Malaysia’s Energy Crisis: Demand vs Supply

This article is based on the article, "Demand for electricity has exceeded supply: TNB chief", in The Star

“Demand for electricity has exceeded supply with some industries not getting the supply they need.” - Che Khalib Mohamad Noh

The electricity industry works in a simple model of converting energy resources into electricity. The structure, operation and financial implications form a natural monopoly. A natural monopoly exists in the electricity industry because the cost of producing electricity is lower due to the economies of scale if there is just a single producer than if there are several competing producers. Malaysia’s largest and national electric utility company, Tenaga Nasional Berhad (TNB) once held a unique position as a monopoly in the generation, transmission and distribution of electricity in Peninsular Malaysia and Sabah. However, due to the 1992 nationwide power blackout crisis which resulted in the introduction of the Independent Power Producers (IPP) as well as the signing of the Power Purchase Agreement (PPA), the market structure has changed from monopoly to oligopoly.

  Nature of electricity demand

  

As electricity is an essential utility, it is a controlled item whereby the electricity tariff is regulated by the government. Demand for electricity is a relatively inelastic demand as a change in the price yields to less than proportionate change in the quantity demanded. Since the quantity demanded doesn't change as much as the price, the curve looks steep. Here’s a simple analogy. If my electricity rate goes up, I cannot simply disconnect my house from the power grid and connect it to another power grid as there is only one main power grid. Regardless of the demand, the price is fixed thus resulting in an inelastic demand.

 What causes the increase in demand of electricity?

Since Malaysia’s independence, it has had one of the best economic records in Asia with the GDP growing an average of 6.5% for almost half a century. As the demand for electricity in Malaysia grows in tandem with its GDP growth, the forecasted growth for electricity has shown an increase of 3.7% in 2012 driven especially by strong demand from the commercial and domestic sectors. With an economic growth of 5.1% in the first half of the year and the growing population exceeding 27.5 million, numerous concerns have been raised by the government regarding the issue of the increase in demand of energy consumption.

Causes of decrease in electricity supply

Three main issues have been identified to contribute to the declining rate of electricity supply:

i.                    Shortage of gas supply

TNB's gas supply has been inconsistent due to numerous factors such as unpredictable shutdowns at Petroliam Nasional Bhd's (Petronas) offshore platforms. Subsidised gas and the inflated demand it encouraged are some of the factors that led to the severe gas shortage faced by TNB. Resultantly, gas supply was limited and had to be distributed between the power and non-power sectors. As TNB relies heavily on subsidised gas from Petronas to fuel its power plants in the peninsula, and the lack of cheap gas means it has to use more expensive alternative fuel.

ii.                  Aging of power plants

A number of power plants are effectively at the end their useful lives, and are no longer competitive. The existing, aging and inefficient power plants reduce the capacity of electricity generators to supply sufficient electricity effectively. Even though power plant projects are underway, the completion of the electrical facility projects would still take a few years to complete.

iii.                Loss of 1^st generation PPA capacity

With the 1^st generation capacity expiring between 2015 and 2017, at least 4105MW of capacity needs replacing even after factoring in the 622MW in new hydro power in the peninsula and the 2000MW expansion of coal plants in Janamanjung and Tanjung Bin.

The official power generation capacity of 21,792MW available in the peninsula means Malaysia still has a comfortable 35.9% reserve margin for 2012 – however, with factors of gas shortage, mothballing of older power plants and loss of 1^st generation capacity the reserve margin will diminish to a dangerously low level of 10% by 2017.

Malaysia’s electricity shortage

An increase in electricity demand and a decrease in electricity supply will increase the equilibrium price. The change in equilibrium quantity is uncertain because the increase in demand increases the equilibrium quantity and the decrease in supply decreases it.

The graph above represents the demand and supply curve, whereby the vertical axis represents the price and the horizontal axis represents the quantity demanded. The intersection between the two curves at point P2 and Q2 is the market equilibrium. A shortage (Q3 – Q1) of electricity supply occurs at a price below the market equilibrium price, P2. At such a price, consumers are willing to consume more electricity than TNB is willing to generate and sell. This is due to the high production cost incurred during the gas shortage as TNB was forced to spend an additional 400 million ringgit ($134.4 million) per month to burn oil and distillates as an alternative to keep generating electricity. Therefore, quantity demanded is greater than quantity supplied thus leading to the rise in price of electricity so that the market reaches the equilibrium price and quantity via the 7.12% electricity tariff hike by the 1^st of June last year.

