Electric car vs Petrol car

Based on Koo in Asia One, he states that an electric car in Brunei is more expensive than a petrol car. This topic is further discussed in his article ‘Cheap petrol price will block electric car’ on 2nd October 2012.

Koo claims in his article, in an interview with The Brunei Times, Hiroshi Masuoka, a senior expert with Mitsubishi Motors Product Strategy Office said that the introduction of electrical cars in Brunei Darussalam may be difficult due to the extremely low petrol price in the country. From the economic view, when an influence on buying plans other than the price of the good changes, there will be a change in demand for that particular good. Electric car is a substitute of petrol car in Brunei. A substitute is a good that can be used in place of another good; it is one of the main factors that affect the demand curve. When the price of a substitute of a good is high, the demand for that specific good is high; there is a positive relationship in between the two variables. As we apply the economic theory to the situation, we know that since the price of electric car is more expensive than a petrol car, the demand for petrol car will increase. Buyers are more willing to pay for good that is in a lower price. This can be proven using Law of demand; when other things remaining the same, the higher price of a good, the smaller is the quantity demanded; there is a negative relationship.

Diagram 1 shows the change in demand in petrol car in Brunei when the price of its substitute (electric car) is high. D1 illustrates the initial demand curve of petrol car, whereas D2 is the new demand curve. From the graph shown, we can see that when the price of petrol car remains the same, demand in petrol car increases as the price of its substitute (electric car) increases. The demand curve of petrol car shifts rightwards. This phenomenon occurs because when the price of substitute of a good is high, people will be more willing to pay for that good instead of its substitute. Now, we are able to see the reason why is petrol car a threat to electric car in Brunei.

Besides that, Koo also states that in Japan and the United States, where the cost of petrol was high, more people were turning towards electric cars in order to save money. He further explains that in Japan, gas was approximately US$2 (S$2.45) per litre at the pumps. The same economic theory applies here, as the cost of petrol in Japan and United States is high, cost of using petrol car becomes high; therefore, buyers become more willing to spend on its substitute, which is an electric car. This explains why demand for electric car is high in Japan and United States but low in Brunei.

In the article, Koo highlighted that the demand of electric car in Brunei is affected by the price of petrol car, whereas demand of petrol car in Japan and United States is affected by electric car. In this event, we know that electric car is a close substitute of petrol car in Brunei, and a petrol car is a close substitute of electric car in Japan and United States. The closer the substitutes for a good of service, the more elastic are the demand for the good or service. When a good has an elastic demand, percentage change in quantity demanded will be greater than the percentage change in price. This can be observed from Diagram 2.

Diagram 2 shows the demand curve of electric car and petrol car; it has an elastic demand because a significant percentage change in quantity demanded will occur when there is a small percentage change in the price of good. Elasticity is the measure of people’s responsiveness of the quantity demanded of a good when there is a change in its price, other things remaining the same. Therefore, we can say that electric car and petrol car are both elastic because when the price of its substitute changes, people’s responsiveness towards the good’s demanded is high.

Next, we will expect an increase of quantity supply in electric car in Brunei, and petrol car in Japan and United States. A change in supply is affected by the prices of related goods produced. Supply of good increases when the price of a substitute in production falls; it decreases when the price of substitute in production increases. Thus, supply of electric car in Brunei will increase whereas the supply of petrol car will fall. This happens because producers are more willing to allocate the same factors of production on a good which has a higher price. This is explained by the Law of Supply; when other things remaining the same, the higher the price of a good, the greater the quantity supplied, and vice versa; there is a positive relationship. Same phenomenon will occur in Japan and United States, where the quantity supply of petrol car will increase and quantity supply of electric car will decrease.

To conclude the situation, a shortage of petrol car will occur in Brunei; quantity supplied of petrol car will not meet the quantity demanded in the market. The same theory applies to Japan and United States, where electric car will have a shortage in the market. To solve the situation, price of petrol car in Brunei has to be increased to a certain price at which the quantity demanded will be equal to the quantity supplied, and market equilibrium is achieved. 

Diagram 3 shows the market equilibrium graph; P1 is the initial price of petrol car in Brunei whereas P2 is the increased price. Market equilibrium is achieved at the point where quantity demanded equals to quantity supplied.

