GOALLLLLL!!!

         Adapted from The Star Newspaper Online dated on 16th April 2010, “About 300 tickets for the final were to be sold on a first-come first-served basis. Fans inside the ticketing center slept on the floor as they waited to be served.” 

Wonder why FIFA choose to sell about 300 tickets for the final using the mechanism “First-come, first-serve”?

        First and foremost, I need to explain some of the economic theories applied by FIFA.Tickets are limited as the stadium can only contain a certain amount of people. As you know,FIFA World Cup catches nationwide attention and World Cup does not happen every year. In fact,World Cup only will be held once every four year. Thus, the quantity demanded will be higher than the quantity supply and equilibrium will be almost impossible to achieve. In equilibrium, the quantity demanded for the tickets is equal to the quantity supplied by the ticketing centers. As what is shown in diagram below, the demand curve and the supply curve intersect at a point (allocation of tickets are efficient). Assume that the price of each ticket sold by ticket centers is 500USD (equilibrium price) and the equilibrium quantity is 4 million tickets (assuming that the venue can only fit maximum capacity of 4 million fans).

Consumer surplus in this case is the excess of benefit received from the ticket over the amount the fans paid. This can be calculated by using the formula of triangle. The area of this triangle is equal to its base (300,000 tickets) multiplied by its height (500USD) divided by two, which is 75 million USD. Producer surplus in this case is the excess of the amount received from the sale of the tickets over the cost of producing it. This can also be calculated by using the formula of triangle, which is the base (300,000 tickets) multiplied by its height (300USD) divided by two; the answer will be 90 million USD.

If FIFA decided to fix the price of each ticket to 400USD (maximum price), this price ceiling will cause an excess of demand and the tickets available is 200,000 tickets (as shown in diagram below). Hence, there will be a shortage of 100,000 tickets.  Somehow in some ways, the number of tickets available (quantity supplied) need to be allocated among the frustrated fans. On the other hand, if the price ceiling is set above the equilibrium price (maximum price), there will be no effect.

         

Other than causing shortage, if the price ceiling is set below the equilibrium price, an inefficient will happen. The price ceiling (400USD) is below the equilibrium price (500USD) and the quantity of tickets supplied (2 hundred thousands) is less than the efficient quantity (3 hundred thousands). Deadweight loss also occurs as the quantity of tickets supplied (available) is less than the efficient quantity. Moreover, producer surplus and consumer surplus shrink. There will also be a potential loss from searching the tickets which is bear by the fans.

            Furthermore, price ceiling encourages black market which is an illegal market that the equilibrium price exceeds the price ceiling (or maximum price). When price ceiling is enforced, frustrated ticket sellers will find ways to increase the price. The level of black market price depends on how tightly the rent ceiling is enforced. When the enforcement is strict, the black market price is equal to the maximum price that the fans are willing to pay. However, if the enforcement is loose, the black market price is close to the unregulated price. The “black dot” shows the maximum black market price of the tickets. To the quantity of 2 hundred thousands, some of the fans are willing to pay 700USD. It’s either they pay the black market price or continue to search for tickets.

Why am I telling you all these? It’s because this is what happens here. Because of the rent ceiling and persistent shortage, FIFA decided to sell about 300 tickets for the final using the mechanism of “first-come, first-serve”. This mechanism is actually one of the ways to allocate scarce tickets as tickets are limited. In other words, tickets are sold to the first few hundred people who took time to line up at the ticket center way before the center start selling tickets.

In my opinion, this is mechanism is only fair to a certain extend as one person might buy more than one ticket. For example, if one person is only limited to buy four tickets at most and each one of them bought four tickets. Mathematically, only about 75 people get to buy the tickets. This means that the rest of the people who line up early won’t get to buy the tickets. In the end, they will become more frustrated if they don’t get to buy the tickets. In addition to that, are the tickets worth lining up? The article also states that some fans inside the ticketing center even sleep on the floor as they waited to be served. The time that they spend on lining up can be used to do other activities that are more beneficial. The marginal cost of lining up is the cost of not spending the time to do other activities.

