The Change In China's Economy

Based on the Jakarta Post article on the 8^th October 2012, the author, Ha Jiming has stated that ever since the 1970s, China has been renowned as the “World Factory” due to its low labor cost and superior manufacturing capabilities. This can be seen on a lot of products if you check the manufacturing label and see the words “made in China”. This production section of China is the main source of economical profit for China as at the end of year 2011, the manufacturing sector accounted for over 32% of China’s GDP and China also possessed the largest share of global trade at 10.6% which is 2.4% higher then US’ 8.2% which is according to the world bank.

As we all know, China has been a mass producer of goods for international trades. Thus China had been the “World Factory” for several decades due to its low labor cost while being superior in terms of production output. This clearly shows that China possesses both Comparative Advantage and Absolute Advantage over other countries when it comes to economical growth. Each of these advantages that China has over other countries is present due to the fact that China’s labor cost is low. This means that they perform the activity of producing goods with a lower opportunity cost compared to anyone else. In addition to this, China also has the Absolute Advantage over other countries due to the fact that they are able to produce a higher level of output compared to others. However, a country that has such an advantage over others can not retain both advantages at once due to the massive economical growth. Over the course of 30 years, China’s advantages in production became unsustainable due to its increasing labor costs and unstable number of laborers. Due to the change that laborers have had an increase in minimum wage by 19.7% China has lost its Comparative Advantage over other countries. The opportunity cost to perform a certain activity within China which involved laborers have increased dramatically thus losing the advantage.

However, due to the increase in the labor wage, the citizens of China have begun spending more in their daily lives. Being able to now afford luxury goods and high end products such as perfumes, branded goods, and clothing that costs a fortune, citizens of China now expend their income on such materialistic goods.  Not only has that, the citizens of China also begun to spend more frequently on services such as telecommunication, tourism and travel, education, healthcare and even insurance. For the sudden increase in expenditure on these there will be a need to upgrade the services and goods consumption which will in turn provide room for development for other sectors.

In addition to this, due to all the excess spending on goods, the sudden surge of demand has greatly indented the supply of the country. Chinese citizens have already emerged as major customers of worldwide branded goods which have had an increase of 20% of total purchases and this value is expected to rise. Chinese citizens now even prefer to eat meat rather then the usual rice grains. Also, in order to produce 1 kilogram of cow meat, 14 kilograms of rice grains would have to be used to feed it which would require the sector which produces the rice grains to supply more rice grains to the farmers who tend to cows. Moreover, due to the sudden demand in meat which in turns the sudden skyrocketing demand of grain, the supply of grain would not be sufficient enough at the moment this the prices of rice grains have increased dramatically.

This shows how the concept of supply and demand can be seen. In a given marketing situation, if the supply of a product is higher than the demand of the product then the price of the product would have to be lowered. This also applies in the other way as in if the demand of a product is higher than the supply of that given product then the price of that particular product would be high. If I were to sell pizzas for a school carnival I would first require a supply of pizzas. Let’s say I had only 20 slices of pizzas for sale but 50 of my classmates and friends wanted to buy it for lunch I would have to increase the prices of my pizza in order to curb the shortage of my pizzas. That being said my friends definitely would not be happy with me but they will still buy it from me due to hunger. This concept works the other way around as well. If I were to sell 20 pizza slices but only 5 of my friends wanted to buy it because they eat it everyday and I overcharge, I will have to reduce the prices of my pizzas to prevent a surplus of supply. My friends in turn would take note of the opportunity and buy the pizzas for a lower price. Sadly I am unable to use friendship as an excuse to overcharge. An example of graph is shown below.

Despite the concept of supply and demand, there is also a case where by prices on certain items and goods do not affect the demand for it. This concept is called price elasticity. Price elasticity is defined as 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. If the demand for a good is inelastic, a large increase or decrease in the price of that good would not change the quantity demanded of that good. You can take note of it that price elasticity applies to goods that are needed such as food and living space. If I sold a pencil for $2.00 each as the normal market price and decide to sell it at $2.10 instead people would not buy the good from me since they can buy it elsewhere. This means that the demand for my pencil is elastic. However, if I were a major supplier of a much needed good such as sugar and salt and the usual price for it is $5.00 for 1kg and I decide to overcharge for my own profit and change it to $10.00 per kg instead, the demand for my salt or sugar would drop only by a little since restaurants and other sectors of businesses need both salt and sugar to sell food. Hence, the demand for my salt and sugar is inelastic.

