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TABLE OF CONTENTS

1.0 ARTICLE SUMMARY 1

2.0 INTRODUCTION 1

3.0 ANALYSIS
3.1 DEMAND & SUPPLY 2 - 4
3.2 SHORTAGE 5 6
3.3 PRODUCTION POSSIBILITY FRONTIER 7- 8
3.4 ELASTICITY 9 10
3.5 PRICE CEILING 11

4.0 CONCLUSION 12

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1.0 ARTICLE SUMMARY
This report is based on the article Making Sarawak a rice bowl of Malaysia posted on 12
th

February 2012 by Borneo Post. The article states that Malaysia is experiencing a shortage of
rice each year and that the government is taking initiatives to reduce the shortage of rice in
Malaysia.
2.0 INTRODUCTION
The issue of rice shortage in Malaysia is never ending. According to Malaysias Agriculture
Minister, Datuk Noh Omar, the demand of rice has been increasing annually by 3% is caused
by the increased in population and also the influx of immigrants is more compared to the
production of food which only increased by 0.05%. (Serba Wangi, March 29, 2011). To add
on that, the fact that the countrys rice production has been decreasing due to few factors such
as labour shortage, poor soil condition, and high energy and fertiliser cost has created a mass
shortage of rice in Malaysia. This has made Malaysia to rely very much on their neighbouring
country, Thailand for the import of rice.
This article states the issues relating to the rice production is included and therefore this
report aims to analyse the rice market in Malaysia with the help of economic theories and
model. The economic models and theories which are going to be discussed consist of demand
and supply, shortage, production possibilities frontier, elasticity, and price ceiling.




2

3.0 ANALYSIS
3.1 DEMAND AND SUPPLY
Demand is defined as the amount consumers are to pay for a particular economic good or
service at a given price (InvestorWords 2012)

Price
s






D
Q Q
1
Figure 1.0
Based on the news clipping by Serba Wangi (see Appendix 1), the population increase
annually in Malaysia has led to the increase in the demand for rice. Based on Figure 1.0,
when demand is increase from D to D
1
, the price is also increase from P to P
1.
Because the
factor population increase is a non-price determinant in the law of demand therefore this
causes a shift of demand curve. In this case, it is shift to the right. Eventually, the equilibrium
price and quantity for rice increase when everything else is held constant, ceteris paribus.


P

P
1
D
1
Quantity
RICE MARKET
3

Supply is defined as the total amount of a good or service available for purchase; along
with demand one of the two key determinants of price.

Price







D
Q
1
Q

Figure 1.1
One of the factors of the shortage of rice in Malaysia is due to the higher energy and fertiliser
costs. This is considered as input price which is one of the non-price determinants for supply.
Producers are not willing to supply more because of the hike in the input prices. Therefore,
when an input price increases, it will shift the supply curve to the left. As seen in Figure 1.1,
when supply curve shift from S to S
1
, quantity supplied decreases from Q to Q
1
which in turn
will make the price increase from P to P
1.
Overall, this creates the equilibrium price to
increase.


P

P
1
Quantity
RICE MARKET
S
S
1
4

At the end of 2011, the Thai government has fixed to pay the farmers at a high price for the
goods in order to lift the rural income. This has caused a hike in the price of rice and
Malaysia being one of the rice consuming nations, is greatly affected by this. However,
Bernas, which is the main rice trader in Malaysia has promised to the price set of the rice
import up until March 2012. (Adnan 2011). With the expected rise in the price of rice, it will
shift the supply curve upwards from S to S
1
as shown in Figure 1.3. When everything else is
held constant, there will be a decrease in the quantity supplied.

Price







D
Q
1
Q

Figure 1.3




P

P
1
Quantity
RICE MARKET
S
S
1
5

3.2 SHORTAGE
The reason of the shortage of rice is because the demand for rice is greater than the supply.
This has been an on going problem for Malaysia for the past year due to decrease of rice
production in the country. However, this has caused the price of rice to increase annually.

Price
s






D
Q Q
1
Q
2

Figure 1.4
When the demand curve shifts from D to D
1,
as you can see from Figure 1.4, the quantity
demanded is greater than the quantity supplied therefore the shaded region below P is called
shortage. As for Figure 1.5 below, it is similar to Figure 1.4 whereby the quantity demanded
is greater than the quantity supplied when the supply curve shifts to the left from S to S
1
. Due
to the existence of shortage, the equilibrium price will have to be increased.
P

P
1
D
1
Quantity
RICE MARKET



SHORTAGE
6


Price







D
Q
2
Q
1
Q
SHORTAGE
Figure 1.5










P

P
1
Quantity
RICE MARKET
S
S
1

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3.3 PRODUCTION POSSIBILITY FRONTIER
The Production Possibilities Frontier (PPF) demonstrates how two goods are able to produce
at the maximum given at specific time with fixed resources and technology at the same time
utilizing maximum efficiency use of available factor resources (Tutor2u 2012). Based on the
article, it stated that the situation got so worrisome that the then government decided to hold
back several mega projects and channel some RM9 billion to increase rice production and
cushion escalating food prices.

