Вы находитесь на странице: 1из 63

Content Page




Top Glove to boost nitrile gloves output


Honda: Car prices to fall post- GST


A $15- hour minimum wage could harm Americas poorest

Corn yields up, prices down


Hadrian the robot bricklayer can build a whole house in two

Fast food chains explosive offering to suit local taste buds


FAO urges sustainability over immediate profits to safeguard

water supplies
Appendix and References






The article shows that the worlds largest glove maker Top Glove Corp Bhd plans
to boost its nitrile gloves production capacity. Based on the product mix by glove volume
from 1 March 2015 till 31 May 2015, nitrile still topped the list, claiming 30% global
demand. Its advantage was the capacity to take orders, backed by faster, more efficient
and technologically advanced production lines. While the company has given more
emphasis on automation, the expansion plans for its factories in Port Dickson, Klang and
in Thailand catering for nitrile gloves in progress. For the third quarter ended May 31,
2015, Top Gloves net profit rose 75%. The better performance was due to higher sales
volume from robust demand for both nitrile and rubber gloves. Aside from the stronger
US dollar, better margins due to advanced and efficient operations also pitched in the
good results.

The field of economics is subdivided into two distinct areas, which are
microeconomics and macroeconomics. Microeconomics is the study of how household
and firm made decision and how they interact in specific market. For example, demand
and supply, price elasticity and market structure. However, macroeconomics is the study
of economy wide phenomena, including inflation, unemployment and economic growth.
Market Structure
The model of monopolistic competition defines a common market structure in which
firms have many competitors, but each firm sells a slightly different product. Top Glove
is categorized as monopolistic competition firm. Monopolistic competition markets
reveal the following characteristics:
1. Large Number of Small Firms
Monopolistic competition market contains a large number of small firms, each
firm which is relatively small compared to the overall size of the market. This
ensures that all firms are relatively competitive with very little market control
over price or quantity. In particular, each firm consists of hundreds or even
thousands competitors. The size of capital of these firms are small.
2. Relatively to Enter or Exit the Market

Most firms involved in monopolistic competition market have low capital

requirements, firms can easily enter or exit the market. However, the amount of
investment is generally larger than for perfect competition market, since there is
an expense to developing or introducing their differentiated products and for
doing many advertisement. With easy entry and exit, firms will enter a market
when the present firms are earning an economic profit and will exit the market
when the firms are making an economic loss. Therefore, this market allows the
remaining market earning a zero economic profit in the long run.
3. Differentiated Product
Monopolistic competition market cannot exist unless there is a slightly difference
among the product that is produced by each firm, which results from differences
in product quality, location, service, and advertising. The products produced are
not similar and identical products. Product quality can differ in function, design,
inputs, and workmanship.
4. Price Maker
Firms are price makers and are faced with a downward sloping demand curve.
This is because each firm makes a differentiated product, therefore it can charge a
higher or lower price than its competitors. The firm can set its own price and does
not have to take the price from the market. This also means that the demand curve
will downwards sloping.
5. Brand Names and Do Advertisement
Brand names will serve to distinguish identical or nearly identical products and to
increase the value of advertising in that the brand name serves as an object to
which desirable characteristics can be attached. Advertising is used to build brand
awareness or loyalty to a particular consumer.
6. In the Short Run
A monopolistic competition firm maximizes economic profit or minimizes
economies losses by producing the quantity that corresponds to when marginal
revenue (MR) equals marginal cost (MC). If average total cost (ATC) is below the
market price, then the firm will earn an economic profit. However, if the average
total cost (ATC) is above the market price, then the firm will experience an
economic loss.
7. In the Long Run

If the monopolistic competition firms in a market are earning an economic profit,

then it will attract other firms enter the same market, which will reduce the profits
of the other firms. More firms will continue to enter the market until the firms are
earning on a zero economic profit. However, if there are too many firms in the
market, then firms will start to make a loss, which will cause them to exit the
market. Consequently, the remaining firms will return to normal profitability.
Hence, the long-run equilibrium for monopolistic competition market will
compare the market price to the average total cost, where marginal revenue equals
marginal cost.
Cost of Production
Top Glove has manufactured various types of glove in the market. The firm is large and
needs to employ thousands of workers. Besides, the firm has thousands of stockholders
who share in the firms profits. Each firms objective is to maximize their profits as large
as possible. Firms incur costs when they buy inputs to produce the goods and services
that they plan to sell. We can derive several related measures of cost, which will turn out
to be useful when we analyze the production of outputs.
Total Fixed Costs
Total fixed costs (TFC) are constant as output increases, the curve is a horizontal line on
the cost graph. Fixed costs are those costs over which a firm has no control. They are
usually tied to fixed inputs or resources. The fixed costs must be paid, otherwise the firm
may have to shut down. For example, Top Gloves fixed costs include any rent for
warehouse and others. Similarly, Top Glove needs to hire many full-time employees to
produce the gloves.
Total Variable Costs
The total variable cost(TVC) curve slopes up at an accelerating rate, reflecting the law of
diminishing marginal returns. Variable costs are those costs which a firm can change at
will. They relate to inputs or resources which are not fixed.For instance, Top Glove has
hire more workers to make more gloves. Top Glove has to pay them wages. The wages
paid for them are variable costs.
Total Costs
The total cost (TC) curve is found by adding total fixed costs and total variable costs. The
total cost curve is represented an upwards sloping curve graphically: costs increase as
output increases. The curve is generally S shaped, reflecting the increasing efficiency
starting from a low level of production, and then a decreasing efficiency as the volume of
production goes beyond the point of diminishing returns.
Average Fixed Costs

Average fixed costs (AFC) are found by dividing total fixed costs by output. As fixed cost
is divided by an increasing output, average fixed costs will continue to fall.
Average Variable Costs
Average variable cost (AVC) is calculated by dividing total variable cost by quantity
produced. It will reflect an increasing then decreasing efficiency in production as output
Average Total Cost
Average total cost (ATC) is calculated by dividing total cost by the quantity produced. It
can also be obtained by adding up average fixed cost and average variable cost at each
level of production. The average total cost curve is represented a steep decreasing portion
and a slightly increasing portion. These are attributable to the fixed and variable cost
Marginal Cost
Marginal cost (MC) is calculated by dividing the change in total cost by the change in
quantity. The marginal cost curve reflectsan increasing then decreasing efficiency as
output increases. For example, the marginal, or additional, cost per unit changes more
than the average total cost for each unit. The cost of one additional meal start to increase
before average total cost does.

Market Structure
Top Glove is considered as monopolistic competition market because when
consumers can find that there are many brands of gloves available in the shop. Besides,
there are many sellers competing for the same group of consumers. Top Glove produces
the glove that is at least slightly different from the other firms. The sellers in this market
are price makers rather than price takers, therefore Top Glove faces a downward sloping
demand curve.Furthermore, the demand curve is downward sloping because glove is
considered as a necessity product, so it is elastic and has many close substitutes products
in the market.
Moreover, the firms can enter or exit the market easily without restriction. Thus,
the number of firms in the market can be adjustfrom an economic profit to a zero
economic profit or from an economic loss to a zero economic profit in the long run. A
monopolistically competitive market departs from the perfectly competitive ideal because
each of the sellers offers a slightly different product.
The monopolistically competitive firm follows a monopolists rule for profit
maximization: It chooses the profit-maximizing output at which marginal revenue equals
marginal cost and then uses the demand curve to find the market price reliable with the
In the short-run, Top Glove will maximize profit by producing the quantity at
which marginal revenue equals marginal costs. Top Glove in Figure 1.1 makes an
economic profit because, at this quantity, price is above average total cost. However,
when there is a short-run economic profit, it will attract new firms to enter the market.
This will increase the number of glove products supplied or offered by the other firms.
Top Glove will face a decreasing demand of glove in the market. Therefore, incumbent
firms demand curves will shift to the left. As the demand of glove products decrease,
thus Top Glove and the other firms profit will be declined.

of Glove






Profit-maximizing Quantity

of Glove

Figure 1.1: Top Glove Makes Economics Profit in Short Run

Furthermore, in the short-run Top Glove in Figure 1.2 makes an economic loss
because, at this quantityat which marginal revenue equals marginal costs, price is less
than average total cost. Thus, short-run economic losses encourage the existing firms to
leave the market. It will reduce the number of output of glove products supplied or
offered by the firms. The remaining firms will face an increasing demand of glove in this
market. Hence, the remaining firms demand curves will shift rightwards. Then, it will
increase the remaining firms profits.
of Glove