By Daniel Ong

Implementation of Barter Trade

Based on one of the Reuters article on 20^th February 2012, the author, John Stonestreet has stated that the trend of Barter Trading has come back to the economy of Spain during the crisis of the recession in Madrid which is headed by a retail store owner named Emanuela Scena. In this current age is had been known that the economy of the world has become rather unstable for most countries as when more companies are founded, the amount of resources required by those companies will cause the overall amount of resources in the world to drop.

Spain has undergone an economical crisis. Spain at that moment was undergoing a recession which greatly affected their economy. A recession is a massive drop in the economic activity spread throughout the economy which often lasts for several months. This is normally visibly seen in real GDP, real income, employment, industrial productions and wholesale retail sales. This recession in Spain caused many people to be unemployed and companies faced issues with releasing people from their workforce to avoid bankruptcy. Spain before the recession had already been experiencing a high rate of unemployment which then increased further when the recession had occurred.

However even with the recession, Emanuela Scena had been unaffected by the negativity of the recession because the store that she runs is operated by a barter system. Spain had previously been involved in barter trade several decades ago but the trend had died down. Despite this, the recession had caused the idea of barter trading to be re-adopted by the society. This barter system is a system in which items are traded for items and agreed upon by both parties of the trade. Recession does not affect this kind of trade because a recession only affects transactions which involve using money. As an example, if a bag of rice costs $5.00 before a recession, it could increase to $7.50 after a recession. However  if in a barter trade a bag of rice is traded for a bag of sugar before a recession, after the recession the barter trade would not be affected because the trade does not involve any money. I for one would not want to spend an extra $2.50 just to eat so I as well would participate in this barter system with Emenuela.

 Initially, the others people of Spain did not like the idea of trading for second hand goods but after a short period of time they understood the necessity of the trade. This in itself has shown the presence of Opportunity Cost among the consumers of Spain.  The idea of opportunity cost is to attain more of an item that is desired while giving up less of another depending on the wants and needs of a person while remaining inside the range of the budget.  When I went to school as a student, I would normally have several choices of food to pick from during recess. Food like fried rice, noodles, burger or if all do not appeal to my senses I would stick to the traditional “nasi lemak” that is sold relatively cheap in my cafeteria in school. Selecting between the first choice and an alternate choice is a sign of opportunity cost where one product or good is given up to make way for another as both cannot be chose at once. This same decision making is shown by the people of Spain when they at first decided to not be involved in the barter trade but later considered it a better alternative compared to their conventional method of purchasing goods.

Moreover, Production Possibility Frontier can also be seen in the article above. The people of Spain are experiencing a recession which means that the prices of all goods in the market have risen to considerable heights. However, instead of refusing to go to the supermarket in order to purchase items they have decided to involve themselves in trading their own items for points in Emanuela Scena’s shop to be later exchanged for other items in the shop. Consumers of Spain have decided that it is more efficient for them to trade goods and pay a small sum of money in her shop rather than to go to a proper shopping complex and purchase an item or equipment there for a much higher price. The efficiency of PPF can be defined as achieved when we cannot produce more of one good without producing less of another. In short, the people of Spain had decided to give up purchasing first hand but expensive goods for second hand goods that are used in a barter trade. I for one can be said as an inefficient student when efficiency is taken into consideration. As a student I have had exams to attend to while I was in school. Though these exams were not particularly hard it is still advisable to study at least before the exams. However, even if I was given a 3 hours gap between exams to study I would spend at most an hour on the books. After that initial one hour I would join my friends to play around with poker cards in class or I would just end up sleeping. This is an example of inefficiency when you do not make the most of the resources that have been given. Which in this case is study time.

By Daniel Ong

Subsidy of Petrol

According to the news from The Star, "The Government will continue allocated subsidy for RON95 petrol despite fluctuation in global fuel prices, said Domestic Trade, Cooperatives and Consumerism Minister Datuk Seri Ismail Sabri Yaakob." 

The three types of petrol in Malaysia are RON95, RON97 and diesel. As the price of petrol is unstable, Malaysians always have to burden the “risk” of the changeable price on petrol. The government will continue to subsidize for RON95 petrol and the price of RON95 petrol will remain constant at RM1.90 per litre even if the global fuel prices were to increase.

