DEMAND,
SUPPLY & SUBSIDY OF SUGAR IN MALAYSIA
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
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