Loss-minimizing Quantity

of Glove

Figure 1.2: Top Glove Makes Economics Losses in Short Run

However, the situation shown in Figure 1.1 and Figure 1.2 do not last long. When
competitive firms are earning an economic profit, as in Figure 1.1, new sellers have an
incentive to enter the market. This entry increases the number of glove products from
which customers can choose and, therefore, reduces the demand of glove faced by each
firm already in this market. In other words, short-run economic profit encourages entry,
and entry shifts the demand curves faced by the incumbent firms to the left. As the
demand for incumbent firms products fall, these firms experience declining profit.
Conversely, when firms are experiencing an economic loss, as in Figure 1.2, the
existing firms in the market have an incentive to exit. As firms exit, consumers have
fewer glove products to select. This decrease in the number of competitive sellers
expands the demand of glove faced by the remaining firms in the market. In other words,
short-run economic losses encourage exit, and exit shifts the demand curves of the
remaining firms to the right. As the demand for the remaining firms glove products rises,
these firms experience rising profit or declining losses.
This process of entry and exit continues until the firms in the market are making
exactly zero economic profit. Figure 1.3 illustrates the long-run equilibrium. If the market
reaches this long-run equilibrium, new firms have no incentive to enter, and existing
firms have no incentive to exit. In a monopolistically competitive market in this long run
equilibrium, price equals average total cost, and the firms earn zero economic profit.
of Glove



of Glove

Figure 1.3: Top Glove Makes Zero Economics Profit in Long Run

Cost of Production
Economy is made up of thousands of firms that produce goods and services for
consumer enjoy every day. For example, Top Glove produces various types of gloves.
Top Glove needs to employ thousands of workers to produce these types of gloves.
Besides, according to the law of supply, most firms are willing to produce and sell a
larger quantity of a good when the price is higher, and this response leads to a supply
curve that upwards sloping.
Using technology to produce goods can make tasks more efficiency. Therefore,
Top Glove has started to use the technology to produce gloves, and it makes the
production lines more efficient, faster, easier and at a low cost. This advancement on
technology has a great impact on short-run curves by when technology improves then
production of gloves will increase. As the production of gloves increase which causes the
average variable cost decrease. Besides, when the production of gloves increase, the fixed
cost is spread over more output, causing the average fixed cost to decrease. For instance,
the fixed costs which isincluded rental payments, salaries for full-time employees,
monthly equipment fees and structured loan payments. Top Glove has given more
emphasis on the automation in production line causes the average of variable cost
decreases. The variable costs involved the wages for workers, utility fees, and costs of
raw materials. Because of the automation in production line which is used by Top Glove,
the labour in Top Glove will be replaced by the technology. By improvingthe technology,
Top Glove will only hire fewer workers or employeesand will increase more production
of glove on average. Therefore, the amount of wages paid and time required for
producing gloves decrease, which will decrease the average variable cost.
Moreover, Top Glove will finally reach the point where there is the advancement
of technology can be produced. Therefore, productivity of Top Glove will rise to a
maximum possible output. Furthermore, human will try to improve or introduce new
technology for producing the glove in the future. Human would come up with latest
technology and change the technology become more efficient, faster and save costs.
Figure 1.3 shown that the technology came to the singularity. The singularity is meant
technological change so rapid and so profound that it represents a rupture in the fabric of
human history. Hence, Top Glove will face the singularity problem in the future in the
production line for producing gloves.



Figure 1.4: Technology Advancement for Top Glove in the Future
In conclusion, Top Glove is a monopolistic competition firm because there are
many sellers and they can enter or exit the market easily. Furthermore, the advancement
of the technology makes the production easier, faster by using a low cost and increase the
quantity of outputs.



Honda Malaysia SdnBhd expects its vehicles prices to be reduced between 1% and 2% on
average, after the implementation of Goods and Services Tax (GST) in April this year.
This is due to the proposed GST rate of 6% is lower than the current 10% of Sales and
Service Tax (SST). CEO Yoichiro Ueno is targeting 85,000 sales units this year and said
that the drop of the car prices is expected for almost of its models, depending on each
model as the SST is different for each car. Last year, the group has exceeded its 76, 000
units sales target, where it achieved 77, 485 units, translated to an increase in market
share to 11.6% against 2014 TIV of 667, 000 units.
Price Elasticity of Demand and Its Determinants
The law of demand states that a fall in the price of a good, and it will affect the
quantity demanded to rise. The price elasticity of demand measures how much the
quantity demanded responds to a change in price. If the quantity demanded responds
substantially to changes in the price, demand for a good is elastic.Whereas the demands is
inelastic, when the quantity responds only slightly to changes in price.
The determinant of price elasticity of demand is availability of close substitutes.
Good with close substitutes tend to have more elastic demand. Whereas good with no
close substitutes or few substitutes tend to have less elastic demand. Beside, we can
determine the price elasticity of demand based on the time horizon. In long run, the price
elasticity of demand is inelastic. This is because consumers can take time to adjust their
arrangement toward the articular goods if the price of goods decrease or increase.
However, in short run, the price elasticity of demand is inelastic because the consumers
have not enough time to do their adjustment. Furthermore, price elasticity of demand can
be determined based on the necessities versus luxuries. Necessities tend to have inelastic
demand. For example, if the price of rice increases, consumers still will go and buy as
usual because this is necessary goods for them. Whereas luxury goods tend to have elastic
demand and consumers will have highly responsive if the price of luxury goods increase
or decrease.

The Costs of Taxation


Taxes are imposed by government to raise revenue, and that revenue must come
out of someones pocket. Both buyers and sellers are worse off when a good is taxed: A
tax raises the price buyer paid and lower the price seller received.
Deadweight loss is a loss of economic efficiency caused by an inefficient
allocation of resources. It does not matter whether a tax on a good is levied on buyer of
seller of the good. When a tax is levied on buyer, the demand curve will shift downward
by the size of the tax. Besides,when it is levied on seller, the supply curve will shift
upward by the amount. In case, when the tax is imposed, the price paid by buyer raises,
and the price received by seller falls. In the end, buyer and seller share the burden of tax,
regardless of how it is levied.
Market Structure (Oligopoly)
There are four types of market structures which are included perfect competition,
monopoly, monopolistic competition and oligopoly. An oligopoly market has a few
characteristic which included:
1. Mutual Interdependence
Mutual interdependence exists when the actions of one firm has a major impact
on the other firms in the industry. Mutual interdependence exists within an
oligopoly industry because each of the oligopolists has a sizable part of the
market. As a consequence, when it changes its sales, its prices, or its marketing
strategies, this oligopoly firm will likely affect the sales of other firms within the
2. Many Barriers of Market Entry and Exit
Barriers to entry are the key characteristic that separates oligopoly from
monopolistic competition on the continuum of market structures. This is because
with substantial entry barriers found in oligopoly, firms cannot enter the industry
as easily. The most noted entry barriers are exclusive resource ownership, patents
and copyrights, other government restrictions, and high start-up cost.
3. Products
Oligopolistic industries general come in two varieties which are identical product
oligopoly and differentiated product oligopoly. Identical product oligopoly tends
to process raw materials or produce intermediate goods that are used as inputs
such as petroleum. While different product oligopoly focuses on the goods that
are mainly foe personal consumption because different people have difference
wants and needs. The example of differentiated product oligopoly included
computer and automobile.

Price Elasticity of Demand
Price elasticity of demand of Honda can be inelastic and elastic based on different
Price of Honda