In Japan and United States, price of electric car has to be raised to a price until quantity demanded will be equal to the quantity supplied, and market equilibrium is achieved.

Source from: http://motoring.asiaone.com/print/Motoring/News/Story/A1Story20121002-374978.html

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H&M Opening in Malaysia

According to Koh in Malaysia Insiders, she states that H&M, a Swedish fast fashion giant, has created a big impact in the fashion market since its opening on the 22nd of September. This is further discussed in her article, ‘Is H&M starting a revolution in Malaysia?’, on 1st of October 2012.

In Koh’s article, she points out that with unbelievably affordable prices of H&M, it is no surprise that even on a workday afternoon after more than a week of its opening, the place was packed to the seams. To prove the statement, we can apply an economic theory to the situation. According to the Law of demand, when other things remain the same, quantity demanded of good increases when price of good decreases, and vice versa. Therefore, when the price of good is low, quantity demanded of good will be great. This is the same when the price of H&M is small, quantity demanded of it will be large, as shown in Diagram 1.

Diagram 1 shows the graph of demand curve of H&M; it illustrates the concept of the Law of demand. Buyers are more willing to buy goods at low price. Hence, there is a negative relationship between price and quantity demanded.

Next, Koh states that cheap price in H&M will be a great challenge for the other fast fashion retailers in Malaysia, as there will be a new competition in the market now. This can be tested using the economic theory, factors that influence a change in demand. When there is an influence on buying plans other than the price of the good changes, there will be a change in demand for that particular good. Price of related goods is one of the six main factors that will affect a change in demand. In the article, Koh states that fast fashion retailers like ZARA, Mango, Cats Whiskers and Uniqlo are all related goods of H&M. They are a substitute in the eyes of consumers. A substitute is a good that can be used in place of another good; when the price of a substitute of a good is high, the demand for that specific good is high, and vice versa; there is a positive relationship in between the two variables. Similarly, since the price of H&M is cheap, the quantity demand in other retailers like ZARA, Mango, Cats Whiskers and Uniqlo will be small.  

Diagram 2 illustrates the concept of change in demand of a good. D1 shows the initial demand curve of other retailers, when other factors remain the same; D2 shows the change in demand of other retailers when its substitute, H&M is introduced. The demand curve shifts leftwards to show a decrease in quantity demand.

As we move on to the supply curve, we will expect a decrease in quantity supply of H&M goods. A change in supply is affected by the prices of related goods produced. When the price of a substitute in production falls, supply of good increases, and vice versa. Therefore, as the price of H&M goods is lower than its substitutes such as ZARA, Mango, Cats Whiskers and Uniqlo, the quantity supply of its goods will be small. This is because suppliers are more willing to allocate the same factors of production at a good with a higher price. This can be explained by the Law of Supply. According to the Law of supply, when other things remaining the same, the higher the price of a good, the greater the quantity supplied, and vice versa.

Diagram 3 shows the supply curve of H&M goods; it illustrates the concept Law of supply where sellers are more willing to sell at a higher price. There is a positive relationship between price and quantity supplied.

Furthermore, another effect of H&M goods in Malaysia will be the forming of new market equilibrium of other retailers’ goods. As the price of H&M goods lowers the quantity demand of ZARA, Mango, Cats Whiskers and Uniqlo, new market equilibrium will be achieved to meet quantity demanded and quantity supplied at a certain price. 

Diagram 4 shows the new market equilibrium of ZARA, Mango, Cats Whiskers and Uniqlo; where supply curve, S intersects with demand curve, D2. Market equilibrium happens when quantity demanded is equal to quantity supplied, at a given price. From the diagram shown, at the new market equilibrium, price of good is decreased and quantity demanded is lowered when there is a decrease in the change of demand. Buyers are more willing to buy goods of H&M.

In conclusion, we can say that goods at fast fashion retails have an elastic demand. This can be explained when there is a slight change in price of good, a significant change in quantity demanded will be seen. Elasticity of demand is a measure of people’s responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. Generally, inferior goods are inelastic whereas normal goods are elastic. Goods at fast fashion retailers are a type of normal goods; they have an elastic demand. Finally, fast fashion retailers should make adjustments in price carefully so the change in demand will not be too massive. 

