The Increase in Subsidies and The Price Cap of The Food Price

Taxes and subsidies. Taxes are something that can increase the price paid by the buyers and lower the prices received by the sellers. So when the taxes decrease the quantity produced, it leads to underproduction. Taxes can be incidence with the elastisity if the demand and the supply when the division between buyers and sellers depends on the elasticities of demand and supply.

Subsidies are a payment that the government give to the producer which can decrease the prices paid by buyers and increase the prices received by the sellers. Subsidies can lead to overproduction when they increase the quantity produced.

Externalities. An externality is a cost or a benefir that effects someone other than the seller or buyer. It can become overproduction when the external cost arises and it become underproductionwhen the external benefit arises.

A public good is a good or service that is consume simultaneously by everyobe even if they do not pay for it. A market would be underproduce national defense because it is in each person’s interest to free ride on everyone else and avoid paying for the good that has been shared. A common resource is owned by no one buy it is available to used by everyone. It can be overused when in everyone’s self interest to ignore the costs they impose on others when they decide how much common the resources to use.

Monopoly become one of the obtacles because it is a firm that provides a good or service. It becomes underproduction when a monopoly produces too little and charges too high to achive its goals.

A price ceiling is a charge that the government give to the producer to make the price higher from the specified level. When a price ceiling is set above the equilibrium it has no effect and the market works in efficient way. But when the price ceiling is set below the equilibrium, it has a powerful effect. A price ceiling can cause a black market where is an illegal market that operatees alongside a legal market in which a price ceiling or other restriction has been imposed.

According to Fintan Ng that local prices are expected to remain stable in August even as food prices soared abroad in the wake of a severe draught hitting parts of the United States and Europe alongside rising energy prices that can make subsidies and price caps continued to mask inflationary pressure in the country, which had experienced a drop in its consumer price index (CPI) since the beginning of the year and they also expected Bank Negara to keep the key policy rate at 3% for the rest of the year as concerns over growth outweighed inflation expectations.

The food price increase because of the occurrence of inflation and the amount of money in circulation. The occurrence of inflation in which is increase or rise in the price of goods or services in a given period. Usually this happens during the period with respect to the moment or event such as Hari Raya and Christmas.

For the amount of money in circulation, this is because the earlier consumptive of the citizen that makes them withdraw their funds that already been deposited for a long time. And with those funds held over sometime makes people "confused" to use it. Because it is simultaneously make a certain item for the shoppers to assault it. Consequently, according to the economic laws, as more and more requests then the price will rise. If a stock available, it will rise under control and at a reasonable range, if it is not then the price will increase dramatically even sometimes it will become effects in the social events.

When the food price is perfectly inelastic demand, the buyers pay the entire tax such as the service tax in the restaurants and when it is perfectly elastic demand, the sellers pay the entire tax. The more inelastic the demand, the larger is the buyer’s share of the tax. But if there is no tax, the marginal cost of the food is equal to the marginal social cost and that makes the market become efficient but not for the production subsidies because at the quantity of food produced, the marginal social benefit is equal to the market price which has fallen so the production subsidies become inefficient and overproduction.

If the marginal social benefit of the food is exceed the marginal social cost, so the tax is inefficient because the tax revenue takes part in the total surplus and the quantity of the food become decreased. So the marginal social benefit of the food has increased or exceeded that make the production subsidies become inefficient and over production. The production subsidies are overproduction in the two situations above that make a market failure to the food, and the price also increase higher than the original price before the subsidies happen to them and the price expectations of inflation will also become a concern for the rest of the year.

Original article link: http://biz.thestar.com.my/news/story.asp?file=/2012/9/18/business/12040573&sec=business

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The Increase of The Supply and Demand Gap of The Gas

            Demand is something that related to what you want, can you afford it or not and do you plan to buy it or notby measured an amoun per unit of time. Demand also reflects to our decision about which we want to satisfy. The quantity demanded of a good or service is the amount that consumer plan to buy during the period at the particular price but it is not necessarily as the sam as the quantity that you actually bought. When the quantity demanded exceeds the amount of goods are available, so the quantity bought is less than the quantity of demanded.

          The factor that influence someone for buying plans is the price. The relationship between the quantity demanded and the price can be known by the law of demand. The law of demand states that when the price is getting higher, the quantity demanded is getting smaller. But when the price is getting lower, the quantity demanded is getting greater.