Of Honda

Figure 2.1: Price Inelastic for Honda


An inelastic graph is a situation when demand for an item changes proportionately

less than the price changes, then the item is price inelastic. From the article, we can
conclude that the price of Honda has decrease at least 4% from its original price due to
the changing of Sales and Service Tax which is 10% change to Goods and Services Tax,
GST which is 6%. The price elasticity of demand would be different based on different
consumer. For example, the consumers who are working and has a stable income, the
price elasticity of demand for this type of consumer is inelastic. Therefore, according to
the Figure 2.1, when the price of Honda decreases from P 0 to P1, the quantity demanded
of Honda has slightly increases from Q0 to Q1. This can be proved that this type of
consumers is less sensitive towards a decrease price of Honda. This is because consumers
who are working, have a higher purchasing power. Hence, decrease in price of Honda
will not give high effect to these consumers.
Another factor for Honda to be inelastic is because the availability of close
substitutes. Honda is the product that has few close substitute and a less competitive
market. Therefore, consumer would not easily switch from buying Honda cars to buying
from other car manufacturers.
Moreover, Honda will be considered as price inelastic because Honda is mutually
interdependence. Firms that are interdependent cannot act independently of each other. A
firm that operates in a market with just a few competitors must take the potential reaction
of its closest rivals into account when making its own decisions. For example, if Honda
wishes to increase its market share by reducing price, it must take into account the
possibility that close rivals, such as Toyota and Kia, may reduce their price in relation.
Therefore other automobile company will also reduce their price when Honda reduces
their price. Since Honda is under non price competition, consumer will not consider
much on the price because the prices of automobiles that have the similar specializations
from different firms are almost same. From Figure 2.1, this clearly shows that under
mutually interdependence, Honda is inelastic as people are not sensitive to the price and
the change in price of Honda (decreases from P 0 to P1) is greater than the change in
demand for Honda (increases from Q0 to Q1
Price of Honda




of Honda


Figure 2.2: Price Elastic for Honda

An elastic graph is a situation when demand for an item changes proportionately
more than the price changes, then the item is price elastic. Newly employed graduates are
more likely to respond towards the price change of Honda. The price elasticity of demand
for the consumer who had graduated and just started workingis elastic. According to
Figure 2.2, we can see that the demand curve is flatter as it shows that the elastic demand.
This is because the flatter demand that passes through a given point, the greater the price
elasticity of demand. Therefore, from the Figure 2.2, when the price of Honda decreases
from P3 to P4, the quantity demanded of Honda has increases gradually from Q 3 to Q4.
The increase of quantity demanded of Honda in elastic demand (Figure2.2) is more than
the quantity demanded of Honda in inelastic demand (Figure 2.1).This proves that this
type of consumers is highly sensitive towards a slight decrease in price of Honda. This is
because newly employed graduates have lower purchasing power. Hence, the decrease in
price of Honda will give higher effect to this group of consumers.Besides, Honda is
considered as a luxury good for a newly employed graduated. Therefore, when the price
of Honda decreases, newly employed graduated will tend to buy Honda since the quality
of Honda is recognized. Therefore, it has slightly increased the sales of Honda in order to
achieve the sales target that had stated on the article.
Moreover, when the government has just imposed the GST of 6%, the price of
Honda will not change because in short term consumer would not have enough time to
adjust to the price change or they have not acknowledge the price change in Honda cars.
While in long term they would have the time to choose and compare the price of Honda
cars with other automobile firms. Although when the price of Honda cars decreases,
other firm would also decrease the price due to the GST implemented but those who are
Honda fans would opt for Honda cars because consumer goes for a car with better
quality, design and functions. Logically thinking fresh graduates buy car to use for long
term, they would not want to change car every year. Therefore, they will go for a car
which is high in quality and another plus point will be now they would be able to afford
for a Honda car.
The Cost of Taxation
Price of Honda

Quantity of Honda

Figure 2.3: Inelastic Demand and Elastic Supply

Besides, for both buyers and sellers of Honda, they need to bear different amount
burden of tax. For example, according to Figure 2.3, buyers will bear higher amount
burden of tax. However, the burdens of tax depend on the elasticity of demand and
supply. For the consumers who are still working and have a stable income, it has inelastic
demand and elastic supply. This also means that the sellers of Honda are very responsive
to the changes in the price of Honda, whereas the buyers of Honda are not responsive to
the price of Honda. When a GST of 6% is imposed by the government on Honda with
these elasticities, the price received by sellers does not fall much, so sellers of Honda will
only bear a small amount burden of tax where is the area of B in the Figure 2.3. By
contrast, the price paid by the buyers who purchase Honda rises substantially. This mean
that buyers who purchase Honda bear most of the burden of the tax where is the area of A
in the Figure 2.3.

Price of Honda





Quantity of Honda

Figure 2.4: Elastic Demand and Inelastic Supply

Furthermore, for the consumers who had graduated and just started working, it
has elastic demand and inelastic supply. This means that this kind of buyerswho purchase
Honda is very responsive to the changes in the price of Honda, whereas the sellers of
Honda are not responsive to the price of Honda. When a GST of 6% is imposed by the
government on Honda with these elasticities, the price received by buyers does not fall
much, so buyers bear only a small burden of tax where is the area of C in the Figure 2.4.
By contrast, the price paid by the sellers who purchase Honda rises substantially. This

mean that sellers of Honda bear most of the burden of the tax where is the area of D in
the Figure 2.4.

Market Structure
Honda cars market structure is categorized under oligopoly market. One of the
characteristics of oligopoly is many market barriers of market entry and exit. Due to
government restrictions, Honda Company has its own copyright given by the government
and Honda has their own patent issues. Besides, Honda is now become a mature and has
successfully reached economies of scale. Before Honda becomes one of the automobile
industries in Malaysia, Honda had already gone through brand name recognition by the
government. Honda is capable to reach the start-up cost to start up their company. If a
new firm tries to enter the automobile market they would have to go through what Honda
had went through if they fail to do so, they will fail to enter the market.
Moreover, Honda is a differentiated product oligopoly. Hondas products seem
different from other companies but the engines or functions of their products can be
same. The technology that uses to produce a car compare to other industries is different.
Firms have designed many patterns for the car, the main purpose is to attract customers to
buy their products. In addition, the patents and ways to produce have to be different from
other industry. Besides, they have their own copyrights and name recognition. This is
why Honda which is in oligopoly market is homogenous and can be differentiated at the
same time.
Furthermore, Honda had been characterized by a small number of competitors and
usually non-price competition because it just has few suppliers. Honda which is
oligopolistic firm keeps a close eye on the activities of other firms such as Toyota, Kia,

and Mitsubishi in the industry. Decisions made by Honda invariably affect others and are
invariably affected by others where each Honda seller is aware of the others actions, and
where these actions effect the decisions of the other sellers. When Hondas price
decreases, the other competitors will also decrease their price and will not have conflict
in the price competition.

Price of Honda




Quantity of Honda

Figure 2.5: Oligopoly Market for Honda

Figure 2.5 showsthat the oligopoly market for Honda. P 1 is the price of Honda and
the Q1 is the quantity of Honda. From the Figure 2.5, we can conclude that if Honda
raises its price (D1), others manufactured cars do not follow the increase, then revenue

will decline in spite of the price increase. If Honda lowers its price (D 2), then the other
firm will match the decrease to avoid losing market share. This is because there is a gap
in the marginal revenue curve (MR1- MR2). Since Honda maximizes profit by producing
that quantity where marginal cost equals marginal revenue, Honda will not change the
price of their product as long as the marginal cost is between MC1 and MC2.

In conclusion, the price elasticity demand of Honda can be elastic and inelastic. It
depends on the purchasing power of consumer and other determinants. Besides, when
government imposes the GST of 6%, the tax that bears by seller and buyer are different.
This depends on the price elasticity of demand and supply. Furthermore, Honda is
considered as an oligopoly firm. This is because Honda has few seller and produce
differentiated products in the market. Honda also has barrier to enter and exit and
mutually interdependent.



This article talk about the increase in Americans minimum wages to $15 will
harm Americans poorest workers. In 2013, the federal minimum wage would rise to $9
an hour from $7.25 an hour according to the Obama Administration proposed. However,
in 2014 they increased the proposal to $10 an hour. Lately, however, in some cities such
as Seattle, San Francisco and Los Angeles, the minimum wages have risen too high to
$15 an hour. New York also raised its minimum wage to $15 for its fast-food workers.
Many economists worry that the increase in minimum wage would lead to the reduction
of employment, thus hurting young and less-educated workers the most. This will result
in an increase in unemployment but also drops in formal labor force activity and perhaps
some growth in undocumented work among immigrants.

The Supply for Labor
The labor supply is the total hours that workers or employees are willing and able
to supply at a given wage rate. The labor supply curve for any industry or occupation will
be upward sloping. This is because, as wages rise, other workers enter this industry as
they are attracted by the incentive of higher rewards. They may have moved from other

industries or they may not have previously held a job, such as housewives or the
Factors affecting labor-supply curve to shift
1. Change in Attitude toward Work: Higher wages raises the prospect of increased
factor rewards and the number of people willing and able to work. Opportunities to boost
earnings come through overtime payments, productivity-related pay schemes, and share
option schemes.If companies do not pay overtime, employee would not want to work
overtime. When employee is paid for overtime, they tend to change their attitude toward
work. The result is an increase in the supply of work.
2. Change in Alternative Opportunities: The real wage rate on offer in competing jobs
affects the wage and earnings differential that exists between two or more occupations.
For example an increase in the earnings available to trained plumbers and electricians
may cause some people to switch their jobs.
3. Immigration:Movement of workers from region to region, or country to country, is an
obvious and often important source of shifts in labor supply. When immigrants come to
U.S, for instance, the supply of labor in U.S increases and the supply of labor in the
immigrants home country contracts.