The Malaysian government has cap the petrol price of RON95 at RM1.90, any excess amount will be absorb by the government. Since RON95 is a controlled product, then the sellers are not allowed to sell price above RM1.90. Petrol is price cap but the excess prices are subsidized by the government. Hence, the suppliers will not lose out. Since the suppliers will not lose out, the supplies are encouraged to maximize the sales since it is a supply-side subsidy. Supply-side subsidy means that the government allocated the subsidy for the suppliers instead of the consumers.

Petrol is an inelastic good, as the price will not have much effect to the quantity demanded. Percentage change in price is less than the percentage change in quantity demanded.  The percentage decrease in the quantity demanded is less than the percentage increase in price. Consumer will still demand for petrol as petrol is a necessity to people who owns a car, but people may not use more petrol. Hence the price elasticity of demand is less than one but greater than zero.

The government will allocate a certain amount of money from taxes to reduce the price or maintain the price for the goods and services at equilibrium. When government subsidizes more on petrol, the quantity demanded of petrol will not be affected. However, this affects the price of the other commodity, goods, services and taxes. The disposable income will be reduced. With the high tax rate, disposable income will be reduced, one will not be able to buy as much as desire. For examples, the car taxes will increase. Once the taxes increase, the price of car will also increase. Thus people will not be able to afford to buy a car with a high price and the quantity demanded will decrease. Hence, the demand curve of the car will shift to the left. In additional, petrol subsidy increase but it does not mean that the quantity demanded on petrol will remain the same. It will still have some slightly changes on it.

As the quantity demanded of car decreased, it will affect the change of demand of the petrol. We measure the influence of a change in the price of a substitute or complement by using the concept of the cross elasticity of demand. The cross elasticity of demand can be positive or negative. It is positive for a substitute and it is negative for a complement. An increase or decrease of price of complement goods will causes the change of the demand curve of a certain good, either shift to the right or to the left. Cars and petrol are complements goods. In this case, it is negative and it will cause the demand of petrol decrease and then the demand curve will shift to the left.

When the income of an individual’s increases, the quantity of demand will also increase. The quantity demanded for petrol will decrease when the individual’s income falls. The government gives subsidy on petrol; it will affect the price of other products and services and also the income of people. As the price of goods rise and the income decrease, the quantity demanded on goods will then reduce too. This is because people could not afford to buy products and services which is in a higher price than before; their power of buying thus will decrease. Back to the topic, the quantity demanded of petrol will decrease due to the reduction of individual’s income. There will be a movement along the demand curve. This also shows that petrol is a normal good to the people as the change of the quantity demanded is greater than the change of income.

We already know that the relationship between the cars and petrol are complement. The change of percentage of the price is greater than the change of percentage in quantity demanded. When there is an increase on price of petrol, the quantity demanded for car will decrease. Another way to say that, the raising in price of cars will affect the quantity demanded for petrol decrease. The quantity demanded will move along the same curve. Other than that, the demand of petrol is greatly influenced by the substitution effect. When the price of petrol increase, people will try to look for an alternative source of energy to power their car. As an example, more and more people are changing their cars to hybrid cars that use a mix of two different energies. The increasing number of the hybrid cars in Malaysia indicates that the demand of petrol is starting to decrease. This has a huge impact on the petrol industry in Malaysia.

Since people cannot afford to buy a car, they will choose to take public transport. Public transportation then become as a substitute of cars. When the price of car increases, the quantity demanded of public transport will also increases. This is called crossed elastically demanded. Hence the demand on public transport will increase and the demand curve will shift rightward to a new demand curve. The cross elasticity of demand is positive.

In Malaysia, as there is a high number of poverty, it is essential that the government subsidies staple goods so that the poor is able to live more comfortably.

*Random fact: Oil (petroleum) was formed more that 300 million years ago.

By Wong Min Yiang

Currency - Japan

Based on an online article from The Star on 17th February 2012, it has stated that the Japan's economy is set for return to growth. Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. When markets fail to allocate resources efficiently, there has been market failure. During a market downturn, government can actually intervene to improve the market outcomes to promote efficiency and equity. Government intervention is actions on the part of government that affect economic activity, resource allocation and especially the voluntary decisions made through normal market exchanges. Government, by its very nature, is designed to intervene in voluntary market activity. Some of the more common types of government intervention include assorted regulations, taxes, price controls, and control over government spending. The general justification for government intervention is that voluntary decisions by consumers and businesses fail to achieve efficiency or other goals deemed important by society.

