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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Price floor in cigarette market can stop the demand?

According to the BERNAMA news, ‘New cigarette price for 20 sticks set at RM 7 from September 1 2012’.

http://www.malaysia-chronicle.com/index.php?option=com_k2&view=item&id=38188.new-cigarette%20price

            According to the news, Malaysia Health Minister Datuk Seri Liow Tiong Lai said Malaysia Government has decided to set a price floor for the 20 sticks pack cigarette due to the increase in demand of cigarette. In this world, cigarette is inelastic goods. The reason why cigarette is an inelastic good is because the quantity demanded for cigarette will never have a huge change compare to the change in price. The equation to count the elasticity of a good is the percentage changed in quantity demanded over the percentage changed in price.

            Price floor is a regulation that makes it illegal to trade at a price which is lower than a specified level. The objective of setting a price floor to cigarette is to reduce the consumption of cigarette because the more you take cigarette the more easily you destroy your health. It goes same to wine, beer and alcohol drink. These goods are also inelastic goods because they will be numbers of citizen who are still willing to purchase no matter how high had the price changed. In the elasticity of demand stated that the closer the substitute product is, the more elastic is the demand for it. Therefore, cigarette is an inelastic good because it got only a little numbers of substitute goods. Price floor which is set above the equilibrium price will only bring a little changed to the quantity demanded for cigarette because it is an inelastic good. In microeconomics stated that, the more inelastic demand of a good, the more slanting the curve is. So, when the price floor is set above the equilibrium price, the will only be a little changed in quantity demanded. In my opinion, the way to reduce the consumption of cigarette is to setting an anti-smoking campaign.

From the graph above, we can see that if the price floor is set above the equilibrium price, there will be a surplus in market. But because the price is set above the equilibrium price, there will be an underproduction in cigarette which will bring the solution to the surplus in market.

Tax incidence is the tax division of the burden of a tax between buyers and sellers. In microeconomics, it stated that if a good is an inelastic good then the tax will be pay by the buyers. Vice versa, if a good is an elastic good, then the tax will be pay by the sellers. In this case, cigarette is an inelastic good so the tax is pay by the buyers.

After a price floor is set, there will be a market failure which is underproduction. A price floor drives a wedge between the buying price and the selling price and results in inefficient underproduction. The price buyers pay is the buyers’ willingness to pay which is measures as marginal social benefit. The price sellers receive is also the sellers’ minimum supply-price, which is equal to marginal social cost. Therefore, if the market is underproduction, this will solve the surplus in the market. Price floor makes marginal social benefit exceed the marginal social cost, shrinks the producer surplus and consumer surplus, and creates a deadweight loss. An underproduction is a deadweight loss to the social. The reason why an underproduction will cause deadweight loss is because the condition does not fulfill the people in the market. Additionally, after price floor is set, smokers who are low income earner will look for a cheaper cigarette. In this situation, smokers who are looking for the cheaper cigarette will find a black market. Black market is a market where buyers and suppliers will have trade activity behind the real market which is control by the government. In cigarette market, smokers are looking for suppliers who are willing to sell cigarette with cheaper price compare to the cigarette market. On the other hands, suppliers who are in black market are looking for smokers who are looking for cheaper cigarette. Buyers and suppliers who are having trade activity in black market will cause deadweight loss to society. When buyers are looking for cheaper cigarette in black market will do some survey and this might cost them. This cost is known as opportunity cost. Vice versa, sellers who are looking for buyers in black market will have to do some survey also. Thus, opportunity costs incur. 

From the graph above, the grey region represent the deadweight loss occurred. The brown area shows the consumer surplus and the blue area represent the suppliers’ surplus. The black region shows the tax revenue earn by the government.

           In the market of cigarette, demand is inelastic. After a tax is added into the price of cigarette, the price will be higher than previous. Although the price of a cigarette have increase, but the quantity bought will not change. Due to the inelastic demand, the buyer will pay the entire tax which is added by the government to the cigarette.

            In conclusion, when a price floor is set for an inelastic good then it will never have a larger change because buyer for inelastic good will never have a large respond toward the price changed. In my opinion, if the price floor is higher, smokers who are low income earner will have no effort to buy cigarette. Thus, rate of crime in social might increase because smokers have to rob others to get money to buy cigarette for satisfaction. To reduce the consumption of cigarette, there is not only setting anti-smoking campaign but also do advertising on effects of smoking on the box of the cigarette.

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Minimum wage causes high rate of employment.