Government projects






Rice Production
Figure 1.6
The Malaysian government faces tradeoff; to fund for the rice production, the government
has to put the mega projects on hold. Figure 1.6 illustrates the trade-off the Malaysian
government faces. For the Malaysian government, the opportunity cost of producing one
additional unit in the rice production is the amount of potential profits that the government
might gain from the mega projects. Opportunity cost is defined as the cost of an alternate

A
B
8

good that must be sacrifice in order to engage in a particular activity. In another word, it
means that the advantage that one could possibly derive by undertaking an alternative activity
Investopedia 2012). Based on Figure 1.6, at point A the government would have to stop
channelling funds for the rice production in order to proceed with the government mega
projects. Whereas point B, it is vice versa.















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3.4 ELASTICITY
Gabrielle Kubic (2012) stated that the index that measures the responsiveness of demand to
vary some if its factors. Price of elasticity of demand (Ed) measures degree of responsiveness
of quantity demanded to price change (Moffatt 2012). The demand for rice is considered as
inelastic. It is because rice is a necessity for Malaysians as it is their staple food. Therefore,
the price of rice will not be affected by the changes of consumption.

Price







D
Q
1
Q

Figure 1.7
Figure 1.7 depicts the inelastic demand of rice in Malaysia by representing a steep downward
sloping demand curve. Based on the graph, it is prove that there is a small significant amount
of change in the quantity demanded, from Q to Q
1,
thus making the price of rice to increase
tremendously, from P to P
1,
when everything else is held constant. This in turn, will force the
rice producers to raise the price in order to increase the revenue.
Anne M. et al. (2009, 110) stated that income elasticity of demand (YED) is defined as a
measure of the responsiveness of quantity demanded to change in income, measured by percentage
P

P
1

Quantity
RICE MARKET
10

change in quantity demanded divided by the percentage change in income. In Malaysia, rice is the
staple food for the citizens. So, rice is considered as a normal good. Therefore, as income of
consumers increases, the demand for rice will then increase. Hence, YED has a positive
value.

(Moffatt 2012) stated that price elasticity of supply (Es) measures degree of responsiveness
of quantity supplied to price change. One of the main products in Malaysia is rice. Due to the
fact that rice takes a long time to harvest. Therefore, the supply curve is perfectly inelastic.
One of the main factors that affects the price elasticity of supply is the short run time period.

Price
SD




D
1


D
Q

Figure 1.8
Based on Figure 1.8, provided the supply is perfectly elastic, should there be any price
changes, P to P
1
the quantity demanded would remain unchanged at Q.

P

P
1

Quantity
RICE MARKET
11

3.5 PRICE CEILING

Price ceiling happens when there is a set limit on price of a particular product given by the
government. Price ceiling is set below the market equilibrium. (Price Ceilings 2012).
The Malaysian government is required to impose price ceiling because price is considered as
a necessity. The reason being is that price ceiling can help every Malaysian to afford buying
rice.

Price



P
E




SHORTAGE D
Q
S
Q
E
Q
D


Figure 1.8
Based on Figure 1.8, without price ceiling the price would be P
E.
At that price the quantity
supplied would be at Q
E.
If the government impose price ceiling, P
C
, the quantity supplied
will fall from Q
E
to Q
S
. Whereas, the quantity demanded would increase form Q
E
to Q
D
. The
shaded region in Figure 1.8 depicts the shortage that occur due to price ceiling.
between Qd and Qs is shortage. This will be explained in detail in the following section.
These are illustrated in diagram below.


P
C

Quantity
RICE MARKET
S

Price ceiling

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4.0 CONCLUSION
The rice production in Malaysia is declining each year. As rice is the staple food for
Malaysians, the demand for rice is always increasing as the population is increasing. But
because of the supply of rice has been declining, this creates more problem to the suppliers as
they have import more rice from the neighbouring country, Malaysia. Thus, shortage of rice
happens.
Therefore, this analysis of this report is based on the economic theories and models and is
also based on ceteris paribus assumption. However, this report does not explain the real world
rice market problem in Malaysia because the report is based on assumptions. With the help of
the economic models, this creates a guideline to answer all the problems associated.


(1550 words)









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REFERENCE LIST
Adnan, Hanim. 2011. Threat of Thai rice price hike. The Star, October 1.

Anne M., Garnett, Philip Lewis, R. Glenn Hubbard, Anthony Patrick OBrien. 2009.
Microeconomics. Frenchs Forest: Pearson Education Australia.
Investopedia. 2012.
Opportunity cost. Accessed April 15,
http://www.investopedia.com/terms/o/opportunitycost.asp#axzz1sVc6qpuu
InvestorWords. 2012.
Demand. Accessed April 9, http://www.investorwords.com/1396/demand.html

Kubric, Gabrielle. 2012.
The elasticity of demand for rice in Peru. Article Directory. Accessed April 17.
http://www.centrorisorse.org/the-elasticity-of-demand-for-rice-in-peru.html

Moffatt, M. 2012. Price Elasticity of Supply. economics.about.com. Accessed April 18.
http://economics.about.com/cs/micfrohelp/a/supply_elast.htm

Price Ceilings. 2012. economics.fundamentalfinance.com. Accessed April 18.
http://economics.fundamentalfinance.com/price-ceiling.php

Tutor2u. 2012.
Production possibility frontiers and economic efficiency. Accessed April 14,
http://tutor2u.net/economics/content/topics/introduction/production_possibility_fronti
ers.htm.



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