Effect of Unemployment to a Country.

    Unemployment, this is the state of having no job, unemployment is a serious personal and social economic problem which is mainly caused by two reasons, lost incomes and production and the loss of human capital. Unemployment rate is high at the moment all over the world especially countries like United states of america where by the september unemployment rate this year is 7.8% which is still high though there is a decrease since august which was 8.1% unemployment rate is high in many countries especially right now where there are some countries like the UK facing a double dip recession and it is mostly due to the rate of unemployment.

        The article that i will be discussing is about the unemployment of greece which has now hit records up to in 25%  july, greece statistical authority reported that  1.2 million greeks were jobless in july this year and where by over 1000 people lost their jobs every day over the past years.

           On the article the author is explaining on how the greece economy is now under recession mostly due to unemployment since in order for a country to have good economy , the citizens should work in order to get money and through that money they can be able to buy and sell goods at a nice price hence the economy gets boosted but the situation there is different the number of people losing jobs is too high. the unemployment rate is mostly influenced by the level of the real wage rate , where by the wage rate adjusts to make the quantity of labour demanded equal to the quantity supplied ,The price floor is when a government imposes regulation that makes it illegal to charge a price lower than a specified level, so when a minimum wage is imposed at  the level above the equilibrium wage it creates unemployment so greece should try and set the minimum wage below the equilibrium wage in order to be able to reduce unemployment appearing rapidly.

         Secondly on the article , they mentioned that the number that is mainly affected with unemployment is the young aged people from the age of 15 to 24 years of age,  mostly this are the people that should have jobs since they are the ones with fresh and new ideas to bring, for example when hiring a company that sells a certain product its most likely to employ a person wit a young age compared to an old person since due to globalization and the use of new technology and social networks the younger generation is the one that is mostly affected , so they are the ones to know how to promote the product through social networks and blogs , compared to old aged people where they prefer using the old technologies , so greece should try and build more infrastructures like what barack obama did with united state of america so as to reduce the number of unemployment , so when they are building hospitals , road and railways stations ,public schools water and electricity supply it helps people get employment even though it is for some time through the building of those infrastructures but for example when hospitals are done then there will be employment opportunities like the nurse or the doctor and even the janitor but they will have employment hence the country’s economy will rise.

          Lastly,  on the article the author talked on how the greece economy is surviving through international bailouts, The BBC's correspondent in Athens, Mark Lowen, said: "The figures have bolstered the anti-austerity argument here, giving fuel to those who believe the entire strategy of Greece's international lenders is wrong, and that pressure for ever more cuts is pushing the country to breaking point and stunting growth.”, greece should try to reduce the loans and try focus on what the country has so that they can not end up with a double dip recession since the number of unemployment is very high compared to most countries especially if the youth are the ones affected a lot.

           Conclusively, from the article it has been seen how the unemployment keeps rising and the greece government do nothing about it since they have borrowed enough loans from other countries that they can not do it anymore especially to a country like US whose economy is also not good and gives out loans to many countries .Also another suggestions it is through the increase of infrastructure as mentioned earlier that will help boost the economy for a certain percentage and there will not be a high percentage of unemployment like what that are facing now.

By Jacqueline Terry

Supply and demand of energy drinks

Supply and Demand of energy drinks.

      According to the article I have reviewed from a book entitled “Redbull and market on the energy drinks” on the 1^st of October 2012, it reflects the competitive market of energy drink that affects the supply and demand of these products.In year 2009 Redbull was basically the main energy drink in the market.Through out the years,many new companies produced energy drink due to the increase the demand for energy drinks mainly for students.New brands such  as Rockstar and Monster Energy Drink entered the market which results to a perfect competitive market.Competitive market can be elucidate where there are many buyers and sellers,all the products sold are identical and there are no barriers to new firms to enter the market.Other than that,the model of demand and supply is very useful to these companies in helping them to predict the changes in quantity and prices in the market.Indubitably,many factors influence the willingness of consumers to buy a particular product.In this case,consumers who are considering to buy an energy drink based on ther three brands state earlier will make their decisions based on the price despite the other factors such  as income and effectiveness of the advertising campaign of the companies that sells the energy drinks.As a producers the theory of considering what a consumer wants to buy is both willing and able to buy needs to be adapt.Through the article,the theory or application of supply and demand proves that when price increases,the quantity of demand decreases.Through the demand schedule  we could see the relationship between the price of energy drinks and the quantity of product demanded and also through the demand curve we could also understand better the relationship of the two variable stated earlier.

