Consumers noticed that a 5kg bottle of premium brand cooking oil priced at RM16. 90 which was above the recommended ceiling price of RM16. 15 for east Malaysia. This had prompted them to alert the Ministry of Domestic Trade, Cooperative (MDTCC). This report will deeply observe, analyze and apply the models and theories into the case study, based on the following concepts, demand and supply, substitutes, shortage, elasticity, price ceiling, consumer and producer surplus and tax. 3. 0 Analysis 3. 1Demand and Supply Demand refers to the quantity of a good or service that buyers are willing to uy, while supply refers to the total quantity of a good or service produced to be offered (Johnson, 2012). Increase in the price of 5kg bottle of premium brand cooking oil which is priced at RM16. 90 has raised the consumers concern, especially when the price has exceeded the recommended price ceiling of RM16. 15, and meanwhile, 1kg bottled cooking oil was sold at RM4. 20 instead of the usual price of RM4. 00 (rounded to 2 decimal place), and thus alerted the Ministry of Domestic Trade, cooperatives and Consumerism (MDTCC) (Boon, 2012).
This has drawn to the perception that due to the increment price in the cooking oil, the quantity demanded has decreased. Thus, there will be changes in the movement along the curve. The equilibrium market price is at RM4. 00 while the equilibrium market quantity demanded is at 95. When the price increases to RM4. 20, the quantity demanded will move from 95 to 90, where the quantity demanded has decreased. “Malaysian Palm Oil Board (MPOB) has increased supply of cooking oil to suppliers and wholesalers nationwide by 20 per cent for the fasting month and coming Hari Raya Aidilfitri celebrations” (Bernama, 2011).
Especially during the festive season, suppliers will supply more than ample cooking oil to the consumers to avoid shortages. Quoted by Ismail Sabri Yaakob, “We hope this 20 per cent increase in supply will ensure there are no problems in obtaining cooking oil during the festive season” (Bernama, 2011). Thus, suppliers will supply more during the festive season. Supply curve will shift to right. When the price increases from RM4. 00 to RM4. 20, the quantity supplied will increase from 95 to 120 due to the expectation of the future price. New equilibrium price of RM3. 0 and equilibrium quantity of 105 is produced when both demand and supply models are combined. 3. 2 Substitute Unlike the broader specific brand like Neptune, Red Eagle and more, the cooking oil itself has no substitute, thus there would be no other alternatives recommended as other exceptions might be even more costly and consumers might somehow feel that it’s pointless to adapt them. 3. 3 Shortage Shortage is the situation at which the demand of the good or services has exceed the supply availability (Investopedia, 2013). Consumers are well awared of cooking oil shortage especially during festive season.
Quoted by Fomca CEO Datuk Paul Seva Raj, “The Government should come up with arrangements and careful planning to ensure so that there is enough supply to commensurate with the market demands”(Yuen, 2011). The reason shortage occurs is due to the exceed of quantity demanded over the quantity supplied when price control (price ceiling) has imposed on the cooking oil. When the price ceiling of RM16. 15 was imposed, shortage has occurred between 320 (quantity supplied) and 400 (quantity demanded), due to the exceed of quantity demanded over quantity supplied.
Thus, black market might even occur. 3. 4 Elasticity Elasticity is the measure of sensitivity or responsiveness of the changes in a variable to another change in variable (Investopedia, 2013). Price elasticity of demand measures the rate of response of changes in quantity demanded to the changes in price. If the price elasticity of demand is more than 1, it would be considered as elastic while if it’s less than 1, it would be considered as inelastic. Yet, if the price elasticity of demand is equal to 1, it would be considered as unitary elastic.
As mentioned earlier, since cooking oil has no substitutes, the demand curve of cooking oil would be an inelastic curve (steeper). The market price of cooking oil is RM4. 00 and the quantity demanded would be 94. When the price increases to RM4. 20, the quantity of demanded would be 90. To calculate price elasticity of demand, the midpoint (average) equation will be given as below: Answers: As shown above, quantity demanded of 94 when the price is RM4. 20 subtracts with the quantity demanded of 90 when the price is RM4. 00, divided by the difference between RM4. 0 and RM4. 20, and then multiply by the average price which is RM4. 10 (4. 20 add with 4. 00 and then divided by 2) and then divide by 92 (94 adds with 90 and then divided by 2), thus the price elasticity of demand calculated will be 0. 89, which is less than 1. Thus, it’s inelastic. 3. 5 Price ceiling Price ceiling is the legally established maximum price at which certain products can be sold at. Price ceiling was imposed by government as to protect the consumers from facing the condition where there is no availability of commodities (Wisegeek, 2013).
