The Impact of Rising Petrol Prices

The Impact of Rising Petrol Prices

Based on the news article I have chosen from NBCnews.com Saturday 6 October 2012 ‘Insane jump in California Gas prices starts to ease’, it discusses about the unprecedented spike in California gasoline prices which slowly showed signs of easing on Friday,. Braden Reddall reports that, “abrupt price spike blindsided the state's car-loving consumers and left some retailers in Los Angeles scrambling for supply, causing wholesale prices to surge and driving up pump prices by an average of 36 cents a gallon.”. Therefore in my opinion I am quite ‘balanced’ about the surprising price increase in gasoline.

As many years have passed, it has brought many physical changes to the world oil market. With that, making the demand increasingly playing a vital role in sustaining the demand and supply balance. No doubt that our demand for oil is inelastic and we should take some precautionary steps before it runs out.

The world we live in now, the supply of oil, slowly but surely, is becoming more inelastic as fresh supply of oil comes increasingly from unconventional oil.  

In terms of the demand of oil, the elasticity of our demand for oil reflects the options we have been using oil in our daily life. Mostly all of us can quickly cut our consumption of oil in small measures such as by carpooling, using public transportation, etc.  In order to make that shift, people find it hard and usually ended up going back their own ways.  For example, if a person lives in a suburban area, far away from sources of public transportation, most probably he or she would opt to purchase a private vehicle.

In the long run, our personal preference to reduce oil consumption increase.  The best alternative would be to switch to a more fuel efficient vehicle

On the other hand, the elasticity of supply, In the meantime, the options to reduce oil demand in response to the rising prices ranges from inconveniences to expensive.

The price of petrol is influenced by the supply and demand for crude oil. If the supply of oil increases, its price will decrease and if the supply decreases, then prices will increase. As oil is such a large component of petrol, any changes in the price of oil will apply the same pressure to the price of petrol.

As the petrol price increases, there is a rightward shift to the demand curve which means there is an increase in demand but smaller is the quantity demanded for the good. Whereas the supply, the increasing price of petrol shifts the supply curve to the left meaning that there is a reduction in supply and a lower quantity supplied of the good.

We all should take precautionary measures to increase the elasticity of oil demand, and reduce the pain of demand destruction by:-

i) Build and construct more alternative modes of transport, such as MRT’s, bike lanes, and practice carpooling

ii) Increasing the taxes on gas slowly and predictably over time to raise funds to fuel the above improvements, and to indicate to the consumers that they need to prepare for higher prices in the long run and suggest to the public by purchasing more fuel efficient vehicles

If price increases are large and sudden, their impacts on short-term growth may be much larger than if they are gradual, because sudden oil price shocks scare households and firms and prevent them from making optimal decisions in the short run.  

Fears of oil scarcity does linger and worries that the world will simply run out of oil—also loom large in the minds of many. A recent IMF Working Paper suggested that some of the gyrations in oil prices in recent years have come about because market participants appear to give some credence to this geological view of binding constraints on oil supplies.

The foremost thing which will happen due to petrol price hike is car sales will take a plunge. Many car buyers will think of switching to diesel or natural gas powered car, but as we all know, diesel commands higher price and natural gas powered cars are limited and not so well accepted by the common buyer.  As the gap between petrol and diesel prices is becoming wider, it’s quite clear that the demand for diesel fuel and natural gas will increase.

An the new invention of Hybrid car producers such as Toyota, Honda, GM and Nissan take advantage of greater oil prices because higher oil prices result in greater gas prices, encouraging customers to find out ways to decrease the amount of gasoline that they utilize. Auto manufacturers have decided to manufacture electric cars and they might make more profits if oil prices will rise in the future.

Future supply disruptions may turn out to be costly not just because of the immediate loss of oil supplies, but because of the fears they trigger about a more permanent loss.