A poll by Reuters showed on Feb 17 that Japan will recover slowly in 2012 after March 2011 earthquake and tsunami. Japan, the world third largest economy according to CNN, set for economy to growth by spending money to its currency market, rebuilding disasters areas, and so on. Japan government plans to spend 18 trillion yen which is around $230 billion on rebuilding the devastated areas of the northeast coast after March disaster and the Fukushima nuclear crisis. With the helped of domestic demand and reconstruction investment, Japan’s economy will archive 1 percent growth starting on April in fiscal 2012/13.

Japan government steps into the currency market in order to save yen since it has been weakened to more than a three months low against the dollar. They have spent a record of 8 trillion yen in unilateral intervention on Oct 31 and another 1 trillion yen in early on November into the currency market. The policymakers afraid the manufacturers move their production site to oversea because of yen’s week strength squeezes exporters’ profits and cause a decline in the competitiveness in Japanese goods. While Japan is reconstructing the tsunami zone, if the yen continues to surge, it could negatively affect Japan’s economy and financial stability. As such, Government intervention of Japan is involved in the currency market. The falling U.S. dollar has hit the Japan’s economy hardly which is still struggling after the March 11 earthquake, tsunami and nuclear crisis. The investors see the currency of Japanese yen as a safe haven because uncertainty by global markets over the U.S debt deal led to the plummeting of dollars versus the Japanese yen. Japan’s exporters get a major headache when the yen rises ruthlessly, inducing major automakers and others to speed up plans to shift production overseas at the expense of direct exports. Exports have been declining as the yen remained strong. On the other hand, labor market has been hit and it is more difficult for the economy to conquer deflationary pressures. For every 1 yen movement up versus the dollar, Toyota, the world’s largest automaker reckons  an approximate loss of $385 million.

Japanese Yen v US Dollar

Japan’s economy was the envy of the world, this Asian tiger had ranking first in GNP per capita in the late 1980s. Japan’s lost decade is caused by the slow act of limiting the scope of the crisis. The Bank of Japan was slow to intervene, investors felt less confident and thus the problem is amplified. Japan’s debt was a primary factor in its lost decade. Debt must be reduced on all levels. The Euro debt crisis is the greatest risk for the economy of Japan. The dollar has gone down below 80 yen recently due to renascent concerns over the European debt crisis, even though a credit easing by the Bank of Japan in February lifted the dollar above 84 yen. Japanese exports become less competitive due to a stronger yen and what is more the value of Japanese firms’ foreign income decreases.

Japan’s central bank strengthened its efforts to spur economic growth, following similar steps by central bankers in the United States and Europe. The Bank of Japan declared it would boost the size and duration of a government bond-buying program that has the intention to uphold borrowing and spending and make Japan’s exports more competitive. The Bank of Japan said it would spend an extra 10 trillion yen on short and long-term government bonds and bills. Besides, the bank also removed a minimum required interest rate on the government bonds it buys. Japan has also been undergoing issues for years such as deflation or falling prices, which can be a drag on economic growth. The Bank of Japan’s extra bond purchases could contribute to the declining in prices.

Japan’s core inflation has been negative for three years and it was negative 0.3 percent in 2011. If the politicians take the Bank Of Japan (BOJ)’s decision on price stability as an inflation target, the political pressure for further easing will probably increase. The hurdle for additional easing has been lowered. This shows that the policymakers can stable the price of goods and increase inflation by taking BOJ’s decision.

On the other hand, Japan central bank said under the political pressure to support the economy, surprised the market on Tuesday by saying it would bring out its asset buying programme by 10 trillion yen, signaling a more hegemony monetary policy to drag the country out of deflation.

In conclusion, what Japan government did is government intervention which can save the market for deflation. Japan government spends 9 trillion yen in currency market, 18 trillion yen to rebuild the devastated areas, consider taking the BOJ’s decision which can save Japan out from market break downs.

*Random fact: Half the population of the world earns only 5% of the world's total wealth.

By Cheong Wai Kit 

Fish Demand Exceeded UK's Current Sea Supply

According to one of the archives stated by an online newspaper, The Guardian on the 21st August 2012, the level of consumption this year has already met the annual fish supplies which leaves the UK reliant only on imported stocks. As we all know, the economy is where a market based economy may be described as a limited social network where goods and services are freely produced and exchanged according to demand and supply between goods or services by the barter system or a medium of exchange with a credit or debit value accepted within the network. Since determinants of supply and demand other than the price of the good in question are not clearly represented in the supply-demand diagram, changes in the values of these variables are represented by moving the supply and demand curves. In contrast, responses to changes in the price of the good are represented as movements along unchanged supply and demand curves.