Wages Affect Labor Supply

When buyers in a goods and services market are making decisions, we can model
their decision-making behavior through a combination of their indifference curves and
their budget constraints to analyze how a person decides to allocate income between
work and leisure.The indifference curves between leisure and all other goods would be
similar to those in the goods and services market. We can combine a worker's budget
constraint with his indifference curves to see how the worker would optimize the laborleisure choice.However, there are 2 factors affecting the labor-supply curve to slope
either upward or downward which is substitute effect and income effect.
1. Income effect: When the wage increases, the income effect makes workers feel
wealthier and therefore makes them want more of leisure and less of
consumption. So when incomes are expected to rise, people tend to travel more as
their incomes rise.
2. Substitute effect: The substitution effect makes leisure relatively expensive since
the worker would have to give up more wages to have free time, so workers will
want more consumption and less leisure.
Because labor is inversely related to leisure, this means that an increase in wages will
cause labor to both increase (substitution effect) and decrease (income effect). Therefore,

when wages increase, the combined effect of the substitution and income effect is that
workers will choose more consumption; the effect on the level of labor and leisure is
Price Floors
A price floor is the lowest legal price a commodity can be sold at. Price floors are
used by the government to prevent prices from being too low. The most common price
floor is the minimum wage which is the minimum price that can be paid for labor. Price
floors are also used often in agriculture to try to protect farmers. For a price floor to be
effective, it must be set above the equilibrium price. If its not above equilibrium, then the
market wont sell below equilibrium and the price floor will be irrelevant. Price floor sets
a minimum price in order to protect suppliers. A price floor creates a surplus.

The Supply for Labor
Wages of Labor (Dollar)




Quantity of Labor

Figure 3.1: A Shift in Labor Supply

Based on the Figure 3.1, it shows that the minimum wages of Americans have
risen too high to $15 an hour in some cities such as Seattle, San Francisco and Los
Angeles. The minimum wages has increase from $10 to $15, thus affecting the supply of
labor to decrease. This tends to reduce the employment rate, thus hurting young and lesseducated workers the most. Therefore, when labor supply decrease from S1 to S2, the
equilibrium wage rises from $10 to $15. At this higher wage, companies hire less labor,
so employment falls from 150 laborsto 100 labors.As a result of a minimum
wage,companiesgenerally experience dramatic increases in the wage expenses as they
rely to a large extent on unskilled labor, since a minimum wage eliminates the ability
ofcompanies to haggle wages for their lowest-level employees. The article states that
according to the U.S. Department of Labor, the minimum wage increased about fifty
percent between 2009 and 2014, going from $10 to $15 per hour. With this dramatic
increase in minimum wages, it will affect the local employment for companies feel that
the minimum wage is a large expense for an unskilled worker, which can cause them to
imposestricter decision criteria for hiring or reduce on hiring altogether.For cities like
Seattle, with a relatively more educated workforce and dynamic labor market, it is worth
taking the risk while for cities such as L.A and Washington D.C, with their large
populations of less-educated workers, including unskilled immigrants, such increase is
extremely risky.

Wages Affect Labor Supply






Hours of Leisure

Figure 3.2: The Work-Leisure Decision


Workers try and maximize their utility based on their preferences between having
free time and having money, and on their budget constraint.A worker's budget constraint
can pivot with a change in the wage. According to the Figure 3.2, if the wage increases,
the curve pivots outwards (I3). If the wage drops, then the curve pivots inwards (I 1).
Therefore, assuming worker are awake for 100 hours per week with the minimum wage
of $15, for every hour a worker works, he earns $15, which he spend on consumption
goods. Thus, his wage $15 reflects the trade-off the worker faces between leisure and
consumption. For every hours of leisure he gives up, he works one more hour and gets
$15 of consumption. This graph shows a workers budget constraint.If he spends all 100
hours enjoying leisure, he has no consumption butif he spends all 100 hours working, he
earns a weekly consumption of $1,500 but no time for leisure. If he works a normal 40
hours week, he enjoys 60 hours of leisure and has weekly consumption of $900.

Wages of Labor (Dollar)



60 70

Labor Supply

Hours of Leisure

100 150
Hours of LeisureSupplied

Figure 3.3: Income Effect


According to this article, it stated thatminimum wages have risen too high to $15
an hour in some cities. So when Americans minimum wages rises, they move to a higher
indifference curve. As long as consumption and leisure are both normal goods, they are
induced to work less, which tends to make the labor-supply curve slope downward
(Figure 3.3). This is because when income increases Americans tends to spend more and
work less. This is supported by a report of Andrew Zatlin, stating that Americans are
having fun and spending. He says that households are back from summer vacations and
budgeting for back-to-school and holiday shopping. Therefore, in order for them to have
more time to enjoy, they would have to give up their time to work. Therefore, income
effect is more likely to occur in U.S. So, it can be concluded that the labor-supply curve
is downward sloping.

Price Floors
Wages Rate
Labor Supply


Minimum Wages



Labor Demand




Quantity of Labor

Figure 3.4: Price Floor


The U.S governments have imposed a minimum wagethat firms are not permitted
to pay less than the amount that the government mandates. This is to raise the wages of
workers who are earning very little. A minimum wage is very similar to a price floor
because it is set above the market wage.
According to the article, it shows that the minimum wages of Americans have
risen too high to $15 an hour in some cities such as Seattle, San Francisco and Los
Angeles. The equilibrium wage is at $10, while the quantity of workers at that wage is at
150. Right now, the labor market has found its equilibrium, and it's in balance. However,
the governments concerned about unskilled workers and decided to impose a minimum
wage of $15, instead of $10. This is to help those workers who are having trouble paying
the bills. The labor market actually loses jobs. At a price of $15, firms only demand and
hire 100 employees, while workers, of course, would love to earn a higher wage, and
there are 200 workers willing and able to take jobs at this minimum wage. So, the
quantity of labor demanded falls, while the quantity of labor supplied rises. Since, there
are 200 workers looking for jobs, but the firms only hire 100, that mean there is a surplus
of 100 workers. The surplus is unemployment. A minimum wage set above the market
wage will increase unemployment by 100 workers.

In conclusion, when minimum wages of Americans increase, the supply of labor
will decrease.Besides, the increase in minimum wagescauses labor to decrease (income
effect). Moreover, increase in minimum wages will cause unemployment because the
quantity of labor demanded decrease, while the quantity of labor supplied increase.


Central Illinois farmer, Rodney Weinzier knew that it is in reality a mere matter of
supply and demand that the corn costs have fallen as yields have increased. In the last ten
years, with the exception of a drought year in 2012, advances in seed technology, plant
food, equipment and planting methods have contributed to historic corn yields. On the
surface, an increase in production would typically be seen as a positive, but the lack of a
market for corn has led to corn being sold at dollars off the profit margin per bushel.
Thus, low prices of the corn per bushel have created more stress for the average farmer.
Although there has been a recent rise in prices to $4.20 per bushel, that price still isn't
enough as there is a study by the University of Illinois shows that $4.30 is the break-even
price for a farmer.

Demand and Supply


Supply and demand are perhaps one of the most fundamental concepts of
economics and they are the backbone of a market economy. Demand refers to how much
(quantity) of a product or service is desired by buyers. The quantity demanded is the
amount of a product people are willing and able to buy at a certain price; the relationship
between price and quantity demanded is known as the demand relationship. Supply
represents how much the market can offer. The quantity supplied refers to the amount of
a certain good producers are willing and able to supply when receiving a certain price.
The correlation between price and how much of a good or service is supplied to the
market is known as the supply relationship. Price, therefore, is a reflection of supply and
The relationship between demand and supply underlie the forces behind the
allocation of resources. In market economy theories, demand and supply theory will
allocate resources in the most efficient way possible.
The Law of Demand
The law of demand states that, if all other factors remain equal (ceteris paribus),
the higher the price of a good, the lesser the consumer willing to buy for that good. In
other words, the higher the price, the lower the quantity demanded. The amount of a good
that buyers purchase at a higher price is less because as the price of a good goes up, so
does the opportunity cost of buying that good. Opportunity cost is where the loss of
potential gain from other alternatives when one alternative is chosen. As a result, people
will naturally avoid buying a product that will force them to forgo the consumption of
something else that they value more. For an example, they will not demand for a
particular good if the goods are priced at a more expensive price. They will want to save
the money to spend on other goods and services. The graph below shows that the curve is
a downward slope.





