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Economics 100 Assignment 1

Table of Contents

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ARTICLE SUMMARY ...................................................................................................................... 1 INTRODUCTION .............................................................................................................................. 1 ANALYSIS ....................................................................................................................................... 2 DEMAND AND SUPPLY ..................................................................................................................... 2 SHORTAGE ..................................................................................................................................... 4 SUBSIDY ........................................................................................................................................ 5 ELASTICITY .................................................................................................................................... 6 IMPORTS ........................................................................................................................................ 8 CONCLUSION ................................................................................................................................. 9 REFERENCES ............................................................................................................................... 10

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Article Summary

The article by GMANews.TV, titled Rice prices to drop by mid-March, NFA says was posted on 10 February 2009. It reports consumers reaction to high prices of commercial rice in the Philippines by queuing for subsidised rice from National Food Authority (NFA) stores.

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Introduction

With last years global rice shortage crisis, consumers are still wary with regards to rice issues in Philippines and uncertainty remains high in 2009. In fact, the International Rice Research Institute has warned that rice prices may increase this year because of high demand amid uncertainties in production due to tight credit access (Morales and Sarmiento 2009).

As various issues pertaining to current rice market situations were brought up in the article, this report aims to analyse the rice market in Philippines with the aid of economic theories and models. This report will examine its market in action, discussing demand and supply, shortage, subsidy, elasticity and imports. In addition, a summary of all areas discussed will conclude this report.

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Analysis
3.1 Demand and Supply

Demand is defined as the amount of goods and services that consumers are willing and able to buy at a particular price and time (Nyunt 2008).

Symons (2008) stated that the rice panic is being linked directly to overpopulation because Philippines has the highest birth rate in Southeast Asia with its annual population growth exceeding 2% and twice that of regional average.

As indicated, the increased population Rice Market Price S0 P1 P0 D1 D0 Q Q Quantity Figure 1.1 size in Philippines has simultaneously led to an increase in number of consumers. Hence, ceteris paribus, the demand for rice also increases. The increase in demand, attributed to population sizea non-price determinant, is represented by a rightward shift of the demand curve from D 0 to D 1 in Figure 1.1. Hence, new equilibrium quantity and price increases from Q 0 to Q 1 and P 0 to P 1 , respectively.

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Supply is defined as the amount of goods and services that producers are willing and able to sell at a particular price and time (Nyunt 2008).

Arthur Yap, agriculture secretary of Philippines, attributed high rice prices to the high price of fertiliser and other inputs in the last planting season (GMANews.TV 2009). Rice Market Price S1 S0 P1 P0 Figure 1.2

Increase in input prices is a non-price factor that shifts supply curve to the left from S 0 to S 1 . Supply of harvested rice decreases because rice producers are less willing and able to produce at given output in the last planting season. Hence, quantity of rice supplied decreases from D0 Q 0 to Q 1 , resulting in increased price of rice from P 0 to P 1 , as shown in Figure 1.2. Quantity
However, NFA spokesman Rex Estoperez assures consumers that rice prices are expected to fall by mid-March because of our summer harvest (GMANews.TV 2009).

Rice Market Price S1 S2

P1 P2

With the anticipated summer harvest, Figure 1.3 supply of rice is expected to increase, shown by rightward shift of supply curve from S 1 to S 2 in Figure 1.3. Hence, D0 Q Q Quantity expected fall of rice prices from P 1 to P 2 is explained with increase in quantity supplied from Q 1 to Q 2 , ceteris paribus.

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3.2

Shortage

Due to excess demand and limited supply of rice, there has been a resulting shortage which has consequently led to price hikes in the Philippines since 2008. Rice Market Price Pe P0

At P 0 , as demand shifts from D 0 to D 1 in S0 Figure 2.1 and supply shifts from S 0 to S 1 in Figure 2.2, there is a resultant shortage, Figure 2.1 shown by the shaded region. In Figure 2.1, quantity demanded (Q 1 ) exceeds quantity supplied (Q 0 ), likewise in Figure 2.2, quantity demanded (Q 0 ) also exceeds quantity supplied (Q 1 ). Quantity Rice Market Price S1 S0 E Figure 2.2 P0

.
Q Q

D0 Q

D1

Shortage Due to the shortage, an upward pressure is applied on the price of rice, resulting in new equilibrium at point E where price is P e and quantity demanded is Q e , as shown in Figures 2.1 and 2.2. Pe

.
Q Q

D0 Q Quantity

Shortage

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3.3

Subsidy

According to Symons (2008), A sharp hike in the subsidy for rice growers to buy seeds has also been promised. A subsidy can be regarded as negative tax to help reduce cost of supplying rice (Nyunt 2008). Rice Market With production cost lowered by the subsidy, rice producers in the Philippines will now be willing and able to produce more, shown by a rightward shift of supply curve in Figure 3. Consequently, quantity supplied increases from Q e to Q 1 and price falls from P e to P 1 . The shaded region represents the total cost of subsidy to the Philippines government. Q Q Quantity D P1 Figure 3 Price P2 Pe S S + subsidy Subsidy

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3.4

Elasticity

According to Nyunt (2008), elasticity is a measure of responsiveness of quantity demanded or quantity supplied to one of its determinants.

