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MICROECONOMICS

THE IMPACT OF ECONOMIC CHANGES TOWARDS MARKET EQUILIBRIUM

Subject Lecturer: Pn. Farah


NAME:
SHERMEN RATNAM MUHAMMAD NUR HAKIM

MATRIC ID:
10DAT13F1157 10DAT13F1163

CASE STUDY: A) DEMAND & SUPPLY OF SUGAR IN MALAYSIA.

Based on The Star Online article, Dated Saturday September 29, 2012 http://thestar.com.my/news/story.asp?file=/2012/9/29/budget/12101183&sec=budget

FIGURE 1

The sugar industry in Malaysia relies heavily on domestic consumption supported by an equally fast growing food processing industry. To satisfy the increase in demand, imports have expanded steadily to meet those demands in recent years. Production is mostly concentrated in the Northwest of peninsularMalaysia in the states of Perlis and Kedah. Malaysia has four processing facilities. Which are in the state of Perlis, Kedah, Penang and Selangor. In figure 1 shows the demand and supply graph for sugar. The price of a good determines the quantities demanded and supplied.

FIGURE 2

The vertical axis represents price of sugar per kilogram, while the horizontal axis represents the quantity of sugar. S represents the supply schedule that producers are willing to supply at any given market price. As the price goes up, producers are willing to produce and supply more of a good to the market. D line represents the amount that consumers are willing to buy it at any given price. As price goes up, people are less willing to consume a particular good or equivalently. There are less people that cant afford a particular good. In both cases, demand falls as price rises. In figure 2 shows the decrease in demand shifts the demand curve leftwards. A change in any influence on buying plans other than the price of the good itself results in a new demand schedule and a shift to leftwards. According to Parkin (2012) the law of demand stated that when other things remaining the same, the higher the price of goods, the smaller is the quantity demanded. The price of sugar is increasing so the quantity of demanded decreasing. People will not buy sugar if the price is increasing or they will buy it lesser. Higher price reduce the quantity demanded for two reasons which are substitution effect and income effect. Without subsidy, the price of sugar is increasing.

FIGURE 3 Figure 3 shows that without subsidy, the demand curve D and the supply curve S determine the price of sugar and the quantity of sugar. Price of sugar, peanuts, oils, wheat and many other farms products receive subsidies by the government. A subsidy is a payment made by the government to a producer. Without subsidies, producers produce tons of sugar with a higher price for sugar per kilogram. Suppose that government introduces a subsidy of RM 0.40 per kilogram of sugar. A subsidy is quiet similar to negative tax. A tax is equivalent to an increase in cost, so a subsidy is equivalent to decrease in cost. The subsidy brings an increase in supply. In 2012 the supply curve shifts rightwards because there is an increase in subsidy but in 2013, the supply curve shift leftwards due to the reduction of subsidy for sugar. S1 represents subsidy for 2012 while S2 represents subsidy for 2013. On 2012, the sugar price per kilogram was reducing by RM 0.40. When the price is decreasing, the quantities will automatically increasing. People will buy goods when the price drops. When the 2013 budget were out and it stated that government will reduce the subsidy of sugar per kilogram for RM 0.20, the price will increase by RM 0.20 and the quantity will reduce. The price for sugar per kilogram increased from 2012 to 2013. The subsidy lowers the price of sugars and increase the quantity produced. Figure 2 shows that the equilibrium occurs when the new supply curve intersects the demand curve. The subsidy lowers the price paid by consumers but increases the marginal cost of producing sugars. Marginal cost is increasing because producers have to produce more sugars because they must begin to use some resources that are less ideal to produce a sugar.

Government gave subsidy to producers so that they could decrease the price of goods. Without subsidy, producers will charger goods at a higher price. Budget 2012 stated that sugar refineries have notified retailers to raise sugar prices by RM0.20. The government has decided to cut its sugar subsidy as it looks to promote a healthier, lower-sugar diet among its people. Malaysia has the highest obesity rate among Southeast-Asian countries and ranks sixth in the Asia-Pacific. When the subsidy is reduced, the price will go up. People will consume less sugar and practice a healthy lifestyle. Government should get rid of the sugar subsidy entirely, so that Malaysian will practice a healthier lifestyle. Sugar is a necessity for many Malaysians. Sugar and spice are just toppings and flavourings. Hence, its okay to use less sugar in every meal.

Sources: http://www.msmholdings.com/sugar.php
http://www.slideshare.net/amitsharma8992/3-supply-and-demand-5385737 http://en.wikipedia.org/wiki/Supply_and_demand

B) Factors influencing the demand and supply of sugar in Malaysia

1) Price of the commodity: Price is a very important factor, which influences demand for the commodity. Generally, demand for the commodity expands when its price falls, in the same way if the price increases, demand for the commodity contracts. It should be noted that it might not happen, if other things do not remain constant.

2) Season and time of the year Malaysia is well known for its multicultural environment and has plenty of festivities such as Hari Raya, Deepavali, Christmas and Chinese New year. Such celebration are almost always accompanied by traditional cookies and sweets. Hence, the demand for sugar shoots up during that time of the year. Some storekeepers would take advantage of the situation and stock up on sugar to cause shortage in the supply to raise the price of sugar.

3) Fashion and trends over the years Malaysians have developed an unhealthy eating lifestyle. In the 1970s Malaysians consumed 17 teaspoons of sugar a day and this rose to 21 teaspoons in the 1980s. Now, they are consuming an average of 26 teaspoons of sugar per day. Despite being unhealthy, it is still a trend among youngsters to go after sweet and unhealthy food. For example, consuming carbonated drinks, adding condensed milk in beverages (milo, coffee, carrot juice) eating chocolates. Sadly, This sweet indulgence has resulted in nearly 1.2 million Malaysians with diabetes, more than 98% with Type 2 diabetes, which is strongly linked to high sugar consumption

2. The effect of equilibrium, price and quantity if: a) Consumer expects the price of Hersheys chocolate to decrease next month, When consumers expect the price to decrease, the demand for Hershey chocolates this month will decrease, because they will wait for the price to fall and then buy the chocolates.

b) Consumers prefer to eat Cadbury chocolates compared to Hersheys chocolate

The change in consumer preference will cause a decrease in the demand of Hersheys chocolates hence a drop in supply quantity.

c) Hersheys company invents a better and more efficient machine to mix the ingredients, hence producing more chocolate in less time. This causes an increase in supply.