            According to the law of demand, there are two reasons about a higher price can reduce the quantity demanded which are the substitution effect and the income effect. Substitution effect happens if the price is rises when the other things are stable so the opportunity cost or the relative price also rises. A substitute good can be use in its place as the opportunity cost of a good rises although each of the goods are unique.

                Supply is related to having more resources and technology to produce something and they are the constraints that limit what is possible. Supply also reflects to a decision about which technologically feasible item to produce. The quantity supplied of goods and services is an amount that producers plan to sell during a period at the particular price but it is not necessarily the same amount as the quantity actually sold.

                The law of supply said that the higher price of good the quantity supplied becomes greater when another things remaining the same but the lower price of good, the quantity supplied become smaller. As the result for the law of supply, the general tendency for marginal cost of producing is to increase as the quantity produced increase and producers are willing to supply a good only if they can at least cover their marginal cost of production.

                Equilibrium is a situation in which opposing forces to balance the demand and supply curve. An equilibrium price is the equal price of the quantity demanded and the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.

            According to Datuk Dr Abdul Rahim Hashim, Malaysia's gas supply-demand gap will start growing next year at the time whereby contracted production declines, and Malaysia faced supply challenges with declining indigenous gas production in Peninsula Malaysia, increased extraction rates, commercially challenging reserves.

            As the demand and supply of the gas grows, it will make the cost of production and exploration become higher than before and it will effect to the market equilibrium price that will be given to the public to consume the gas. When the price is increase, the consumers do not buy it and it becomes a production surplus. Beside that the demand of energy also increases along the amount of the population which grows higher than before and that makes a shortage happen.

            When the amount of the population getting higher and their income still remain the same, it becomes a problem for them at where they cannot afford the gas for their daily use. The shortage that happened will make extinct for the gas to be consumed for the public. The effects of gas’ extinct are the distributor will face loss or bankrupt, and the restaurant owner will be forced to close their business.

            As the demand of the gas and the surplus of the gas have increased, the equilibrium price becomes uncertain because the increase in demand raises the equilibrium price and the increase in supply lowers it. But if once the demand and supply of the gas have decreased, the equilibrium price becomes uncertain because the decrease in demand lowers the equilibrium price and the decrease in supply raises it.

            Datuk Dr Abdul Rahim Hashim also said that within South-East Asia, end-user gas prices in Malaysia are the lowest, given the heavy subsidies which kicked in over 15 years ago, in 1997 and according to Abdul Rahim, Malaysia currently ranked 15th in terms of gas reserves and 21st in terms of oil reserves and they need to balance the nation's dynamic economic and socio-political interest and this must be done as to ensure security of gas supply.

            Malaysia becomes the lowest user of gas because the subsidies that the government gives, make the gas’ price become higher and they become a burden for 15 years and in this 15 years, their income is not increase and they cannot afford to buy the gas for their daily needs.

            In this case, the government should not make the price of gas above the average income of public, it will effect their living expense in any matters. The government should find another sources that have the same function for the gas substitution so that there will be no shortage among the people who use the gas and government should make sure the capacity for each people are fair based on their needs when using the gas.

            The government also needs to increase the reserve for the gas and the oil so that Malaysia can be in the higher rank than before. If the government increases the reserve of the oil and gas, citizens will have good supply of the oil and gas and the market equilibrium price will go back to the normal price and there will be no shortage or surplus in both the users and the producers to use or produce the gas and oil.

Original article link: http://biz.thestar.com.my/news/story.asp?file=/2012/5/9/business/11255164

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Effects of infinity demand for petroleum.

           PETRONAS started supplying petrol to all Malaysian since 1974 and ever since then, all Malaysian have been able to use cheaper fuel compare to neighbouring country. Fuels are natural resources aging back to centuries and it is a non-renewable resource, furthermore it is used mainly as a power source for most vehicles in the world therefore its demand is very high. Unfortunately, fuels are limited resources whereas demand for fuel are unlimited therefore creating some serious problem in the fuel price.  

