Fuel Problems in California

Link : http://www.bbc.co.uk/news/world-us-canada-19853740

The main problem of this article is about California fuel price rises force pump closures. Why can force pump closures in California? Why it can be like that? Based on the news from “BBC News US and Canada” in one part the Golden State price of fuel hit up to $5.69 a gallon (£ 0.91 per litre) $1.20 more than a gallon that is the nation most expensive patrol.

California was not running out the patrol but because of the power cut, exacerbating the supply problem in this few weeks. Many factors that make California fuel shortage, it because a fire a chevron refinery in Richmond on 06 August 2012, one of the region’s largest has left in producing at a reduced capacity. And also pipeline problem that move crude to Northem California was also shut down and two plans closed, in this several day California fuel resumed normal operation so in this case in this article, we can see that. Firstly why it can be change in supply. There are 6 main factors that can bring changes in supply.

·         The prices of factors production.

The prices of factors production used to produce a good influence its supply so when the price of the factors rises, the lowest price that produce it willing to accept so supply decrease.

·         Price of related goods produced

The price of the related goods produces that from produce supply. For instant that when fuel rise up to so high buyers or seller changing from fuel to solar energy.

·         Technology

A technology occurs when a new method is discovered that lowers the cost of producing goods.

·         Expected future prices

When a goods rise in future supply will decrease the good today selling the good in the future for a higher price.

·         The states of nature

Is it influence supply when bad weather, more broadly, natural environment, earthquake etc. So when good weather the goods is increasing when bad weather the goods decreasing for the supplier.

            So in this case there are two factors that really affected the supplier. Firstly expected future price, it is necessary for government take action to decrease the fuel in this few day for buyer and also the owner pump closures. In some of the owner looking that better to close the pump closure rather to cut the profit margins. This also can be affected to black market. The others one that related the case is the state of nature because in the article said that one of the fuel tank had a power failure for several day and that cause lack of fuel in California that make raise of the price, supply decrease but the demand still increase so make the fuel price raise up to this point.

Rises in the price of the patrol has changed the quantity of supplier to decrease. As we can see that the supply curve is moving leftward from So to S1. Due to increase the price of fuel, it occur a shortage. This shortage can be occur when the quantity of demanded has exceeded the quantity of supply. In this case, supplier cannot produce more than what the demand needed. Therefore, shortage was occurred. The second reason that can possibly affect the shortage is due to the maintenance. In the graph, it shows that when the price is $4.49, the quantities are 15 millions people that are willing to buy the fuel. And if the price rises or increasing up to $5.69 so the quantities decrease to 13 millions people that are willing buy the fuel every day.

When we discuss about Elasticity, there are two kinds of elasticity: Elasticity demand and Elasticity supply. Elasticity demand is a unit free measure of the quantity demanded of a good to change in price when all others influence on buying plans remains the same. And for Elasticity supply is measured of the quantity supplied a changed of supplied good when others influence remains the same.

Elasticity demand

Based on the article above, it describes about the Inelastic Demand because when the price rises from $4.99 or increasing up to $5.69, the quantity of demand (Millions of people) will remains the same or just affect a few number of quantity demand. Buyers will still purchase the fuel as majority they need the fuel for their car every day and small fraction of buyer will be shifting from using the fuel to solar energy and using the bus, cap (taxi) or use bicycle for their transportation. However, there are still many buyers that willing to buy the fuel for their transportation although there might be lack of fuel or increasing fuel price nowadays (E=0).

Taxes is increasing the price by the government law by the buyers and lower the prices received by the seller. I believe that in many countries that buying the fuel outside the countries so government must pay taxes to others countries and charged to buyers and make received by the seller becoming lower. This also applies in this case.

When we discuss about subsidies, Subsidies is a benefits that given by the government to decrease the price paid by the buyer and increase the price that received by seller. In my opinion, subsidies are needed because now in California lack of fuel causes of the electricity problem and causes the fuel price rise up to $5.69. Therefore, when government provides the subsidies, it will cause the fuel price to decrease for few days.

In conclusion, shifting in the supply curve can be directly affected by the factors of expected future price that can cause the price of the fuel in California and affect some of the pump closures closed for week because it can cause a cut in the profit margin cost. In my point of view, the suitable recommendation will be the problem of electricity in California could be reduced so that the fuel industry could resume their production and the fuel price will decrease to an average price in California. Besides that, if government could provide subsidies to citizen of California, it would be great benefits to those people who needed the fuel for their daily needs. Therefore, by the government intervention such as subsidies, it could help them to purchase the fuel in a possible lower price.