In order to ensure a successful policy recommendation and implementation on the electricity market, it is essential for the government to recognize the intensities of electricity consumption. It is a question of the political will of the Federal Government to implement what has been planned, and of the policymakers to make the most economical decisions - for instance, regarding the abolishment of gas subsidies and regulation of the IPPs. As we know, when anything is scarce, a price hike begins. As electricity shortages become more of a concern, the market mechanism will induce price increment. With other bills already at record highs and incomes remaining low, the average household is likely to feel the pinch.  

Oligopolistic Cement Industry: The Rising Prices of Cement

This article is based on the article, "Probe warranted if cement makers have pact to raise prices", in The Star.

          Current economic tidings have now shifted from the fairly straightforward world of perfect competition and monopoly into the complex and erratic world of duopoly and oligopoly. It can be observed that many market structures are inclined towards being an oligopoly as time progresses.

Nature of oligopoly

An oligopoly is basically a market dominated by a few producers whereby each has control over the market in industries with high level of market concentration.  A few prominent instances in Malaysia would be Celcom, Digi and Maxis for the telecommunication sector as well as Petronas, Exxon Mobile and Kencana for the oil and gas industry. Oligopoly exists when the number of firms in an industry is so small that each must consider the reactions of the rivals in formulating its price policy. Over the years, major issues have been associated with collusive oligopoly, most notably the interesting case study of the OPEC cartel with their ability to dominate and manipulate market prices and production of oil. However, the main focus of this writing would be in response to the recent issue of cement price hike by the oligopolistic Malaysian cement industry.

Characteristics of cement industry oligopoly

i.                    A few large producers

Malaysia’s cement industry is controlled by six major cement producers, the biggest player being Lafarge, followed by YTL Cement, Tasek Corp, Cement Industries of Malaysia, CMS Cement and Holcim (M).

ii.                  Homogenous product

Despite the existence of several types of cement, this is a fairly homogenous good with limited space for differentiation. While there are various types of cement and the substitution between them is feasible, cement is hardly replaceable by another good.

iii.                Control over price

Cement price issues began back in 2008 when the Malaysian government implemented the automatic price mechanism (APM) whereby prices would be determined by the manufacturers proposing a cost structure that cannot be examined or determined by the consumer or the government, thus giving complete price control to the manufacturers.

iv.                High barrier entry

High capital investments involve the mining concession and the capacity of plant. An important element to be considered in assessing the market entry of cement is associated to the access to raw materials: limestone and gypsum deposits. Regarding structural barriers, the market presents economies of scale and the existence of high sunk costs that could be considered as entry barriers deterring the initiation of operations of a potential competitor.

Three oligopoly models

    

As observed in a normal kinked-demand curve above, competitor and rivals strategizes against each other by ignoring price increase or matching price decrease. Consumers effectively have two partial demand curves and each part has its own marginal revenue part - resulting in a kinked-demand curve to the consumer whereby price and output are optimized at the kink. The kinked-demand curve model of oligopoly is sought to explain the complexities of oligopolistic prices as a natural result of non-collusive behavior. However this is not the case as prices of cement is increasing instead of decreasing.

Therefore, the case of cement price increment is most likely of price leadership. Due to the mutual interdependent nature of oligopolistic firms, it is necessary for firms to maintain price stability. Thus when the firm with a clear and dominant market position changes the price, firms with lower market shares follows the price changes prompted by the dominant firm. We can observe instances of this matter with major petrol retailers and mortgage lenders as most suppliers adopts pricing strategies of leading firms. When Lafarge hiked up its cement prices by 6%, other industry players also duplicated the move. Since the dominant firm keeps prices stable, other firms are reluctant to change.

Lastly, collusive pricing is done in order to accomplish joint-profit maximization within a market or to prevent price and revenue instability in an industry. It represents the attempt by manufacturers to manipulate supply and fix the price at a level near to the level one would expect from a monopoly. To fix prices, they must be able to exert control over the market’s supply.

   

According to the diagram above, a producer cartel fixes the cartel quantity and price at output Qm and price Pm. Allocation on the distribution of cartel output might be based on an output quota system or another process of negotiation. Assuming that the firms have identical cost, demand and marginal revenue, the result of collusion is as if he firms made up a single monopoly firm as shown in the graph below.