AandB are points on the demand curve. Each point on the curve reflects a direct
correlation between quantity (Q) and price (P). The demand relationship curve illustrates


the negative relationship between price and quantity. The higher the price of a good, the
lower the quantity demanded and the lower the price, the higher the quantity demanded.
The Law of Supply
Like the law of demand, the law of supply demonstrates the quantities that will be
sold at a certain price. But unlike the law of demand, the supply relationship shows an
upward slope. This means that the higher the price, the higher the quantity supplied.
Producers supply more at a higher price because selling a higher quantity at higher price
will increase their revenue.






C and D are points on the supply curve. Each point on the curve reflects a direct
correlation between quantity (Q) and price (P). The supply relationship curve illustrates
the positive relationship between price and quantity. The higher the price of a good, the
higher the quantity supplied and the lower the price, the lower the quantity supplied.
When supply and demand is equal which is when the supply function and demand
curve intersect, the economy is said to be at equilibrium. At this point, the allocation of
goods is at its most efficient because the amount of goods being supplied is exactly the
same as the amount of goods being demanded. Thus, the buyer and seller are satisfied
with the current economic condition. At the given price, suppliers are selling all the goods
that they have produced and consumers are getting all the goods that they are demanding.





Based on the graph above shown that equilibrium occurs at the intersection of the
demand and supply curve, which indicates no allocative inefficiency. At this point, the
price of the goods will be Pe and the quantity will be Qe. These figures are referred to as
equilibrium price and equilibrium quantity. However, in the real market place equilibrium
can only ever be reached in theory, so the prices of goods and services are constantly
changing in relation to fluctuations in demand and supply.
Disequilibrium occurs whenever the price or quantity is not equal to the
equilibrium price and equilibrium quantity.
1. Excess Supply (Surplus)

Qs >Qd








At the beginning, the equilibrium price is Pe and equilibrium quantity is Qe. When the
price of that good increase, the suppliers are trying to produce more goods, which they
hope to sell to increase profits, but those consuming the goods will find the product less
attractive and purchase less because the price is too high.This has increased the price
from Pe to P1, which has led the quantity demanded less than the quantity supplied. This
has caused the disequilibrium of market economy, surplus. Therefore, if the price is set
too high, excess supply will be created within the economy and there will be allocative
P (Shortage)
2. Excess Demand


Qd> Qs






At the beginning, the equilibrium price is Pe and equilibrium quantity is Qe. The
shortage is created when the price is set below the equilibrium price. Because the price is
so low, too many consumers want the good while producers are not making enough of it.
This has decreased the price from Pe to P2, which has led the quantity demanded more
than the quantity supplied. This has caused the disequilibrium of market economy,
shortage. However, as consumers have to compete with one another to buy the good at
this price, the demand will push the price up, making suppliers want to supply more and
bringing the price closer to its equilibrium.
Cross-Price Elasticity of Demand
The cross-price elasticity of demand measures the change in demand for one good
in response to a change in price of another good.
The cross-price elasticity of demand shows the relationship between two goods or
services. More specifically, it captures the responsiveness of the quantity demanded of
one good to a change in price of another good. Cross-price elasticity of demand is
calculated with the following formula:
CrossPrice Elasticity of Demand=

change quantity demanded of good X

change price of good Y

The cross-price elasticity may be a positive or negative value, depending on

whether the goods are complements or substitutes. If two products are complements, an
increase in demand for one is accompanied by an increase in the quantity demanded of
the other. For example, an increase in demand for cars will lead to an increase in demand
for fuel. If the price of the complement falls, the quantity demanded of the other good
will increase. The value of the cross-price elasticity for complementary goods will thus
be negative.
A positive cross-price elasticity value indicates that the two goods are substitutes.
For substitute goods, as the price of one good rises, the demand for the substitute good
increases. For example, if the price of coffee increases, consumers may purchase less
coffee and buy more tea. Conversely, the demand for a substitute good falls when the
price of another good is decreased. In the case of perfect substitutes, the cross elasticity
of demand will be equal to positive.
Production Possibilities Frontier (PPF)


Production Possibilities Frontier (PPF) is the curve that shows all of the possible
combinations of two goods that can be produced within a specified time with all its
resources fully and efficiently employed.
Quantity of
Good B



Quantity of
Good A
The economy can produce at any combination on or inside the curve (A, B, D).
Point C outside the curve is not attainable.
There are four assumptions on PPF, which are full employment and productive
efficiency, producing two goods, fixed resources and fixed technology. It is said that
points A and B are attainable and efficient because all resources are fully and efficiently
employed. Points inside the curve (D) is attainable and inefficient because resources are
not fully and efficiently employed. Point outside the curve (C) is unattainable because of
limited resources.
Consumer Goods
Shifts in the Economys
Production Possibilities Frontier
This is when there is an increase in available resources or technological advance that
benefits consumer goods.

Capital Goods


Demand and Supply
Price of Corn





Quantity of Corn

Figure 4.1: Shift in the Supply Curve of Corn

Based on the Figure 4.1, the price equilibrium is $4.30 and the quantity
equilibrium is Qo. The advancement in seed technology, fertilizer, equipment and
planting methods for corn has increase the production of corn. Thus, it will shift in the
supply curve of corn from S1 to S2 due to the improvement of technology. This has
decrease the price of corn to $4.20, and increase the quantity supplied to Q 1, which is
more than the equilibrium quantity, Q0. Disequilibrium of market condition has occurred,
which is surplus. The market condition where the suppliers produce more goods than
what the consumer need that the quantity supplied (Q1) is more than the quantity
demanded (Q0). This is because when the price of corn has reduced, the consumers are
now more willing and able to purchase more corn as according to the law of demand.
Price of Corn

Quantity of Corn Cereal

Q1 Q2
Figure 4.2: Demand of Corn Cereal due to the Input Cost

As the price of corn has reduced due to advancement of technology, it can be shown on
the Figure 4.2 that after the drop in the price of corn. This is followed by the increase in
demand for corn cereal. The corn cereals main ingredient would be corn which corn is
the input goods for corn cereal, the manufacturer of corn cereal are more willing to
produce corn cereal at a lower price as the raw material (corn) is now cheaper. Thus, the
demand for corn cereal will therefore largely increase. In this situation, it can only be
good news for the manufacturer of corn cereal as the cost of production has largely
reduced. They are able to produce vast amount of corn cereal with a much lower cost.
Cross-Price Elasticity of Demand
The cross-price elasticity of demand is a positive or negative number
depends on whether the two goods are substitutes or complements. We assume that corn
and wheat are substitute goods. Substitutes are goods that typically used in place of one
another. A decreases in corn price will induces the producer to manufacture products by
using corn. The producer will switch the input goods from wheat to corn due to the drop

in corn price. Thus, the price of corn and the quantity of wheat demanded move in the
same direction, the cross-price elasticity is positive.
Besides, the corn and farm equipment are complement goods, which
means goods that are typically used together. The advancement of technology has
decrease in the price of corn. Therefore, farmers will plant and harvest more of this
commodity and will need more farm equipment to harvest the crops. In this case, the
cross-price elasticity is negative, indicating that the drop in price of corn will increase the
quantity of farm equipment demanded.
Production Possibilities Frontier (PPF)
This is a production possibilities frontier graph that makes the assumption that the
economy only produces two goods, wheat and corn. It has also assumed that it has
already in a condition where it has full employment and productive efficiency, the
technology is fixed and the resources available are also fixed.
Quantity of


Quantity of Corn

Quantity of Wheat

FigureA4.3: Production Possibilities Frontier for Corn and Wheat

The production possibilities frontier curve has shown that by forgoing wheat just
to produce is not worthy as the PPF has shown increasing opportunity cost which as the
economy continues to increase production of one good (corn), the opportunity cost of
producing that next unit increases. According to the Figure 4.3, point A and B are
attainable and efficient because the economy have fully utilised the given resources. Point
D is attainable, but inefficient because the economy did not fully utilised the resources
given. Point C is not attainable which may be caused by insufficient of resources or the
technology level is not advanced enough.

Quantity of Wheat


Figure 4.4: A Shift in the Production Possibilities Frontier

As the article mentioned, advances in seed technology, fertilizer, equipment and
planting methods have led to historic corn yields. This is a good example of
demonstrating how advance in seed technology can further increase the production of
crops. Based on the Figure 4.4, with the advancement in seed technology, the economy
can now move the PPF curve outward from A to A by making the choice of producing
corn only.
To conclude that when the supply of corn has increased due to the advance in
technology, the price of corn has decreased. The relationship between corn and corn
cereal is complements, which means that when the price of corn decreases, the quantity
demanded for corn cereal will subsequently increase. The cross-price elasticity of
demand for corn and wheat is positive, because they are substitute goods and the quantity
demanded for wheat decrease when a decrease in corn price. Moreover, farm equipment
and corn are complement goods, therefore the cross-price elasticity is negative and the
quantity of farm equipment demanded increases as the price of corn decreases.
Furthermore, with the advances in seed technology, fertilizer, equipment and planting
methods, farmers should use it to fully produce corn instead of wheat.



