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Unit Name: Introductory Economics ECON1000


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Article Summary
The article Spike in sugar price raises fear of increasing food cost
discusses the possibilities of rise in price for sugar based products.
Malaysian Government maintain a ceiling on wholesale and retail price of
refined sugar. In the event of recent hike in price of raw sugar, government
allows the change in wholesale refined sugar from 1900RM a tonne to
2600RM a tonne. The retail price is unchanged. There is 31% of rise in
price and it is predicted that the commercial users will have a significant
impact and sugar-based commodities will see an increase of price. There is
a proposal to the government to also change the retail price of sugar.
Introduction
This essay will cover the economic theories that was applied at the sugar
market. It will also discover the laws of demand and supply, shortage or
surplus, price elasticity of demand of sugar and market efficiency.
Demand and Supply of Sugar
Demand curve shows the relationship between a product price and
quantity demanded of the product (Brennan 2014). Every year there is an
increase in demand of sugar. Sugar is a basic commodity and it is used
heavily in making food products. As the article stated price increases then
the demand will be less, so there will be a movement along the curve. As
the law of demand asserts there is an inverse relation between changes of
price and quantity demanded (Brennan 2014), if price rises the demand
will be less. The article does not say about any changes in demand, but if
the price rises and Ceteris Paribas then it can be considered that demand
will fall. The consumers here are the industrial users who will have to pay
2600RM instead of 1900RM per tonne.

Figure 1.a represents the movement of changes in quantity demanded and


changes in price. Before the price change the demand for sugar was Qd1 in
P1. Assuming P1 is 1900RM. After the price change the demand is now Qd2
in P2. Assuming P2 is 2600 RM. The demand curve is D1. Movement along
the demand curve is from point A to point B. Consumers have to pay 31%
more price, which caused the demand to decline. Another non-price
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variable to shift the demand curve is income. The price of sugar rises and
the consumers have to bear it by change the price of their manufactured
sugar based products, again law of demand is in effect for these products.
The industrial users will earn less revenue because demand of the
products will be lessening; so the consumers of sugar will be less
interested in buying more sugar concerning to make a profit.
One of the determinant is price of the substitute product. Industrial use of
High Fructose Corn Syrup is very common. The consumers may not have
considered the possibilities of using high fructose corn syrup, which can be
used as a sweetener; but in regard to the rise in price of sugar they can
consider the possibilities of using it. It will significantly decrease the
demand of sugar and increase the supply of corn syrup. Figure 1.b
represents the supply and demand of high fructose corn syrup.

It shows that because of the increase in price of sugar substitute product


corn syrup demand has shifted. In price P1 there was demand of Qs1
quantity and in P2 price there is Qs2 quantity demanded. Demand curve
shifts to right from D1 to D2. Supply curve is S1.
The supply curve shows the relation between the price of a product and
quantity of a product supplied (Brennan 2014). One of the agent for
shifting the supply curve is expectation of future prices. As article this
stated there is a rise in the price of sugar, then the suppliers may store the
manufactured product to sell later at a higher price. The law of supply
affirms if prices escalate there will be an increased amount of supply. So
an obvious determinant is changes in price, because the higher the price
more profit there will be thus producers will produce more sugar; but the
demand is lower due to the high price so it will decrease the supply as the
demand falls. Below the graph shows movement along the supply curve
and shits in supply.

It shows that at P1 price seller can produce and supply Qs1 quantity of
product. At an increased price of P2 seller is willing to provide increase
supply of Qs2 quantity; but because of the changes in price, demand is
lower so the actual quantity supplied is Qs3. The variables explained here
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causes the reduce in supply. It causes the supply curve to shift in the left
from S1 to S2
Another non-price factor for shifting the supply curve is price of the
substitute. As mentioned above because of the price changes in sugar
consumers will go for high fructose corn syrup as a substitute, if the
substitutes price remains the same there will be an increased demand for
corn syrup thus lower the demand for sugar and drop in the supply of
sugar.
Price ceiling is government imposed rules and government controlling the
price for a commodity at a precise amount below the equilibrium price in
the market. When there is a price ceiling the price cannot change without
governments permission. In a free market economy price ceiling is a
burden for the producers, but it can be proved as efficient in many ways
for the consumers. Chen and Robert W. (1996) argues price ceiling is not
so effective. Long term exposure of ceiling in a product or services can
cause shortage and black market trade for the commodity (DAWN 2009).
Price Floor is also set price by the government at a higher than the market
equilibrium. As the article mentions the government of Malaysia maintains
a price ceiling on refined sugar. Ceiling should cause a shortage in supply
but not that kind is stated in the article, also not about the if the
equilibrium price is set below market equilibrium or according to market
equilibrium. According to Reuters (2010) Malaysia subsidies on sugar. To
keep the production at a constant rate and to overcome the shortage on
sugar the government controlled price is the new market equilibrium.
Changes in price was necessary to achieve an equilibrium in the market.
That way producers do not have to bear the burden of loss because of the
recent price hike in raw sugar. Below is a graphical representation of how
equilibrium price shifts.