Effect of price increase of cement on consumers

Due to the increment in development rate and economic growth prospects in Malaysia as well as the absence of a substitute, demand for cement is relatively inelastic. This means that change in the price yields to less than proportionate change in the quantity demanded resulting in a steep curve.

Consumers ranging from direct users like contractors to indirect users like property buyers have no choice but to soak up the rising cost of cement. Even though the government introduced the automatic price mechanism (APM) to improve transparency between producers and end-users in the name of consumer protection, the effect is deteriorating as consumers are now vulnerable to potential abuse by producers as they are forced to absorb higher costs. The monopoly-type of behavior also creates market inefficiencies, distorts pricing vis-a-vis the global market and underutilizes the installed production capacity.

The sudden increment in cement price when the price of electricity, coal and petrol is constant has made a few number of authorities question the legitimacy of the price increment. Authorities from the Real Estate and Housing Developer’s Association (Rehda) claims that the cement companies are colluding to create an artificial shortage. If the statement is found to be true and that the cement producers have been proven to breach the Competition Act 2010, we can see how collusive oligopoly is harmful to the market.

As supervision is not possible, undesirable effects occur due to the loss of productive and allocative efficiency. Less economies of scale can be seen through the act colluding to create shortage. Notably, CIMB Research has highlighted in a report the possibility of Lafarge reversing the price hike due to public pressure from the Master Builders Association Malaysia as well as political factors, with the looming national polls by June next year.

Common Agricultural Policy

           The government or governing body of countries has always been intervening with how the economy operates. An open economy is where the market in free from external intervention and all decisions are based on the supply and demand, but it only exists in theory. In the real world, there would always be a certain extend of intervention from the government. Government intervention is an action taken from the government that alter or change economic activeness, supply ability, and the unconstrained decisions made through normal market trade, to stabilise the market. Government intervention could take place through many ways, like taxation, production quotas, subsidies and price capping.

            According to an article by David Gow , ‘UK to dismiss Common Agricultural reforms as inadequate' (http://www.guardian.co.uk/world/2003/jun/26/eu.politics1?INTCMP=SRCH), the United Kingdom government is against the European Commission’s decision to reform the Common Agricultural Policy, which they expect that will enable a 9% cut in government spending on CAP. Caroline Spelman, UK’s environment secretary, said: "We're in a situation where there are global problems with food security, economic uncertainty and the loss of biodiversity. Reforming the CAP is the best opportunity in a generation to take a major step forward … but we're worried that the commission's proposals will be far too backward-looking and this precious opportunity will be lost."

            So what is Common Agricultural Policy? Does it benefit the society, or does more harm than good? The Common Agricultural Policy is a form of price regulation and subsidy that is implemented in the European Union. It was formed to stabilise the income of farmers by setting a ceiling price or a floor price for agricultural product. This will provide a guaranteed price for the farmers for their crops. Otherwise, farmers would not be able to respond to consumer demands effectively due to the fluctuating prices.

            Assuming the CAP has set the price of agricultural goods above the equilibrium point, this is good news for farmers. The producer surplus will increase, while consumer surplus will decrease. The higher price has guaranteed a higher income for their produce and this will encourage the farmers to plant more crops, causing the supply in the market to increase. However, the supply for crops may not change in the short run as it takes times for the farmers to plant more crops and for the crops to grow. As for the consumers, the higher price might discourage them from buying the products, and demand falls. As a result, there would be overproduction in the market.

            If the CAP has set the price of agricultural goods below the equilibrium point, consumers would be the one benefitting from it. Consumer surplus will increase, while producer surplus will decrease. And since the price has been set below the equilibrium price, it is then cheaper for consumers to purchase. Demand would go up as well since people could afford more of the good and those who could not afford before could afford it now. There would an underproduction in the market, as farmers might have lesser incentives to produce the crops and the demand is higher than the supply.

            Though the Common Agricultural Policy, farmers will also receive subsidies to aid their production. Subsidy is ‘a benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction.’ Bruce Stokes explained in his article that the subsidy amount received is based on how environmental friendly their practices are. As the farmer’s cost of production has reduced, the farmers will tend to increase their supply. As a result, price will drop and consumers will benefit.

            And then there is a method which the government uses to intervene when there is an overproduction or an underproduction. It is called the Buffer Stock Scheme. The Buffer Stock Scheme is a part of the Common Agricultural Policy’s method of stabilising prices. As seen in the graph, the government buys in the excess amount of agricultural products at S2 from the farmers and releases it into the market when there is a shortage of supply at S1. Both actions will push the supply back to S, while the price and quantity is stabilised back at P and Q.