Chilli price raised in Indonesia

Link : http://www.thejakartaglobe.com/bisindonesia/chili-soy-bean-prices-hurt-indonesian-food-businesses/423875

The main issue of this article is to discuss in detail about the price ceiling of the chilli and the soy beans which poses a substance impact on the businesses involve. There are two essential commodities which are being discussed herein. First commodity being "chili" while the second being "soy beans". These two commodities are chosen because they are heavily discussed in many forums and articles. Now, the essential question: "What causes the chilli prices in Indonesia to rise as high as Rp.one hundred thousand, what can be done to overcome problems faced by this rapid and excessive raising price? Who is going to be affected by this, the buyers or the sellers?

I believed that in view of this issue and the most common causes for the soaring high chilli prices are due to rainy season which are common within the region and crop spoilage. When demand of the product increases, the supplier could not meet up with the demand with satisfy the market. Market influence also plays a major role in the soaring price, is due to the fact that there are many buyers in the open market which will make bulk order of the individual commodity because for various reason such as the fear of not being able to meet the needs of their individual customers or probably in order to speculate with the commodity market. If all buyers of the market were to only get what they require, there will not be an issue of soaring price for the commodity.

Two reason that higher price change quantity demanded from the law of quantity demanded:

1.Substitution effect

An effect that cause by the rise price, other things remaining the same, its relative price its opportunity cost. To buy more that relatively lowers price and that higher price will not buy. Therefore, the opportunity cost rises and the intensive of economics switch to a substitute is becoming stronger. In this case, people tend to change their chilli to other spicy goods like paprika which usually we call this a substitute good.

2.Income effect

When a price rises, other things remain the same; the price rises relative to income. People cannot afford to buy a goods that the want, the must decrease the quantities demanded of other goods. Like in this case Indonesia people love to eat spicy foods, so the need to buy chilli therefore they need to decrease chilli and decrease other good to buy.

Now we have to look into the possible remedies into how the problem of soaring cost can be overcome. The answer to that is as simple as the supplier maintains it price for the commodity but it is unlikely to happen, taking into consideration that human are essentially money driven. Then I look into other alternative solutions to solve the problem such as goods substitution effect which I have mentioned above. I will also consider the fact as to whether can the Indonesia government take action about the two commodities price, a simple way whereby the government could ease the heat in such issue is to subsidy part of the rising cost for the commodities mentioned above to the supplier so that they will not increase the prices all together to make purchasing for buyer difficult.

Last but not least, "for whom?" Who will be affected if prices of chilli keep rising until such days?  It will definitely impact all down the supply line which includes suppliers (including whole seller), buyers, consumers and the government. Suppliers will be impacted because the supplier would have a problem in order to meet the demand of the market. They would also have to consider about retain their buyers and not to let them have the idea of substitution and yet at the same time making a profit of the opportunity cost. Supplier will not only be the only group who will be affected. Buyers of such commodity will also be affected because buyer will have to deal with rising cost of the commodity which will reduce their profit margins if the commodities are being sold. However, in order to maintain this profit margin, the buyer will then transfer the cost onto its consumer who will have no choice but to bare all the excessive pricing that is charged on them. Seller could determine and affect the price to a variable extent because when the seller is willing to pay more when the demands increase and also the same when seller willingness to buy less the quantity demand decrease and the supplies exceeds its demand. Last but not the least is the government. It affects the government because the government will have to deal with the citizen’s unhappiness when this happens, that is why many a times, and the government are "forced" to take cooling measure for such commodity crisis when faced. This could potentially take a substantial dip into the country's monetary reserve if the problem is not solved in the long run. We can see if below the example of price ceiling in my opinion.

Example of price ceiling of chilli:

Based on the graph, we can see the point of the deadweight loss is the point where the underproduction happened. And the equilibrium price is Rp.80.000’- and the quantity is 9. In order to protect the price of chilli, government introduced a price ceiling. A price ceiling is a price that set below market equilibrium and according the graph that the price ceiling has been set at Rp.70.000, - by the government. When a price ceiling is set, a shortage occurs. This shortage can possibly create a black market of chilli. Black market is a price that is currently control and set by the supplier itself in order to meet the shortage of the quantity demanded. For example, when price ceiling that given by the government is at Rp.70.000,-and some buyer sell it with price up to Rp.100.000, - . In this case, black market occurred due to the shortage of the supply of chilli. People that are willing to buy for the chilli will put much effort on buying no matter how expensive the price of chilli that are sold by the black market. As a result, this black market is the one who currently controlled the price during the lack of chilli supplied.