Reference

Article : http://bottomline.nbcnews.com/_news/2012/10/05/14246283-insane-jump-in-california-gas-prices-starts-to-ease?lite

The Effects Of Tax on Tobacco and Alcohol

The Effects Of Tax on Tobacco and Alcohol

Based on the newspaper article I have chosen for The Star’s BizWeek Saturday 29 September 2012 ‘Tobacco and alcohol companies happy with status quo’, it discusses about the taxes on cigarettes and alcohol in Malaysia’s Budget 2013. Nakano says that, “excessive taxation impacting retail prices has always been a key factor in driving consumers to purchase illegal cigarettes”. Therefore in my opinion I am quite ‘balanced’ about the government not changing the tax on these items.

According to article, it begins by indicating that any increase creates a negative impact on sales and any upsurge in sin taxes drives consumers to resort to illegal products, followed by adding that JTI Malaysia would work with the Government to lessen illegal cigarettes in Malaysia as there “was a need to create greater awareness amongst retailers and smokers that selling and buying illegal cigarettes is a serious offence under Malaysian law.’. The concluding point states whereby the decision made by the government was consistent to the government’s Economic Transformation Programme (ETP) objectives, the National Key Economic Areas (NKEA’s) and the Entry Point Projects (EPP) which focuses on growing the tourism sector. JTI Malaysia believes that increased enforcement by the authorities, etc: the Royal Malaysian Customs and Ministry of Health have started to bare results .

Alcohol and tobacco are goods which are closely becoming a necessity in life. The illegal trade in cigarettes has a substantial impact on the people and economy of Malaysia. When the level of illegal cigarettes trade increased from 20% in 2002 to 36% in 2010, there was a corresponding decline of 31% in legal volume from 19.5 billion cigarettes in 2002 to13.5 billion cigarettes in 2010. This loss in legal volumes explains to a loss of tax revenues to the government estimated to be at least RM2 billion annually. Moreover, the illegal cigarette trade undermines public health initiatives to reduce tobacco consumption because it makes tobacco easily accessible at extremely low prices. Unlike legal cigarettes which are manufactured and sold in compliance with strict government regulated, illegal cigarettes deliberately neglect such regulations. Furthermore, the illegal cigarette trade encourages people to commit more crimes and possible funding of terrorism activities, as widely reported by the international media.

The government has made it clear that there won’t be any changes in the tax, when the taxes on tobacco and alcohol remain the same, the prices of these products to will also maintain the same too and therefore causing the demand to either remain the same or increase. Or it could go the other way, which is when the taxes are implemented, the prices of tobacco and alcohol rises and therefore causing the demand will to decrease, which leads to an increase in supply. On another viewpoint would be if, the government decreases the tax charge on tobacco and alcohol, the prices of the products may still remain the same original price, on the other hand the demand will surely increase.

A tax increases the costs of producing one’s product which causes the supply curve to shift to the left. With a tax, it is possible for the supplier to pass on some or all of this tax onto the buyers by placing a higher price. This is known as shifting the burden of the tax and the ability of businesses to do this depends on the price elasticity of demand and supply

The right diagram talk about demand is elastic meaning that demand responds to a change in price. The producer must absorb most of the tax itself meaning that they have to accept a lower profit margin on each unit sold of a product. When demand is elastic, the effect of a tax is to raise the price, but it causes a bigger fall in equilibrium quantity. The output has fallen from Q to Q1 because of a reduction in demand.

On the left diagram, the demand for the product is inelastic which enables the producer to pass on most of the tax to the consumer through a higher price without losing too much in sales.

Even placing a minimum price on cigarettes is not working due to the poor law enforcement in Malaysia plus cigarette retailers have been freely violating this particular law since it came into force. The government should at least increase the tobacco tax to enable the prices of cigarettes to increase to at least a double digit figure.

