Demand and Supply-The Increase of Sugar Supply

According to an article called ‘Sugar supply to be increased from Thursday’ from The Star (29 June 2010), the author stated that the Government will add 10% more sugar supply to wholesalers and retailers nationwide starting from Thursday until September. Below is an excerpt from The Star,

 "The additional supply is to meet the high demand for sugar, especially during the coming festive season," he said when winding up the debate on the 10th Malaysia Plan for his ministry in the Dewan Rakyat, here, Tuesday. Early this month, the Government added 5% to the sugar supply to meet the current demand. Ismail Sabri said to ensure sufficient sugar supply always, the Government had appointed the relevant associations to supply and distribute the essential commodity to their members.

Two years ago, the demand for sugar has increased because of the upcoming festive season. Therefore, the demand curve for sugar can be demonstrated below.      

As the price of sugar decreases, the quantity demanded for sugar increases. This reflects on the law of demand when the price of a good falls, the quantity demanded will rise. This usually happens because of two things, which are the income effect and the substitution effect. People can afford to buy more (the income effect) and they will switch away from consuming alternative goods (the substitution effect). However, in the case of sugar, there are no alternative goods for it which means that the quantity demanded for sugar increases due to the income effect. The word quantity demanded refers to the amount consumers are willing and able to purchase at given price over a given period. Since the festive season is a determinant that causes demand to rise, the whole curve shifts to the right, consequently, increasing the demand. This shows that at each price, more sugar will be demanded than before.

However, according to the article, the author stated that the government is forcing the retailers and suppliers to increase the supply of sugar by 5%. The quantity supplied of any good or service is the amount that sellers are willing and able to sell. The law of supply states that the quantity supplied rises as the price of a good rises, other things remain the same. At that time, the supply curve of sugar is shown below.

                

The supply curve for sugar shows how much sugar producers offer for sale at any given price, holding constant all the other factors beyond price that influence producers’ decision about how much to sell. Because the government decided to make suppliers and wholesalers to increase the supply of sugar by 5%, at any given price, the suppliers are now willing to produce sugar at a larger quantity. Thus, the supply curve for sugar shifts to the right.

   Having analyzed supply and demand separately, they are now combined to see how they determine the quantity of sugar sold in the market and its price. The graph below shows the market supply curve and market demand curve together. The one point at which the supply and demand curve intersects is called the market’s equilibrium. The price at this intersection is called the equilibrium price. On the other hand, the quantity at this intersection is called the equilibrium quantity.

               

Here, the equilibrium price is RM2.50 per packet of sugar and the equilibrium quantity is 35 packets of sugar. At the equilibrium price, the quantity of the good that buyers are willing to buy exactly balances the quantity that sellers are willing to sell. The actions of buyers and sellers naturally move markets toward the equilibrium of supply and demand. However, we should consider what happens when the market price is not equal to the equilibrium price. Suppose now the market price is above the equilibrium price. At a price of RM4 per packet, the quantity of sugar supplied (52 packets) exceeds the quantity demanded (18packets). There is a surplus of the good where suppliers are unable to sell all they want at the going price. When there is a surplus of sugar market, the sellers of sugar would find a lot of stocks of sugar they would like to sell but can’t. They respond to the surplus by cutting their prices. Falling prices, in turn, increase the quantity demanded and decrease the quantity supplied. Prices continue to fall until the market reaches the equilibrium. Suppose now that the market price is below the equilibrium price. In this case, the price is RM1 per packet, and the quantity of the sugar demanded (54 packets) exceeds the quantity supplied (11 packets). There is a shortage of the good where demanders are unable to buy all they want at the going price. When a shortage occurs in the sugar market, buyers have to wait long lines for a chance to buy one of the few packets of sugar that are available. With too many buyers chasing too few goods, sellers can respond to the shortage by raising their prices without losing sales. As the price rises, quantity demanded falls, quantity supplied rises and the market once again moves toward the equilibrium.

Next, what happens to the price of sugar when both the demand and supply of sugar increases?

In my opinion, this actually depends. The festive season affects the demand curve because it alters the amount of sugar that households want to buy at any given price. At the same time, the government forces the suppliers and retailers to increase the supply for sugar because of the high demand. The curves shift in the same directions as they did in our previous analysis. The demand curve shifts to the right from D2 to D1 and the supply curve shifts to the right from S2 to S1. As I see it, the market equilibrium has gone up, the quantity increased from q2 to q1 whereas the equilibrium price remains the same as it was originally at p1. Hence, I believe that the price of sugar remains the same when both demand and supply of sugar increases.

However, this was two years ago. The situation of the supply of sugar at current time is completely different. The government now helps to subsidize sugar for consumers from RM0.20 per kg to RM0.54 per kg. In my point of view, I don’t think that this is a smart move by the government. According to statistics, Malaysia is already ranked at 6^th place for obesity rate among the Asian region. From how I see it, subsidizing sugar for Malaysians is only going to move the rank for obesity rate in our country higher. People are obviously going to purchase more sugar and at the same time consume more of it. I feel that what the government should do is to remove the subsidy for sugar and provide more gymnasiums in our country. This way, the people in Malaysia would have a healthier lifestyle.

Individual 3