Increase Tax on Tobacco

http://thestar.com.my/news/story.asp?file=/2012/9/21/focus/12058559

         Everything that you earn and almost everything you buy is taxed. Tax is the division of the burden of a tax between buyers and sellers. Malaysian government wants to increase the tax on cigarettes because simply, they want to reduce smokers in Malaysian.

Figure 1

           Figure 1 shows the demand curve for tobacco companies before tax is inelastic. The price that consumers pay initially per pax is P. P also represents the price that the producers receive. The price per pack that consumers pay is the revenue per pack that producers receive. Smoking is a habit that is hard to kick. Hence, demand for cigarettes is highly inelastic. If there is a large price changes, it will only result small changes in the quantity demanded. Only large price increases will shrink demand curve because the demand is inelastic to price changes. Inelasticity and the burden of tax go hand in hand. The burden of a new tax falls very largely on the consumers with most of the revenue coming out of consumer surplus.

Figure 2

            In figure 2 shows the graph for tax on buyers. A tax on buyers shifts the demand curve from D to D-tax on buyers. The equilibrium quantity decreased from Q1 to Q2, the price paid by buyers increases from P1 to P3. the price received by sellers falls on P2. The tax raises the price paid by buyers by less than the tax lowers the price received by sellers  so buyers and sellers share the burden of tax. Essentially the effect of the payments is to increase fixed costs for the tobacco producers. In conclusion, prices are raised and consumption falls.

When a tax is increased, its burden falls on those consumers or producers who cannot move to a substitute product to avoid the tax. Consumers will still buy cigarettes even if the price is increasing because there is no substitution for cigarettes. For producers, the resources used in producing the product cannot easily be deployed in the production of something else. The availability of substitutes determines the steepness of the demand curves of consumers or the supply curves for producers. 

Figure 3

Figure 3 illustrates in this market for cigarettes, demand is perfectly inelastic because there is no substitution for cigarettes in Malaysia, the change in surplus resulting from the settlement  Most of the tax comes out of consumer surplus. The producers lose much less surplus. Consumers are willing to pay for the price of cigarettes per pax even if its increases. Cigarettes is an inelastic demand because smokers will still buy cigarettes even if the price goes up. They could buy less if the price is up. Even if the price of cigarettes increases, the demand is not significantly impacted. It is difficult to reduce the consumption of cigarettes without making a big changes. Dead weight loss is the sum of the consumer surplus and the producer surplus that is not transferred. It is simply destroyed by the tax. This is a general principle  Taxes on goods for which demand is inelastic destroy less consumer surplus. The total loss of surplus to society will be less than the dead weight loss if the government invest the tax proceeds in projects that have positive net present value.

The price of cigarettes per pax from 2010 to 2012 is increasing. From RM6.40 to RM 10.00 per pax, but at the end of the day, people are still buying cigarettes even if the price is increasing. It is true that Malaysia sells cigarettes at a low price.  In other countries, they sell one pax of cigarettes for almost RM 40. In my opinion, if the government wants to increase the price of cigarettes per pax from RM 10 to RM 20, then they should increase it. Even though people will still buy it, they will eventually buy it lesser. Maybe they will buy it at least twice a week because the price is too expensive. They will have second thoughts to buy it.

Demand, supply & subsidy sugar in Malaysia

Budget 2013: Sugar subsidy reduced.

DEMAND, SUPPLY & SUBSIDY OF SUGAR IN MALAYSIA.

http://thestar.com.my/news/story.asp?file=/2012/9/29/budget/12101183&sec=budget

FIGURE 1

Sugar industry in Malaysia is characterized increasing direct domestic consumption supported by an equally fast growing food processing industry. The supply side by a small domestic production base that is unlikely to expand. To meet the growth in demand, imports have expanded steadily to record levels in recent years. Production mostly concentrated in the Northwest of peninsular Malaysia in the states of Perlis and Kedah. Malaysia has four processing facilities. Which are in the state of Perlis, Kedah, Penang and Selangor. In figure 1 shows the demand and supply graph for sugar for 2012. The price of a good determines the quantities demanded and supplied. 