Source from: http://www.themalaysianinsider.com/print/business/is-hm-starting-a-revolution-in-malaysia/

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BOOSTING OF PETROL PRICE

     

     According to Star Newspaper dated on 3 November 2010, which has written by Star's journalist reported that the price of premium petrol RON 97 has gone up by 30% in the news of “RON 97 price hike hits high-end users”. It was reported that price of premium petrol RON 97 has gone up by 30% from RM 2.70 to RM 3.00 per litre. 

      Petrol is extremely controversial product because without it, goods can't be delivered as a result of transportation problem and businesses will be badly affected. Crude oil is a product traded on the international market. Unscrupulous oil companies hoard the product in order to create a shortfall of supply thus increasing the price of crude oil and investors trade it to make a quick profit. Petrol is a direct product processed from crude oil and inevitably increases in price as a result of these actions. Hence, this will be passed down to consumers.

Essentially, when the price of petrol increases, the quantity supplied for the petrol would increase whilst other determinants remain constant (ceteris paribus). The price and the quantity supplied would have a positive relationship and this is why the supply curve is sloping upward from left to right. At this price, the supplier will supply more because they will earn bigger profit to cover their marginal cost of production in a way that they also can minimum their inputs in order to maximize their outputs. There will be a movement along of the supply curve because the amount that the supplier will supply has increase.

We assumed that the initial price and quantity supplied is at P1 and Q1. When the price of petrol increases, the supply curve will move upward from P1 to P2 and the quantity supplied for will increase from Qs1 to Qs2.

On the other hand, the quantity demanded will be influenced by the increasing price of petrol too. The quantity demanded will decrease whereas there will be a movement along the curve. This is because the consumer will change their buying behaviour.  It shows that law of demand has a negative relationship between the price of petrol and the quantity demanded for it. 

The initial price and initial quantity demanded is at P1 and Q1. When the price of petrol increases, the supply curve will move upward from P1 to P2 and the quantity supplied for will increase from Qd1 to Qd2.

Moreover, the price of petrol increase will affect the complement good. A complement good is a product that is typically used in conjunction with another product. For example, car is the complement with petrol. Hence, when the price of petrol increase the consumers were likely to cut back on travel and vacation, and eating out in restaurants and hold back spending.

Furthermore, the market equilibrium will change due to the changes in quantity demanded and quantity supplied. A market equilibrium is a whereby the quantity demanded is equal to the quantity supplied. Equilibrium in a market will exist when the plan of buyer and sellers deal at the same price and it occurs when at the intersection of the supply curve and demand curve  As discussed earlier, the quantity demanded will decrease and the quantity supplied will increase when the price of petrol increase. This situation will create a surplus which the suppliers of petrol willing to produce and supply more however, the buyers are not willing to buy. This is why the quantity supplied exceeds the quantity demanded. 

The market equilibrium price is Pe and Qe. Thus, when the price of petrol increases, the supply curve will move upward from Pe to P1 and the quantity supplied for petrol will increase from Qe to Q2. In contrast, when the price goes up, the quantity demanded will decrease as shown with Pe to P1. The surplus is formed. To overcome the surplus, the petrol producer or supplier should set a lower price in order to increase the quantity demanded and make the price of petrol fall to the equilibrium price. Some producers may choose to scale back their production. The current high petrol prices may be due in part to an increase in demand. Suppliers take the opportunity to increase the price to reduce surplus.

The responsiveness of the quantity demanded of the petrol due to changes in its price when all other determinants on buying plans remain unchanged can be measured by the elasticity. The price of elasticity of demand of petrol is inelastic because a higher price of petrol has less impact on the quantity demanded for petrol. For instance, a price increase of one percent of petrol will only affect less than one percent of the quantity demanded. Therefore, the total revenue will increase. However, a price cut will decrease the total revenue when the demand is inelastic. An increase in petrol price will not reduce much of the quantity demanded for petrol because it is a necessity rather than and also due to lack of substitute product. Hence, consumer will purchase even when price increase. 

Government should impose a price ceiling in order to protect the consumers. Price ceiling is a regulation set by the government that makes it illegal to charge a price lower than a specified level. A price ceiling is a maximum value that a supplier could sell the petrol. In other words, the producers are not allowed to set the price of petrol higher than the price ceiling. Producer and consumer surplus will shrink and dead weight loss will occur.