This year, the UK’s fish consumption has already matched what our seas can supply for the year, leaving the country with no choice but to be reliant on imported cod and haddock for fish and chips, fellow campaigners have been given a warning regarding such travesty.

In a simple conclusion, annual fish supplies from UK seas can only satisfy demand for 233 days, so if the UK were to rely on its own fisheries for the year we would run out of stocks by today. The situation has worsened since last year, when the UK effectively ran out of fish more than a month earlier than in 2012, but is largely unchanged over the past decade. This shows that there is an obvious shortage in the fishery market throughout the UK. An illustration of a shortage diagram is shown below.

As the quantities demanded are slowly rising, it is to occur that there will be a type of substitution effect and also income effect. Substitution effect is whereby if the price of a good rises, other things remain the same, its opportunity cost rises. Every good has its substitutes. As the opportunity cost of the fish rises, the incentive to economize on its use and switch to a substitute becomes stronger.

Whereas income effect is when a price rises, other things remaining the same, the price rises relatively to the income. Faced with higher price and an unchanged income, people cannot afford to buy the things they previously bought. They must decrease the quantities demanded of at least some fishes. Usually, the good whose price has increased will be one of the goods that people will buy less of.

On the demand curve, it is to be illustrated by the demand curve and the demand schedule. The term quantity demanded refers to a point on a demand curve.

Another way of looking at the demand curve is as a “willingness and ability to pay curve”. This curve is a way to measure the marginal benefit. If a small quantity is available, the highest price that someone is willing and able to pay for one more unit is high. But as the quantity available increases, the marginal benefit of each additional unit falls and the highest price that someone is willing and able to pay also falls along the demand curve.

 In the term of supply, it refers to the entire relationship between the price of a good and the quantity supplied of it. Supply is illustrated by the supply curve and the supply schedule. The term quantity supplied refers to a point on a supply curve which is the quantity supplied at a particular price.

If we can fix this by using the price adjustments way, it can maybe smoothens the economic crisis. Suppose the price of fishes is RM2. Consumers plan to buy 20 million fishes a week, and producers plan to sell only 12 million fishes a week. Consumers just can’t force producers to sell more than they plan to. In this situation, powerful forces operate to increase the price and move it toward the equilibrium price. Some producers notices the unsatisfied consumers, they tend to raise the price. As producers push the price up, the price rises toward its equilibrium. The rising price will reduce the shortage because it decreases the quantity demanded and increases the quantity supplied. When the price has increased to the point at which there is no longer a shortage, the forces moving the price stop operating and the price comes to rest at its equilibrium. An example of the change of demand diagram is shown below.

The second way to fix this is that if a type of surplus forces the price down. Powerful forces operate to lower the price and move it toward the equilibrium price. Some producers, unable to sell the quantities of fishes they have planned to sell, cut their prices. In conjunction, some producers scale back their production. The falling price decreases the surplus because it increases the quantity demanded and decreases the quantity supplied. When the price has fallen to the point at which there is no longer a surplus, the forces moving the price stop operating and the price comes to rest at its equilibrium.

If the UK's seas were better managed to allow fish stocks to recover from over-fishing  it could maybe meet annual demand from its own waters and even be a net exporter of fish. Ian Campbell, one of the reporters pointed that fishing within sustainable levels and acclimating fish consumption to available resources is the only way to attain healthy fishing grounds. Over-fishing has been a central failing of the current common fisheries policy and the UK is determined and also must to be ensuring that catches are set at a level that is conceivable.

*Random fact: The fastest fish is sailfish. It can swim as fast as car travels on a highway.

