According to Malaysia
Insider and The
Star Online, Malaysia Prime Minister Datuk Seri Najib Razak announced
that subsidy on sugar will be reduced by 20 cent per kilogram effectively on 29th September
2012 on-wards bringing the retail price from RM 2.30 to RM 2.50 per kilogram
now. The decision is made after statistics shown that there are more than 2.6
million Malaysians were diabetic. This is the fifth times that there is an
increased on price of sugar since 2010. However, our Prime Minister hopes that
the community of business will not burden the people due to the increased of
price of sugar.
Diagram 1 is the demand
curve of sugar in Malaysia. A demand curve shows the relationship between the
quantity demanded of a good and its price when all other factors that will
influence consumer’s purchase remain unchanged.
The law of demand state
that the quantity demanded for sugar decrease because of the raise in the price
of sugar. In diagram 1, the consumers are willing to buy more when the price is
RM2.30 as the demand for sugar decrease than the demand of sugar when the price
is at RM2.50. The demand curve shifted slightly to the left towards the new
demand curve when the price of sugar increases. The new equilibrium is formed
then the new demand curve intersects with the supply curve which is colored
yellow on diagram 1. This proves that consumers are more willing to buy at
a lower price. Equilibrium in the market will only occur when the price at
which the quantity demanded equals to the quantity supplied.
The law of supply state that the quantity supply for sugar will increase due to the raise in the price of sugar because producers tend to producer more when the price is higher to cover the marginal cost of production. The increased in price of of goods will increase the minimum price that a supplier is willing to accept for producing each quantity of that good rises. (Sloman. J, 2004) Price of sugar increased 20 cent in January 2011, 25 cent in July 2011 and 20 cents again in December. It then increased again in mid 2012 and 20 cents in September 2012. The increased of price of sugar created a upwards supply curve as shown.
The price
elasticity of demand is a units-free measure of responsiveness on how
changes in price will affect the quantity demanded when other factors that will
influence buying plans remain unchanged. There are three types of demand
elasticity which are price elastic, unit elastic and inelastic. In this case,
sugar is known as inelastic. Because the percentage of changes in price causes
a lesser change in percentage of quantity demanded.
Diagram 2
Even though the price of
sugar increases from RM 2.30 to RM 2.50 because of the reduction of subsidy by
the Government, the consumption of sugar will hardly decrease. This means that
the percentage of changes in price is more than percentage changes in demand
and this is to prove that sugar is very inelastic. From the diagram, we clearly
define there is a downwards slopping of the demand curve. Percentage of people
income spent on the goods is one the common determinants that affect the demand
curve. However, due to sugar is a necessity in life, no matter people income
increasing or decreasing, they still need to buy sugar as before. The purchase
proportion might be affected as people would not buy sugar in large proportion
as before. Therefore, sugar can be concluded as an inelastic demand in price
elasticity of demand.
However explanation for
sugar could be very practical because sugar is a basic need in every household
and there are not many closer substitutes that can replace it. Arguably, honey
and syrups can replace the sweetness of sugar, but the outcome and taste will
definitely not be the same. Consumers will continue buying sugar even the
price is high.
Sugar is a necessity in life as there are no close substitutes even though theorically sugar can be replace by coconut sugar, maple syrup and fruit juice. Price elasticity of demand is applied on this kind of situation. In this situation, although there are substitutes items for sugar, but the demand of sugar will not be affected that much, thus it is inelastic demand. The demand of sugar remains almost unchanged despite the increase of price of sugar. Sugar is so important because without enough sugar in your blood stream, you can become confused, forgetful or even lapse into a coma. (Ochs, 2011)
Power of subsidy by the
Government
Malaysia Government do
subsidizes sugar to reduce the burden of Malaysians on buying expensive sugar.
This is a type of payment by the Government to the producer in encouraging the
sugar manufacturers to produce more sugar for the people. Whenever there is a
subsidy, it will certainly reduce the cost of production of the producers.
Producers will tend to produce and supply more when the cost of production is
low, thus causing the supply curve to shift to the right. (Diagram 3)
Diagram 3
However the Government
decided to reduce the subsidy by twenty cent when tabling the 2013 budget by taking
the health of fellow Malaysians into consideration. This decision changes the
supply curve graph whereby the supply curve shifted to the left because the
cost of production for producers increases when Government decided to reduce
sugar subsidies to producers. (Diagram 3) From now on producers tend to produce
lesser sugar because the cost of production has increased.