The creator, Mark Pivac who is an Australian engineer has built a robot that can
build houses in two days, and could work every day to build houses for people. The robot
is called as Hadrian, it was a solution to the lack of available workers for bricklaying as
the average age of the industry is getting much higher, and the robot might be able to fill
some of that gap. However, there is also some people are arguing that it will take the jobs
of human bricklayers and this causes unemployment in bricklaying field in Australia.
This is because human house-builders have to work for four to six weeks to put a house
together, and have to take weekends and holidays. The robot can work much more
quickly and doesnt need to take breaks. In fact, Hadrian works by laying 1000 bricks an
hour, letting it put up 150 houses a year. Also, Mark Pivac will now work to
commercialise the robot, first in West Australia but eventually globally.

Demand for Labor
The industrysdemand for labor is a derived demand; it is derived from the
demand for the firm's output. If demand for the firm's output increases, the firm will
demand more labor and will hire more workers. If demand for the firm's output falls, the
firm will demand less labor and will reduce its work force.
Effects of Technological Change for demand for Labor
Scientists and engineers are constantly figuring out new technologies to give
better ways for human being. Technological advance raises the marginal product of labor,
which in turn increase the demand of labor and shifts the labor-demand curve to the right.
As a result, demand for labor for particular field would be increased.
However, it is also possible that technological change to reduce the labor demand.
The invention of a cheap industrial robot, for instance, could conceivably reduce the
marginal product of labor, shifting the labor-demand curve to the left, reducing the
demand for labor. Economists call this labor-saving technological change. This is because
the invention of the robot has become the substitute for human labor, the industry would
prefer robot rather than human as it is more effective.
History suggests, however, that most technological progress is instead laboraugmenting. Think about secretaries that used to type letters on typewriters long time
ago. It may be now replace typewriter with modern computers that can easily duplicate
and edit documents, one secretary now can do the same amount of work as four
secretaries could in the days of typewriters. That means the labour of the secretary has
been augmented by the advance of technology, one secretary is now worth four
secretaries in the past. When a technology is improving then it means the population and
labour force grows, and actually grow the number of effective workers faster than the
population grows.

Diminishing marginal product

It is a condition occurs when more and more workers are hired by particular
industry, each additional worker contribute less and less to production because industry
has a limited amount of equipment. It needs to bear more cost when hiring more workers,
because of the profit cannot cover the wages paid to the additional worker. To understand

why diminishing marginal would causes a loss for industry, we need to study the table
Output MP of


Value of MP of
Labor (RM)


Marginal Profit

Based on the table above, when number of worker increases, the quantity of
output will increase. At the same time, diminishing marginal product occurs, when the
number of labor increases, the marginal product (MP) declines.
Production Function
Quantity of Output


Quantity of Output worker

Production function is a graph showing the relationship between the inputs into
production (worker) and the output from production. As the quantity of input increases,
the production function gets flatter, this reflects the property of diminishing marginal
product is happening.

Formula: Value of the MP of Labor = P x MP


Value of MP

A decrease in marginal product of labor (MPL) will cause a reduction for value of
the MP. To calculate the marginal profit, we need to minus workers contribution to the
value of MP from the wages that pay to worker. Lets assume that a kilogram of the
output is RM10, if an additional worker produces 80 kg of output, the worker has
produced RM800 of revenue, so the first worker has helped the firm to earn a profit of
RM 500, because the value of MP is more than wage. However, the third worker causes
the firm to have a loss of -RM100 because value of MP is less than wage. Since the
primary goal of an industry is to maximize the profit, it force to stop hiring additional
worker in this field.

Demand for Labor
In general, when there is high demand of the output, the demand for labor will
increase, this is because demand of labor is derived demand. In this case, the demand for
brick house in Australia is high, and the demand of labor is supposed to increase.
According to Master Builders Association of NSW executive director Brian Seidler, the

labor drought came amid increased demand for bricklayers not just in the new home
market but from thousands of renovators. Nearly 65 per cent of existing housing stock is
25-35 years old. They all need renovations. The problem is weve got to get people
interested in the industry, MrSeidler said. However, in this case, the demand for labor
has decreased, this is due to the invention of Hadrian, a robot which become the
substitute to the available bricklayer. The shortage of bricklayer has been solved, and
demand for bricklayer is no longer higher.

Wages of Bricklayer

Figure 5.1: Demand forQuantity
of Bricklayer
L1 L0

The invention of robot, Hadrian has assisted Australia to solve the shortage of
available labor. However, this technology has led to labor-saving technological change
also. The demand of labor is decreasing in Australia, thus shifting the demand for labor
curve from D0 to D1 that has shown in Figure 5.1. This is because Hadrian has become the
substitute to the labor. The invention of Hadrian allows more brick houses to be built in
short period, whereas labor need a long period to build more brick houses. Human house
builders have to work for four to six weeks to put a house together, and have to take
weekends and holidays. The robot can work much more quickly and does not need to
take breaks. Although Hadrian has benefits the demand market for brick house, there is
also some disadvantages. Since the demand labor has reduced, the wages of the labor will
be affected. Wages will be reduced, industry has more options regarding the type of
inputs to build the brick houses, either Hadrian or human labor. There is a high possibility
that the unemployment rate will rise in Australia. Bricklayers will lose their job, and they
have to look for other highly demanded job.


Value of the Marginal Product

Value of
Marginal Product

Profit- maximizing

Quantity of Bricklayer

Figure 5.2: The Value of the Marginal Product of Labor

There are few factors that affect industry would not hire more workers. The
invention of Hadrian is one of the factors that results in industry has no interest in hiring
more workers. Another factor is that the value of the marginal product of labor.
According to the Figure 5.2, when the marginal product of labor is more than market
wages, the industry will hire worker. Similarly, when the marginal product of labor is less
than market wages, the industry will not hire additional workers. The reason is industry
will make a loss, the revenue earned by the bricklayers is not adequate to cover the wages
rate. All these are because of property of diminishing marginal product. If the industry
hire more workers, each contribution by the workers will be reduced, because of limited
equipment. The marginal product will decrease gradually, and this will also lead to a drop
for the value of marginal product. The industry would not hire workers when the
contribution made by the workers cannot cover the wages paid to workers. The industry
will maximize the number of worker until the wages rate equal to marginal product of
labor. The intersection of the marginal product of labor curve with the market wage
determines the number of workers that the industry hires.
Initially, the high demand for brick houses in Australia and shortage of bricklayer have
led to a rise in demand of bricklayer. However, Mark Pivac, the Australian Engineer had
invent a robot, Hadrian to substitute the job for bricklayer. As a result, shortage of
bricklayer has solved, the demand of bricklayer is decreasing and automatically the
market wages rate will be reduced. There is a high possibility that the unemployment rate
in Australia arise due to the low demand for bricklayer, they need to find other highlydemanded job. The decrease in demand labor not just because of the substitute of robot,
Hadrian, but also because of property of diminishing marginal product. The industry will
only maximize the number of worker until the marginal revenue product of labor meet
the market wage ratein order to achieve its primarily goal which is to maximize profit.


This article talks about a new product that KFC introduced for its customers in
conjunction with the festive season. The product is called the KFC Ayam Kicap
Meletup. With the tagline So Meletup Sure Must Share, it features a combination of
Malaysias favorite condiments and unique soy sauce that suits local taste buds. The KFC
Ayam Kicap Meletups price ranges from RM 10.95 to RM 74.25 with various side
dishes and free cutlery sets. It is available at all KFC restaurants nationwide.
Utility is an abstract measure of the satisfaction or happiness that a consumer receives
from a bundle of goods. According to economists, if a bundle of goods provides more
utility than the other, it is to be preferred by consumers. By using an indifference curve,
we are able to find out how consumers maximize utility with the choices they make.
There are four properties of indifference curves:
1) Higher indifference curves are preferred to lower ones.
People usually prefer to consume more goods rather than less.
2) Indifference curves are downward slopping.
The slope reflects the rate at which the consumer is willing to substitute one good
for the other. If one good is reduced, the quantity of the other good must increase
for the consumer to be equally happy. This also assumes that the marginal rate of
substitution is always positive.
3) Indifference curves do not cross.
It is because at the point of intersection, the higher curve will give as much utility
as of the two goods as is given by the lower indifference curve. This is absurd and
4) Indifferent curves are bowed inwards.
The slope of an indifference curve is the marginal rate of substitution- the rate at
which the consumer is willing to trade off one good for the other. It reflects the
consumers greater willingness to give up one good that he already has in large
quantity. People are more willing to trade away goods they have in abundance and
less willing to trade away goods they have little, thus it is bowed inwards.
A budget constraint illustrates the limit on the consumption bundles that a consumer can
afford. By combining the budget constraint with indifferent curve, we are able to see how
consumers maximize their utility within their income. The point where the budget
constraint touches the indifference curves is the optimum point. It represents the best
combination of bundled goods available to the consumer. At the optimum, the slope of
the indifference curve equals the slope of the budget constraint. Thus, the consumer
chooses consumption of the two goods so that the marginal rate of substitution equals the
relative price.