By Rose Elida

Water Scarcity

Based on an online article from The Economic Times on the 9th of July 2011, it says that the high food cost has affected poor nations, hence, there is water scarcity. Scarcity exists when we are unable to get everything we want, and there is no getting away from the fact that we want more than we can get. Economic water scarcity is the most disturbing form of water scarcity due to the lack of investment in water and good management that allows the problem continue to exist. Water is not just for drinking but contributes to food production, energy and manufacturing. The allocation of water resources maintains the community by supplying water for human consumption, food production and sanitation, addressing mainly equity issues. As such, water is vital in our lives and has an essential role in the economic development of countries. Water is scarce in many countries including china continue to boost food imports. The restraints on food production and supply due to water scarcity gives pressure on food prices and the countries will be more dependent on food imports. In order to meet the rising demands for food, farmers will need 19 percent more water by 2050. According to a United Nations report, water scarcity persists in many farmers region. There is restraint on water availability for agriculture in many countries and the condition of it is aggravated. The use on fertilizers is increasing greatly in the world’s agricultural systems. However, the use of additional fertilizer produce only low amount of additional food product. Meanwhile, the quality of soil is lowered because of the fertilizers and intensive cropping. These factors cause the limitation of possibilities of increasing food production substantially and will boost relative food prices at a minimum and resulting hunger for many. The underground water which is pumped out at higher rates than rainwater replenish it to supply irrigation for agriculture and this problem results in the fall of water tables on every continent. 

 Efficient pricing and taxation can improve the allocation of a scarce resource. Most of the economic and welfare impacts is caused by the taxes on agricultural water use. The water use reduces much lower than the price of water. The sufficient water supply is intense for increasing number of countries due to the uneven allocation of water and people among regions. Population grows rapidly can increase the consumption of water and thus the problem worsens. Disruption of weather patterns is caused by the climate change and the emission of greenhouse gasses such as methane, carbon dioxide and nitrous oxide. There is more rain in some places but less in other places. China is affected by droughts over many years. The components of water resources are surface water, floodwater, desalinated water and groundwater. They are the main input for several kinds for economic sectors, such as industrial, hydropower, recreation and municipal. It is incumbent on us to allocate water resources efficiently and thus we need to make economic decisions reconcilable with social objectives, those are efficiency and equity. Economic efficiency is related to the amount of wealth that can be produced by a given resource whereas equity is about the allocation of the total wealth between the sectors and individuals in society. There are many forms of water allocation plans try to merge both efficiency and equity principles. Water is the scarce resource, and the economic produce returns by using it. Resources must be allocated efficiently so that the marginal benefit from the use of the resource is the same as the sectors for maximization of social welfare. If not, society will allocate more water to the sector for self interest. The resource may be allocated according to equity. Equity is related to fairness of allocation. For instance, an allocation of water resources that is based on equity suggests that all households have a basic right to obtain water services.

A marginal cost pricing mechanism ensures that a price for water is same as the marginal cost of providing the last unit of that water. The water’s unit price is equivalent with the marginal cost by an allocation which is considered an economically efficient. The total value of production across all influenced sectors of the economy is maximized by the efficiency criterion. Water charges comprise any social costs, although they may be hard to calculate. Social cost and scarcity value are shown in higher marginal cost curves than the private marginal cost curve. Marginal cost pricing can be implemented to open up differential prices for different qualities of water where water with higher quality possesses a higher marginal cost of provision. Public water allocation has intention to stimulate equity objective, ensuring that the water is supplied to areas of inadequate quantity. It gives protection to the poor, support to environmental needs and provision to a given level of water so that the minimal needs are in the receiving sector. Scarcity reflects the fact that the common measures in rising water demand in the past was to enlarge the water supply system. During Seasonal shortages, higher cost prices should be implanted to recover fixed costs to ration all of the water during the highest demand.

In conclusion, water scarcity is a serious issue of the future. Water scarcity is currently in the backseat because there are many issues being concerned in the world today. We tend to find a solution for the problems when the problems become fearsome. What will the new generation drink after 20 years? Many research and projections show that this will be a fearsome circumstance in as early as 20 years from now.

*Random fact: A healthy person can drink about 3 gallons (48 cups) of water per day.

By Cheong Wai Kit 

Smartphones No Longer a Want But a Need

Based on a news article on Budget 2013, it has stated that smartphone is no longer a type of want but it is a need for the teens these days. As we all know that, majority of the people own at least a smartphone nowadays in this digital era, especially the youths. Smartphone is not only a device which can make phone calls, send text messages, but also able to access to the internet, send and receive e-mails. They can easily get information from the internet by just few clicks on smartphones no matter where they are. In this scenario, smartphone is no longer a want but a need. With the increasing demand for smartphones, many of the suppliers such as Apple, Samsung, HTC and Blackberry are working hard to meet the growing demand. People will purchase a smartphone no matter how expensive the price is and choose it according to their preferred or favorite brand.