            Other than the first-come, first serve mechanism, there are actually some other possible mechanisms that can be used to allocate scarce tickets. One of those is lottery. A lottery can allocate the tickets to those who are lucky. Whether if you‘re extremely rich or whatsoever, you still can‘t buy one. There’s also the discrimination mechanism which I think it’s more unfair than first-come, first serve mechanism. This is because discrimination that based on nationality, family ties, friendship, race and etc. might be involved in. We can’t prevent this mechanism to occur whether we it or not.  

So, price cap works or not? It varies depending on individuals. 

The consequences of decreasing the subsidy of sugar

According to the article from The Malaysian Insider dated on 28 September 2012, the subsidy on sugar will be reduced by 20 sen per kilogramme effective on 29 September 2012.Prime Minister Datuk Seri Najib Razak said that the decision to reduce the subsidy on sugar was made as about 2.6 million people in the country were diabetic. But the government is still subsidising 34 sen per kilogramme on sugar involving an expenditure of RM278 million. The price of sugar, a controlled item, had gone up four times, to RM2.30 per kilogramme. It will be increased to RM2.50 per kilogramme by 29 September 2012. He said it was hoped that the business community would not burden the people by increasing the price of sugar, but instead reduce the content of sugar in food and beverages. The increase had been necessitated by factors beyond the government’s control, such as climate change, natural disasters in producing countries and global market price.

In my opinion, subsidy, which is a payment made by the government to a producer, decrease the prices paid by buyers and also decrease the price which producer produce. The effects of a subsidy are similar to the effects of a tax but they go in the opposite direction. So, subsidy is like a negative tax. Based on this article, the government is still subsidizing 34 sen per kilogramme on sugar after reducing 20 sen from the price of sugar per killogramme, involving an expenditure of RM278 million.

There are five effects of a subsidy to sugar. The first one, the supply of sugar will increase when it is subsidized. Next, a subsidy decreases the price of sugar and increases the quantity production of sugar. Subsidy also lowers the price paid by consumers but increases the marginal cost of producing sugar. Furthermore, the government pays a subsidy to sugar producer on each kilogramme of sugar produced. Lastly, the subsidy results in inefficient production. At the quantity produced with a subsidy, marginal social benefit is equal to the market price, which has fallen. Marginal social cost has increased and exceeds the market price (marginal social benefit), so the increased production brings inefficiency. Below is an example of the effects of a subsidy on sugar.

As shown in the diagram above, with no subsidy producers produce 20 million tons a year of $20 a ton. Let‘s say that the government give a subsidy of $10 a ton. This shifts the supply curve rightward to S-subsidy. The equilibrium quantity increases to 30 million tons a year, the price falls to $15 a ton, and the price plus the subsidy received by producers rises to $25 a ton. In the new equilibrium, marginal social cost exceeds marginal social benefit and the subsidy results in inefficient overproduction.

Next, sugar will increase 20 sen per kilogramme on 29 September 2012 as government reduced the subsidy on sugar. According to the law of demand, there is an inverse relationship exists between the price of the sugar and the quantity that consumers are willing and able to purchase. As government reduces the subsidy on sugar, it means the price of sugar will increase, causing the quantity demand of sugar will decrease. Assume that sugar is a necessity good in our life, faced with the higher price of sugar and unchanged income, people are not willing to pay the price that had been raised and they will tend to use less sugar. An increase in the price of sugar will only slightly affect the quantity demanded. Thus, the quantity demanded of sugar is inelastic.

The increase had been necessitated by factors beyond the government’s control, such as climate change, natural disasters in producing countries and global market price. Let‘s say there’s natural disasters, supply of sugar will decrease and the supply curve will shift leftward. Thus, the supply of sugar will not be sufficient for the demand. There will be an underproduction in the market of sugar causing the price of sugar will increase. Hence, the supply of sugar will shift to the left. Other than that the equilibrium price will increase and the equilibrium quantity will decrease. Some of people might not be able to buy the sugar when the increase in the price of sugar. Thus, the demand of sugar will automatically decrease; the market sugar will change to be more efficient.