The RM7 per pack these past three years has not been prohibitive to children because it does not take reality into account. A national study on youths who smoke has discovered many facts on youth smokers. More than half of the minors (53%) said they purchase their own cigarettes, while 30% acquired them from friends. In Malaysia, 55% of the current adolescent smokers smoke less than 10 sticks per day. Mathematically, at RM7 a pack, a single stick costs 35cents. If three schoolmates were to share a pack of 20 sticks, they only pay RM2.30. States such as Kelantan, 95% of the retailers sold cigarettes to minors without verifying their age with a total of over 80,000 retail outlets selling cigarettes throughout the country, and many of which are located nearby schools. Last year, there was no tax increase on tobacco and cigarette prices remained affordable.

The World Bank recommends the tax on cigarettes to be at least 65% but in Malaysia, it is only 45% of the retail price of cigarettes. Malaysia should imitate countries that have successfully reduced smoking among youths. Countries such as Australia and Singapore have high tobacco tax to curb crimes involved in the country.

A pack of cigarettes costs A$15 (RM38) and S$12 (RM29.80) respectively. Both of these countries have also stringent border control to ensure smuggling of cigarettes is low.

While there are many government interventions to reduce the demand for tobacco are likely to succeed, the actions to reduce on cigarette supply are less promising. This is because that if one supplier is to be shut down permanently, an alternate supplier would reap the gains an incentive to penetrate the market. The drastic measure taken by the government of prohibiting tobacco consumption is unjustified on economic grounds, as well as unrealistic and hopeless. A substitution of crops is frequently suggested as a way to decrease the supply of tobacco, but there is little to no evidence that it reduces consumption, because the incentives to farmers to grow tobacco are much greater than for most other crops.

So is it good or bad if there is a change in taxes on tobacco and alcohol? If there is an increase in tax, it is more likely more crimes would occur which result in more youngsters who are unable to afford these products to be desperate and to result to violence and even theft just to satisfy their needs. People would also result to buying these products cheaper of the black market or by even through illegal smuggling. In terms of what the government should do, they should at least reduce the tax by controlling the imports of these products to our country and a better alternative would be to plant tobacco on our soil and to brew alcohol beverages in our land. These methods would probably reduce the amount of people from smoking and drinking by only a small margin, so the government should also carry out more health campaigns to curb on these issues on crimes and to be open concern of the public’s welfare especially children who are addicted to these products.

Reference

Article : http://thestar.com.my/news/story.asp?file=/2012/9/29/budget/12100718&sec=budget

House Price/ Mixed Reaction To House Ceiling Price Increase Under Scheme

Based on the article I have researched. I was assign to do economic analysis based on article that I have chosen. The article I have chosen is about Price ceiling. Let me give you the definition of price ceiling. Price ceiling a regulation that makes it illegal to charge a price higher than specified level. The topic of the article  “ Mixed reaction to house ceiling price increase under scheme “.

This is the article I found on The Star online website: http://thestar.com.my/news/story.asp?file=/2011/10/9/nation/9663570&sec=nation

Moreover, Price Ceiling is also known as price control. A government regulation that makes it illegal to charge a price higher than a specified level is called a price cap or knows as price ceiling. The effects of price ceiling on market crucially depend on whether the ceiling is imposed at a level that is below or above the equilibrium price. Price ceiling is set above the equilibrium price has no effect.

Price ceiling set above the equilibrium price has no effect. The reason is that the price ceiling does not hold back the market forces. The force of the law and market forces is not in conflict.  But when the price ceiling is applied to housing market it is called rent ceiling. If price is set above the equilibrium rent, it has no effect. It means the price ceiling does not exist in market. Meanwhile if the rent ceiling is below the equilibrium price, it has powerful effects. Many factors influence buying plans, and one of them is the price.

HOUSING MARKET

                                                              CEMENT MARKET

Since, the article is about the government to increased price ceiling. I’m going to brief about rent ceiling. Usually price ceiling is applied to housing market, it is called rent ceiling. (Parkin. M, 2012, page 128).

In my opinion, by increasing the housing price may not be applicable to people who earn less than RM3000 per month. One of the housing owner, Eric Tan said household who earn RM3000 could not afford RM400, 000 house.