Chart shows that P1 and Qd1 is the past equilibrium price and quantity
demanded because of the price ceiling. S1 and D1 was the default point of
intersection. The price rise causes a change to shift the demand curve to
D2 and supply curve to S2, which now intersects at a different point. P2 is
the new price and Qd2 is the new quantity demanded. That is the new
equilibrium price and quantity demanded of sugar.
Price Elasticity of demand and the Total Revenue
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Price elasticity is a relationship between the changes of price and changes


in quantity of demand. It projects the responsiveness of price or a product
to how each response to the changes of the other one. This is
measureable by theories. There is a formula to measure price elasticity of
demand.

As the article does not says any significant amount of demand is going to
be changed, instead it says the industrial users have to increase the price
of their products and considering it is one of the basic food source, the
demand has not changed drastically. As mentioned earlier due to
determinants of demand the demand of sugar will be less. It will be elastic
if the demand drops proportionately with the changes in price by one. it
will be inelastic if the demand drops proportionately with the changes in
price by less than one. Below is the diagram of the applying of the theory
above stated.

PEd= %Qd/%P

= (1725000-1700000) (1725000+1700000) / (2600-1900)


(2600+1900)
= 0.0072/0.1555
= 0.0463
Data from the diagram clearly shows that prices rise in an amount and the
changes in demand are weak in response. It can be concluded that sugar
has an inelastic demand in Malaysia. Total revenue is the amount that
sellers earn from buyers when selling their goods (Brennan 2014). In the
event of producers increase the price of sugar, they will earn more
revenue even if the demand drops. The demand is inelastic so changes in
demand will cause a small amount of loss to incur, insignificant to the
revenue will be earned.
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Market Efficiency
Consumer Surplus is the price consumers willing to pay and price
consumers actually paid (Brennan 2014). The Producers Surplus is price
producers willing to accept and the price producers actually received. As
stated in the article government allows the price to change, which caused
the demand to change and supply curve to shift to the left. As per
consequences the consumer surplus drops by area B, C, D. whereas shift
of the supply curve will increase Producers Surplus by area B and drops in
area F, G.

In conclusion, the producers are better off increasing the price. The 31%
rise of price will earn them a big revenue, also with government
subsidizing the sugar they have much less burden to worry about. Other
factor the producers are the most gainer of the price rise is inelastic
demand for sugar. In near future it does not seem plausible to the inelastic
demand become elastic, so they will keep earning profit.
On the contrary, the consumers, who are the industrial users of sugar they
will have an inferior period to cope up. With 31% increased price of sugar
their product will have to also increase the price, and it is a huge risk for
them to be in the market; because their customers may not accept the
change of price and they can face a loss or limited revenue to continue
production of sugar based products. The consumers should think about
using high fructose corn syrup as a substitute sweetener. Using a
substitute will ensure their economic growth and ensure production, also
will not be risking losing the customers.

References
Chen, Yongmin, and Robert W. Rosenthal. "On the Use of Ceiling-Price
Commitments by Monopolists." RAND Journal Of Economics 27, no. 2
(Summer 1996): 207- 220. EconLit, EBSCOhost (accessed October 2,
2016).
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Dawn 2009. Will price controls on sugar work?. DAWN, September 7, 2009.
http://www.dawn.com/news/838724/will-price-controls-on-sugar-work
Kong See Hoh, 2016. Spike in sugar price raises fear of increasing food
cost. The Sun Daily,
August 4, 2016.
http://www.thesundaily.my/news/1925248
USDA, 2016. Sugar: World Markets and Trade, United States Department of
Agriculture, Foreign Agriculture Service, May 2016.
http://www.fas.usda.gov/data/sugar-world markets-and-trade

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Spike in sugar price raises fear of increasing


food cost
Posted on 4 August 2016 04:58pmLast updated on 4 August 2016 07:26pm Kong See Hoh
newsdesk@thesundaily.com

PETALING JAYA: Sugar manufacturers have increased the wholesale price of refine sugar
by RM600 a tonne, from RM1,900 to RM2,500, raising fears that prices of sugarbased
products will go up in tandem.
According to a report in Nanyang Siang Pau today, the government had allowed the hike in
the wholesale price of refine sugar effective this month due to the increase in world raw
sugar price.
However, the retail price of refine sugar remains unchanged.
Domestic food industry players lamented that the steep price hike in sugar for commercial
users is putting pressure on food manufacturers.
They said the prices of sugarbased food and beverage products will have to go up.
MSM Malaysia Holdings Bhd presidentcumgroup chief executive officer Mohamad Amri
Sahari told the daily the government withdrew all sugar import permits in March and
requested that sugar manufacturers sell the commodity to wholesalers at RM1,900 per
tonne.
"But following the sharp rise in the prices of raw sugar in the world market, we appealed to
the government to allow the wholesale price to be increased.
"So, with effect from Aug 1, the price has gone up from RM1,900 to RM2,500 per tonne. This
is good news for us."
He said the company had also proposed the government increase the retail price of sugar,
which is maintained at RM2.84 a kg currently.
SME Association of Malaysia president Michael Kang said the huge jump in wholesale price
of sugar will have a significant impact on the domestic food manufacturing industry, adding
that increases in prices of food products are inevitable.
He pointed out that products such as bread, biscuits, soy sauce use a lot of sugar.The hike in
the price of sugar for industrial users will hit food manufacturing the hardest, he said.
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"With the increase in production cost, the prices of manufactured food products will definitely
go up."

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