FIGURE 2

The vertical axis represents price of sugar per kilogram, while the horizontal axis represents the quantity of sugar. S represents the supply schedule that producers are willing to supply at any given market price. As the price goes up, producers are willing to produce and supply more of a good to the market. D line represents the amount that consumers are willing to buy it at any given price. As price goes up, people are less willing to consume a particular good or equivalently. There are less people that can’t afford a particular good. In both cases, demand falls as price rises. In figure 2 shows the decrease in demand shifts the demand curve leftwards.  A change in any influence on buying plans other than the price of the good itself results in a new demand schedule and a shift to leftwards. According to Parkin (2012) the law of demand stated that when other things remaining the same, the higher the price of goods, the smaller is the quantity demanded. The price of sugar is increasing so the quantity of demanded decreasing. People will not buy sugar if the price is increasing or they will buy it lesser. Higher price reduce the quantity demanded for two reasons which are substitution effect and income effect. Without subsidy, the price of sugar is increasing. 

FIGURE 3

Figure 3 shows that with no subsidy, the demand curve D and the supply curve S determine the price of sugar and the quantity of sugar. Price of sugar, peanuts, oils, wheat and many other farms products receive subsidies by the government. A subsidy is a payment made by the government to a producer. With no subsidy, producers produce tons of sugar with a higher price for sugar per kilogram. Suppose that government introduces a subsidy of RM 0.40 per kilogram of sugar. A subsidy is quiet similar to negative tax. A tax is equivalent to an increase in cost, so a subsidy is equivalent to decrease in cost. The subsidy brings an increase in supply. In 2012 the supply curve shifts rightwards because there is an increase in subsidy but in 2013, the supply curve shift leftwards due to the reduction of subsidy for sugar. S1 represents subsidy for 2012 while S2 represents subsidy for 2013. On 2012, the sugar price per kilogram was reducing by RM 0.40. When the price is decreasing, the quantities will automatically increasing. People will buy goods when the price drops. When the 2013 budget were out and it stated that government will reduce the subsidy of sugar per kilogram for RM 0.20, the price will increase by RM 0.20 and the quantity will reduce. The price for sugar per kilogram increased from 2012 to 2013. The subsidy lowers the price of sugars and increase the quantity produced. Figure 2 shows that the equilibrium occurs when the new supply curve intersects the demand curve. The subsidy lowers the price paid by consumers but increases the marginal cost of producing sugars. Marginal cost is increasing because producers have to produce more sugars because they must begin to use some resources that are less ideal to produce a sugar.

Government gave subsidy to producers so that they could decrease the price of goods. Without subsidy, producers will charger goods at a higher price. Budget 2013 stated that sugar refineries have notified retailers to raise sugar prices by RM0.20.  The government has decided to cut its sugar subsidy as it looks to promote a healthier, lower-sugar diet among its people. Malaysia has the highest obesity rate among Southeast-Asian countries and ranks sixth in the Asia-Pacific. When the subsidy is reduced, the price will go up. People will consume less sugar and practice a healthy lifestyle. Government should get rid of the sugar subsidy entirely, so that Malaysian will practice a healthier lifestyle. Sugar is a necessity for many Malaysians. Sugar and spice are just toppings and flavourings. Hence, it’s okay to use less sugar in every meal.

Monopolistic Competiton : How Solar System firms compete in the market

There is getting more company outside registered for green building and ready to spend on green building materials for projects. The amounts spent on green building materials continue to rise and it makes sense to go green. Through the article above, we can know that Solar System Business is a monopolistic competition market in this century. Although the number solar system company is getting higher, but it is still a specific business and they continue doing it in their very own way. Green Building index in Penang for the next two years is expected to hit around RM60 million to RM120 million. Some of the popular materials and energy-saving products include solar panel which is built on the top of buildings and solar water systems in houses.

Nowadays, most markets in the world are emulative but they are not perfectly competition. It is due to the companies or corporation in these markets have some power to set their prices, as monopolies do. In the economics book, they called this type of market monopolistic competition. Monopolistic competition is a market construction in which a large number of companies compete while produce a differentiated item, companies compete on the product price, quality, and marketing, lastly they are easy to join or leave the market. In this situation, green buildings make sound economic sense besides ecological and environmental sense. There are a lot of solar system companies outside such as G-solar business, YongYang solar energy and so on. If the demand of the solar system keeps on increasing, there will be more solar system companies joining into the market. In this year, those companies have sold about 40ft containers of solar system materials with a net worth of RM500, 000. They are expected to sell 10 more 40ft containers with a net worth of RM2 million in the following year.