Based on the diagram above, when the market price of the cooking oil is RM16. 90, the equilibrium quantity is 360. When the price ceiling of RM16. 15 was imposed, quantity demanded has reached to 400 while quantity supplied has reached to 320, where quantity demanded has exceeded over quantity supplied. In contrast, this creates shortage. This ‘scarcity’ has created unsatisfactions to the consumers due to the unbalance of quantity that different buyers have. Due to this shortage, this leads to black market, at where sellers will sell the products they own at higher price illegally.
The price sold at black market is RM17. 15. This in turns create dead weight loss. 3. 6 Consumer and Producer surplus Consumer surplus is the difference between the price paid by customers and the actual price they paid while producer surplus is the difference between the willingness producers able to supply and the actual price they received (Riley, 2012). Consumer surplus is measured by the area above the market price and below the demand curve while producer surplus is measured by the area below the market price and above the supply curve.
Economy is efficient when total surplus of consumer and producer surplus are maximized. Diagram above is when the total surplus of consumer (red area) and producer surplus (blue area) are maximized, which means that the economy is efficient. Diagram above is when the price ceiling was imposed. Consumer surplus (red area) is more than the producer surplus (blue area) in this case. The black area within the quantity of 320 to 400 is the consumer’s gains. Diagram above is when the black market occurs due to the shortage. Consumer surplus (red area) is less than the producer surplus (blue area).
The purple area is dead weight loss created by the black market due to the inefficiency reallocation of resources. 3. 7 Tax Tax is the government levy on corporations or individuals (Investopedia, 2013). The equilibrium price and quantity before the implementation of tax is RM4 and 95. Consumer has to pay for RM4 while producer will receive RM4 as well. Supposed that 1 dollar of tax was imposed, the supply will decrease, thus, the supply curve will shift to upward. The new equilibrium price is RM5 and the new equilibrium quantity has lowered down to 90. Consumer now has to pay for RM5 while the producer will receive RM3.
The red shaded area represents the consumer surplus after the tax imposed while the blue shaded area represents the producer surplus after the tax imposed. The grey shaded area represents the tax revenue received by governments. 4. 0 Conclusion Cooking oil is one of the necessity goods and consumers are encouraged not to be panic when purchase the cooking oil especially during festive season, to prevent them from getting exploited by the markets. Consumers must also be aware of the shortage that happened few years ago, and prevent the same thing happening again. References Bernama, 2011. Cooking oil supplied increased for festive season. ttp://www. theborneopost. com/2011/08/09/cooking-oil-supply-increased-for-festive-season/ (Accessed 27 January, 2013) Boon, Peter. 2012. Consumers complain cooking oil sold at higher than fixed price. http://www. theborneopost. com/2012/11/27/consumers-complain-cooking-oil-sold-at-higher-than-fixed-price/ (Accessed 20 January, 2013) Investopedia. 2013. Shortage. http://www. investopedia. com/terms/s/shortage. asp#axzz2JErdrnik (Accessed 26 January) Investopedia. 2013. Taxes. http://www. investopedia. com/terms/t/taxes. asp#axzz2JErdrnik (Accessed 27 January)
Johnson, Matt. 2013. Economic Basics: Supply and Demand. http://www. sophia. org/economic-basics-supply-and-demand-tutorial (Accessed 26 January) Mofatt, Mike. 2013. Price Elasticity of Demand. http://economics. about. com/cs/micfrohelp/a/priceelasticity. htm (Accessed 26 January). Riley, George. 2012. Consumer and producer surplus. http://www. tutor2u. net/economics/revision-notes/a2-micro-consumer-producer-surplus. html (Accessed 26 January, 2013) Wisegeek. 2013. What is a price ceiling? http://www. wisegeek. com/what-is-a-price-ceiling. htm (Accessed 26 January)