One of the facts and figures in Budget 2013 Malaysia which announced by our Prime Minister, Datuk Seri Najib Tun Razak on 28th  September 2012, stated that government will subside RM200 on purchasing smartphone for youths aged 21 to 30 with incomes of RM3,000 and below. Malaysian youths will be able to enjoy this rebate when purchasing one 3G smartphone from an authorized dealer. The Prime Minister who is also Finance Minister said that there will be a total amount of RM300 millions allocated for this project (package) and to benefit 1.5 million youths. Government will cooperate with the Malaysian Communications and Multimedia Commission and telecommunication companies to reach a better network system to access the information.

There are two types of subsidies which provided by government: subsidy for producers and subsidy for consumer. These two subsidies have different effects toward the market. Subsidy for producers will be of benefit to the suppliers. Subsidy will be deducted in cost of production and producers will more likely to produce and the quantity of supply will increase in the market. Hence, the supply curve will shift to the right and the demand curve stay constant. Then it formed a new equilibrium point which has a higher quantity but lower price. The gap between the origin curve and the new curve is a subsidy per unit.

Subsidy on Produces

Another subsidy will be the subsidy on consumer. This will increase the demand on certain product in market as the consumers are just needed to pay less than the origin price because part of the amount were already “paid” by government and it acts as rebate to the consumer. The demand curve will move to the right and this will form a new equilibrium which has a higher price and greater quantity.

Subsidy on Consumer

In this case, it is considered as the subsidy on demand-side as it is a rebate for the purchasing on smartphone for Malaysian youths. Demand on smartphone will increase due to consumers have limited income and they do not have to pay much on it. Hence the demand curve will move to the right. While at the same time, the supply curve remains constant. This will form a new equilibrium point with a higher price and higher quantity. The increased price does not mean that consumers have to pay more when purchasing smartphone but it is a sum of the origin market price with subsidy. Subsidy will cause an additional trades made. Suppliers are actually receiving additional profits as the consumers demanded more on smartphones. Suppliers can then maximize their profits to meet the demands. 

Smartphone is an elastic good as consumer can have variety brands to choose before they purchase a smartphone. They will choose the trusted brand and also the price of smartphones has not much of difference. Also the smartphones are substitute goods because they can substitute each other.  For example, a consumer chooses Iphone instead of Samsung as it is his or her favorite brand. Hence, Samsung is substituted by Iphone and this proves that smartphone is actually an elastic good. In additional, Samsung became the opportunity cost which is the second best that consumer foregone.

As the smartphone users are increasing, the telecommunication companies, for examples Maxis, Digi, Celcom will also upgrade their network system and provide more data plan for the users to have a well-perform on surfing. In this case, demand for data plan will also increase. Some of the telecommunication companies will also provide plans that attached with smartphone. With the government’s subsidy, the demand for smartphone will increase and the companies profit will then maximize too. In order to perform a better way in networking system, the companies might have to upgrade their system. They also might hire additional labors to achieve a good service for their customers. This shows that there will be an increasing in job opportunities in the market.

Job opportunities increased will lead the rate of unemployment become lower. A country should not have a high percentage of unemployment as this shows the country did not completing using their input (labor) in production. This is a waste and unemployment in Malaysia is becoming more serious as there are many graduated students from institutions of higher education still looking for a job. As to solve this problem, the more the job opportunities, the less the unemployed graduates.

Once they have a job, they will receive wages. Wages is defined as an income and they have the ability to buy goods. When an individual’s income increases, he or she will demand for more goods and services. They will try to make changes to have a better lifestyle. For instance, a fresh employed graduate who has an income below RM3, 000 can have a chance to own a smartphone as the government subsidies on it. When a person has incomes, he or she will have the power of buying goods and services, thus the quantity of demand will increase.

Subsidies from government will cause the change of demand then form a new equilibrium point. It is not just affect the demand but also other element such as people with lower income can afford to enjoy some luxury goods. Subsidy is an action which protects the consumer from the raise of price of product by the producers.

*Random Fact: Did you know that 80% of the world population now has a mobile phone?