Let’s have a look at the graph below:

        As you can see,based on the graph we could say that the demand curve slopes downwards because consumers will buy or consume more amount of cans when the price decreases.For example,in this case if a can of energy drink cost about $3.00 per can,consumers will only buy 60 million cans per day where as if the price lower down or decrease by $0.50 it will increase the quantity bought by consumers for 10 millions more cans per day.This proves that the product became less expensive compare to other products which encourage the consumers to consume more when the supplier decreases the priceThis  shows that consumers are willing to buy the energy drinks at a lower price because they can afford to buy more.

      In addition,law of demand plays a big role in determining the analysis and market for energy drinks.It states that inverse relationship between the price of a product and the quantity of the product demanded which is also can be interpret as holding everything else constant which also known as ceteris paribus,when the price of product falls,the quantity demanded of the product will increase,and when the price of the product rises,the quantity demanded will decrease.The law of demand holds for any market demand curve.Consumers buy a larger quantity when the price decrease because of the substitution effect and the income effect.Substitution effect refers to the change in the quantity demanded good that results from a change of price making the goods less expensive and relative to other products that are substitutes.For example,when the price of energy drinks increase,consumers will find subtitutes to other drinks such as coffee or sports drink.As for the income effect,the price change refers to change in the quantity demanded of a good that results from the effect of change in the good’s price on consumer’s purchasing power.Thus,a fall in the price of energy drinks lead consumers to buy more energy drinks.This is because both the cans are now less expensive relative to the substitute products and because the purchasing power had increased.Despite change in price,when we allow other variables to affect the willingness of consumers to buy energy drinks would result to change in quantity of demanded at each price for energy drinks.Therefore,shift in demand curve will occur whether it is increase or decrease in demand which is a movement along the curve.Variables that would shift the market demand are the income,prices of the related good,taste,population and demographic and expected future prices for the energy drinks.The graph below will illustrate the changes in demand curve:

  

When consumers increase the quantity of energy drinks that they want to buy,the market demand curve shifts to the right,from D1 to D2 whereas when consumers decrease the quantity of energy drinks that they want to buy the demand curve shifts to the left,from D1 to D3.

Now,we will look at the supply side of the market for energy drinks,same as demand many variables influence the willingness of the producers to sell a good or services.In this case, when the price of energy drinks rises,producing the goods are more profitable,therefore quantity supplied will increase which is a good news towards the producers.

   

Below is the supply curves that explains the relationship between the price of energy drinks and the quantity of the drinks supplied:

As price changes,Red Bull,Monster Energy,Rockstar and other firms that produces energy drinks change the quantity they are willing to supply.This is shown in the graph.For example,at a price of $2.50 per can producers are willing to p 90 million cans where as at a price of $3.00 producers will supply 100 million cans.Most supply curves are to be upwards according to the supply law which states an inverse relationship that when everything is constant,increases in price will cause increase in the quantity supplied.Variables that will shift the market supply will be prices of inputs,technological change,prices of substitutes in production,number of firms in the market and expected future price for energy drinks.

 Then,the purpose of a market is to bring buyers and sellers together which brings us to the market equilibrium.The demand for energy drinks will cross the supply curve at a point which is known as e the point of market equilibrium.

Conclusion, in a rapidly growing market such as energy drinks,firms need to increase productivity capacity quick enough in order to compete in the market.Fail to do so,will result in losses for firms that produces energy drinks.

By Najwa binti Mohamed Mokhtar

Government to review on providing subsidy to Taiwan citizen may give diverse effect

According to the article, `Taiwan government plans LED lamps subsidy’, published on 3 Oct 2012, states that Taiwan government are planning on providing subsidy for LED lamps. Subsidies represent payments to producers by the government which reduce their variable costs of production and encourages them to expand their output. It involves a direct payment by the government to a producer to make the price paid by consumer less than it should be. Subsidies are often used by government to influence production and the prices of commodities in an economy. Government only provide the finance that is needed to produce a good or services. It is important to note that it does not necessarily mean that government has to produce the particular product. Governments may intervene in markets in order to try to restore economic efficiency. If markets are seen to be failing, for the sorts of reasons indicated earlier, then the government may try to move the market to a more efficient position through the use of various policies. Both productive and allocative efficiency could be improved through the introduction of appropriate government policies which in this case, is subsidies. Subsides are usually provided when the government are convinced that the goods and services will bring benefit to the consumer. On other words, subsidies are paid for goods that give positive externalities. The graph below shows how subsidies move the market demand and supply curve:

                     Based on the graph above, subsidies will increase the supply thus, shift the firm’s supply curve to the right. This happened because the cost of production of LED lamps is reduced because of the government subsidies provided. The equilibrium point without government intervention is at the green point where D₁ = S_1. Equilibrium price falls from P₂ to P₁ and quantity supply increase from Q₁ to Q_2. If we apply this theory to the real situation in Taiwan, with no subsidy, the price of the LED lamp is at P₁ with the quantity supplied at Q_1. With a subsidy of NT$200 per LED lamp for five to ten lamps, the price will go down to P₂ along with Q₂ as the quantity supply. If the firm’s demand curve in more inelastic, it will result in a greater consumer’s gain from a subsidy. This is because, an inelastic demand curve does not give much response to the changes in price. On the other hand, when demand is perfectly inelastic, the consumer will gain all the subsidy because the market price will drop by the entire amount of subsidy. Besides that, a perfectly inelastic demand curve is not responsive at all to the changes in price. Indeed when the demand is relatively elastic, the price will affect more on the quantity bought and sold, therefore result on a small fall on the price. By contrast to inelastic and perfectly inelastic demand curve, elastic demand does give a great effect on the changes in price. This can be shown by the graph below :

                        In this case, Taiwan’s government are willing to provide a subsidy of NT$200 per LED lamp which usually cost NT$400-500. This means that the subsidy could have covered mostly half of the original price. This will boost up demand for LED lamp by half of the usual quantity demanded before the imposition of subsidy. Therefore, manufacturing firms who produce their own LED lamp will tend to increase production as soon as the news of an imposition of subsidy was released. Besides that, subsidies can affect consumer surplus. Consumer surplus is the excess of the benefit received from a good over the amount paid for it. The difference between what the consumer actually pays for a commodity and the maximum sum they would have been willing to pay is also referred to as consumer surplus. It is measured by the area below the demand curve, above the price line. As subsidy is introduced, the price of the LED lamp is reduced. For any good and services, though, there are always some people who are prepared to pay above the given price to obtain it. Therefore, as the price of LED lamp reduced, the difference between the amount of the consumer are willing to pay and the real price (after subsidy) is increased. Consequently, consumer surplus is increase. It can be shown by the graph below :

                                                                                                                             

According to the graph, the consumer surplus before subsidy is represented by area A. The area of A,B,C and D appears as the consumer surplus after subsidy was introduced. This proves that consumer surplus increase as subsidies are introduced.

                        There are several effects of the introduction of subsidies to the market which includes inefficient overproduction. The marginal social benefit matched the market price which has decline. On the other hand, marginal social cost has increased and exceeds marginal social benefit. This will result in a surplus. It is a waste to produce a good excessively. It could lead to misallocation of resources as the resources could be used to produce other goods and services which give a higher benefit. In addition, subsidies makes the poor people afford to buy the LED lamps. However, it gives advantages to people who already could afford to buy LED lamp before subsidy. They will enjoy the lower price in the market. Furthermore, subsidies could maintain or increase income (revenues) of producer as well as boost the real living standards of some groups of consumers, for example, lower income households.  As expected, there is considerable debate over which is the best method of government intervention when externalities are present in the market. Whether or not subsidies are a way to get rid of the market failure in economy, it depends on how effective is the amount distributed. Subsidies causes heavy reliance on the government, like Malaysia. Subsidies is probably good for a short term fix in overcoming market failure, but in the long run, not a good idea. Lifting the subsidies will cause social unrest due to their comfort in relying on the government to provide subsidies.Government subsidies inevitably carry an opportunity cost and in the long run there might be better ways of providing financial support to producers and employees in specific industries.