Price elasticity of demand (PED) is the responsiveness of quantity demanded to a change in price (Sloman 2006, 48). Demand for rice is price inelastic because it is an essential food producta necessity in the diets of Filipinos; hence, changes in its consumption are not significant with changes in price. Price P1 Figure 4.1 P0 Rice Market Inelastic demand for rice in the Philippines is represented by a steep downward-sloping demand curve D 0 in Figure 4.1. It can be observed that there is a less than proportionate or insignificant decrease in quantity demanded from Q 0 to Q 1 even D0 Q Q Quantity though price has increased greatly from P 0 to P 1 , ceteris paribus.

Income elasticity of demand (YED) measures the responsiveness of demand to changes in consumers incomes (Sloman 2006, 58). Rice is a normal good for majority of Asian countries; hence, YED for rice is positive in value because when income rises, demand for rice will also increase. In the Philippines, demand for rice is income inelastic because changes in quantity demanded will be less than proportionate since there will still be rice consumption no matter how consumers incomes may change. From the table below, income elasticity of rice, a type of cereals, at 0.387 is small (0<YED<1).

Source: http://documents.wfp.org/stellent/groups/public/documents/manual guide proced/wfp187903.pdf

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Price elasticity of supply (PES) is the responsiveness of quantity supplied to a change in price (Sloman 2006, 57). Not only is rice a staple and necessity in the Philippines, it is also a primary product whose production is seasonal with long gestation periods. Therefore, its supply is also inelastic. The main factor affecting PES is time period so in the short run, with changes in price or demand, supply cannot be changed easily. Domestic Rice Market Price SD Figure 4.2 P1 P0 D1 D0 Q Quantity

In the very short-run, rice supplied by producers or farmers in the Philippines is perfectly inelastic (PES=0) because rice takes months its to grow and cannot when be

harvested,

quantity

changed. With rice supply at S D , as shown in Figure 4.2, any change in price of rice such as from P 0 to P 1 , quantity of rice supplied will remain at Q D . Rice Market Price S P1 P0 D1 D0 Q D Q SR Quantity S SR Figure 4.3

Although a producer of rice, the Philippines government has to import rice from other countries to meet all of its rice needs. Given time in the short run, with imported rice supplies from the global rice market, supply of rice in Philippines remains relatively inelastic at S SR though not perfectly so like S D , as shown in Figure 4.3.

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3.5

Imports

The worlds largest rice importer is Philippines (Symons 2008) and for the lean months of 2009 (JulySeptember), 500,000 metric tons of rice have already been imported (GMANews.TV 2009). The imported rice contributes to the governments buffer stocks which are stocks of a product used to stabilise its price (Sloman 2006, 80). Therefore, if rice prices do not fall by mid-March as expected, NFA will bring it out to stabilize prices in the market (GMANews.TV 2009). In Figure 5, before trade of rice, consumer Rice Market Price DS E Pe B P A DD Q DS Q Q DD Quantity C D Figure 5 surplus is region E while producer surplus is regions A and B. With the import of rice, consumer surplus increases to regions B, C, D and E while producer surplus decreases to just region A. As such, total surplus after trade increases from regions A, B and E to include regions C and D gained. Hence, domestic producers of rice will lose while domestic consumers gain from increased consumer surplus and lower prices.

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Conclusion

In conclusion, the rice market in Philippines faces fluctuating demand and supply, adding to uncertainties and fear of shortages in 2009. Despite the Philippines governments intervention through subsidies and imports, consumers and producers remain sceptical. As there are many contributing factors affecting the rice market, the analysis of the article, using economic concepts and theories, is based on the ceteris paribus assumption. Hence, although not true reflections of the rice market in real world context, the assumption helps in the explanations while the economic models aid in anticipating effects on the rice market depending on the causes or factors involved.

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References
2009. Rice prices to drop by mid-March, NFA says.

GMANews.TV.

http://www.gmanews.tv/story/148050/Rice-prices-to-drop-by-mid-March-NFAsays# (accessed March 28, 2009).

Morales, N. J. C., and R. S. Sarmiento. 2009. Rice supply, imports for 2009 secured Yap. http://www.gmanews.tv/story/144643/Rice-supply-imports-for-2009-secured-Yap# (accessed March 23, 2009).

Nyunt, H. H. 2008. Economics 100. http://203.59.97.2/myibt/ui/main.php (accessed March 3, 2009). Sloman, J. 2006. Economics. 6th ed. England: Pearson Education Limited.

Symons, E. 2008. Arroyo pressured on birth control as rice shortages create chaos. The Australian, April 21. ProQuest. http://proquest.umi.com.dbgw.lis.curtin.edu.au (accessed April 6, 2009).

Table:

Income

elasticity

by

food

groups

in

the

Philippines

[Image].

n.d.

http://documents.wfp.org/stellent/groups/public/documents/manual_guide_proced /wfp187903.pdf (accessed April 1, 2009).

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