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