Prime Minister Datuk Seri Najib Razak said the decision to reduce the subsidy on sugar was made as about 2.6 million people in the country were diabetic. He said it was hoped that the business community would not burden the people by increasing the price of sugar, but instead reducing the content of sugar in food and beverages. But the price of sugar had already gone up 4 times to RM2.30 per kilogramme. On 29 September 2012, the price will be increased to RM2.50 per kilogramme. To me, increasing in price  of sugar is a good thing as excess consumption of sugar is not good for our health. It can cause serious diseases like diabetics.

In conclusion, subsidies are necessary for government to pay to producer when the prices of necessity goods increase and people might not be able to buy them. An increase in subsidy will lower the price, the demand will increase. A decrease in subsidy will increase the price, the demand will decrease. Natural disasters will shift the supply leftward, so the price of market equilibrium will increase and the quantity of market equilibrium will decrease. The increase in subsidy of sugar would only burden the people. It might not be able to reduce the people with diabetics.

Is There Still a Need For Olive Oil?

 Troubled Times for the Olive Oil Industry

      
         According to an article of Olive-oil prices posted on 22^nd September2012 on http://www.economist.com/node/21563304  from the print edition, when it comes to the production of olive oil, Spain tops the list. Spain which is located in the Mediterranean has the highest production of olive oil. This is due to the ideal climate for growing olive groves and the factors of production such as sufficient land, capital and efficient labourers.

      But a current drought in Spain will have a huge impact on the production of olive oil. This will cause the supply of olive oil to decrease which will cause the supply curve to shift to the left, which will result in an increase in price of olive oil as shown in Figure 1. The producers of olive oil in Spain have been mass producing olive oil, this has induced a continuous shifting of the supply curve to the right which causes the price of olive oil to keep falling as shown in Figure 2. The price has fallen to its all-time low seen for the past 9 years.

Figure 1

Figure 2

      For these 9 years, the consumer surplus has been increasing because they have been able to purchase the olive oil and lower prices. However the price “extra virgin olive oil” which is the top range of olive oil has increased by over 50% due to the surplus in stock from the previous year. The supply of “extra virgin olive oil” is therefore able to meet the demand of consumers. The demand for “extra virgin olive oil” has been increasing causing the demand curve to shift to the right and since there is a surplus in stock from the previous year, the supply curve is already able to cope with the demand. Thus creating a new market equilibrium with a higher price and with more “extra virgin olive oil” being purchased.

      When the price of “extra virgin olive oil” increases the demand for a substitute such as vegetable oil will increase. The demand for complements of “extra virgin olive oil” such as salads will fall. But it all depends on whether the demand for “extra virgin olive oil” is inelastic or elastic. If it is inelastic an increase in price will not affect the quantity of bottles of “extra virgin olive oil” being demanded. Where else if the demand is elastic an increase in price will heavily affect the number of “extra virgin olive oil” bottles being bought. Therefore the producers of the “extra virgin olive oil” have to be smart on how much they produce in order to maximise their total revenue. If they are looking at consumers who have elastic demand they should sell at lower prices but if the consumers have an inelastic demand then they should sell at higher prices.

      Producers have to anticipate the movement of their competitors if they wish to maximise their profit. They have to plan well in terms of the short-run and long-run production, this is because olive oil is harvested from the olive grove plants and olive grove plants take time to grow. This is why if a producer notices a sudden surge in demand for olive oil then they will not be able to produce enough olive oil to meet the demand and will lose out in terms of sales to their competitors. The producers will also have to monitor and have a forecast of how the market is going to turn out.