            The Buffer Stock Scheme is a form of subsidy for farmers, as it keeps them from competing in real market prices. The farmers tend to over produce crops in the BFS as they know that the government would buy in the excess amount and their profits will not go down. Due to that, the farmers have little incentive to produce cost effectively.

            The Common Agricultural policy is actually a government failure. Firstly, it causes an inefficient allocation of resources in the market. Guaranteeing the farmers a higher price for agricultural goods will only discourage them from allocating their resources efficiently according to the market and to produce cost efficiently. It would also attract more entrants into the agricultural market or encourage farmers to expand their production. More lands would be cleared off to make way for agriculture purposes and this could have a huge impact on the environment. But if the government tightens the regulations on land ownership, this would not be a problem.

            Moreover, the cost for maintaining this policy is tremendous and is a strain to the European Union’s budget. As mentioned in an article 'The EU common agricultural policy', it is said that the policy costs around £30bn a year, or half the EU's £60bn annual budget. The government would have to rent warehouses to store the excess commodities that are bought in. The government then would then incur a high storage cost for storing the large quantity of agricultural goods in warehouses.

            The Common Agricultural Policy may seem as if it is doing more harm than good to the society. However, I think its intentions are good and it should be encouraged.  It is important that the EU commission plan thoroughly and carry out the policy carefully, making sure that all sides benefit from it.

Externalities of Electricity Generation

           

Based on the article “Take into account environmental externalities” written by Dr. Pola Singh in The Star, (http://biz.thestar.com.my/news/story.asp?file=/2012/4/2/business/11012372&sec=business), it is discussed by the author that in the process of generating electric energy in Malaysia, there are many side effects that arises from it, mainly environmental pollution.

            Externality refers to a cost or a benefit that affects parties outside of a transaction, besides the seller and the buyer, and is not reflected on the price. Externalities are made up of two parts, a consumption externality and a production externality, with both can be either a positive externality or a negative externality. The environmental problems created as a result of electricity generation is a negative production externality, and negative production externality occurs when the marginal social cost exceeds the marginal private cost.

            In Peninsular Malaysia, 52% of electricity is generated by natural gas, 40% by coal, 5% by hydro and the other 3% by diesel, fuel oil and renewable resources. The burning of fossil fuels will release gasses such as nitrogen, carbon dioxide and sulphur dioxide, all which are detrimental to the health of residents living nearby. As we can see from graph, the residents are facing higher costs compared to the firms; the marginal social cost is above the marginal private cost. Thus, it is proven that the generation of electricity causes a negative production externality.

Also, there would be a welfare loss as a result of the electricity generation in terms of over production. The optimum point is at B, where the Marginal Social Benefit equals to Marginal Social Cost, while cost and quantity are P1 and Q1 respectively. The market equilibrium, on the other hand, is set at point A, where cost is at P and quantity is at Q. Any point between Q1 and Q creates a welfare lost, as there is a divergence between the MSC and the MSB. As the quantity increases, the gap between MSC and MSB grows. The quantity which the market achieves equilibrium is greater than the optimum quantity, thus there is an over production. The sector is producing too much energy than the required and the people’s health are affected by it.

            It is also mentioned in the article that Malaysia’s power sector is heavily subsidized by the government. The fuels used by the Independent Power Producers in Malaysia are subsidized by Petronas, and it is estimated that the amount adds up to RM86.6 billion from 1997 to 2010. By providing subsidies, the government hopes that it would help them increase their production and help the consumers stabilise the electricity rates charged. But instead, this will encourage inefficiency in the sector as IPPs would not have the incentive to be productive efficient.

            So, does it mean that because the social cost of generating electricity is higher is greater than the social benefit, the government should just shut down the whole power plant? In my opinion, that is almost impossible to do. It is important to consider factors other than the costs and benefits before deciding whether it brings more harm than good to society. We should instead focus on the long run. Electricity generation in Malaysia relies heavily on fossil fuels, and in the long term, residents may face health problems and the air quality will be worse due to the burning of the fossil fuels.