In this market, each company has a limited capability to affect the price of its products or items. Due to the average price in the market, each company only can increase their price by a small amount. Besides, some of the individual home owners prefer to use the solar system for their property. This makes the demand of the solar system rises. When the demand is getting higher, producers would like to fix a higher price. However, the number of companies in monopolistic competition is huge, it is not possible for them to coordinate and discuss about the price. On the other hand, a company in this market, must be tacful to the average price on the market, but all of the companies in the market is rather small. It means that no one company can affect the market condition. They might not have power to influence the market price or influence other companies’ actions. When one of the companies increases the price of solar panel by a large amount, consumers will search for other types of products that they willing to buy. When this happen, that company will sell less products and they have to pull down the price to the market price but they won’t disappear unless they increase the price by a large amount. If they don’t lower down the price, they might be eliminated from the market because individual company will never have the power to influence the price in monopolistic competition market.

In addition, the article showed developers who do meet the Green Building Index (GBI) requirements have to pay development charges of RM15 per square ft and RM20 per square ft for the residential and commercial projects respectively. Penang is listed third in Malaysia in terms of the number of solar system projects registered with GBI, right after Kuala Lumpur and Selangor and ahead of Putrajaya. There are also many producers and developers that are not applying for the GBI certification. When consumers plan to buy or apply solar panels for their property, they might choose those companies who do meet the requirement. It is because reliability is one of the very important things considered in the quality part. Some developers might offer a cheaper solar panel but it is low quality and not reliable. In this situation, consumers will choose the better-quality solar panel rather than those which are not applying for GBI certification although it will be more expensive. Moreover, service is another important thing. Producer or developers who provide efficient services and make sure their customers receive the products quick will be a better company in monopolistic competition market. These companies might can survive in the market for a longer period.

 Because of the product differentiation, a company in the monopolistic must market its product. There are 2 main styles to market their product which are advertising and packaging. A better advertisement and package for the products can persuade more buyers that the quality of the product is higher. In this case, buyers feel satisfied to buy their product. On the other side of the coin, a low quality developer persuades buyers come to purchase their products with a lower price although the quality is lower. Solar system companies do so. Each solar system company or corporation must market its product by using creative advertising and the product produced must be nicely packaged. It can show their product is high-quality and enough functional for consumers to use in daily life.

In conclusion, Monopolistic competition has no obstacles to prohibit new companies from joining the market in the long run. Therefore, a company in monopolistic competition cannot make a economic profit in the long run. When a company in the market make a economic profit, new company found it profitable and join the industry. Those entry lower the prices and wipe out the economic profit. At the end, the economic profits eliminated. However, when some of the companies sustain economic loss, they started to leave the industry. These exit increase back the prices and clear away the economic loss. In the long run equilibrium, the companies in the market make zero economic profit.

http://thestar.com.my/metro/story.asp?file=/2012/10/2/north/12111008&sec=north

The Star (2nd October 2012)

Demand and Supply of Singapore's private home

Singapore’s private home prices reach a new high in the third quarter in this year. A government report came out after developers sold more homes. In line with preliminary estimates released by the Urban Redevelopment Authority 1st Oct 2012, private residential property price index rose 0.5% in the three months ended 30 September. The index exceeds 0.4%in the previous quarter. Singapore decided to inhibit the increasing trend of shoebox apartments that are smaller in size by capping the number of homes that can be developed in suburban projects. They estimate the home price index will rise by 1% to 3% this year.

In economics situation, the private home price in Singapore keep on going high is due to the demand of private home. Wants are the unlimited desires. When the citizens of Singapore demand the private home, they can actually afford it and plan to buy it. The quantity demanded of private home increases so that developers and producers increase the prices because at the moment the demand of private home will not decrease. The government plans to limit the number of homes for apartment projects outside the city’s central area to discourage shoebox units. The new rules will be implemented from Nov 4. When the price of a good or service in market keep increasing, government have to take action to stop it because it might affects the economic situation of whole country. Government will take several actions to reduce the price of a good or service to the equilibrium point. The purposes of these actions are to concern for middle or lower income workers. Government has to make sure all those lower income workers can afford a shoebox apartment someday. More than that, if the government didn’t take any action, other country will start to complaint and criticize the system of the country. It’s is because the price of a good in the country is too much higher or lower than another country.