                                                                   
By Siti Nurdiana binti Kamalul Arifin                                                                                   

                        

Follow-up of  minimum wage hike gives disparate response

                According to the article, ‘Do US workers deserve minimum wage hike?’ published on September 29,2012 , there has been a rise of unemployment rate as minimum wages is increased. A minimum wage is a price floor that is applied to a labour market. Basically, at the equilibrium level, the quantity of labour supplied matches the quantity of labour demanded in the market. However, in this case, wages are not distributed according to the equilibrium price. Minimum wage is a type of government  intervention. When there is a government  intervention, there is a market failure. This means that market fail to deliver desirable economic or social outcome. Minimum wage occur when the wage rates are too low and couldn’t keep up with the rising prices of goods in the market. Therefore, labour union will turn to government  and demand for a higher wages. Labour union is an organisation that seek to represent labour in their place of work. The graph below shows the effect of minimum wage in the market :

                                                  

                                                                                               

                            At the equilibrium wage, the quantity of labour employed is L₀ with a wage rate of W_0. If a strong labour union can push the wage rate up to W₁, which is above the equilibrium, the numbers of labour that is offered a job by the employee is decreasing. It can be determined by the difference between L₂ and L_0. On the other hand, at this wage rate, the number of workers who are willing and able to work is L_1. As a result, there is a surplus between the demand of labour and the supply of labour. The surplus of labour will result in unemployment as mentioned earlier. There are a lot of negative effects from unemployment towards the government, economy and business. As for government, there will be a decrease in tax revenue. Since there are lesser people working, the amount of income tax collected by the government will also reduce. People who are unemployed will also tend to reduce spending. Consequently, the amount of tax on consumer spending will also reduce. There will be lesser demand for goods and services in the market. The standard of living of the person who is unemployed will also reduce. Furthermore, the external cost of unemployment includes increase in crime rates. This occur because people are desperate to get a source of income. Besides that, more young workers will tend to find work elsewhere as in overseas. This will eventually reduce the amount of national income. Minimum wage is a very serious and delicate issue to the employees as well as employers who react simultaneously to this issue. Employee will not hire young workers at the current minimum wage because they will have to pay a higher salary than before (equilibrium wage rate). So in the short term where everything is fixed, the employee will keep on employing a few workers. In the long run, everything could be varied and the minimum wages could be diminished and employee will start to employ more workers.

                            In this case, the wage floor will lead to an inefficient output. This is because, in the labour market, the quantity of worker employed is less than the efficient quantity which is the L₀ if we look at the graph above. The supply of labour marks the marginal social cost of labour to workers. Marginal social cost means the additional cost occur when  another worker is employed. Demand on the other hand measures the marginal social benefit from labour. Marginal social benefit is the additional benefit  gained when another worker is employed. The minimum wages also result in increase amount of people seeking for jobs. As the marginal social benefit outreach the marginal social benefit, there will be a deadweight loss. Deadweight loss is the loss of economic welfare due to the fact that potentially desirable production and consumption does not take place. Deadweight loss also does not have to do with the consumer surplus or producer surplus. The graph below shows how deadweight loss arise in the market. The grey area correspond to the deadweight loss. It gives the measure of the amount of deadweight loss due to the imposition of minimum wages.

                            However, minimum wages is unfair to the society. This is because only the people who are employed enjoy the benefit of the minimum wage. Those who are unemployed will have to suffer even more compared to when minimum wages was not introduced. Whether there should be a minimum wage is controversial and to top it of, the amount of state benefits being paid to low-income earners would be reduced with the introduction of a minimum wage. As a conclusion, there are pro and cons of the introduction of minimum wages as it gives benefit to one part of society who were employed or already be employed before the minimum wages was introduced  but it will also give a negative feedback to the other part of societies who are unemployed.  It is clear that those who had previously been paid below that rate will be receiving a higher salary compliance to the minimum wages. Certain countries such as Unites States of America (US)  produce a highly educated labour capital , however they were not given enough opportunities to grab because most of the firm concentrates on maximising profit by hiring low cost labour which is totally opposite from the law of minimum wages in order to minimise their cost. It is not the matter of graduates nowadays are being picky on finding a job. Unemployed young workers will not have the chance to gain experience and to be in line with those who have higher salary in the future. The effect of minimum wages on any set of workers will depend on the elasticities of substitution across different types of workers and the cross elasticity of demand across different type of goods.

By Siti Nurdiana binti Kamalul Arifin     

                           

                           

                           

Quantity Supplied and Demand and Effects of Substitution Goods.

          On the article it says " Lenovo PC ousts Hewlett-Packard (HP) as the worlds most top PC makers",i will be discussing on three economics concepts Quantity demanded, quantity supplied and effects of substitution products.Quantity demanded of a good or services is the amount that consumers plan to buy during a given time period at a particular price while quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price where by Substitution effect is when the price of a good rises other things remaining the same , its relative price and its opportunity cost rises. As it rises the incentive to economize on its use and switch to a substitute becomes stronger.