Market structure
Monopolistic competition is a market structure in which many firms sell products that are
similar but not identical. It has the following attributes:
1) Many Sellers
There are many firms competing for the same group of customers.
2) Product Differentiation
Each firm produces a product that is slightly different from those of other firms.
3) Price Maker
They can easily change the price strategy of the market. If one company changes
their product price, it will also influence the other firms to change their prices.
4) Free Entry and Exit
Firms can enter and exit the market without restriction. The number of firms in
the market adjusts until economic profits are driven until zero.
Economies and Diseconomies of Scale
Economies of scale is the property whereby long-run average total cost falls as the
quantity of output increases. Diseconomies of scale is the property whereby long-run
average cost rises as the quantity of output increases. Constant returns to scale is the
property whereby long-run average total cost stays the same as the quantity of output
changes. Economies of scale often arise because higher production levels allow
specialization among workers. Diseconomies of scale can arise because of coordination
problems that are inherent in any large organization.
At low levels of production, the firm benefits from increased size because it can
take advantage of greater specialization. By contrast, the benefits of specialization have
been realized at high levels of production, and coordination problems become more
severe as the firm grows larger. Thus, long-run average cost falls at low levels of
production because of increasing specialization. It rises at high levels of production
because of increasing coordination problems.


Based on the article, KFC introduced a new product, which is the KFC
AyamKicapMeletup. This is because they need to attract consumers and increase the
marginal utility of customers. Assuming that the KFC Original Flavored Fried Chicken
was KFCs best-selling product before the new product is introduced. In the earlier stages
of introducing KFC Original Flavored Fried Chicken, consumers tend to buy the KFC
Original Flavored Fried Chicken and their total satisfaction increases accordingly.
However, as the total satisfaction of customers increases day by day, the marginal utility
towards KFC decreases with each additional unit of the same good consumed. Based on
Figure 6.1, when the total utility of the consumer reaches the maximum point (Point A),
the marginal utility of consumer will become zero. Therefore, the additional satisfaction
of consumer toward KFC will decline and this makes the marginal curve downwardslopping. This downward-sloping marginal utility curve has a significant effect for
consumer behavior regarding demand of KFC. Hence, KFC introduces a new product to
increase the satisfaction of consumers.
Point A


Quantity of KFC

Quantity of KFC

Figure 6.1: Relationship between Total Utility and Marginal Utility


Quantity of KFC Original Flavored Fried Chicken (Units)





Indifference Curve


120000 Quantity of KFC AyamKicapMeletup

Figure 6.2: Indifference Curve

Based on the article, the KFC AyamKicapMeletup is expected to shift the
consumers preferences towards this new product. The indifference curve in Figure 6.2
shows the combinations of KFC Original Flavored Fried Chicken and KFC
AyamKicapMeletup with which the consumer is equally satisfied. The points A and B are
on the same curve. Thus, consumers are indifferent among both combinations.
With the new product, consumers will increase their consumption of the KFC
AyamKicapMeletup. From the Figure 6.2, we can see that the quantity of the KFC Red
Hot decrease from 1000 units to 500 units while the quantity of AyamKicapMeletup
increase from 20 units to 1200 units. This is because KFC AyamKicapMeletup is the new
product that is introduced by KFC and consumers are curious of it, thus consumers will
buy more KFC AyamKicapMeletup. This in return increases the satisfaction level of
consumer towards KFC product. When consumer buy each unit of KFC
AyamKicapMeletup, they will give up more and more KFC Original Flavored Fried
Chicken. The consumers preference shifts from point A to point B (Figure 6.2). This also
explains why the indifferent curve is bowed inward.


Market Structure
KFC is a monopolistic competition firm. KFC sell products that are different from
each other but there are no perfect substitutes for their products in terms of quality,
branding and location. KFC also sell differentiate product such as KFC Red Hot Chicken
and KFC Original Flavored. There are many firms in the market due to the unrestricted
freedom for other firms to enter to industry. It mean that firms can easily entry and exit
the market. When the market make a profit, many firm will entry into the market without
any restriction whereas when the market make a loss, the firm will exit the market. Due
to this condition, KFC will make zero economic profit in long run. We can analyze from
the Figure 6.3.
Price of KFC

Price of KFC


Quantity of KFC

Quantity of KFC

Figure 6.3: KFC Makes AZero Economics Profit in the Long Run
Based on the Figure 6.3, we can assume that the demand of KFC increase and
cause the price of KFC increase from P 1 to P2. Hence, KFC are making profits and this
situation have cause new firm to enter the market. The entry increases the number of
sellers and numbers of KFC products. When the number of sellers increase, supply curve
increase from S1 to S2, it causes the price of KFC decrease from P 2 to P1. When the price
decrease to the original price P1, KFC does not make any profit and KFC is in the market
have an incentive to exit. Therefore, the remaining firm earn exactly zero economic
profit in the long run.
Besides, KFC cannot limit their production as they have many competitors in the
fast food chain such as MC Donald and Burger King. For the pricing strategies, KFC
ignored the price of the competitors and set up their own price. This can explain why
KFC is a price maker. As a monopolistic competition market, KFC set their own price
based on the cost and theres no perfect substitute for the tastiness of their meals. The
price of the AyamKicapMeletup ranges from RM10.95 to RM74.25 with different
quantities and side dishes.


Economies of Scale


Quantity of AyamKicapMeletup
Figure 6.4: Economies of Scale
Figure 6.4 above shown that the increase in quantity of AyamKicapMeletup
produced causes the long run average total cost (LRATC) to decrease. By introducing the
new AyamKicapMeletup, the increase of customers would lead to KFC increasing their
output to fulfil the demand of customers. In the long run, KFC will face economies of
scale as the increased production of the new product would lower the cost of production.
From Figure 6.4, we can see that the increase in quantity from Q 1 to Q2 has decreased the
cost of production from P1 to P2. This is because workers are able to specialize and
become better at his or her assigned task.
Diseconomies of Scale





Quantity of AyamKicapMeletup

Figure 6.5: Diseconomies of Scale

However, as the quantity produced increases continuously, it will eventually face
diseconomies of scale due to coordination problems. As KFC produces more and more
AyamKicapMeletup, the more stretched the management team becomes, and the less
effective the managers become at become at keeping costs down. From Figure 6.5, we
can see that the increase in quantity from Q 1 to Q2 has caused the cost of production
increase from P1 to P2.


In conclusion, introducing new flavour of KFC which is KFC AyamKicapMeletup has
increase the satisfaction of consumers. Hence, consumers will buy more new flavour of
KFC compare to the old one. Besides, KFC is considered a monopolistic competition
market because KFC has many sellers. KFC is a market which has free barriers to enter.
Therefore, it can enter and exit easily. KFC is a monopolistic competitive firm because
KFC is a price maker.