According to the report, purchases made by Singaporeans increased to 35% of the total this year from 19%in 2011, almost on par with foreigners, DTZ Holdings Plc said, citing authority data. The law of supply states other things remaining the same, the higher the price of a good or service, the greater is the quantity supplied. The number of home purchases made by Singaporeans this year has totally beyond for the whole of 2011. Population is one of the factors that bring changes in demand. The larger the population, the greater is the demand for goods and services. When the population of Singapore increases, it may also bring changes to the demand of private home. Due to this implication, the purchases made by citizens of Singapore might increase. Buyers, both foreigners and locals are slowly increasing. DTZ Holdings Plc expect to see more activity and interest in luxury housing in the next half year with a few projects gearing up for launch.

On the other hand, prices of non-landed private residential areas increased 0.2% in the prime district in the quarter, getting higher 0.6% than the previous quarter. In addition, prices increased 0.5% from the previous quarter in suburban areas. As we can see, the index between two quarter of non-landed private residential areas has not much different because the government is maintaining the prices to let it retain at the market equilibrium point. Besides, this phenomenon is also because of the income of the buyers. Income is another factor that brings difference in demand. When income increases, most consumers will buy more goods or services. Conversely, when income decreases, consumers buy less. When there is less consumers in the market, the producers will not increase the supply of goods or service because a surplus will rise. After the surplus rises, some producers unable to sell units they planned to sell. In this situation, they forced to lower the price toward the equilibrium price. At last, the price will back to the equilibrium point. If those producers don’t lower their price, consumers will search for another cheaper product which is called a substitute. Moreover, it is also because of prices of related goods. When the price of a good or service that consumers plan to buy is higher proportion than their income, they might search for substitutes. A substitute is a good that can be used to replace for another good. When the private home prices increase, buyers will search for other units which are cheaper. When the price of a private home unit in Singapore is higher, they might search for cheaper unit like non-landed unit or smaller unit.

In this situation, private home are normal good. It is because a normal good is a good or service that consumer will buy when their income increase. When consumers get higher pay, usually they will search for better goods or services. Although the purchases made by Singaporeans increased to 35%of the total of this year, private home sales in August fell 27% from a month ago. Under the Chinese Lunar calendar, developers sold less properties in that month considered inauspicious. This situation illustrates preferences is also a element that alter the demand. Preferences define the value that people place on each good and service. Preferences depend on such things as the weather, information, and fashion. As the report showed, some of the buyers think that buying a home within ghost festival is very unlucky.

In conclusion, a competitive market involved many buyers and sellers. It means that individual buyer and seller can’t influence the market price. Demand and supply within the market sustain to balance the prices of goods and services. With these 2 methods, there will be a equilibrium point on the demand and supply curve. Threfore, a equilibrium price rises in every single market. Desires are unlimited. Because of this, lot of things can be produced. However, unprofitable things will not be produced by suppliers. Lastly, demand shows a determination which wants to meet the satisfaction. On the other side of the coin, Supply states a decision which is technically feasible projects, thereby generating it.

Collapse on Wool Industry

Wool was an important industry for Australia as it was the number one industry that helped build Australia in the late 1840’s itself. The Australian Merino was one of the world’s finest wool growers. Nevertheless, the industry had a big collapse in the 1980’s also known as one of the biggest business disasters that cost over 10 million dollars of a debt of 3 million dollars that Australian wool growers were lumbered will along with other costs that hit Australia. Many wool growers suffered from the wool collapse. Hence, the Reserve Price Scheme was introduced as a guarantee to Australian wool growers a minimum price for their wool. It was introduced to protect the wool industry as a means of nation building besides bringing stability to the fluctuating wool prices. In 1991 however, the scheme failed causing a collapse in the wool market (Wool Bale Out, 2011, http://www.abc.net.au/landline/content/2010/s3287468.htm).