     This article talks about how Lenovo PC’s have sold more than Hewlett-Packard the research firms Gartner and IDC are discussing on the reasons for their market shares to being high and also why lenovo a chinese PC maker is now the worlds most top PC maker.

       Firstly,on the article Gartner said “Lenovo shipped 13.8 million units in the third quarter compared to HP’s 13.55 million units” whereby through shipping a large million unit than hewlett packard (HP) , Lenova were able to get a larger market share and also its because they also cut their price aggressively hence due to having a low price the demand of lenovo PC increased hence the quantity demanded for lenovo will increase while the demand for Hewlett packard PC decreased since many buyers demanded the one with a low price and as Andrew Milroy of Frost & Sullivan told BBC due to the momentum that Lenovo has had then it makes it inevitable for it to be the number one PC maker across all charts so due to that even if hewlett packard  had shipped more units the market share would not have been as large as Lenovo’s since buyers will buy if the product is of low price and also of good quality and that is what lenovo had that is why it had the bigger market share after shipping a 0.3 million units more than HP.On the change in the quantity  demand curve , since the quantity demanded for lenovo has increased due to decrease in price then the demand curve shifts rightward and for HP since the demand of the PC has decreased then the demand curve will shift leftward. 

      Another Economic concept from this article is quantity supplied ,BBC news article states that IDC another research firm has kept Hewlett-Packard at the top, though the difference is not as big as the first shipment was made, in this analysis we see that Hewlett-Packard is leading with a shipment of 13.9 million units and Lenovo has 13.8million units shipped where by here the difference in unit is 0.1 million units , however though the shipping of Hewlett-Packard was big the market share was 15.9% and Lenovo’s market share being 15.7% which the difference is 0.2% .The supply of Hewlett-Packard  was large but the market share was not that large compared to the market share that lenovo pc had since the prices on Hewlett-packard was not cut as the first third quarter lenovo had shipped , if the quantity supplied is high the sellers benefit from it but also if there is another related good which in this case it is Lenovo , buyers will tend to be with the low price hence the demand of Hewlett-Packard will decrease and also there will be a surplus of goods,since the price of lenovo has fallen then the quantity supplied decrease while of HP will increase since the price of the PCs are high.

     Lastly effects of substitute goods , on this article it is seen how the global PC shipment has fallen down for 8% during the quarter at the same period, the article says due to having tablet PCs like ipad or samsung galaxy the personal computers have been hurt since it has slowed the global economy of personal computers, when a better substitute is brought like this since it is much cheaper than the PCs, it is also much smaller and very portable to carry anywhere and it has everything that a normal PC has hence people tend to buy the tablets since it is much convenient and preferable,the demand of PCs will decrease since the price of the tablet is low but if the price of the tablet was high than the personal computers then the demand of PCs will increase and the demand of the tablets will fall.The article also state that they are struggling to find a product that may help turn around its fortune so as people will keep on buying PCs instead of tablets that is currently causing severe slump to the PC market. 

        Conclusively,From this article it has been seen how the quantity demand of a certain good or service can bring an effect to another relative good mostly because of the price fall and also how if the supply of a product is high then the market share is high when other factors remain constant, in this article the personal computers are facing a hard time due to coming of tablets which has more advantages compared to personal computers and also due to technology and globalization people tend to buy the latest products and try them out and do not like sticking with old technology.

By Jacqueline Terry

Subsidy For Sugar Reduced

According to the article “Sugar Subsidy Reduced” dated September 29, 2012 by The Star, the Government proposed to reduce sugar subsidy 20 sen per kilogramme to 34 sen as one of the move to create a healthier nation.