Some middle class and lower class people could not even qualify the loan. Nowadays scenario, it may be difficult for young people to look for affordable housing area. Housing house price RM200 below is impossible to find nowadays.

Since the housing house has increase drastically. People have to “ Increased search activity “. Increased search activity mean time looking for someone whom to do business is called search activity The government increase the housing price, people have to find another alternatives such as looking for affordable housing price in the market. Nowadays market, people spend more time checking housing price before making decision to buy it. Unfortunately, when a price is regulated and there is a shortage, search activity increase. Rent-controlled housing market, frustrated would-be renters scan the newspaper, not only for housing advertisement but death notices. In this case, any news or information about housing or apartment, first come first serve basis. The lucky people who notice about this faster can buy the house.

Moreover, he opportunity cost of good value is equal not only to its price but also the time we spend to search the good one. So basically the housing is the equal the rent (a regulated price) and the time we willing to spend and other resource we spent for the restrain quantity available in the market. Search activity cost most of us. We spend more time to find it, looking for another resources such as phone call. We try to call people to look for the affordable house price and gasoline. We need to travel form A to B. We use a lot gasoline to look for places.  (Parkin. M, 2012, page 128).

In my opinion, the government should not increase the housing price because not everyone can afford to buy it. Do you think the rent ceiling fair? Since government increases the housing area, only people who can afford RM400K houses. Rent ceiling might not be inefficient. They don’t achieve a fairer allocation if government keep increase the housing price. Basically, if the government keep on increasing house price. This middle class people will be abandon. The government should allocate to every level of class people from rich to poor people. I notice 2 problems occur when I read this article. Firstly, a “ lottery problem “,  “ first come, first served “. (Parvin. M, 2012, page 130)

Lottery means you allocate housing to those who are lucky, no to those who are poor. Basically, poor people will be neglect because rich people only are the lucky ones in this category. The rich people will not be a problem because they can afford anything. Meanwhile the poor will be left behind without houses to stay. Second reason is “ First come, first served “.  This method been use to allocate houses in England after World War 2.  This method use to allocates housing to those who have the greatest foresight and who get their names on a list. Usually this method does not help the poor one. (Parvin. M, 2012, page 130).  The Government increase the housing price maybe because increase price cement. Government should control the cement price in the market. House developers have to increase the housing price because to cover the cost price. Last time 50KG of cement cost RM 16.50, now RM 17.50. The cement price increase by RM 1.00. Most of cement producers in Malaysia have increased their cement price. Only Sarawak company, CMS Cement confirmed it would keep prices at the current level. Not only cement, Sand and some other factor to make house is getting expensive.

In conclusion, the government should allocate housing to different level of class people accordingly. Government should be fair to different class of people regardless of race, religion belief and so on. Middle class people should be able to buy house but the house should be set in affordable price. Besides that, government should not increased housing price. By increasing housing price, it will only benefit the rich people. Middle class and low class people could not afford to buy. They cannot even apply for long-term housing. I strongly disagree with the statement “ Its not fair if the result isn’t fair “. The government should be fair to everyone.

Market Failure and the Implementation of Price Floor

When a market is not in equilibrium, market failure will occur. Before we go into what market failure is, let us first look into some assumptions. The first assumption made is we assume the market has many buyers and many sellers, which means no single buyer or seller can be able to influence the market price as each individual firms or household are considered relatively small compared to the market size. The next thing will be complete freedom of entry into and exit from the market. Besides that, buyers and sellers are well aware of the market price and production cost. Products sold in this market are also homogenous as they are all of the same quality and are identical in the eyes of consumers. The last one will be the assumption that factors of production can be switched from one industry to another easily, making them perfectly substitutable.