According to statistics, it is estimated that Malaysia produces about 105.08 billion kWh of electricity in 2009. And out of that, 93.8 billion kWh are consumed in the country and another 91.7 million kWh are exported to neighboring countries. If the government decides to shut down the plants, not only would Malaysia lose out on export revenues, the whole country may face a power shortage and lives would be made much worse.

            However, externalities can be tackled, only if the right measures are taken. One of the popular methods to tackle externality of pollution is by imposing carbon taxes. The carbon tax requires firms pay taxes for the amount of carbon contents that they release throughout the production process. This is a great way to tackle inefficiency in the independent power producers as externalities are now reflected on the market price. The IPPs are now forced to reduce the externalities they caused to as low as possible and achieve efficiency.

            Also, another effective way of reducing externalities by adopting the pollution permit system, or the Cap-and-Trade system as they call it. The government sells these permits to firms, giving the firms a quota on the limit which they are able to pollute. Firms are able to trade, sell or buy these permits among themselves. Firstly, these permits encourage the firms to reduce its inefficiency. Due to their inefficient production, the firms are polluting at a higher rate. Firms would then have to purchase more permits and this will incur higher costs for them. As a result, there would be an incentive for them to reduce the cost of buying permits by polluting less. Moreover, the issuing of permits gives the government the ability to control the overall rate of pollution in the country. The government is able to restrict the number of permits that they issue, indirectly controlling the level of pollution.

            All in all, the carbon tax and pollution permit system are actually very effective ways to tackle environment externalities of electric generation and should be encouraged in all countries. One of the down side to these methods is that the higher cost will be carried by consumers; the taxes will be passed on to consumers in terms of higher price.

            In conclusion, electricity still holds a great part in our lives and it is inevitable that some degree of environmental impact would occur as a result of its production. But there also long term solutions where this could avoided, maybe through current green technologies such as solar energy and bio fuels. Who knows, in the near future we could be enjoying a pollution free environment without worrying about power shortages and environmental issues.

Fake Minimum Wage

An arguable article  take from The Malaysian Insider (http://www.themalaysianinsider.com/malaysia/article/pr-bns-minimum-wage-almost-no-change-at-all/ ) :

“KUALA LUMPUR, Oct 4 — The ruling Barisan Nasional (BN) coalition’s minimum wage policy brings about “almost no change at all”, the federal opposition Pakatan Rakyat (PR) said today.

“The announced minimum wage rate of RM900 for the peninsula and RM800 for Sabah and Sarawak is actually inclusive of allowances, which effectively means the basic wage is still between RM700 and RM800,” PR said in a statement signed by PKR’s Chua Tian Chang, the DAP’s Liew Chin Tong and PAS’s Dr Dzulkefly Ahmad.

“This means the purported changes were almost no change at all,” they said, claiming that a study by the Human Resources Ministry showed a third of the workforce currently earn around RM700 each month.

PR asked BN Youth chief Khairy Jamaluddin (picture)to join the federal opposition coalition in demanding that the government “declassify” a confidential World Bank report titled “Optimal Design for a Minimum Wage Policy in Malaysia” dated July 28, 2011.

PR also said that talk that “an additional RM200 in minimum wage would bankrupt companies is simply untrue.”

Yesterday, Khairy had attacked PR’s proposal to set the minimum wage at RM1,100, arguing that higher floor wages will cause companies to go bankrupt.

But Chua said at a press conference today: “The problem is not minimum wage per se, the problem is actually the lack of support services.

“Although we maintain that RM1,100 is viable for majority of enterprises, unfortunately the smaller enterprises are not sufficiently protected and the government has not given them enough support for them to sustain even RM700.”

PR said this shows that the minimum wage policy “must not be implemented in isolation and in a piecemeal manner”.

It added that the pact had proposed to cut down reliance on foreign labour and human labour, as well as increase female participation in the workforce.”

            Here we are talking about price floor that are applied to a labor market, or otherwise called minimum wage. A minimum wage enforced at a level that is higher than the equilibrium wage leads to a high rate of unemployment. Based on the article, Barisan Nasional announced that the minimum wage will be increased to RM900 for the peninsular and RM800 for Sabar and Sarawak but this figures are inclusive of allowances. This means that the basic wage is still lower than RM900. Lets compare this in a graph.

                  The above graph represents the minimum wage rate that is given to labors without the addition of allowances given to labors.  W1 represents the minimum wage that is imposed by the government excluding the allowances. W2 represents the wage rates that is supplied to the labor when allowances are added with the minimum wage imposed.