FAO and the World Water Council have reported by 2050, water is most likely to be
scarce as the increased competition, which has affected 2/3 of the world. The reason for
water scarcity is also said to be caused by water pollution as a result of intensive
agriculture, industrialization and fast growing cities and over consumption mainly for the
production of food. As the pollution of water produced by humans, programs that can
ameliorate the water storage facilities, wastewater capture and reuse and research to
reduce water usage in farming.
Scarcity is one of the most basic economic problems the economy face. Scarcity
happens because the society has unlimited wants, but is simply provided with limited
resources. Thus, decisions have to be made on what to take. Trade-offs are often pressed
out as an opportunity cost, which is the most preferred possible alternatives. Resources
have to be allocated efficiently and effectively due to resources are limited and insatiable
Economists would then need to reach certain decisions made and what is the next
best alternative that they had to give up. A commodity is considered scarce if it receives a
non-zero cost to consume. In other words, it costs something. Nearly every good
consume costs something and is scarce. By consuming one good, another good is
foregone. Therefore, scarcity forces decisions and tradeoffs to be taken in.
Different kind of goods
1. Private Goods
They are both excludable and rival in consumption. Excludable means that it is possible
to prevent someone from consuming the good, to consume, one must pay in order to
consume the goods. Rival in consumption as in one particular good has been consumed
by a person, it cant be consumed by another person anymore. For example, Ali bought a
pancake and he ate it. Bakar can no longer eat that particular pancake anymore, as that
particular pancake is considered as a private good for Ali.
2. Public Goods
They are neither excludable nor rival in consumption. A person cannot be prevented from
using a public good and one persons use of the public good does not reduce another
persons ability to use it. For example, Clarisse walked through the alley at night with the
help of streetlights. Clarisse cannot be prevented from using the streetlights and after
using the streetlights. It will not stop Denise from using the streetlights too.
3. Common Resources
They are rival in consumption, but not excludable. For example, when Evan caught a
fish from the ocean, there will be fewer fish to be caught by others. Due to the vast size

of the ocean, the fishes are not excludable goods as it is difficult to stop others from
fishing fish out of the ocean.
Common resources are often overconsumed. The problem can be illustrated by the
parable of the Tragedy of the Commons. This parable is a story with a general lesson:
when one person uses a common resource, he or she diminishes other peoples enjoyment
of it. Because of this, the imposition of regulations and taxes are executed by the
government to reduce the use of common resources.
4. Natural monopoly goods
They are excludable but not rival in consumption. For example, consider an uncongested
toll road such as the North South Highway in Peninsular Malaysia. It is an excludable
good since one has to pay toll to use the road. Yet uncongested toll road are not rival in
consumption and the use of the road by one person does not affect the amount of use of
another person.
An externality arises when a person enlists in an activity that acts upon the
wellbeing of a bystander and yet neither pays nor receives any compensation for that
effect comes by that activity. If the impact on the bystander is beneficial, it is called
positive externalities. Nevertheless, if the impact is adverse to the bystander, it is called
negative externality. In the presence of externalities, societys interest in a market
outcome extends beyond the well-being of buyers and sellers who participate indirectly.
This is because buyers and sellers overlook the external effects of their natural processes
when determining how much to demand and supply, the market equilibrium is not
effective when there are externalities. That is, the equilibrium fails to maximize the entire
benefit to society as a whole.
Externalities come in many forms, namely:
Positive externalities
A positive externality exists when an individual or firm preparing a decision does
not have the entire benefit of the decision. The welfare to the individual or firm is less
than the benefit to society. Thus, when a positive externality exists in an unregulated
market, the marginal benefit curve (the demand curve) of the individual making the
decision is less than the marginal benefit curve to society. With positive externalities, less
is produced and consumed than the socially optimal level.
When a positive externality exists in an unregulated market, consumers pay a
lower price and consume less quantity than the socially efficient outcome. There are
many common examples of a positive externality. Immunization prevents an individual
from getting a disease, but has the positive effect of the individual not being able to
spread the disease to others. Keeping your yard well maintained helps your house's value
and also helps the value of your neighbours homes. Beekeepers can collect honey from
their hives, but the bees will also pollinate surrounding fields and thus aid farmers.


Once again the government can correct the market failure by inducing market
participants to internalize the externality. The appropriate response in the case of positive
externalities is exactly the opposite to the case of negative externalities. To move the
market equilibrium closer to the social optimum, a positive externality requires a subsidy.
Health and medication are heavily subsidized through public hospital.
Negative externality
A negative externality (also called "external cost" or "external diseconomy") is an
economic activity that imposes a negative effect on an unrelated third party for which
they are not compensated. In this case, the market has failed because no one pays for the
cost resulting from negative externalities. It can arise either during the production or the
consumption of a good or service. Externalities commonly occur in situations where
property rights over the assets or resources have not been allocated, or are uncertain. For
example, no one owns the oceans and they are not the private property of anyone, so
ships may pollute the sea without fear of being taken to court.
Government can correct these market failures. A variety of approaches can be
used to address the problem of negative externalities. For example, the government can
impose a pollution compensation tax on an activity that creates negative externalities in
order to bring the private cost in line with the social cost of the activity. Creating new
property forms is another alternative. Here, instead of government directly regulating an
activity to make sure that resources are allocated efficiently, resources may be privatized
so that the individuals will have an incentive to exercise property rights to the resources
efficiently. Or, the government may impose obligatory controls regarding certain
activities. For example, most municipalities do not allow leavers to be burned or dogs to
roam freely.


Water is the resource that is scarce in this article. The reason being
overconsumption of water and water pollution. The natural resource of water is not
enough to cover the high consumption of our society. Therefore in order to solve the
problem, the authorities have urged public and private sectors to invest in programs that
protects water supplies.
Different types of goods
Water, like public goods, is not excludable. The water consumption of one does
not hinder the other person from using it. It is, however, rivalrous in consumption. When
one consumes water, it precludes the consumption of water by another person. Therefore,
water is a common resource. While public goods are free of charge to anyone that uses
them, it is not the same for common resources. To prevent overuse of water, the
government has imposed usage charges to mitigate the problem. As the market for water
does not adequately protect the environment, the contamination caused by the markets
are remedied with regulations, fee imposition or with corrective taxes on polluting
activities. Therefore, water is a common resource.
Price of Water

Social Cost (Private Cost and External Cost)

Supply (Private Cost)

Demand (Private Value)



Quantity of Water

Figure 7.1: Pollution and Social Optimum

Due to externality, the cost to society of producing clean water is larger than the
cost for the firm to manufacture it. For each unit of goods is to be developed, the social
cost which includes the individual costs of the goods producers plus the cost to those
bystanders affected adversely by the pollution of water. From the Figure 7.1 above
depicts the societal price of producing commodities. The social-cost curve is above the

supply curve because it brings into account the external cost imposed on society by goods
producers. The difference between these two curves reflects the cost of the pollution
To determine what quantity of clean water should be produced, a benevolent
planner will require to maximize the total surplus derived from the market (the value to
consumers of goods minus the price of making commodities). The planner will
understand that the cost of producing clean water includes the extraneous costs of the
pollution. Thus, it is rational to choose the level of resource produced at which the
demand curve crosses the social-cost curve. This intersection determines the optimal
quantity of clean water from the societal point of view.
It is observed that the balance amount of goods, Q market, is bigger than the socially
optimal quantity, Qoptimum. The understanding of this inefficiency is that the market
equilibrium reflects only the private cost of output. In the market equilibrium, the
marginal consumer values goods less than the social cost of producing it. That is, at
Qmarket, the demand curve lies below the social-cost curve. Therefore, reducing clean water
production and consumption under the market equilibrium level raises total economic
To achieve the optimal outcome, taxes should be imposed on industries that
pollute the water supply. The function of such a tax, called internalizing the externality
will give buyers and sellers in the market an incentive to take account of the external
effects of their actions. The industry will take account on the cost of pollution when
deciding how much output is to be produced. As the market price would reflect the tax on
producers, consumers will have the incentive to consume a smaller quantity of water.
In conclusion, water is a common resource. It is scarce due to overconsumption
and water pollution. Negative externalities arise due to industrialization leading to
pollutants being emitted into the water source. Thus, government should impose taxes in
order to prevent overconsumption and water shortage in the future.


APA Reference
Griffin, A. (2015). Hadrian the robot bricklayer can build a whole house in two days.
Retrieved from http://www.independent.co.uk/life-style/gadgets-and-t
Huffman, T. (2015). Corn yields up, prices down. Retrieved from
J.Holzer, H. (2015).A $15-hour minimum wage could harm Americas poorest workers.
Retrieved from http://www.brookings.edu/research/opinions/2015/07/15-dollarminimum-wage-harm-economy-holzer
Keene, N. (2015). Huge Demand for Brickies: Much moolah to be had for willing
workers. Retrieved from http://www.dailytelegraph.com.au/news/nsw/hugedemand-for-brickies-much-moolah-to-be-had-for-willing-workers/storyfni0cx12-1227245387308
Scott, C. (2015). FAO urges sustainability over immediate profits to safeguard water
supplies. Retrieved from http://www.foodnavigator.com/Policy/FAO-urgessustainability-over-immediate-profits-to-safeguard-water-supplies

Wan IlaikaMohdZakaria. (2015). Honda: Car prices to fall post-GST. Retrieved from

Zatlin, A. (2015). Americans Are Having Fun (And Spending). Retrieved from


Marking Scheme
Marking Scheme


Summary of the newspaper cutting

Discussion (Introduction, Theory, Concept etc)
Appropriate diagrams, explanation of the diagrams and application
English competency