Market failure will prompt government into taking actions such as controlling the price or designing price policies to hold the actual price at some disequilibrium value. So let us look at why market failure happens before going more in depth into the price policy we are going to discuss. Market failure occurs when the price mechanism fails to allocate resources efficiently when they are left to be decided by demand and supply forces. A few reasons initiating market failures are non-provision of public goods and externalities. In a free market which is also called the perfect market, public goods are not provided due to two characteristics which are non-excludability and non-rivalry. Non-excludability means when a good or service is provided, it will be free to all. Therefore, no one will be willing to pay for it as they will be hoping for others to do the payment so they can enjoy free services. As for non-rivalry, it basically means the consumption of a good or service will not reduce the consumption possibilities of others. One clear example for this is streetlamp where people will still be able to benefit from it even if it is used or shared by others. Another reason for market failure to occur is due to externalities where it is further divided into positive and negative externalities. Positive externality affects market equilibrium in a sense that producers always produce lesser than what the society wants which causes inefficiency to occur. As for negative externality, it is just the other way round where products are produced way more than what the society want leading to disequilibrium.

Now that we know why government intervene in the economy, we will go more into one of the policy we are going to discuss, price floor. Price floor is also known as minimum price and is basically set to guarantee a certain amount of price is there for that particular good. This regulation makes it illegal for trading to take place at any price below the indicated level.

Price here actually means the wage rate of labor while quantity is the amount of labor available in the market. Price floor has to be set above the equilibrium point (P1) to ensure it can work effectively. If it were to be set below the equilibrium point (P2), it will bring no effect as buyers and sellers will continue to consume and produce at the original equilibrium with equilibrium price of P0 and equilibrium quantity of Q0.

From the article ( http://www.themalaysianinsider.com/malaysia/article/minimum-wage-gazette-on-july-1-takes-effect-in-january-2013/ ), we know that a floor wage or the minimum wage has been announced by our very own Prime Minister Datuk Seri Najib Razak on the eve of Labour Day. This implementation is introduced to secure a minimum wage rate for the workers. As mentioned above, the minimum wage has to be above the equilibrium point to be truly effective. This price policy has brought up a certain amount of debates between economists as well as politicians. Therefore, we shall look at some of the effects when a successful minimum wage is introduced.

From the diagram, we can see that the quantity of labor available in the market is at Q2 while the demand for the service of labor is at Q1 when the price is set at P1. This eventually causes a surplus of labor because the amount of labor willing to work exceeds the number of labor the firms want to employ. This will continue because the firms are not allowed to hire workers with a wage rate below the wage floor. However, firms always hope to minimize their cost of production so this action actually results in unemployment. Besides that, minimum wage also causes market disequilibrium where both consumer and producer surplus are reduced. Original consumer surplus is represented by the area A, B and C but is now reduced to only area A. Original producer surplus which is area D, E and F is left with only area F. So what really happens to area C and E is described as a deadweight loss which is also the social loss. This is because the amount of goods produced when a labor is employed now reduces. As for area B and D, it now represents the opportunity costs where lots of bargaining and negotiating actually takes place. Producers are searching for people willing to work below the price floor (P1) while workers are searching for a wage rate of P1 or even higher. This time used for negotiations will incur opportunity costs as they can actually use this time to get another job and earn extra income.

So, is this action of government fair? No doubt it has angered many employers especially small-medium enterprises (SME) where we can find from the article. According to the article, 59 percent of labor forces are employed by small-medium enterprises and when this policy starts, unemployment will definitely occur as they will not want to increase their production costs. Another effect from this implementation is that illegal employment of workers might occur. When unemployment is common in an economy, some workers who desperately need a job will agree upon a wage rate lower than the minimum price and some even below the original equilibrium price. This exploitation of labor occurs because unemployment makes it hard for workers to get a job and when their life is depending on it, they will no longer have the bargaining power to ask for a better pay.

However, introducing this policy will also provide some benefits in some area such as reducing the income gap between the rich and the poor. Although there is still a significant difference, wage floor can at least prevent them from growing wider. Workers can also avoid from being abused by their employer as law stated that employers are not allowed to bargain and get a desperate worker at a rather unsatisfying wage rate.