      If the demand for “extra virgin olive oil” continues to increase, this will lead to new firms coming in to try and make some profits for themselves since the market is doing so well. This will cause some competition, but it depends whether the market is actually control by a monopoly company. If it was a monopoly company, it could eliminate all the newly formed firms by selling the olive oil below the market price thus killing all competition. But since the demand for olive oil is of high demand right now many firms will enter the market and try to compete with the existing firms. If more and more new firms established, the monopoly cannot forever be selling at low prices, as it will cost the monopoly firm a big lost and eventually shutdown as well.

      The producers have to be both allocative and productive efficient in order to be truly efficient. Allocative efficiency is a point where the marginal benefit is equal to the marginal cost. In other words the producers must be producing a good which is socially desirable or high in demand. Productive efficiency is where the producers have to be producing at the lowest average total cost.  This is so that the producers can save money by producing at the most cost minimizing level without affecting the quality of the product. These 2 types of efficiency are crucial for a firm to succeed in the olive oil business.

      However the European Union is concern of the quality of olive oil which is being mass produced in Spain and therefore has decided to cut subsidies given to the producers. By cutting the subsidies the cost of producing olive oil has increase. Producers now cannot produce as much as they could previously, this will shift the supply curve to the left which will raise prices. By doing so, the European Union may just have killed two birds with one stone by increasing the price of olive oil which has been at its lowest price for the past 9 years and also reassuring that the quality of olive oil as it cannot be mass produce anymore. The subsidy should be removed only from the larger firms which are mass producing the olive oil and not for the whole sector of firm which are producing olive oil. The newly established firms rely heavily on the subsidies to produce the olive oil, removing the subsidy from them may very well force them to meet their end. Subsidies can help raise production, thus moving the supply curve to the right as shown in Figure 3.

      All in all, the supply and demand of olive oil will determine its selling price. Since there has been a drought in Spain which has severely affected the growth of the olive groves which will decrease the supply of olive oil in the near future, prices are expected to soar sky high. Both of the consumers and producers of olive oil will face difficult times ahead.

The Mobile Phone Industry

Samsung leading the Mobile Phone Industry?

      
         According to an article published by Reuters, 5^th October 2012 Samsung Expected to reach End of Record Run. Available at <http://www.nytimes.com/2012/10/06/technology/samsung-expected-to-reach-end-of-record-run.html?ref=business> .Samsung has enjoyed a quarterly profit of almost double the profit of last year, this is mainly due to the success of sales of the high-end televisions and its smartphones. The Galaxy modelled smartphones was the main money-maker for Samsung which the model Samsung Galaxy S3 alone sold over 20 million units in just over a month.

      The huge success in large volume sales of the Samsung smartphones is owed to the marketing department in Samsung which emphasizes a lot on advertising to capture the interest of consumers. Advertisements are one thing but choosing the venue and time to advertise the products is another thing. The marketing team of Samsung made a good choice in promoting their smartphones during the 2012 Olympics held in London.  Many people tune in and follow Olympic Games and the medal tally closely and during the commercial break this was when many people got to know about the Samsung smartphones and its features. It is said that Samsung spent over $2.7billion just on advertising during the 2012 Olympics.

      Since there was so much hype and talk about the all new Samsung Galaxy S3 it was not surprising that there were difficulties in the supply side to meet the demand for this new smartphone. The Samsung Galaxy is considered a normal good as it comes with a hefty price whereby not everyone who wanted a Samsung Galaxy S3 could just get it. However, during the first launch of the smartphone its demand was price inelastic as many people wanted to get their hand on it, therefore people prioritise the urge of having a Samsung Galaxy S3 ahead of their needs. But human wants are unlimited but the resources are limited, and in this case it is the labour that was the problem of why the supply could keep up with the demand of the smartphone. But at that point of time the market was in equilibrium as shown in Figure 1.

Figure 1

      However, after two months into the launch of the Samsung Galaxy S3 the demand for it became more elastic because of the other substitutes of newer smartphones such as the IPhone and Blackberry. When the demand is elastic, an increase in price will lead to a bigger than proportionate change in demand for the Samsung Galaxy S3. If the price of the Samsung Galaxy S3 was priced too high, then consumers would rather switch to other substitutes. When the demand of the Samsung Galaxy S3 decreases the demand its complements such as the casing or protective cover for it will also follow suit. The sales of the complementary goods would decline and the firms producing it will incur losses as they cannot clear the stock that they have had produced.

