Is the position of RON97 becoming unstable?

According to The Star Online dated 7^th September 2012, the price for premium petrol RON97 has gone up by 30sen to RM3 a litre. The law of demand states that when other things remaining the same, the higher the price of a good, the smaller is the quantity demanded; and the lower the price of a good, the larger is the quantity demanded. In other words, the higher the price of a good, the lesser the people will demand that good. In this case, the quantity demanded of RON97 will reduce as the price has increased by 30sen. The amount of RON97 that consumers demand at a higher price is less because as the price of RON97 goes up, so does the opportunity cost of buying RON97. As a result, people will naturally avoid buying RON97 that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope. 

A and B are the points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). Thus, at point A, the quantity demanded will be Q1 and the price is RM3.00 while at point B, the quantity demanded is Q2 and the price is RM2.70. The chart shows that when the price of RON97 increases from RM2.70 to RM3.00, the quantity demanded of RON97 decreases from Q2 to Q1. It indicates that the higher the price of RON97, the lower the quantity demanded; and the lower the price of RON97, the higher the quantity demanded. Therefore, the demand curve illustrates the negative relationship between price and quantity demanded.

       A higher price of a good reduces the quantity demanded of that good for two reasons, which is substitution effect and income effect. For substitution effect, when the price of a good rises, other things remaining the same, and its relative price - its opportunity cost - rises. Although each good is unique, it has substitutes – other goods that can be used in its place. As the opportunity cost of a good rises, the incentive to economize on its use and switch to a substitute becomes stronger. For income effect, when a price rises, other things remaining the same, the price rises relative to income. Faced with a higher price and an unchanged income, people cannot afford to buy all the things they previously bought. They must decrease the quantities demanded of at least some goods and services. Normally, the good whose price has increased will be one of the goods that people buy less of.

       
       In this case, a litre of RON97 initially sells for RM2.70 and then the price has increased by 30sen to RM3.00. People now buy less RON97 and more RON95; the substitution effect. Faced with a tighter budget, people buy even fewer RON97; the income effect. The quantity of RON97 demanded decreases for these two reasons.

      Like the law of demand, the law of supply demonstrates that when other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of good, the smaller is the quantity supplied. But unlike the law of demand, the supply relationship shows an upward slope. It means that the higher the price, the higher the quantity supplied. In this situation, the quantity supplied of RON97 will increase as the price of RON97 has increased by 30sen. Producers supply more at a higher price because selling a quantity of RON97 at higher price increases revenue.

A and B are the points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point A, the quantity supplied will be Q1 and the price is RM2.70 while at point B, the quantity supplied is Q2 and the price is RM3.00. The chart shows that when the price of RON97 increases from RM2.70 to RM3.00, the quantity supplied also increased from Q1 to Q2. It indicates that the higher the price of RON97, the higher the quantity supplied; and the lower the price of RON97, the lower the quantity supplied. Hence, the supply curve demonstrates the positive relationship between price and quantity supplied.

A higher price increases the quantity supplied because marginal cost increases. As the quantity produced of any good increases, the marginal cost of producing the good increases. The marginal cost is the opportunity cost of producing one more unit of it. It is never worth producing a good if the price received for the good does not at least cover the marginal cost of producing it. When the price o f a good rises, other things remaining the same, producers are willing to incur a higher marginal cost, so they increase production. The higher price brings forth an increase in the quantity supplied. Thus, with an increase in the price of RON97, other things remaining the same, the quantity supplied increases.

In conclusion, a market is any arrangement that enables buyers and sellers to get information and do business with each other. Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period and at a particular price. The relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the firm can offer. The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Hence, price is a reflection of supply and demand when the allocation of resources is in the most efficient way possible.