The reserve price scheme is to set a minimum price for wool set above the equilibrium price. In short, a floor price was set. Price floor is a regulation enforced by the government that makes it prohibited to charge below the specified price which is the price floor. A price floor needs to be set above the market equilibrium to be effective as there will be no effect if the price floor was set below the price equilibrium. When the price floor is above the equilibrium, it will result in a surplus because the wool supply exceeds the wool demand.

The remaining part which is A + C is the potential loss from consumer searching for wool. The supply of wool fails to meet the demand of wool in the short period of time (short run).

Based on the graph above, it can be seen that the consumer surplus at equilibrium price, Pe was C + D + F. After the floor price, Pf, the consumer surplus was F only. This is because when price increases from Pe to Pf, the quantity demanded reduces from Qe to Qd which results in a loss in surplus.

The producer surplus at equilibrium price, Pe was A + B + E. After the floor price, Pf, the producer surplus was E only. So, there was a loss in producer surplus as well because the wool growers were not efficient as they did not take into consideration the demand of consumers.

The deadweight loss is the total loss in surplus due to inefficiency. In this case the deadweight loss is D + B. This is because the total surplus is not at its maximum and there is an underproduction of wool supply.

Diagram 1: Wool production in the short run

The implementation of floor price, Pf, by the government through its Reserve Price Scheme as mentioned above results in a surplus. The reason why there is a collapse of this scheme is instead of maintaining a conservative price floor; the scheme eventually made this a price extraction which in a way also it failed as there was deadweight loss (inefficiency of production).

The price elasticity of demand for wool changes from inelastic to elastic over time. In the long run, the demand for wool is price elastic as shown in Diagram 2 as there are now substitutes available. Wool prices halved by the late 50’s as the wool industry had to face new competitor i.e. synthetic fibres such as nylon and polyester (Wool Bale Out 2011). Consumers can now choose to purchase synthetic fibres rather than wool itself should the price continue to rise. Also, despite the drop in floor price to 700 cents a kilo, there is still stockpiling of wool, indicating that demand for wool by consumers did not increase much. The reason so is because demand hardly changes.

On the other hand, the price elasticity of supply is inelastic due to the producers having to either work its labour force overtime or hire additional workers to increase production. In the long run, supply becomes price inelastic as shown in Diagram 2 because as time passes, producers can now increase their supply. This is proven through stockpiling when the price increases from Pe to Pf thus, supply is more inelastic.

In terms of consumers and producers surplus, in the long run, both remain the same as mentioned in part (a). The only difference would be the magnitude of loss because the price elasticity’s of demand and supply had changed over time. For the same reason, the magnitude of deadweight loss differs from that mentioned in part (a). This is because there was no disaster like this before so comparison is not needed. Since deadweight loss still exists in the long run, it can be concluded that the Reserve Price Scheme is not the right solution.

Diagram 2: Wool production in the long run

In the long run, there would be a rapid increase in supply of wool as producers increase production. This causes the supply curve to shift from S to S₁ as shown in Diagram 3. As for demand, it declines as there is now substitutes available i.e. nylon and polyester for consumers to choose from. Thus, the demand curve shifts to the left from D to D₁ as shown in Diagram 3. The increase in supply together with the fall in demand causes the price to fall from P₁ to P₂ and quantity to rise from Q₁ to Q₂. As a result, total revenue of wool producers decreases from the red area to the blue area, indicating that wool growers are making a loss from its production. This price ceiling is no longer effective due to the loss for wool growers.

Diagram 3: Wool producer’s total revenue

The collapse of the wool industry would have impacted the clothes industry. Woollen clothes would decrease in production and the supply for wool’s close substitutes would increase instead. Some examples of wool’s close substitutes would be nylon, polyester and synthetic fibre. Besides that, the food industry would also be affected. With the collapse of the wool industry, it is highly likely that the production of wool will decrease therefore resulting in less sheep being killed. When less sheep are killed, there is an increase in supply for lamb meat.

The Australian government’s intention of helping the wool industry with the implementation of the Reserve Price Scheme only worsened the situation. It did not benefit the producers as expected and instead brought great suffering to both producers and consumers of the market whether in the short run or long run. Furthermore, the Reserve Price Scheme was inefficient due to deadweight loss and it also left a permanent scar on the market even after it was scrapped. The government could have instead tried subsidising the producers or providing incentives as a form of assistance for farmers. As a conclusion, the Reserve Price Scheme implemented by the government did not have a good impact on the wool industry.

Link:  http://www.abc.net.au/landline/content/2010/s3287468.htm