According to The Star News: ‘Addressing issue of minimum wage’, government in Malaysia is now come out an Act which to protect the worker. It stated that employees’ wages must reach the minimum of RM 900 per month starting from next year.

            After this Act has been made from government in Malaysia, there will be a surplus of workers in a market. In this situation, we assume the workers are employee, while the people who are hiring a worker be producer. When wages of employees increases; there will be a decrease in demand of employees. As we all know the law of demand stated that when other influences remaining the same ‘the higher the price of a good, the smaller is the quantity demanded’. In the other hands, the law of supply also stated that ‘the higher the price of a good, the greater the quantity supplied’. Because of the nature of human behavior, consumer is not willing to accept things which are price higher than what there expected.

         Government has done some survey before forming this Act to make sure this can reach the market equilibrium. Market equilibrium is the situation in which opposing forces balance each other. Market equilibrium occurs only when the price balance the plans of buyers and sellers. In market equilibrium, price is at the level which quantity demanded equals to quantity supplies. In market equilibrium, price will automatically adjust lower when there is a surplus.

           To make sure the wages of employees are accepted by employee and producer, a price floor of wages should put in this market. A price floor is a regulation that makes it illegal to trade at a price lower than specific level. After this price floor applied to labor markets, it is knows as minimum wage. Price floor which set below the market equilibrium price will never bring any effect to the labor market. Therefore, price floor or minimum wage should put above the equilibrium price so that it can affect this market. If price floor is set above the equilibrium price, the quantity of labor supplied exceeds the quantity of labor demanded. This situation is what I had mentioned in paragraph 2, Surplus. Because of the minimum wage, this will create a high unemployment rate. After a minimum wage is set above the market equilibrium price, a deadweight loss will arises.

The black area in the graph above shows the opportunity cost when consumer and supplier are doing job search when there is a price floor. When the government involve in setting a price floor in labor market, consumer is not willing to hired employees with high wages, so they will do some research activity to find some employees who is willing to work with them in a lower wages. In the other hands, when the quantity demanded of employees is low, employees who are looking for a job will be doing job search also looking for consumer who is willing to pay higher wage to employ them. When suppliers and consumer doing this research, petrol expenses, phone bills expenses and time expenses will become the opportunity cost. The red triangle area shows the deadweight loss. A deadweight loss is a loss to society. In this situation, this deadweight loss is the loss of workers.

            The sum of the black rectangular area and red triangle area are the total loss. The sum of this two areas are the deadweight loss and the opportunity cost when workers and producer are doing research on searching.

            After the government forms this Act to set the minimum wage, there will be an underproduction of workers because the marginal social benefit is exceeds the marginal social cost. The reason why there is an underproduction because those workers are the input of production process.

            In this situation, there will be a black market incurs. Black market is an illegal market that operates alongside a legal market in which a price floor or other restriction has been imposed. A surplus of workers creates a black market in employee. Illegal arrangements are made between the workers and employers at the wage below the price floor. When there is a black market occurs, as a producer who is looking for minimum cost will be doing some research activity to look for workers who are willing to work for them at the price below price floor. Vice-Versa, when a minimum wage is form, unemployment rate getting higher, so as a worker will do some research to look for job who is willing to hire them at the lower wage.

            In microeconomics, citizen will ask is the minimum wage fair enough to everyone? As an economist, the answer is NO. Because most of the economists believe that the minimum wage brings high unemployment rate to low-skilled younger workers. Thus, the minimum wage raises the incomes of those workers who have jobs, but it lowers the incomes of those workers who cannot find jobs. The impact of the minimum wage depends on the skill and experience of the worker. Workers with high skills and older experience are not affected because their equilibrium wages are well higher than minimum wages. For these workers, the minimum wage is not binding. If the quantity demanded of worker is more elastic, it might have a bigger rate of unemployment compare to a free labor market.

            In conclusion, opponents of the minimum wage contend that it is not the best way to combat poverty since it affects only the income of those in employment and may raise unemployment. Additionally, when the unemployment rate is high, this might increase the rate of crime in the nation because citizen cannot afford to live without income. 

Original article link: 

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What makes market demand fall?

Demand is defined as the quantities of a product that purchasers are willing and able to buy at various prices per period of time, ceteris peribus. Whereas, supply refers to the quantities of a product that suppliers are willing and able to supply at various prices per period of time, other things again remaining constant. In every single market, for instance, market for apples, oranges, ladies handbags and etc, there must be demand and supply. In the article, the sales of apple in the UK is said to be declining, why is it so? How did it happen?