      In order for Samsung to reap economies of scale and continue increasing their profit they must be able to lower the long run average cost by producing a higher number of goods and also produce at the lowest point on the long run average cost curve. This can be done by investing in research and development to come out with new bigger machines to produce the smartphones at cheaper cost as they can produce higher quantities. When the quantity of smartphones being produce increases the average cost decreases because the fixed cost needed to produce the smartphones can be spread out over the high number of smartphones produced. Besides that, Samsung can also implement division of labour which can lead the specialization hence increasing the efficiency and ultimately decreasing the cost of production. Samsung will want to produce at the minimum efficient of scale as shown in Figure 2.

      On the other hand, if Samsung wish to increase their revenue they should continue selling their smartphones at lower prices in regions where the demand is elastic. Because even when the price is decreased the quantity demanded for the smartphone will increase by more than the priced decrease this will increase the total revenue at an increasing rate. Samsung should stop decreasing the price of the smartphone when the demand is unit elastic. This is the point whereby the change in price of the smartphone equals to the change in quantity demanded for the smartphone, the total revenue is maximized at this point. In contrary where else in regions where the demand for smart phones is demand inelastic, Samsung should increase the price of their smart phones. This is because when the price is increased the quantity demand for smartphones will decrease less than the price is increased. At this region Samsung will be still increasing total revenue but at a decreasing rate.

     The government can play a role in helping both Samsung maintain their profits and also help out the consumers. The government can start off by providing subsidies to Samsung which will be able to lower the cost of production. This will enable Samsung to produce more smartphones and increase the supply of smartphones. When the supply is increased, it will cause the supply curve to shift to the right which will lower the price of smartphones being sold. More consumers will be able to afford and enjoy the smartphone as the prices are now lowered and a new market equilibrium has been formed. However if the government gives too much subsidies to Samsung then they might turn Samsung into a monopoly power which will have the power over the whole market. So the government has to be wise in terms of decision making and to which producers the subsidies are actually given to and not just blindly giving out subsidies to every producer.

      In any event, Samsung has to be careful on what decisions they make if they want to keep their profits up. Because their arch rival, Apple which is also mainly in the smartphone business and other big companies such HTC and Sony are watching over Samsung’s every single move and will not hesitate to take advantage of the situation for their own gains and benefits. At this point of time in the fast paced moving world, it can be anybody’s game. One small mistake can lead to a huge blunder which will make you fall behind your competition.

The demand of hybrid cars

Based on the article from TheStar dated on 30 December 2010, the demand of hybrid cars is rising. Demand is what consumers are willing and able to pay, because of having the cheapest hybrid price at RM98000.An analyst from a local research house said that Honda Insight is not only cheaper but also offers good fuel economy as well. A Civic Hybrid costs RM129000; Toyota Prius is falls from RM175000 to RM139900 for each. Quoted from the article in The Star, the research auto analyst thinks that the rise in demand for the Insight would influence the sales of vehicles like Toyota Vios and Honda City because people would not mind forking out a bit more money to buy a hybrid. On the other hand, the sales of Perodua vehicles wouldn’t be influenced as these cars are much cheaper. They are still having the highest demands comparing to others imported vehicles.

The sales of Honda Insight which costs RM98000 for each are better than Toyota Prius. As Insight is having a cheaper price, Prius is more expensive than Insight. According to the law of demand, when other things remaining the same, the lower the price of a good, and the larger is the quantity demanded. Prius and Insight are similar type (as they are both hybrid cars), consumers will logically buy the car with the lower price. This called substitution effect.