In conclusion, any increase in price of petrol will affect the economy as a whole, eg; higher logistics cost which will increase the price of goods sold. Consumers have to bear the burden of higher cost of goods, thus setting in inflation. With the price of petrol keeps increasing, consumers will have to change their lifestyle such as car-pooling and taking public transportation. They will also have to cut down unnecessary traveling and vacations. Most countries have to practice Government intervention to control price by subsidizing in order to curb inflation.

sources from:http://thestar.com.my/news/story.asp?file=/2010/11/3/nation/7348742&sec=nation

written by : Alicia Ooi Lei Har

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DRAMATIC RISES IN PRICE OF CHICKEN

       According to Star Online news about “Chicken prices shoot up ”dated on 8 May 2011, written by Ng Cheng Yee and Qishin Tariq , they reported that the price on chicken has increased. The price of chicken has gone up to as high as RM8.50 per kilo at some wet markets. The rising prices of chicken’s feed has caused this situation happened.

          Chicken meat is an essential food will give carbohydrate sources for Malaysian.  Due to this matter, the price of food will increase such as chicken rice, chicken satay, fried chicken and so on. Apart from that, consumer will demand more on the fish, pork duck and beef which are the substitute of chicken meat. Low income consumer will most probably reduce the consumption of chicken meat due to its price. However, chicken supplier will be happy to supply more chicken in order to earn more profit.  Surplus may exist because quantity supplied will exceed quantity demanded. In my opinion, the increase of price on chicken will definitely affect the demand and supply chain in Malaysian food market.

Essentially, when the price of chicken increase, the quantity demanded of chicken in Malaysia will decrease. In other words, a higher price will induce a reduction in quantity demanded for chicken. It has a negative relationship between price and quantity demanded. The buying behaviour will change because the consumers are not willing and not able to buy more chicken at the market price. This will cause the consumer to consume less chicken meat. Thus, there will be a movement along the demand curve and we assume that others determinants remain unchanged (ceteris paribus). A rising price of chicken will cause the demand curve move up because the price is increasing.

        We assume that the initial price is P1 and the initial quantity demanded is Q1. When the price of chicken increases, the demand curve will move upward from P1 to P2 and the quantity demanded for chicken will decrease from Q1 to Q2. The law of demand proved that when a price of good increases the quantity for the food will decrease. This is a movement along the curve.

On the other hand, the consumer will change their buying behaviour due to the income effect and substitution effect which that influence to law of demand. Consumers cannot afford to consume chicken as previously because of price increase and will therefore reduce consumption.  They will consume more chicken when the price reduces or when their income increases. Furthermore, the consumer would find a replacement to substitute chicken with other meats, such as fish, beef, pork or duck which is more affordable. When the price of the chicken increase, the quantity demanded of the substitute meats will increase. It has the positive relationship. Hence, the consumers would consume other meats because of this economic reason. Thus, the demand curve for chicken will decrease and there is a shift of demand curve. While, at the actual price, the quantity demanded of other meats will increase. This because of the substitute effect has mentioned earlier.

In contrast if the price of the chicken is expected to increase in the future so, the quantity supplied for the chicken will increase. Therefore, the supply curve will move upward. This is because the price of chicken has a positive relationship with the quantity supplied. The movement along the supply curve will exist. The producer is willing to supply more chicken if they can at least cover their marginal cost of production. This is why the supply curve is upward sloping from left to right.

At the initial price of P1 and Qd1, the S1 supply curve of chicken shifted leftward from S1 to S2. This shows that the supply is decreasing. The quantity will also decrease from Qs1 to Qs2. This is a shift of supply curve due to other determinants which is the increasing price of chicken feed.

In conclusion, price is an important factor which will inevitably affect the supply and demand of chicken. Any substantial increase in the price of chicken will result in consumers reducing consumption or consume substitute meats which are more affordable. The price increase is largely due to increase of price of chicken feed which directly increases the cost of the producers. Also, a shortage of supply exist due to disease which will indirectly cause price increase if the demand of chicken maintains. Nevertheless, price increase can be corrected when producers shift to cheaper chicken feed products in order to maintain efficiency or government intervention to bring down the price as chicken is a controlled item in Malaysia.

article excerpt : http://thestar.com.my/news/story.asp?file=/2011/5/8/nation/8642408&sec=nation       
written by : Alicia Ooi Lei Har   

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The Rise of Sugar Price

The article, “Malaysia’s sugar demand to increase 36% by 2020” written by Chong Jin Hun in The Edge Financial Daily, May 20 2011, stated that the demand for sugar in Malaysia is expected to increase from 1.4 million tonnes to 1.9 million tonnes in year 2020 due to the increasing population and economy growth.