By Wong Min Yiang 

The End of Elastic Oil

Based on one of the Forbes article on 26th January 2012, the author, Tom Konrad has stated that the past 10 years have brought a structural change to the world oil market. The current economic issues that the whole world is unfortunately experiencing has become something of a conundrum for most people mainly because the majority of the population do not have any idea what it means and what exactly it entails. Why did the economy fall down? What are the reasons behind the increase of prices? These are the questions that a lot people have been asking themselves. That is why it is important that we truly understand the implication of this major problem that affects the globe.

As far as we know, the term demand and supply is some sort of a theoretical concept of price determination. It is ceased that during in a competitive market, the unit price for a good will digress until it settles at point where the current quantity demanded by consumers will equal the current quantity supplied by producers, which, resulted in an economic equilibrium of price and quantity. For the last ten years, the world’s oil market has brought into a fundamental change where changes of demand are vastly playing a role in maintaining the supply and demand of balance. These changes will come at a progressively distressing cost to our economy unless we start to take steps to make the demand of oil more flexible. As you can see the economic equilibrium below.

Oil which was formerly too expensive to exploit becomes economic with a rising oil price. To the imprudent observer, it might seem as if there is nothing to worry about in the oil market. Sadly, there IS actually something to worry about, well at least if we want to have our healthy economy back that is. The new oil reserves we’re now exploiting are not only more expensive to develop, but they also take much longer between the time the first well is drilled and the when the first oil is produced.  That means it takes longer for oil supply to respond to changes in price.

In economics definitions, the oil supply is slowly becoming less elastic as compared to new oil supplies which come in a greater extent from the unconventional oil.  Elasticity is a term whereby is the measurement of how changing one economic variable affects others. If a small change in price produces a large change in demand, demand is said to be elastic.  If a large change in price produces a small change in supply, then supply is said to be inelastic.

On the demand side, the elasticity of our demand for oil determines the variety we have to consume oil for our daily needs. At a personal level, we can quickly cut our demand for oil a little bit by associate it car trips, keeping our tires properly inflated, and such.  But the ability to make such cut-backs is often limited, and even such simple measures come at a cost of time or convenience, which is why we’re not doing them already.  If we live in an area without good public transport, we can’t stop driving to work without losing our job, so we keep driving to work, and paying more for the gas to get there. The graph below is one of many examples for the elasticity of demand.

Over the longer term, our personal options to cut oil consumption will increase.  We can move closer to work, or to somewhere where we can walk or use public transport to get to our job. This is why the most fuel-efficient vehicle is a moving van. Replacing a car with a more fuel efficient vehicle is an option for those who have money or credit, but the people who are under the most pressure from high fuel prices are unlikely to be able to afford such options.  If they can’t resort to ride sharing or public transport, they may simply lose their jobs because they can’t afford to get there.

The reduction in fuel use that comes from people losing their jobs and no longer commuting to work also contributes to the elasticity of demand, highlighting the point that while reductions in fuel use can be beneficent, they can also be harmful to the economy.  Reductions in demand due to high prices are often called demand destruction, and it is just as unpleasant as it sounds.

Since our options for reducing oil demand in response to rising prices range from inconvenient to highly extravagant, to downright painful, it is clear why the media and politicians focus so much attention on the other half of the equation which was when supply adapts to changes in demand, voters don’t have to make uncomfortable choices.

While fiscal issues constrain elasticity of supply, geology and politics constrain oil supply elsewhere.  Brazil’s giant pre-salt fields, like deep water discoveries in the Gulf of Mexico and elsewhere, are much more expensive and slow to develop than were past discoveries. 

In conjunction, if the oil were quick and easy to get at, we would have gotten it already. All these factors mean that the elasticity of oil supply is falling, so oil demand has to adjust more in response to changes in price than in the past.

Since there is little reason to assume that the elasticity of oil demand has changed significantly while the elasticity of oil supply has fallen, we have to expect that overall oil price elasticity has fallen as well, and these changes should show up in oil market data.

Since neither demand nor supply can respond instantly to changes in price, I had to estimate the average reaction time. To do this, I looked at the correlation between changes in the oil price and changes in supply and demand with various falter.  I used price and volume changes over a period of three years because three year changes gave me the strongest results, although one and two year changes were almost the same.

Hence, both elasticity of demand and supply has a fact that it got influenced by a few factors which was the closeness the substitution, the proportion of income spent on the good, and also the time elapsed since the price change.

*Random Fact: Petroleum is the official word for oil. The word petroleum is derived from 2 words in Latin means "rock" & "oil". 


By Rose Elida