Domestic Trade, Cooperatives and Consumerism
Deputy Minister Tan Lian Hoe explaining the reason of Government reducing sugar
subsidy is for the people's own good.
The effect of reducing subsidy by the government can be felt by the
both parties consist of buyers and producers. Consumers will have to buy sugar
at higher prices and the cost of production of sugar will increase which could
be a burden for manufacturers. “People will consume lesser sugar and practice a
healthy lifestyle including eating a healthy diet,” say Domestic Trade, Cooperatives and Consumerism Deputy Minister Tan Lian Hoe after prime minister announced the 2013 budget. (The
Star, 2012). I totally agree with this statement, because due to the increase
in price of sugar, usually people are putting 3 teaspoons of sugar into a cup
of coffee but after the reduction of subsidy, people will reduce sugar
consumption by adding only 2 teaspoons of sugar.
Besides that many food
retailers or traders will take this advantage to increase the price of their
product although sugar is not their main ingredient. For example, makers will
increase prices of breads even though sugar is not the main ingredients in
making bread.
Diagram 4
Once the subsidy is cut
down, the market price of sugar will increase, the quantity demanded of sugar might
also increase before the subsidy is reduced. This is because consumers will buy
all the sugar with a cheaper price from shops or hypermarkets before the price
increase. At the end of the day, this will cause shortage of sugar in many
areas.
Price ceiling effect
The solution to control
the price of sugar from being increased uncontrollably, price ceiling is implemented by the
Malaysia Government to control the sellers from setting the price higher than
they are allowed. Price ceiling is a practice by the government so that all
inferior goods are affordable for all citizens. Selling price that exceeds the
price ceiling is illegal and will be penalized.
A maximum price for sugar
is set at RM2.50. The government set a maximum price for sugar below the
equilibrium to prevent sellers from increasing the price when the demand of
sugar is high.
The amount of sugar
producers able to supply when there is a price ceiling is as Q1. The amount of
sugar demanded by consumers is as Q2. There will be a shortage of
sugar because the quantity demanded is larger than the quantity supply (Q2-Q1).
Diagram 5
Graph Explanation
The implementation of
price ceiling of sugar causes shortage has created the emergence of underground
market or black market. Malaysians
has been stiffened by regulations which permit only four companies to sell sugar. The supply of sugar
became insufficient when there is a large demand which very limited demand. A large jump in pricing has left many
unable to buy legally regulated sugar but to buy sugar from the black market. (Hoovler,
2010). Many will loss during the process of searching for sugar which is known as deadweight loss that consists of loss of consumer surplus and producer surplus in a market.
Barrier of entry
MSM Malaysia Holdings Berhad
Malaysia Government only
allows four manufacturers to supply sugar in our country. MSM Malaysia Holdings
Berhad is the leading producer in Malaysia. The strong barrier of entry of
legal protection in protecting the existing manufacturers prevents other
competitors from entering the market. (Begg, D. and Ward, D., 2003) The firms’ monopoly position is protected
by the Government, economic profits of sugar can be persist in the long run. In
the long run, MSM Malaysia Holdings Berhad will be earning supernormal profit
because there is no competition of it due to high barrier of entry.
(1537 words)
References:
Begg,
D. and Ward, D. (2003) Economics for business. London: McGraw-Hill.
Hoovler, E. (2010), Seven Black Markets You Won’t Believe Exist. [online] Available from: http://www.thesmokingjacket.com/humor/seven-insane-black-markets-you-wont-believe-actually-exist (Accessed on: 1 June 2013)
Ochs. C (2011) A
Lack Sugar In Your Diet [online], Available from: http://www.livestrong.com/article/479903-a-lack-of-sugar-in-your-diet/
(Accessed on 1 June 2013)
Sloman, J, “Economics for Business”,
Third Edition, FT Prentice Hall, 2004
Sloman, J, Wride, A and Garratt, D,
“Economics”, Eighth Edition Global, Pearson, 2012.
The Malaysia
Insider, (2012) Sugar 20 Sen Dearer From Tomorrow [online], Available from: http://www.themalaysianinsider.com/malaysia/article/sugar-20-sen-dearer-from-tomorrow (Accessed
on 31 May 2013)
The Star Online,
(2012), Sugar Subsidy Reduced [online]. Available from: http://thestar.com.my/news/story.asp?sec=budget&file=/2012/9/29/budget/12101183 (Accessed
on: 31 May 2013)
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