           Oil supplies are considered necessity good now days and are resources that is depleting while the price are on the rise. With the resource depleting, the demand for fuel still grows continues to grow at a rate of 4% a year, therefore increasing the chance of changing the country into a pure importer country in the near future. According to the data above, we can conclude that this is an inelastic demand curve because the percentage change in the quantity demanded is smaller than the percentage change in the price   ([RM2.70/RM1.92]*100), therefore making the quantity demanded for a product to barely respond or respond very little to the changes in the price of the product.

            Since this is an inelastic demand curve in addition to the fact fuel is a necessity good and it is an oligopoly market in Malaysia, whereby only a few firms such as Petronas, BHP and Shell controls a large market, suppliers have the higher hand because they could manipulate the price all they want while the demand of fuel will not change much because the substitute for fuel is hard to find. Even though substitute such as hybrid cars uses very little fuel which is an alternative way to solve the fuel problem, the price for these vehicles are very high, not to mention the spare part that will cost them a fortune when a system breaks down. Furthermore, after some research that I’ve done, I realise that consumers only hear that these hybrid vehicles run on a special battery which cuts down fuel consumptions, what they don’t hear is that these special battery are required to be change after 100,000 miles of travelling, required constant maintenance and the cost for these batter is around $15,000. We can now safely conclude there are little substitute to the fuel problem in the market therefore forcing all consumers to purchase fuel even though the price are high in order to fulfil their daily activity.

              In order to protect the public interest and to ensure the public are not over charged, the government intervention is necessary to helps the citizen by subsidising the fuel and imposing a price ceiling for fuel sale within the country. I believe the effort taken by the government will help the locals a lot by just maintaining a 30-sen per litre discount from market price(RM3.00) and imposing a price ceiling for fuel, in other words, the maximum price sale of fuel would be at RM2.70 a litre. With those actions, the government are now aiding the middle income and lower income people which could use the excess money to buy more necessity good to increase their daily living standard.

            Furthermore, the fuel not only causes problem to individuals, it also causes problem to big companies such as the Penang Freight Forwarders Association (PFFA). Many people know fuel is the main “money generator” for Transportation Company, thus making me to conclude that the Penang Freight Forwarders Association (PFFA) was one of the many victims which were affected by fuel problem and the recent Europe Crisis. The reason why PFFA has to worry so much about the fuel price increase is because when prices of fuel increases, all transportation companies such as PFFA will have additional operational costs and some of this cost might be passed on to its customers thus making some of PFFA business partner and customers to have a thought of withdrawing due to the increase in operational cost and decrease in revenue.

            According to the graph above, we can conclude that PFFA will decrease its’ supply to meet the new market equilibrium. If PFFA tries to maintain at the old equilibrium, a surplus will occur between the old market equilibrium and the new market equilibrium as the demand for PFFA service drops along with the supply of PFFA service.

            Furthermore, PFFA main cargos are electronic chip, and with the recent Europe crisis which has seemingly no end, thus making the demand for these chips to “drop like stones” and pulling down PFFA profits. Electronic chips are used in electronic equipment such as laptop and ultra-book and with the Europe crisis pulling down so many companies; it directly causes a sudden drop in many citizens’ salary which leads to the decrease in demand for electronic chips. In my opinion, when salaries go down, it turns computer into a luxury good; when demand of a luxury good drops, sales of all complementary good such as electronic chip of computer will drop as well. As this is a well proved situation, I believe that as long as the Europe crisis continues, demand for PFFA service will continue to drop because the incomes for many thousand people are on the fall.

            Overall, according to my point of view, I think it is safe to assume that the increase in fuel price will affect many parties. Governments need to take action against the people responsible for causing the sudden increase in fuel price because fuel is widely used to accomplish daily activities. Government could help supplier by approving their loan and giving financial aid; imposing price ceiling to help consumer to survive from conditions that could make necessity product unattainable.

Original article link: http://thestar.com.my/news/story.asp?file=/2008/6/5/nation/21461533&sec=nation

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Why do people often face with Blackout?

            In theory, economic should be meant to be a stable market where the supplier supplies products to meet the society demands. Unfortunately, things don’t always go as plan because in the world of economics, things and value are never stable and are always changing. As a result of these, problems such as the surplus, shortage, meeting market equilibrium price, substitution effect, attainable point and unattainable point exist.