Consumers usually consider everything before purchasing a car, including fuel saving. Honda Insight is not only cheaper but also offers good fuel economy as well. Insight has a very good sale as it is hybrid car. A hybrid car has two motors, the general petrol-powered and electric motor. This type of car is fuel efficient as it can switch between battery and petrol when in need. The two motors provide extra boost using a battery that is rechargeable. Thus, the demand of Insight will increase. Furthermore, the demand of Insight is also based on the prices of related goods. In this case, fuel is a complement of car as it is used in conjunction with the car. Nowadays, fuel is getting more expensive; Ron 95 is RM1.90 per litre, and Ron 97 is RM3 per litre. So, with this, I can say that the demand for the hybrid car will increase.

Price of Prius falls from RM175000 to RM139900 for each. It was cut down around RM35000 and now, the price of Prius and Civic are more or less the same. According to the law of demand, the lower the price of a good, the larger is the quantity demanded, when other things remaining the same. The consumers who are able to buy Prius (quantity demanded) will increase when the price cut down around RM35000. This is proven when the sales of Prius increase by 250 units as of November 2010. Hence, I can conclude that when price cut down, sales will increase.

Maghfur, the research auto analyst of OSK, thinks that the rise in demand of Insight would influence the sales of vehicles such as Toyota Vios and Honda City. Demand can be defined as you demand something, you want it or can afford it or have made a definite plan to buy. “Wants” are the unlimited desires or wishes people have for goods and service. “Demand” reflects a decision about which wants to satisfy. Demand is affected by preferences. Consumers will only buy what they wish to buy. So, I agree with Maghfur that the sales of Toyota Vios and Honda City would be slightly influenced when the demand of Insight rises.

Maghfur also said that “people would not mind forking out a bit more money to buy a Hybrid’. As the price of Toyota Vios and Honda City is within RM70783 to RM90819 (include road tax and insurance), especially Honda City which price starts from RM85840. The difference between the price of Honda Insight and two other cars is only between RM7000 and RM 18000. Mathematically, you will spend RM7000 to RM18000 more if you buy Honda Insight. So, the opportunity cost, which is the highest-valued alternative that must be give up to get it is Toyota Vios or Honda City. In addition to that, in long term, compared to petrol-based cars, consumers would actually “earn back” the money spend on fuel as hybrid cars as I mentioned above can switch between the two engines. Therefore, consumers are willing to spend more money to buy a Hybrid. He also thinks that sales of Perodua vehicles wouldn’t be influenced as these cars are much cheaper. A lower cost of vehicles will be more affordable to population if compare with a higher cost of vehicles. Therefore, most people are willing to buy the lower price rather than the higher price of vehicles. In other words, Perodua vehicles are still having the highest demands comparing to others imported vehicles. This is very obvious because many Perodua vehicles can be seen along the roads and highway when you are driving.  

In conclusion, the quantity demand of hybrid cars will be affected by the price of hybrid cars. The quantity demand of a type of cars will be affected by the lower price of the similar type of cars. Price of complement will affect the demand for all the cars. People will also buy the cars which they like, although the cars cost higher than others.

sin taxes

DR A. SOORIAN stated in The StarNewspaper, dated on Tuesday July 28, 2009 that even if taxes are increased, these group of people will still drink and smoke. They will continue to damage their health. The increased prices will impact negatively on their standards of living. They will be less able to feed, clothe and house themselves and resign to a life of misery. “Do the increases reduce the consumption of alcohol and cigarettes? No! People would still smoke and drink to “unwind” or are stressed and are addicted to the practices” he said. He also said that “Raising liquor and cigarette prices will encourage smuggling of these goods”. I agree with the statement, hence the cigarette and alcohol is perfectly inelastic demand.  Besides that, the increase of sin taxes will cause formation of illegal market.

               

      Why we need to pay taxes? This is because of the benefits principle .The principle state that people should pay taxes equal to the benefit they receive from the services provided by government .This arrangement is fair because it means that those who benefits most pay the most taxes. For example, high taxes on alcoholic beverages and tobacco products to pay for public health-care services. The division of the burden of a tax between buyers and sellers depend on the elasticity of demand and supply .In next paragraph, I will explain the elasticity of demand and supply.