In summary, a price floor policy just like this minimum wage can bring both advantages and disadvantages depending on how people react to it. Therefore, it is really important to have a study on the situation before deciding on anything. If the unemployment rate is not too high compared to the benefits the society can benefit from. It will be wise to have it implemented but if it is the other way round, government will have to come up with a new policy to help increase and protect the workers welfare.

Subsidies and Their Relevance

Subsidies are usually given by government to help and facilitate in increasing the quantity or amount supplied by a firm especially on merit goods. Merit goods are goods that will bring positive externalities to the society. External benefits here mean that those who are not involved directly in the production or consumption will be receiving benefits when someone produce or consume a certain goods. For example, when someone consumes health care, he or she will reduce the spread of contagious diseases to the society. The society is said to benefit from this consumption although they did not receive any health care services directly. Back to subsidies, government usually provides subsidies to encourage firms to produce more by actually helping them produce goods at a lower cost.

From the diagram above, we can see that there is a shift in supply curve, which is the upward sloping curve. Demand curve, which is the downward sloping curve, remains unchanged. The initial equilibrium point (E0) is the intersection between demand curve (D) and initial supply curve (S0) with equilibrium price of P0 and equilibrium quantity supplied at Q0. When government supply subsidies, the supply curve will shift from S0 to S1 as the production cost is currently lower which prompted the producers to increase their production. This eventually causes the equilibrium point to change as well as the equilibrium price and equilibrium quantity. Equilibrium point (E1) is currently the intersection point between demand curve (D) and the new supply curve (S1) while equilibrium price is currently P1 with an equilibrium quantity supplied of Q1. When supply increases, price for the particular good will fall. This is due to the reason that supply for the good is relatively sufficient to cater for the demand in the current market. From the diagram, we can also see the amount of subsidies given by the government. It is represented by the dotted line between S0 and S1. This amount of subsidies can be enjoyed solely by the sellers or buyers or even shared between them depending on the price elasticity of supply of the particular good. However, as production increases, there is a misallocation of resources due to the inefficiency covered by subsidy. This is also called the deadweight loss and can be represented by the triangle area of AE0E1. It is a net loss to society because this amount of money could have been used for other purposes such as producing more public goods, or to reduce government expenditure which might lead to a reduction in tax incurred on the people.

Subsidies can definitely benefit people in a way that we actually pay lesser for the goods we consume. This can be really beneficial particularly when we are given the aid in industries such as medical and education fields. However, this may not usually be the case especially when the funds are allocated on certain goods that benefit the rich more rather than the poor. For example, subsidy spent on fuel in the year 2012 is RM42.4bil which is a 17% increase compared to the previous year of RM 37.61bil. Cheap petrol benefits wealthy people in a sense that comparing them driving a fuel-guzzling BMW X5 with a Perodua Myvi most average Malaysians owned, we can clearly see that the percentage of their income used on fuel will be much lower compared to the percentage of income used on fuel by an average or a middle class earner. Imagine someone earning RM100k per month spending say like RM500 on their fuel consumption. The percentage of their income used on fuel is only 0.5%. As for a typical middle income earner, if they earn RM4000 per month and spend around RM200 on their fuel, the percentage is 5% which is way more than the percentage of income spent on fuel by those wealthy people.

Besides that, our subsidy policy actually weakened our independence as the subsidy mentality infiltrates all level of our society. When we talk about subsidy, it should bring an effect where it actually makes us more competitive and efficient as our cost of production is now lower compared to previously. However, what really happens is that once subsidy is provided, people tend to take it for granted and do not use those resources to its maximum capability. Instead, wastage occurs and this ultimately makes us noncompetitive when on papers it should have. One clear evidence, are jackets or sweaters easy to notice in offices? This scene is due to the “never say die attitude” of the air conditioning that keeps us cold or somewhat way too cold. Energies are not used to their potential when they should have been because they are too cheap to some firms causing them not to make it an effort to consume energies wisely. This will further deteriorate our nation’s competency with other countries when they are actively searching for ways or substitutes to minimize energy consumption when fuel prices are high. The diagram below shows how the demand for a substitute good increases when the price of fuel increases. Price of fuel increases from P0 to P1 which causes the quantity demanded to fall from Q0 to Q1. Demand of substitute good on the other hand increases from DD0 to DD1 at the same price level as people seek for a replacement of fuel to reduce costs they have to bear.