            Subsidies are payment made by the Government to a produce. Government subsidizing goods will affect the equilibrium in the market. When subsidies are given to the producers, the cost of production decreases; therefore, there will be an increase in supply and the market price will decrease. Lower price paid by the consumers increases the marginal cost of production and it leads to inefficient of overproducing

             

Referring to the graph above, the line D0 represents the demand curve of sugar and S0 represents the supply curve of sugar before it is subsidize. Equilibrium is achieved at E0, the equilibrium price represented by P0 and equilibrium quantity is represented by Q0. When government provides subsidy to sugar, the supply curve shifts to the right from S0to S1 and the new equilibrium achieved is at E1, a new equilibrium price at P1, which is lower than P0and the new equilibrium quantity increases fromQ0 to Q1.When subsidy is given, it reduces the cost of production of sugar. Suppliers are able to produce greater amount of sugar and this leads to lower market price and consumption of sugar increases. In the new equilibrium, marginal social cost (on the supply curve) exceeds the marginal social benefit (on the demand curve) and the subsidy results in an inefficient overproduction. At the quantity produced with subsidy, which is Q1, marginal social benefit is equals to marginal social benefit, in which it has fallen. Marginal social cost has increased and exceeds the market price and because marginal social costs is greater than marginal social benefit, the increased of production leads to inefficiency. Besides that, subsidies lower the market price of a good; hence subsidized producers sell their products in the global market. The increase in supply in the market will lower the market price; therefore, producers from other countries will lessen their production and receive smaller revenues.

            Not only providing subsidies will leads to inefficient overproduction, has it also aroused health issues such as diabetes. Sugar is an elastic demand product. When it is subsidized by the government, the price of sugar will become cheaper and according to the law of demand, when the price of a good decreases, the quantity demanded will increase. Consumers begin to consume more and lead to health conscious. Based on an article entitled “Sugar Subsidy Reduced for People’s Good” dated 2^nd October 2012 in the New Strait Times, The Deputy Minister of Domestic Trade, Cooperatives and Consumerism, Datuk Tan Lian Hoe mentioned that the reduction of sugar subsidy is not to burden the people but done for their own good because when the subsidy is reduced, the price will goes up. Consumers will consume less sugar as well as to practice a healthy lifestyle.

            However, when subsidy is removed,producers took the advantage to hike up the price of sugar. In order to prevent this from happening, the Government intervenes and imposed a government regulation that makes it illegal to charge consumers a price higher than a specified level known as price ceiling. When price ceiling is imposed, it has a powerful effect on the market because price ceiling attempts to prevent the price from regulating the quantities demanded and supplied. When price ceiling is applied into the sugar market, it creates a shortage in sugar supplied, search activity as well as a black market.

            At the equilibrium price of the sugar market, the quantity demanded is equals to the quantity supplied and there is no shortage or surplus of sugar. Anyhow, when a price ceiling is set below the equilibrium, the quantity demanded will be greater than the quantity supplied and a shortage of sugar occurs. As a result, the quantity of sugar available in the market is the quantity supplied by the suppliers and it must be allocated among the consumers. When the sugar supplied is limited, buyers have no choice but to search for alternatives and the time spent to look for it is called search activity. Search activity is costly because the opportunity cost such as the time spent to search for alternatives can be long and it could have been use in other productive ways. In addition, price ceiling also encourages illegal trading in a black market. Black market is an illegal market where the equilibrium price is higher than the price ceiling imposed. Suppliers desperately seek ways to increase the price of sugar because they are unwilling to supply sugar at a low price. The price at the black market depends on how strict the price ceiling is enforced on the sugar price. If the price ceiling enforced is loose, the price at the black market is irregular because buyers can buy from elsewhere. On the other hand, if the price ceiling imposed is strict, the black market price is equals to the maximum price that the buyers are willing to pay. This is because the buyers are desperate to purchase the sugar and it the quantities supplied is limited.  

The graph above shows the inefficiency of price ceiling. When a price ceiling is imposed in the sugar market, it results in an inefficient underproduction. The marginal social benefit of sugar exceeds the marginal social cost and a deadweight loss lessens the consumer surplus and producer surplus. The rent ceiling is enforced below the equilibrium price, P1 and the quantity of sugar supplied, Q1 is lesser than efficient quantity, Q0. A deadweight loss occurs because the quantity of sugar supplied is less than the quantity demanded and it also shrinks the consumer surplus and producer surplus. The potential loss from searching for a close substitute is borne by the consumers whereas the full loss from the price ceiling is the total of deadweight loss and the increased cost of search. 

In conclusion, both subsidy and price ceiling lead to inefficiency in the market. Subsidy causes overproduction whereas price ceiling leads to underproduction.

By Hoh May Yen

        
            

What Happens When Petrol RON97 price increases?