              

      Who is the one really to pays these taxes? Tax incidence can answer this question .Tax incidence is the division of the burden of a tax between buyers and sellers When the government impose a tax on a good, the price paid by buyers  might rise by full amount of tax , by a lesser amount or not at all. If the price paid by buyers rises by the full amount of the tax, then the burden of  the tax falls entirely on buyers .This mean the buyers pay the tax. If the price paid by buyers rises by a lesser amount than a tax, then the burden of the tax falls partly on buyers and party on sellers. On the other hand, if the price paid by buyers remain unchanged, this mean the burden of tax is falls entirely on sellers.

                 

      The cigarette and alcohol is perfectly inelastic demand .For example, a pack of cigarette is Rm10 with no tax. If cigarette is taxed at RM 3 per pack, we must add the tax to the minimum price at which tobacco company are willing to sell cigarette. A tax of RM 3 per pack shift the supply curve to move upward, but the quantity bought does not change. Buyers pay the entire tax. This group of consumer still buying cigarette and alcohol although the price of cigarette and alcohol is increase because of the raise of tax. The more inelastic the demand, the larger the amount of tax paid by buyers. What happen if the cigarette and alcohol is perfectly elastic demand? For example, with no tax the price of cigarette is RM 10 per pack .If the cigarette is taxed RM 3 per pack, this will cause the supply curve will shift to the left and the quantity sold decrease .In this situation, the sellers pay the entire tax. In this situation, the tax raise cause consumers decrease their willingness to buy this product and the quantity sold decrease.

          
    

      The cigarette and alcohol is perfectly elastic supply. For example, with no tax, the price of a bottle of beer is RM15. A tax of RM 2 a bottle increases the minimum supply-price to RM 17 a bottle. The supply curve move downward .The tax has increased the price buyers pay by the full amount of the tax which is RM 2 and it has decreased the quantity sold. Buyers pay the entire tax. The more elastic the supply, the larger the amount of the tax paid by buyers.

            

      Assume that the cigarette and alcohol is perfectly inelastic supply .The price of a bottle of beer is RM 15 without tax. With a tax of RM 2, the price remains at RM17 a bottle. The number of bottles bought remains the same, but the price received by sellers deceases to RM 13 a bottle .Although beer is taxed at RM 2 a bottle but the supply curve does not change because the supply still produce same amount of beer .The amount of beer bought by buyers remain the same if the price is RM 15 a bottle, so the price remains at RM 15 a bottle .The sellers pay the entire tax.

Figure on top explain the tax of beer which on buyers. Tax incidence can help us understand the burden of the tax is fall on buyers or sellers. The price and quantity is just an example. With no tax, 400million bottles a year are bought and sold at the price RM15 a bottle. A tax on buyers lowers the amount they are willing to pay sellers , so it decrease the demand and cause the demand curve shift to the left. The equilibrium quantity decrease to 350 million bottles per year .The price paid by buyers increase to RM15.50 a bottle and the price received by sellers falls to RM14.50 a bottle. The tax raises the price paid by buyers by less than the tax and lowers the price received by sellers, so buyers and sellers share the burden of the tax. Let say a tax is fall on sellers and it just likes an increase in cost. To determine the position of the new supply curve, we add the tax to the minimum price that sellers are willing to accept for each quantity sold. This cause equilibrium quantity and supply decrease. 

      In short, taxes will affect the price of alcohol and cigarette as well as the supply and demand. Alcohol and cigarette is harmful to health of public. Besides increase the sin taxes, government should take other action to lower the demand of alcohol and cigarette. So that, the benefit and health of public can be protect.