            According to the article that I have read, serious problems of shortage exist when the demand for electricity exceeds its supply. I believe the main reason why the demand exceeds the supply is because of the lack of fossil fuel which is mainly used to produce electricity. In Malaysia, we get our fossil fuel from neighbouring country because local sources are depleting which partly the cause of our shortage in electricity production. The more reason why Malaysian needs to appreciate the amount of electricity we have is because we do not want our economy to fall. Recently when Myanmar faced an energy shortage that was the result of long term mismanagement of the government, it leaves many thousands to suffer because when there is not enough electricity supplied to the factories, workers loses their jobs and causes inflation within the country. If Malaysian does not treasure the amount of electricity they have now, the economic might become like Myanmar.

            In addition, I believe another reason why the electricity industry does not meet locals demand is because they are facing human resource problem where not enough skilled personal to run the computers are produced. Even though many engineers are produced yearly through local university, they cannot handle the “new computer numerical control (CNC) machines with more than five axes” because of the lack in experience and insufficient knowledge about the equipment. Furthermore, the high demand in electricity could also be related to “Johor’s plan of their new regional oil and gas (O&G) hub in line with the Economic Transformation Programme” which causes a huge power demand in Johor. Besides that, it is believe that cost and profit plays a major role in the power shortage in Malaysia and this is proven when a conflict between the government and TNB arises. TNB is delaying their project to construct a high tension transmission towers due to some land problem even though the government had proposed several other routes. TNB keep refusing to accept the alternative route due to some cost and profit problem, thus delaying the construction of the towers and causing power disruption which leads to insufficient power being distributed.

             Furthermore, the high demand for power can be link to the factors that move a demand curve. As for all we know, Malaysian population are growing in great numbers day by day which can be lead to “the larger the population, the greater is the demand for goods.” There are no more than 2 electricity companies that supplies electricity for Malaysia while the population in Malaysia is growing. With the increasing population but barely 2 electricity suppliers, the population vastly outnumbered the numbers of suppliers which causes a shortage. In the graph below, a shortage occurs at location “a” whereby the demand of electricity is more than the electricity supplied.

            After studying this graph, the new demand curve arises because the supply for electricity is constant whereas population in Malaysia increase continuously which causes the demand for electricity to increase. One can conclude that the new market equilibrium point is the best solution for this problem because at that point, all resources are used efficiently.

           Malaysia’s situation now is at point “a” where by that position in known as a shortage. A shortage means that a situation where the goods demanded is greater than the good supplied in the market. At this point, when TNB decides to push up its electricity price from 20sen pKw to 35sen pKw, both point will reach the new market equilibrium point whereby the equilibrium price will act as a regulator and allowing opposing forces to balance each other. Besides that, the law of demand also states that the higher the price of a good, the lower the quantity of good demanded. By using this law, when the price of electricity increased to 35sen pKw, the demand of electricity will decrease thereby allowing both parties (consumers & suppliers) to meet an agreement that will balance and benefit both parties.

            To cope with the power shortage problem, I suggest more people should try to tap in the electric industry in Malaysia such as the independent power producers (IPPs). IPP compose of a few organizations that produce electricity and sells them to TNB which in return sells them to us Malaysian. This opportunity was given to the IPP Companies when a big blackout occurred in Malaysia on Sept 29, 1992 and on Aug 3, 1996 and after the incident, IPP Company number increases when they start to realise TNB can no longer produce enough power to sustain the entire country based on its performance and therefor they start to build their own power plant, generates electricity and sells them to TNB to ease their burden and meet Malaysian demands for electricity.

           Lastly, due to the power shortage, the Malaysian government have been considering of using Nuclear power as an alternative power source to the depleting fossil fuel electricity because Malaysia could not ignore the benefits of nuclear power in future generation energy mix. Though Nuclear power might be seen as a very tempting alternative power source, we must never forget the risk that it poses. Nuclear power is known globally as an alternative power source, but it also proof to be nuisance when the nuclear generator generates too much power at one time. According to an article that I have read about electricity in France, I found out that there was a surplus of nuclear generated electricity in France which instead causes the country to face a huge loss when they were forced to sell off excess electricity to another country for a price lower than its own original cost.

Original article link: http://thestar.com.my/news/story.asp?file=/2012/2/16/nation/20120216103037&sec=nation

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