Introduction This report discuss on how to tackle the shortage of sugar in Malaysia based on an article .

Sugar is very important commodity in Malaysia as well as other parts of the world because it is an essential item. In Malaysia sugar imported from countries like Australia, and Fiji but refining process is done in Malaysia. Over the past years a trend has been observed that prices has been increasing due to shortage of sugar during festive periods and sugar smuggling from Malaysia to other neighboring countries such as Indonesia due to the sugar in Malaysia is subsidized by the government under the price control and antiprofiling act 2011. This report is to analyses the relationship between the sugar market in Malaysia as well as the relationship between sugar shortage during festive season and cross border smuggling in Malaysia. This report will also test other economic principles as to gain a better understanding of the Malaysian sugar market. This report will also highlight factors that contribute to the sugar smuggling and it causes and effect.

Demand and Supply Under the law of demand clearly states that everything else being constant, when the price of a product falls, the quantity demanded of the product will increase and when the price of a product rises the quantity demanded of the product will decrease (Hubbard et al. 2010, 65). Under the figure 1.0 the increase in demand will shift the demand curve rightward (D toD1) to reflect the increase. As the result of the shift the equilibrium price of sugar will increase (P toP1) and higher new equilibrium quantity demand (Q to Q1) . Under the change of demand non price determinant such as increase of population, price of related goods, taste and expected future prices is a major cause in the change of demand while the quantity demand will not be effected by the change of demand .The factor that causes the demand curve to shift right is because of the expected shortage of sugar in future due to smuggling. When consumers are convinced, the demand curve will increase now as they try to avoid paying more in the future.

P S EQ1 EQ

P1 P

D1 D Q

Q Figure 1.0

Q1

Under the law of supply clearly states that everything else constant, increases in price will lead to increase in the quantity supplied, and decreases in price cause decreases in the quantity supplied (Hubbard et al. 2010, 71). Under the figure 1.1 the graph represents the change of supply. The quantity supplied is not affected by the change of supply , the change of supply is influenced by the non-price determinants such as the price of inputs, technological change , prices of substitute in production, expected of future prices and the number of firms in the market. Based on the figure 1.1 the supply curve will shift left is caused by the price of input. When the price of international raw sugar increases will result higher raw sugar cost for the country thus it will lead hike of sugar prices of domestic sugar (Fang,2012). Under figure 1.1 the lower supplies will shift leftwards (S to S1) as it follows the ceteris paribus theory thus it will result a higher equilibrium price (P to P1) and lower equilibrium quantity of supply ( Q to Q1)

P S1 S P1 EQ1

EQ

D Q1 Q Q

Figure 1.1

Interaction between Supply and Demand

At figure 1.2 it shows the change of supply and demand of sugar. When there is in the change of supply and demand would result the change of the market equilibrium. Market equilibrium is the point whereby the demand curve meets the supply curve, at this point consumers are willing to buy the quantity amount sugar which is equal to the quantity of supplier are willing to sell. At figure 1.2 the new demand and supply curve is pitted against the old demand and supply curve it clearly shows there is huge difference in the equilibrium quantity and price. It shows that the price will increase (P to P1) and the quantity of sugar in the market will increase (Q to Q1) this is due to a drastic increase demand that overwhelms the increase in price caused by the shortage of sugar supply. This situation is beneficial for producing nations such as Australia, Thailand and Brazil but it is a reverse scenario for net Importing nation such as Malaysia, Indonesia and Singapore.

S1 S P1

EQ1

EQ D1 D Q Q1 Figure 1.2

Price elasticity of demand

Elasticity is about how an economic variable can affect and be affected by another economic variable. Price elasticity of demand is the responsiveness of the quantity demanded to a change in price, by P dividing the percentage change in the quantity demanded of a product by the percentage change in price (Hubbard et al. 2010, 97). Sugar is inelastic therefore any slight rise in prices of sugar wont lead to a significant change in demand (Saruabh,2012) so therefore when a demand is inelastic the percentage of the quantity demand is less than the percentage change in price with the price elastic less than 1 in an absolute value . A downward slope demand is observed in figure 2.0, although sugar is an inelastic demand but it is not perfectly inelastic due to there are substitutes such as artificial sweeteners. S S1 P EQ

P1

EQ1

D Q Q1 Q

Figure 2.0

Elasticity and Total Revenue

When the demand is inelastic an increase in price would also result an increase in revenue this is due to the percentage rise in price is greater than the percentage in decrease in quantity demand thus since sugar is an essential item, consumers would still purchase them even though there is a small price increase.

