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:
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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.
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