage in sugar might be reduced as well. Just have a look at the graph below:
Assume that P3 is price of sugar in RM1.40. The market was experiencing shortage which result in the shop keeper don't have sufficient sugar to sell. The shop keeper could increase the price of sugar from P3 to P2 to balance up the supply and demand. Base on the law of demand, when price of sugar increased, there will be a decrease in the quantity demanded for sugar. However, it goes the same as when the price of sugar decreased, the quantity demanded for sugar increased. So, the price will increase until the price where the supplier willing to sell and the price where the buyer willing to pay to get a kg of sugar. When the price reaches P2 and that is the point where buyer will buy and seller will sell. It is called the Equilibrium which means the condition that the economic forces are balanced. The other way of solving the shortage is increase in sugar supply as what the Government did. The graph will be similar to the first graph on above that the Supply curve shift rightward where the shortage will be reduced without increasing in price.
The first graph shows the demand curve downward sloping and that represent the relationship of demand which I explained on the earlier graph. Then the second graph shows the supply curve upward sloping and that represent the relationship of supply. The law of supply is different from the law of demand. Law of supply is where the price of sugar increase, then the sugar quantity supplied increase. One will increase while another increase and this is the law of supply. Other than the quantity supply, there are few more determinants of supply; technology; the price of related goods produced; expected future price; price of factor of production; and state of nature.
Demand Elasticity of Sugar in Malaysia
In year 2012 Economicstalkonly had said that, "Based on article inMalaysia Insider, as subsidy on sugar was made as about 2.6 million people in Malaysia were diabetic; Prime Minister Malaysia Datuk Seri Najib Razak announced that the subsidy on sugar will be reduced by 20 sen per kilogram that effective 2012 September 29."
Diagram 1 is the demand curve of sugar in Malaysia. Prime Minister Malaysia Datuk Seri Najib Razak announced reduces the subsidy of sugar. Then, the price of sugar increase of 20 sen from RM2.10 to RM2.30. The quantity demanded reduced as the price increase of 20 sen. The demand curve shift to the green labeled Demand (new). It formed a new Equilibrium price as well from to blue dot to red dot in the line of supply.
Even-though the price had increase, but the sugar's consumption will never decrease. This was because sugar is a necessities product with no close substitute and sugar was used in many foods and drinks in Malaysia. Then, price elasticity of demand for sugar was applied. Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to change when its price changed (Moffatt, n.d.). Sugar is inelastic under this situation. The quantity demanded remain constant regardless of the price which mean that the demand remain the same no matter the price increase or decrease. If sugar would say so the perfectly inelastic product and the foreign currency exchange will be the perfectly elastic product as the small change in price and there will be a huge huge in quantity demanded.
The Subsidy affect the price
Meanwhile, the
Prime Minister Malaysia Datuk Seri Najib Razak also announced an allocation of
RM1.5 billion to stabilize the price of cooking oil in the market. He said the
allocation was to maintain the increasing price differential and consumption
quota on cooking oil. Government wills subsidies when the price of cooking oil
increases. Subsidy is like a negative tax. A tax is equivalent to an increase
in cost so a subsidy is equivalent to a decrease in cost. In the United States,
the producers of peanuts, sugarbeets, milk, wheat, and many other farm products
receive subsidies. A subsidy is a payment made by the government to a producer.
A large and controversial Farm Bill passed by Congress in 2008 renewed and
extended a wide range of subsidies. The effects of a subsidy are similar to the
effects of a tax but they go in the opposite directions. The effects are
increase in supply, fall in price and increase in quantity produced, and
increase in marginal cost. Due to lack of future information, other example
will be used to replace cooking oil.
First of all, increase in supply. In
diagram 3, with no subsidy, the demand curve and the supply curve determine the
price of peanuts at $40 ton and the quantity of peanuts at 40 million tons on a
year. Suppose that the government introduces a subsidy of $20 tan to peanut
farmers. The subsidy brings an increase in supply. To determine the position of
the new supply, we subtract the subsidy from the farmers’ minimum supply-price.
In diagram 3, with no subsidy m farmers are willing to offer 40 million tons a
year at a price of $40 a ton. With a subsidy of $20ton, they will offer 40
million tons a year if the price is as low as $20 a ton. The supply curve shift
to the green curve labeled supply-subsidy.
Next, a fall in price and increase
in quantity produced. The subsidy lowers the price of peanuts and increases the
quantity produced. In diagram 3, equilibrium occurs where the new supply curve
intersects the demand curve at a price of $30 a ton and a quantity of 60
million tons a year. For the third effect, subsidy effects the increasing in
marginal cost. The subsidy lowers the price paid by consumers but increases the
marginal cost of producing peanuts. Marginal cost increases because farmers
grow more peanuts, which means that they must begin to use some resources that
are less ideal for growing peanuts. Peanut farmers slide up their supply curve.
In diagram 3, marginal increases to $50 a ton.
Reference List
TheStar (2006) Sugar Supply to be increased from Thursday (Online) Available from: http://thestar.com.my/news/story.asp?file=/2010/6/29/nation/20100629155404&sec=nation [Accessed at 5 June 2013]
Investopedia (n.d.) Ceteris Paribus (Online) Available from: http://www.investopedia.com/terms/c/ceterisparibus.asp [Accessed at 5 June 2013]
TheStar (2012) Sugar Subsidy Reduced (Online) Available from: http://thestar.com.my/news/story.asp?file=/2012/9/29/budget/12101183&sec=budget [Accessed at 5 June 2013]
TheMalaysianInsider (2012) Sugar 20 sen Dearer from Tomorrow (Online) Available from: http://www.themalaysianinsider.com/malaysia/article/sugar-20-sen-dearer-from-tomorrow [Accessed at 5 June 2013]
Farah, Wina, Adilah, and Eugene (2012) Subsidy may affect the demand of Sugar (Online) Available from: http://economicstalksonly.blogspot.com/2012/10/subsidy-may-affect-demand-of-sugar.html [Accessed at 5 June 2013]
Moffatt.M (n.d.) Price elasticity of demand (Online) Available from: http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm [Accessed at 5 June 2013]