               

             So, when government announces that minimum wage is increased inclusive of allowances, basically it doesn’t make any effects to the labors. The wage rate received by the labors are basically the same. As we can see that the minimum wage is implied above the equilibrium level the quantity demanded supplied for labor exceeds the quantitiy demanded. Therefore, this occurs a surplus of labor. The surplus of labor is the labors that are unemployed. This also remains the same when the government announce that minimum wage in increased but there is also subsidy cuts in the petroleum or any normal goods in the market. It will also give very little effect to employees.

            When we look at the labor market, supply curve also measures the marginal social cost of labor while the demand measures the marginal social benefit from labor. Such labor market that is not imposed by a minimum wage distributes the economy’s limited labor resources to the jobs in which they are valued most efficiently.

             When quantity of labor employed is lower than the efficient quantity, there is a deadweight loss. Some workers would like to work at the competitive market wage but cannot, and the companies that would be happy to employ them at that wage are unable to. The potential benefits from employment that go unrealized are deadweight losses.

            There is usually an inversely connection between the demand for labor and the wage rate that a business needs to pay for each extra worker hired. If the wage rate is high in a market, it is more expensive to hire extra employees. When wages payed are lower, labour becomes fairly cheaper than for example using capital equipment and it becomes more cost-effective for the business to take on more employees. There is also a comment stated that by increasing the wage rate in a country, it will create more high school dropouts because teenagers prefer to work than study.

            Furthermore, if there isn’t any minimum wage imposed by the government, labors and employees will continue to work until the quantity supplied of labor is equals to quantity demanded. Therefore, reaching the equilibrium level. Minimum wage acts as an artificial price floor on labor.

            Some advantages of minimum wage are it motivates workers to work harder and more efficient. It also increases the standart of living for the poorest people who work in farms or the undeveloped places. As the price of labour increases, technological development will also increase because this may encourage business efficiency at a constant rate.  Next, it also removes away the low paying jobs, forces the to train for and strive for a better paying jobs.

            

            Disadvantages of minimum wage is that it affects the small to medium size business more than it affects the large business. It reduces the quantity demanded of workers by drastic lessening in the number of hours worked by employees or through the lessen number of jobs offered to the people.

          

              The main argue here is the fairness of the minimum wage that is imposed by the government. This depends on the demography. "The 900 ringgit level is too high for those in small towns and remote villages," said Shamsuddin Bardan director of the Malaysian Employers' Federation. The situation is better managed if the minimum wage rate is connected to how the labors work and the productivity of the labors. This will be fairly a better way to pay them. This will also be unfair because firms are willing to hire more workers and people are also willing to work but they are not allowed by the minimum wage that is imposed. This blocks voluntary exchange in the market. Some alternative beside imposing a minimum wage rate are providing the workers with a basic income. 

Malaysia Sugar Market

From an excerpt dated 27^th august 2009:

Prevent sugar shortage

“SUGAR is one of the most heavily subsidised commodities around the world. Some 80% of foreign sugar market prices are subsidised by their respective governments to match the price of sugar in the United States, a value that is lower than production costs for sugar in those countries. Sugar is expected to be in short supply worldwide this year because of erratic weather patterns which disrupt production.

Even though the Malaysian Government has asserted that there is enough sugar, consumers are already thronging hypermarkets and supermarkets to get their supply of sugar and most small shops and convenience stores are running low on stocks. With the festive season approaching, demand will be on the rise, and it will definitely affect market stability despite the authorities’ promise to keep prices stable.

According to the Domestic Trade, Cooperatives and Consumerism Ministry, one of the main causes of the current sugar shortage is refineries cutting back production of sugar after over selling the commodity in the first six months of this year.

Unlike coarse sugar, refined sugar is not under the list of controlled items basically because it is mainly used by bakeries. Since the price of refined sugar is not under control, producers could choose to increase production, leaving the production of coarse sugar low, resulting in an artificial shortage.

The four major sugar producers in Peninsular Malaysia have deliberately produced more refined sugar to create an artificial shortage of coarse sugar in the country for their own benefit.

As part of the immediate measures to solve the problem, extensive inspections should be conducted to catch profiteers. Greater enforcement at the border will discourage smugglers, and a campaign to encourage Malaysians to live a healthier lifestyle by consuming less sugar will be helpful.

Other than that, the Government should cancel the permits of errant manufacturers, wholesalers and suppliers and blacklist them as a deterrent to ensure that there will be no shortage of not only sugar but also other essential goods in view of the approaching festive season.