These energy saving methods of theirs are currently their strong weapon or strategy to outdo their competitors. They can even make extra profit if the energy prices of global fall as long as demand is inelastic, meaning that the changes in price of energy will not lead to a change in quantity consumed.

Therefore, what Umno Youth chief Khairy Jamaluddin mentioned about the funds spent could be better used is notably true. (Full article can be found here at: http://thestar.com.my/news/story.asp?file=/2012/10/6/nation/12132262&sec=nation ) The first step taken by the government is to remove the 20sen per kg subsidy in sugar from the previous 54sen per kg subsidy. No doubt it increases the burden on the people but don’t we realize something? Lower income people will not spend extra of their income on sugar when they have been subsidized. Instead, they will use it on other purposes deemed more important such as education and health care. Not to forget that the system in subsidizing food items or petrol also benefits the rich people and big company that is supposed to help those in need, particularly those from lower income group. Another arguable matter is that illegal workers or even foreigners are also benefitting from this system. Therefore, it is really an issue the government should look into more thoroughly so as to bring the best out of the intentionally good subsidy.

So, converting the funds into certain other areas like education and medical health centers catered for the poor as suggested by the Umno Youth chief is definitely something we should agree upon as it will no doubt bring benefits to the poor who are still finding it an issue to fund their children to a proper education or sending them for medical assistances when needed. Subsidies on merit goods should definitely be the priority when deciding on which area of goods are to be subsidize so as to decrease the gap between the rich and the poor as well as to help propel the standard of living of the poor in our country.

Increase In Demand For Hybrid Cars

Market is any arrangement that enables buyers and sellers to get information and to do business with each other. Meanwhile competitive market is a market that has many buyers and many sellers, so no single buyer or seller can influence the price.

Definition of demand is the ability and desire to purchase goods and services. When you demand something, then you want it? Can afford it, and plan to buy it. Wants are the unlimited desires or wishes that peoples have for goods and services. Did you ever thought yourself “ if you only you could afford it “ or “ why this stuff some expensive “. The quantity demanded of a good or services is the amount that consumer plan to buy during particular time and price. Neither the quantity demanded nor necessarily the same amount we bought. Normally quantity demanded exceeds the amount of goods available in the market. So the quantity demanded bought is less than the quantity demanded. We look the relationship between the price of goods and quantity demanded. Does other things remain the same?  Does the quantity demanded of a goods change as its price changes? The law of demand can provide you with the answer. The law of demand states “ other things remaining the same, the higher the price of the goods, the smaller the quantity demanded, and the lower the price of the goods, the higher the quantity demanded “ We must be wondering why the higher the price? The lower quantity demanded? There are two main reasons: Substitution effect and income effect. To see the substitution effect and the income effect at work, think about the effects of a change in the price..  I have been assign to do an individual assignment. The reason writing the weblog entries is to reflect and apply economic concept to a real world situation. I came across this article from the star online, http://biz.thestar.com.my/news/story.asp?file=/2010/12/30/business/7702950

The article is regarding “ Increase in demand for hybrid car “.

Honda Malaysia Sdn Bhd and UMW Motor Sdn Bhd have already recorded combined bookings of nearly 1500 units for Honda Insight and Toyota Prius hybrid models. These numbers of bookings come in less than three months.