Consumer Surplus and Producer surplus

Consumer surplus is the difference between the highest price a consumer is willing to pay and the actual price they pay (Hubbard et al. 2010, 131). The area above the market demand curve and below the market price is known as consumer surplus. Producer surplus is the difference between the lowest price a firm is willing to accept and the actual price (Hubbard et al. 2010, 133).The area above the market supply curve and below the market price is known as producer surplus.

S C+B =DWL

F
P3 A P (RM 2.84) D P2 (RM 2.30) E D Q Figure 2.1 B Price Ceiling C EQ Smugglers Market

Based on Figure 2.1, the consumer surplus before the price celling is located at point F, A and C while producer surplus before the price is located at D, E and B. When price ceiling is introduced the points that represents consumer surplus is F, D and A. The points that represent producer surplus is E. In conclusion, when the government introduces the price ceiling not only it reduced producer surplus it also helps to reduce the market price thus reducing the profit margin of the supplier.

Price Ceiling and Market Efficiency

Price ceiling is the legally established maximum price at which a good can be sold (Hubbard et al. 2010, 137).A price celling is very good example of government intervenes when neither consumer nor producer are unhappy about the present market equilibrium. Based on the Figure 2.1 it can be observed that the current market price at point P1 is at RM2.84 (Business Times,2012)when price ceiling set the price drops to P2 at RM 2.40(Business Times, 2012). While price ceiling does not bring benefit to the producer because it decreases the producer surplus while it brings benefit to the consumer as it increases consumer surplus. When price ceiling takes effect the Point D will be transferred from the producer surplus to the consumer surplus. It also causes the producer surplus to decrease by point D while point C and B has become a deadweight loss. Deadweight loss is result of the price ceiling. Based on the Figure2.1, shortage occurs due the result of government imposing price ceiling which causes lower production of goods as shown in from point Q to point Q1.The cause of shortage is usually due to the quality demand is greater than quantity supplied thus when price ceiling been imposed point D will transferred from the producers to consumers thus allowing consumers to buy sugar at a lower due price ceiling acts as form subsidy. Shortages occur due to sugar smugglers selling it at the black market at point P3.Consumer surplus is represented in point F while Producers surplus would represented in point E, D and A. Smugglers will make huge profits selling in the smugglers market in the neighboring countries such as Indonesia. In recent times, it was reported that 945 Kilograms of subsidized sugar has been seized in a raid by the ministry of domestic trade, cooperatives and consumerism (Adit,2012)

Conclusion The international sugar market has been very volatile over past decade due to the high demand from developing nation such as China and Russia thus it has major impact in the domestic sugar price in Malaysia due to this situation the Malaysian government has to increase its sugar subsidy in order to cushion the price of sugar in the domestic market and due this smuglers take advantage of this situation and smuggled sugar over to neighboring countries such as Indonesia because of higher sugar prices over their side in order to curb the number of smuggling the government should take more assertive action to the smugglers. All analysis are done based purely on proven economic theories doesnt actually reflect the International nor Malaysia sugar market.

References

Hubbard, Garnett, Lewis, Obrien. 2010. Essential Economics. New South Wales: Pearson Australia.

Sanganeria, Saurabh.2010. How can we tackle the sugar price rise? . Accessed April 1, 2012, http://www.dnaindia.com/speakup/report_how-can-we-tackle-the-sugar-price-rise_1334068

Adit, Gary.2012. Sugar tops list of smuggled items to Indonesia Ministry. Accessed April 2, 2012, http://www.theborneopost.com/2012/03/30/sugar-tops-list-of-smuggled-items-to-indonesiaMinistry/

Ehan,Isaac. 2010. Tackling the Sugar Shortage. Accessed April 3, 2012, http://thestar.com.my/news/story.asp?file=/2010/5/13/sarawak/6248390&sec=sarawak

Business Times .2012.Malaysia retains sugar price, ups subsidy.Accessed April 10, 2012 http://www.btimes.com.my/articles/20120127215408/Article/

Fang,Ivy Ng Lee.2011. Not all sweetness and light.Accesssed 11,2012 http://research.cimb.com/index.php?ch=eq_my&pg=eq_my_cwu&ac=39196&bb=0&fname=file