The public must also cooperate by reducing the intake of sugar, preventing wastage, and report to the ministry those who hoard or smuggle sugar.

Sugar consumption can be expected to continue its upward trend in Malaysia, reflecting population and income growth. To meet domestic needs, Malaysia is likely to increase raw sugar imports, and inevitably place a heavier reliance on the global market.

To ensure future sustainability of sugar supplies in the domestic market, the Government, producers, and consumers must play their respective roles earnestly. Otherwise such problems will imminently resurface every year particularly during festive seasons.”

In the first part of the article which was taken from (http://thestar.com.my/news/story.asp?file=/2009/8/27/focus/4594848&sec=focus) stated that sugar is going to be in short supply because of erratic weather patterns that disrupts the production. In economics, state of nature is one of the main factors that  cause the supply curve to shift. Commonly, the supply curve will shift to the left, because state of nature may refer to a sudden weather changes. The graph below shows the shift of the supply curve to the left. When the supply curve shift to the left, it means that there is a decrease in supply. Thus, the market equilibrium will also rise to a new point which is previously from (P1,Q1) to (P2,Q2). Quantity supplied of sugar at this point will decrease and the price will increase slightly.

            There will also be a shortage in the demand and supply curve because the quantity supplied for sugar is less than the quantity demanded by consumers. Again, this is caused by the slow production due to the changes is weather.

Next, it has also been stated that the supply of sugar is low and the quantity demanded for sugar will rise drastically because of the festive season that is coming. A lot of consumers are hoarding the stocks of sugar to be used in making cookies, cakes and traditional biscuit during the festive season. These are the main reason why small markets and shops are running very low on stocks. The rise in quantity demanded is shown below in the graph.

When the demand curve shift to the right, the quantity demanded also shift from Q1 to Q2 which results in high quantity of sugar demanded due to the festive season. Due to the change in quantity demanded, prices of sugar per packet will also increase because the suppliers are aware that festive season is coming and the demand of sugar will increase. Therefore, the suppliers will increase the price of the sugar in order to make more profit. When the festive season arrives, the elasticity of sugar is inelastic. In these case, the total revenue generated is high and one of the reason is consumers will still have to buy sugars that are sold at a higher price because of the festive season. More sugar needs to be used in this specific times. This is one of the factors that affect the price elasticity of demand for a good which is the time elapsed since a price change. In this factor, it is stated that the more the time consumers have to adjust to a price or the longer that a good can be stored without losing its value, the more elastic the demand of the good. Since the the time for consumers to adjust to price is relatively low, the elasticity will be less than 1.

The article stated that there is an over selling of sugar for first six months in 2009. It is one of the main causes that forces the the sugar supply to be brought down. Therefore, in the first six months, there were surplus.

Surplus occur when the quantity supplied of sugar increases more than what consumers are demanding for. Therefore, you can see the surplus on the above graph at point (P1,Q1) to (P1,Q3). In order to sell of the surplus, the producer has to lower the price to the equilibrium price and it will increases the demand of sugar simultaneously. Since refined sugars are not a controlled item due to the wide use in bakeries, supplier can choose to increase the production of refined sugar leaving the production of course sugar low. This will cause an artificial shortage.       

The article did mentioned about smugglers smuggling sugar across the borders to Malaysia. This product will be illegal products. Profiteers will make the price lower but there is a possibility that the demand will decrease as a prohibition of possessing illegal sugars deters some consumers from wanting to purchase it. Although the price offered by these illegal producers are relatively lower than what the legal market is offering, some consumers are insecure about the quality of the product given to them. Therefore, the product is inelastic at this point. Government should start to monitor the borders and checking the stocks of each retailer so that there is no overselling that will occur.

“Sugar consumption can be expected to continue its upward trend in Malaysia, reflecting population and income growth.” – The Star Online.

Malaysia’s sugar consumption will rise due to the increasing in population and income growth. This can be stated as the “income effect” which meant that an increase in real or nominal income encourages the consumer to buy more units, the good is referred to as normal; most goods fit in this category.

            

            Malaysians consumers has a rigid mindset such that looking for an alternative for refined sugar is never been considered. Some of the substitution goods for refined white sugar is brown sugar or other artificial sweeteners. These consumers still remain complacent and are not considering on a better substitutes like reducing sugar intake.