Number of demand of hybrid car is increasing drastically. Demand of hybrid car is increasing because the government decision under budget 2011 to grant full excise duty exemptions on hybrid below 2000cc until Dec 31, 2011. If the consumers buy hybrid after Dec 31, 2011 they have to pay the car price plus with the excise duty. Basically they have to pay more. Since the government decision under budget 2011 to grant excise duty exemptions on hybrid car below 2000cc this is the time to buy car cheaper. Honda Malaysia Sdn Bhd is expecting bookings to hit 1000 units by the end of the month.  As we all know, Car price in Malaysia are really high compared to our neighbor Thailand and Indonesia. Our government imposed high excise tax on car. Since government already imposed tax on petrol car, now they want to impose tax on hybrid car above 2000cc after Dec 31, 2011. Basically people buy hybrid car because is cheaper and saves fuel consumptions compared to petrol car. Hybrid is substitute of petrol because is easy to maintain and fuel-efficient compared to petrol car as I mentioned so many time. Since nowadays petrol is becoming more expensive and government imposed high excise tax on car. Consumer tends to switch to hybrid car now.

According to spokesman, Honda Malaysia will continue to service and provide spare parts to their previous Civic hybrid. Honda Malaysia already discontinued importing Civic hybrid because Honda Malaysia introduce new hybrid model called Insight, which is way cheaper, compared to Civic hybrid.

Honda Insight is the cheapest hybrid car in the Malaysia market. Honda Malaysia targeting 4000 bookings units by the end of 2011.

Based on the article about increased demand for hybrid car. OSK Research auto analyst said rise-demand of hybrid car could have an impact on sales of petrol-based vehicles that were same price as hybrid car.

Consumer demand more Honda Insight hybrid and Toyota Prius hybrid and this will affect the sales and demand of Honda and Toyota petrol car that price range same as Honda Insight and Toyota Prius. Nevertheless, consumers still will to forking out a bit of money to buy hybrid car. Likewise I mention before people demand more hybrid car because it the substitute for petrol base car. Petrol base car need to pump petrol. If you car above 2000cc. you need to pump petrol more often. Hybrid car is good for a long term and save fuel consumption. Besides that, we hardly need to pump petrol because the car uses electricity power to move.

            The demand of price hybrid car increased does not mean everyone can afford it. The cheapest hybrid car in the market cost market around RM 100K- RM179K. The Government already grants excise duty exemptions on hybrid car 2000cc only till Dec 31, 2011. Do you think everyone can afford hybrid car? I personally think not everyone can afford it. The rich and middle class people could afford this hybrid car.

Moreover, the maintenance to maintain hybrid car is neither expensive nor cheap but nevertheless if the car break down. Normal, routine maintenance and minor repairs are not higher than petrol base car but if something goes wrong with the hybrid system? You are going spend a lot of money to replace hybrid system or to fix it. Most of lowest class people could not afford to maintain this type of car especially hybrid car. Malaysian National Car Company, Proton should come out their own hybrid car in order to provide for lowest class people. But likewise, I mentioned above the hybrid car system is the major problem here. It is not cheap replace brand new hybrid system; it cost a lot of money. The increase in demand for hybrid car only benefit does rich class people and middle class people who could afford and maintain it. Hybrid car for a short term does not beneficial but for longer term? Yes the possibility to maintain hybrid car for longer term is better than short term. The hybrid car is currently still new in Malaysia; it takes times for people to recognize it and to know how to maintain it. The substitution effect for petrol base car is hybrid car. Since not everyone can afford it, lowest class people have to take LRT. The substitution effect to replace hybrid car for normal petrol car is still not relevant.

In conclusion, based on this article Hybrid car is substitute for petrol base car. Although petrol car base still can be use.  Hybrid car are way cheaper than petrol base car. Consumer now faced with tighter budget, so they have to switch something is cheaper. This called income effect second law of demand. The quantity demanded for petrol base car will decrease since people now tend to buy hybrid car.

The graph above shows demand of supply of hybrid car below 2000cc. The demand of hybrid car is increasing drastically. Consumers tend to switch to hybrid car now. Petrol car base need to pump petrol. Since petrol price is getting expensive nowadays, hybrid car is the substitute to petrol car. Hybrid car is more convenient and user-friendly.