After reading the article, I agreed to what Chong said regarding the sugar demand and its price. The author has listed the main factors that caused the sugar demand to increase was the increasing population and the economy growth. The increasing population will cause the demand of sugar to increase because when there are more people in the country, the food consumption of the country will increase. The rapid growth in sugar consumption comes with the equally fast growing food processing industry. For example, foods and beverage such as soft drink, ice-cream, and chocolates contains high sugar level. In the economics term, these goods are complementary goods. The more foods you produce, the more sugar you need; therefore, the sugar consumption in the country will increase. This caused the demand curve to shift right (from D to D1), as illustrated in Diagram 1.

Another factor that stated by the author was the positive economy growth. When the economy is doing well, the income of people will naturally increase as well. When the income increases while other things remain, people will have more purchasing power. Here, we must consider what type of goods we are referring to. In this case, we are referring to necessity goods which are goods that people consume in daily life no matter what the price is. When people have more purchasing power, they will buy more sugar or any foods that contain sugar than they previously brought. This will cause the sugar consumption to increase and so does the sugar demand.

Other than population and economy growth, I believe that consumer preference is also affecting the sugar demand.  The daily food consumption pattern of Malaysian adults which aged 18 to 59 years old consist of local kuih, sweetened condensed milk, chocolate-based drinks and cordial syrup. All these foods and beverages are relatively high sugar. In fact, 40% of the ingredients in sweetened condensed milk are sugar. Besides, 43% of Malaysian men and 28% of Malaysian women consumed condensed milk daily. This figures shows that, Malaysian people prefer to consume sugar based products which will eventually lead to increment of sugar demand.

The author stressed that the price of sugar will increase as the demand increase. This is because the price of raw commodity on the world market increase. When the global sugar demand increase, the suppliers are not willing to supply the amount of sugar demanded by consumer if the price remain constant. This can be explained using the market equilibrium. When the sugar demand increase (demand curve shift right, D to D₁) but suppliers are unwilling to produce, this will cause shortage in the sugar market (between Q₁ and Q₃). In order to curd this shortage, buyers must be willing and able to pay suppliers a higher price so that the suppliers can produce more (from P₁ to P₂). However, when the price increased, the sugar demand will decrease slightly because people will buy less. Thus, form a new equilibrium price where both buyers and suppliers are willing and able to buy and produce, which is the point (Q_2, P₂), as illustrated in Diagram 2.  

I think that the increment of sugar price can affect consumer positively and negatively. It is positive effect because as the price increase, the demand decrease and so do the sugar consumption. Consuming too much sugar is bad for health. The prevalence of overweight and obesity in Malaysia has been upward trend, even children have been reported to be obese for the past few years. For example, US government imposed restriction on sugar price to US consumer. This allows US people to buy sugar at a cheaper price and caused them to consume large amount of sugar per year which total up to 150 pound in average. They not only have to suffer from health burden but also the financial burden that used for medical treatment. In contrast, the negative effect of sugar increment is that consumer expenditure will increase. This is because consumer will has to spend more money in buying sugar as well as its complementary goods such as sweetened condensed milk and soft drinks.

            In conclusion, the increment of sugar demand can be caused by population, income and consumer preference on food consumption. The change in sugar price is due to the market force that pushes the price higher to meet the equilibrium price and equilibrium quantity that can satisfy both buyers and sellers. In addition, the increment of sugar price assists people in controlling their sugar consumption by lowering their sugar intake. However, high sugar price gives consumer burdens by increasing their expenditure in term of food expenditure.

Source from :  http://www.theedgemalaysia.com/in-the-financial-daily/186872-malaysias-sugar-demand-to-increase-36-by-2020.html
Written by: Chong Li Min

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What Happen When Gasoline Price Increase?