First and foremost, it’s very important to know what does the Law of Demand state. It states that all other things remain unchanged; more of a good will be demanded at a lower price. Therefore, a change in price actually affects the quantity demanded of a good. Next, what causes a shift in the demand curve? When the demand curve in a market shifts, there is either and increase or decrease in demand. There are few determinants that cause the demand curve to shift, consumer preference, prices of related goods, income and the others.

In the diagram above, different shifts of the demand curve, D is illustrated. From D to D₁, demand curve shifts to the left; there is a decrease in demand. On the other hand, demand curve shifts from D to D₂, an increase in demand causes the curve to shift leftward. As mentioned, there are few factors that can affect the demand of one good and these concepts can be applied to the apple market, which faces a fall in demand recently, based on the article I read.

In the apple market, it’s said that consumption has fallen 3.2 per cent last year to 501million kilos, or 1,104million pounds (Poulter, 2009). People question, why? Other than what has been mentioned in the article, consumers are eating less healthily nowadays, the fall in consumption may be caused by the expected future price. While making decision to buy or not to buy, people make assumptions and predictions. The current situation in the apple market that there is excess of supply makes everyone think that the price of apple is going to be lower in the future, in other words, it will continue falling. Hence, with the thought of having cheaper apples in the future, consumers choose to purchase afterwards, not now. It thus leads to a fall in demand for apple for current period.

Next, the advancement of technology has caused really great improvement in the production other healthy product. People no longer need to consume fruits like apple to maintain health or absorb the nutrient that they need. Other healthier and more convenient products that carry the same or better effect are all over the market. For instance, people can just drink a bottle of yogurt or apple juice to get the nutrients that an apple contains. People would rather choose to consume these kind of goods compared to an apple which has to be peeled off as it saves time, and is less troublesome. In short, the improvement of healthy products has slowly replaced the traditional way of being healthy which is by eating fruits. So, demand for apple is decreasing.

Other than those are stated in the article, there may be some other reasons that cause the fall in demand of apples. The prices of related goods can actually affect the demand of one good whereby the related goods are its substitute and complementary good. Substitute goods are goods that can be used in place of another good. In this case, substitutions of apples would be oranges, plums and other fruits. Whereas, complementary goods are the goods that are used in conjunction with another good. In this case, flour is used simultaneously with apple when people are to bake apple pies; flour is a complementary good to apple. A reduction in the price of its substitute goods leads to a fall in demand of apples. In addition, increase in price of the complementary goods will reduce the consumption of apples.

Nevertheless, factors like income of the consumers definitely cause a shift in the demand curve in the apple market. Apple, being a normal good, will be bought when consumers’ incomes rise. However, supportive data shows that private sector wages fell by 1.9 per cent – a fall driven by thousands of City workers not receiving a bonus in the year 2009 (Wallop, 2009). As a result, demand of apples falls just because of the decline in income of people, when it is known as a normal good. Yet, there may be exception too because for some people with higher incomes, apple is inferior good. If that is the case, then this reason may not be valid.

Instead of just figuring out the root of this issue, the UK government should actually do something to boost the demand of apple. In other words, government intervention is needed in this field. Firstly, government can provide subsidies to the apple planters. By providing better equipment and facilities like better fertilizers, soil and etc., better quality of apples can be produced and hence, consumers will again have the confidence in apples, consumption is very likely to increase again. Other than providing better tools, government should also take the initiative to hold a campaign to send a message to the public regarding the benefits of consuming apples.

In a nutshell, the causes of a fall in demand of apples are actually the general guidelines for the UK government to do something about the situation. By considering all the economic and scientific factors, the authority like Apple and Pear Association should figure out a way to boost the demand of apples, as suggested. However, other factors have to be considered to determine its successfulness. For instance, the elasticity of demand of apple, the elasticity of supply and etc. need to be very well and carefully considered before making any decision that may affect the economy of the entire country.

Original article link: http://www.dailymail.co.uk/news/article-1215030/Apples-losing-crunch-nation-abandons-fruit-favour-sweets-junk-food.html

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How does a price floor work and affect a market?

In different countries, there are different policies set by the governments in order to intervene the market of any goods correctly when it is necessary. Government might control prices by setting price ceiling and price floor, impose tax and provide subsidies and etc. To be precise, few policies are designed to intervene the market and are used very commonly, fiscal policy and monetary policy.

