The Climbing Sugar's Price.

Based on The Star Online (May 10, 2011), the price of coarse and fine sugar will be increased by 20sen to RM2.30 per kilo today, said Domestic Trade, Cooperatives and Consumerism Ministry secretary-general Datuk Mohd Zain Mohd Dom. He said that the increase was to reduce government sugar subsidy by RM116.6mil from RM400mil per year. The latest increase is the first this year (2011) after last year’s (2010) hikes of 20sen in January, 25sen in July and 20sen in December. He also said that based on economic impact studies of past sugar price increases, the prices of items that use sugar as a raw material including food and beverages should not go up by more than 5sen.

The 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 on buying plans remain the same. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.

A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.

In this situation, the elasticity of demand of sugar is said to be inelastic because only modest changes can be seen in the quantity demanded. Sugar is more insensitive to price changes as consumers would continue buying it despite price increases. Sugar has become the thing that is more of a necessity in consumers’ daily life because normal people will consume sugar everyday either in their food or in their drinks.

The elasticity of the demand curve can be calculated by using a simple equation which is percentage change in quantity demanded divided by percentage change in price. If the elasticity is greater than one, the demand curve is considered to be elastic. If the elasticity is equal to one, the demand curve is considered as unit elastic. Last but not least, if the elasticity is less than one, the demand curve is said to be inelastic. As mentioned previously, the demand curve is a negative slope. Inelastic demand of sugar is represented with a much more upright curve as quantity changes little with an increase in the price.

There are three main factors that influence the elasticity of demand. They are the closeness of substitutes, the proportion of income spent on the good and the time elapsed since a price change. The closeness of substitute is the probably the most important factor influencing the elasticity of a good or service. In general, the closer the substitutes of a good or service, the more elastic are the demand for the good or service. We would say that sugar is an inelastic product because of its lack of substitutes. People who drink coffee or tea every morning normally will add some sugar into their drinks. People couldn’t replace the sugar by adding salt into their drinks as salt is not the substitutes of sugar. So, sugar is an inelastic product as most people are not willing to give up sugar no matter how the price changes. In short, necessities such as food or housing have poor substitutes and are crucial for our well-being. So, necessities generally have inelastic demand. Luxuries such as exotic vacations have many substitutes, one of which is not buying it. So, luxuries generally have elastic demand.

Next, the proportion of income spent on the good that affecting demand elasticity refers to other things remaining the same, the greater the proportion of income spent on a good, the more elastic is the demand for it. For instance, compare a consumer’s elasticity of demand for sugar and housing. When the price of sugar increases, he or she will consume as much as before. But if the price of landed house increases, he or she will look for apartment. The demand for housing is not as inelastic as the demand for sugar. It is because housing takes a large proportion of individual’s budget but sugar takes only a tiny portion. Consumers don’t like either price increases, but they hardly notice the higher price of sugar while the higher price of housing put their budget under severe strain.

Time elapsed since price change is the third influential factor. The longer the time that has elapsed since a price change, the more elastic is the demand. The price of sugar increases since January 2010 and continues until the latest yet consumers are continuing buying sugar. This means that sugar is inelastic because the changes in price do not have a significant influence on the quantity demanded.