What happens when the demand of pork meat increase

Yee stated in The Star Newspaper, dated on January 11, 2011 that an increased demand for pork products has prompted a 20% increase in pork meat prices for the coming festive season compared to last year.  The Johor (South) Butcher Association chairman, Foo Ow Chek said that pork prices had gone up by RM3, with a kilo priced at RM17. “There is no fixed or regulated price and the prices differ depending on the sellers and this had stirred a lot of dissatisfaction among consumers and traders alike,” he said. He also said that a high demand in a product naturally causes the price to increase.

      The increase in demand of pork meat will create a shortage. In this situation, some pig farmers realize that they can‘t provide enough pork meat for the consumers, hence they raise the price of pork meat. Some pig farmers try to slaughter more pigs so that they can increase their output. The rising price reduces the shortage because it decrease the quantity demanded and increase the quantity of supplied. When the price has increased to the limit which there is no more shortage, the forces will cause the price stop operating and the price remain at its equilibrium.

                                                                                                                                                                     

 





The figure above explains the demand of pork meat before the festival season. Initially, the demand for pork meat is the red demand curve .When Chinese New Year is around the corner, customers usually rushed to buy the meat in bigger quantities, this causes the demand for pork meat to increase and the demand curve will shift to the right (blue curve). Now, there is a shortage of pork meat. In order to eliminate the shortage, the price of pork meat increase to a new equilibrium price .Change in demand cause the equilibrium price and equilibrium quantity to increase. When the demand increases, there is a movement up along the supply curve; the quantity supplied increases but supply does not change. The supply curve also does not shift.

      When the price of pork meat increases, other things remaining the same, its opportunity cost increase. Hence, consumers will try to find other products to substitute pork meat and this cause the quantity demanded of the pork meat to decrease. For example, consumers will choose to buy chicken, lamb, beef or even frozen pork to substitute pork meat and this cause the demand of the substitutes increase. On the other hand, if the price of pork meat decreases, consumers will purchase less of the substitutes and purchase more pork.

      If Chinese New Year is around the corner, the expected future price of pork meat rises. Consumers will buy more of the pork now before its price is expected to rise, so the current demand for the pork meat increases. Similarly, if the expected future price of pork meat falls, the opportunity cost of buying pork meat today is high relative to what it is expected to be in the future. Hence, consumers will buy less of pork meat now before its price is expected to fall, so the current demand of pork meat decrease and increase in future.

      The pork farmers don’t know when the expected future price of pork meat will increase. Even if they know that the price will increase and no matter how high the price will increase in a short time (that causes the demand to rise), they cannot do anything to increase the supply of pork meat. Although all the technologically possible ways to adjust supply has been use but the pig farmer also cannot increase the supply of pork meat in a short time.  This is because pork meat is long-run supply which is elastic. It takes time for pigs to grow until mature and to be slaughter. For pork meat has a perfectly inelastic momentary supply because pork farmers need to wait for the pigs to grow and the quantity available for that day is fixed.

      Some pig farmer will increase the price so that they can gain maximum profit. Government should enforce a maximum price (price ceiling) to protect the people’s interest so that the suppliers will not simply increase the price. Price ceiling is the regulation of government that make it illegal to charge a price higher than a specified level. The price ceiling is very important because it able controls the price of pork meat on the market effectively. The effects of a price ceiling on a market depend crucially on whether the ceiling is imposed at a level that is above or below the equilibrium price. If a price ceiling is set above the equilibrium price has no effect because the price ceiling does not suppress the market force. The force of the law and the market forces are not in conflict. There is a powerful effect on market when the price ceiling is set under the equilibrium price. The force of the law and market forces are in conflict because the price ceiling attempts to prevent the price from regulating the quantities demanded and supplied.

      In short, I agree with the statement of Yee, as the demand increase the price will increase during the festive season. For instance Chinese New Year will cause the demand of pork increase and this cause a shortage on market. The high demand of pork meat increases the price. Some supplier take this opportunity to raise the price so that they can gain maximum profit in this specific period .In order to protect the benefit of the consumer, government should take some action to control the pork meat in market when the price increase became unreasonable. Setting a price ceiling is one of the effective ways to protect the benefit of consumer when the price of pork meat is going up.