            When there is no government intervention, the market is said to be efficient. Efficiency in this field means that the market has achieved both allocative and productive efficiency. Market is productively efficient when firms are producing at its lowest average cost while market is allocatively efficient when the right amount of goods and services needed by the consumers are produced. In the case of market being efficient, the marginal social benefit (MSB) is equal to the marginal social cost (MSC). Marginal social benefit is defined as the sum of the additional benefit enjoyed by the entire society by consuming one good or services. Whereas, marginal social cost means the extra cost viewed by the whole society when one additional unit of good and service is produces. The graph below illustrates an efficient market.

        The diagram above shows that the market is in efficiency whereby MSB equals to MSC. In this situation, the total surplus (sum of consumer and producer surplus) is maximized. This happens when government does not do anything to the market in order to achieve certain goals.

            According to the article, Scottish government has an incentive to set a minimum price of 50p per unit of alcohol (Philip, 2012). This may be rooted by the unreasonably low price that has been determined by the market force in that country. Market forces simply mean the demand and supply in the market that can determine the price of alcohol when the two curves intersect. In my opinion, the relatively low price may be due to the supply is very much more than the demand in the alcohol market.

            According to the Independent UK, Ms Sturgeon said that: "Cheap alcohol comes at a price and now is the time to tackle the toll that Scotland's unhealthy relationship with alcohol is taking on our society. Too many Scots are drinking themselves to death. The problem affects people of all walks of life. It's no coincidence that as affordability has increased, alcohol-related hospital admissions have quadrupled, and it is shocking that half of our prisoners now say they were drunk when they committed the offence. It's time for this to stop. Introducing a minimum price per unit will enable us to tackle these problems, given the clear link between affordability and consumption." With this announcement, it is pretty true that this government action is actually mainly to maximize social welfare, letting people in Scotland know how harmful alcohol is, and eventually cut down the consumption of alcohol by the whole society.

            In order for a price floor to work, it must be set above the equilibrium price. Otherwise, the market price and quantity traded will only stick to the initial ones determined by the invisible hand (market forces). Diagram 3 below will tell us how the minimum price should be set in order to achieve what the government wants.

             In diagram 2, the market equilibrium is initially associated with the market price P_e and the quantity traded Q_e. Yet, the government is not satisfied with the combination and hence has decided to intervene the market by setting a minimum price of P_min. In Scotland, the minimum price is set to be 50p per unit of alcohol. Back to the diagram, the minimum price causes a fall in quantity demanded in the alcohol market and hence, the quantity traded is reduced to Q₁, government’s main purpose of setting a price ceiling is achieved. Moreover, the minimum price will cause a surplus of Q₁Q₂ in the market due to the excess supply. Scottish government will have to buy in the market surplus of Q₁Q₂ or else the excess stock will be wasted in the market itself, no one is going to “clean” it. The government can actually export the excess supply of alcohol to other countries to boost economic growth.

            Other that setting minimum price, Scottish government can also impose a tax on alcohol, either on buyer or on seller because taxing both sides will get the same effect of reducing the quantity traded of alcohol, which is also the goal that government wants to attain. The following diagram will show how does tax work to control the consumption and production of alcohol.

            Two of the diagrams above have clearly shown that how an imposition of tax can cause a decrease in quantity traded of one good. In diagram 3, tax is charged on producers and this pushes up the price that consumer will react by stop purchasing the good, quantity demanded fall. With that, quantity traded definitely fall, too. In diagram 4, tax is imposed on buyers. This causes a shift leftward of the demand curve, followed by a fall in quantity supplied due to lower price, quantity traded falls, too. Obviously, tax imposition is also one of the effective ways of controlling the consumption of demerit goods, for example alcohol. Other than achieving government’s goal to maximize society welfare, tax revenue is also a form of income for the government.

            Overall, the effect of setting a minimum price may not be as strong as imposing taxes. It is because taxes can tackle both of the supply and demand side, where the price floor will only make people to consume less, but encourage the suppliers to produce even more since they can earn more. In addition, the party that enjoys the most benefit would definitely be the society itself. This is because they are able to live a healthier lifestyle when the government actions actually work. There would be less crime, less disease and less accidents happening in the country. However, those who are seriously addicted to alcohol would be the ones who suffer from paying a higher price to satisfy their needs.

Original article link: http://www.independent.co.uk/news/uk/home-news/scottish-government-announces-minimum-50p-alcohol-pricing-7745694.html

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