In the article “RON97 is now RM3 per litre, petrol dealers say”, dated 6th September 2012, The Star had reported that the price for premium petrol RON97 has gone up by 30 cents, which is from RM2.70 to RM3.00 per litre. According to Datuk Hasim Othman, the president of the Malaysian Petrol Dealer Association, the increment of petrol price is due to the increase of the world fuel price market. And what affects the market forces? Adam Smith’s “invisible hand” idea in the Wealth of Nations implied that the competitive markets that sends the resources to their highest value use affects the market forces. A market is any arrangement enables buyers and sellers to get information and to do business with each other and a market price is the price when equilibrium has reached.

Demand is something that we want, can afford it, and plan to buy it. The law of demand states that when other things remain the same (ceteris paribus), the higher the price of a good, the smaller the quantity of a good demanded; and when the price of good decreases, the quantity demanded will increase. In this situation, when the price for the premium petrol, which is the RON97 increases, the quantity demanded for it  will automatically decrease because of the law of demand.

The graph above illustrates the quantity demanded when the price of a good changes. For instance, the price of good is at P1, the quantity demanded is at Q1. When the price increase from P1 to P2, quantity demanded decreases from Q1 to Q2. This is because of the law of demand. This same goes to the increase of Petrol RON97 price. When the price increase from RM2.70 to RM3.00, the quantity demanded dropped just like the above graph illustrates, which is from Q1 to Q2 because of consumer behavior.

             

The decrease in quantity demanded due to the increase of price is because of the substitution effect. Substitution effect is when the price of a good rises, the demand for substitute goods will increase. The graph above shows that when the price of petrol RON97 increases the quantity demanded decreases because consumers seek alternatives to substitute petrol RON97 and therefore, the quantity demanded decreases from Q1 to Q2. This leads the consumers to decrease their usage in petrol RON97 and increase the demand for petrol RON95.

   

Besides that, income effect also affects the decrease in quantity demanded when the price of a good increases. When the price of goods increases relative to income, people cannot afford to purchase all the things that they bought previously and hence, the quantity demanded decreases. The income of the consumer still remains the same although the price of petrol RON97 increases. The purchasing power of the consumer becomes weaker and they could no longer afford to buy the same amount. Therefore, consumers substitute petrol RON97 with the cheaper RON95 and able to consume more of it.

Petrol RON95 is the substitute for RON97. When the price of petrol RON97 increases, the quantity demanded decreases. This leads to an increase in demand for RON95 because it is a close substitute to RON97. The graph below is an example of demand for petrol RON95 when the price for RON97 increases.

When the price of RON97 hikes, the quantity demanded for RON97 will decrease. This leads to consumers change to consuming RON95 and therefore, the demand for RON95 increases. This leads to the demand curve for RON95 shifts to the right from D0 to D1 and the demand rises from Q1 to Q2, although the price for RON95 remains unchanged at P1.

We know that according to the law of demand, when other things remain the same, the price of a good rises, the quantity demanded will fall and vice versa but does the price increase by a large amount and the quantity demanded falls by a little? It depends on the responsiveness of the quantity demanded to a change in price or the elasticity of demand. Price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences remain constant.

For instance, the graph above depicts that when the price of petrol RON97 increases, which is fromP1 to P2, the quantity demanded drops at a large amount from Q1 to Q2. This is because petrol RON97 is elastic demand. Elastic demand is when the percentage of changes in price is lesser than the percentage of changes in the quantity demanded. Petrol RON97 is an elastic demand because it has a close substitute. The closer the substitute, the more elastic is the demand for it. When the price increases, consumers will find an alternative to substitute it and it can be easily substituted because RON95 is available and cheaper.

         However, petrol RON95 is an inelastic demand good because it has no close substitute besides RON97, which is far more expensive than RON95. The graph below shows the inelastic demand for petrol RON95.

From the graph above, although the price of petrol RON95 increases at a large amount, which is from P1 to P2, the quantity demanded drops only slightly from Q1 to Q2. This is because petrol RON95 is an inelastic demand good. Inelastic demand is when the percentage of changes in price is exceeds the percentage of changes in the quantity demanded. Although the price of petrol RON95 hikes at a large amount, the quantity demanded diminish slightly. The faster the time that has elapsed since a price change, the more inelastic the demand is. Consumers have no choice but to accept the new price and continue to consume petrol RON95 because of the inelasticity of demand.

            Therefore, the demand for a certain goods is determined by consumer behaviour as well as the elasticity of demand. It is rational that when the price of good increases, the quantity demanded will decrease when other things remain unchanged. 

             

By Hoh May Yen