Based on the article edited by Wallace in Thomson Reuter, MasterCard’s SpendingPulse reported on 7 August 2012, U.S. gasoline demand fall as the price rise due to oil leakage of more than 1000 barrels of oil at Midwest's largest refineries and a crude oil artery in Wisconsin. However, the yearly gasoline consumption is still lower than previous year.

In my opinion, the shortage of gasoline demand will cause the price to increase because when there is a limited supply of gasoline that the producer or patrol station can offer to consumer, consumer will be desperate for gasoline. However, they are unable to force the producer to produce more than they plan. Therefore, some producer will take advantage of the situation by not increasing their output unless the price increases. Here, a strong market force enters to increase the price (from P₁ to P₂) while reducing the shortage (from Q₂ to Q₃) because it decreases the quantity demanded and increases the quantity supplied. This is because when the gasoline price increases, people tend to buy or use less gasoline; however, producers are more than willing to produce gasoline when the price is high. Hence, the market force will pushes the price higher until it reach a point where both buyers and producers are willing and able to buy and produce the amount of gasoline demanded, which is also called the equilibrium price [point (Q₂, P₂)], as showed in Diagram 1

Furthermore, I believe that gasoline is a relatively inelastic good. This is because consumers only show slight response towards the change in price of gasoline. This means that the percentage change in the quantity demanded is less than the percentage change in price of gasoline. So, the consumers are less price sensitive toward the change of gasoline price. Gasoline is goods that are required by everyone in every day in order for them to reach their respective destination. However, consumers are not totally unaffected at all by the gasoline price. This is to say, consumers might want to change their way of using the gasoline; in term of using it more wisely when the price rises. Therefore, consumers who are more sensitive toward the gasoline price increment may change the way they reach their destination.

Some people may decide to change their car into a more fuel-efficient car such as hybrid car while others may decide to travel less by car, either by using alternative transport mode or traveling less in general.  When the gasoline price increases, people might want to reduce the amount of driving and increase the fuel efficiency of driving such as changing their driving behaviour by slower acceleration or reduce vehicle speed so that the vehicle will not take up too much gasoline while driving. Some people might also decide to use alternative public transport such as bus and LRT instead of personal transport so that they do not have to spend too much on gasoline cost. Other than that, some people might even want to change their car permanently into a fuel efficient vehicle which is the hybrid car. Hybrid cars are created in a concept where it is powered by battery power engine in order to reduce the carbon dioxide release to the atmosphere as less gasoline burned. Furthermore, hybrid car user can minimize the gasoline consumption if they travel without exist the power limit by the battery.

However, of all the factors that might affect the elasticity of gasoline demand, income has the highest probability that will affect consumer’s price sensitivity towards the change of gasoline price. High income people tend to be less price sensitive than low income people. This is because when people have higher income, their purchasing power increase, they will be less concern of whether the gasoline price increases or not as it will not affect them. For them, gasoline may be necessity goods. So, the income elasticity of gasoline demand is inelastic as income increase. On the other hand, for low income people, gasoline may be a luxury good. When the price of gasoline increase while other influences remain unchanged, people will feel poorer, they will not be able to purchase the same amount of gasoline as they previously do. They will be more price sensitive and reduce the use of gasoline or change their driving behaviour to reduce the gasoline cost. Therefore, income elasticity of gasoline demand is elastic for lower income people.

The increment of gasoline price benefits the environment as the quantity demanded of gasoline (gasoline consumption) decreases. When gasoline price increase, the quantity demand for its complement goods which is convenient car will decrease. This is because people will prefer to use public transports or even change their car into a fuel efficient car in order to curb the constant increment of gasoline price. This in turn safe guards the environment from air pollution.

In conclusion, the increment of gasoline price is due to shortage, where quantity demanded is less than quantity supplied. This caused the market forces to push the price higher to reach the market equilibrium. Though, gasoline may be relatively inelastic, but consumers may still make slight changes in term of the ways they of use gasoline, such as changing personal car into a fuel efficient car, use public transport and change their driving behaviour to reduce gasoline consumption. It is also identified that level of income has huge impact on income elasticity of gasoline demand, where gasoline is income inelastic for high income people and income elastic for low income people.
Source from : http://www.reuters.com/article/2012/08/07/us-usa-gasoline-demand-idUSBRE87616320120807
Written by : Chong Li Min

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