Effect of increase in price of sugar on producer and consumers

“What is the economic effect of increase in price of sugar on producer and consumers in Shah Alam?”

ABSTRACT

Sugar is necessity in life and hence sugar industry is important. In addition, the evolved food processing industry causes sugar industry to expand. Lately the Malaysian Government decided to remove or to decrease the sugar subsidy. In the opening of 2010, the government started to decrease the sugar subsidy and this causes the price of sugar to increase. There is two party who suffers; the consumers and the food sellers.

The research question is “How did What is the economic effect of increase in price of sugar affect the food sellers in Shah Alam?” In completing this research, interviews and surveys had been conducted to investigate the opinion of the food sellers and the residence which is the consumers in Shah Alam. Besides that, research through internets and library had also been carried on to explore more about the matter.

When the research had completed, the results show that the food sellers had to increase the price of their product but not directly because of the price of sugar. The increment of the price is because the price of other products has increased. The removal of subsidy to the sugar industry by government causes the price of the products to increase as well as the sugar. The income of food sellers had decreased. Shortages happen as industry that uses sugar tend to buy sugar from the wholesalers as the price of sugar is cheaper than buying from the sugar industry itself. Consumers and the food sellers are affected from the shortages.

(245 words)

The Introduction

The consumers in Malaysia have variety of menus for their daily diet, and sugar is one of the most important assets to it. Thus the market of sugar is an important factor to Malaysia’s economy.

Lately the price of sugar has increased due to the government intervention. Government intended to decrease the subsidy. Early 2010, the government started to decrease the subsidy by RM0.20. Then recently, the government remove the subsidy to the large industry that uses sugar to manufacture their product. The sugar market in the region was badly affected, and the party that have lost the most due to the government surprising action are the food sellers and the consumers.

This research was done to investigate the burdened caused by the increase in price of sugar to the food sellers. I chose to do this research in Shah Alam mainly because I want to study on how the increase in price of sugar affects an industrial area. In Malaysia, there is only four main sugar factory; one of them is in Shah Alam which is Central Sugar Refinery (CSR). The research would be interesting to conduct, since the supply can easily distribute to the consumers. This factor, in theory, should have created a more efficient market for the food industries.

Besides that, increment in price of sugar likely to be happen again in the future time as the government wants to decrease the sugar subsidy gradually. So, by doing this research, I can educate the society to prepare themselves on the consequences that they might face in the future.

In the beginning of the research, I am expecting the food sellers in Shah Alam to be slightly affected by the increase in price of sugar. The food sellers will increase the price of their product and the demand of their product will decrease.

2.0 The Research

This section of the project paper will explain further on the details of the research and how it was conducted.

2.1 Objectives

This research main aim is to study the effects of increase in price of sugar to the food retailers Shah Alam. Yet, in completing the investigation, this research has a few objectives that need to obtain in order to answer the research question.

To find the changes in income and sales of the food sellers in Shah Alam after the price of sugar has increased in 2010.

To find out the consumers behavior on the demand of the sugar after the price of sugar has increased.

To find the condition and operation of the market of sugar after 4 months of price of sugar has increased.

To investigate the causes of sugar shortages in Shah Alam.

2.2 Hypothesis

A hypothesis had been made as an early inference about the result of the research. The hypothesis is:

In the short run the food sellers in Shah Alam were only slightly affected by the increase in price of sugar. The food sellers will increase the price of their product and the demand of their product will decrease.

2.3 Methods

Three methods had been chosen to be used in this research. Each method was done specifically to obtain the objectives that had been set before.

Interview

The first method chosen is through interview. The interview was done to investigate the supply-side of the story after the price of sugar has increased. It was done for a few times and involved a few food sellers and grocery retailers in Shah Alam. As the sample result, 10 food sellers, 2 grocery retailers and 6 bakeries had been chosen for the interview. The result is assumed to represent the whole area of Shah Alam. The aim of the interviews is to achieve the first, second, third and fourth objective (2.1.1, 2.1.2, 2.1.3 and 2.1.4). the questions asked during the interviews can be referred to in appendix.

Surveys

Aside than the interview, a survey was done also to achieve the second objective (2.1.2). The survey was in the form of questionnaires and involved residents around Shah Alam which were chosen randomly. 50 sets of the questionnaires were distributed and the results represent the whole community of the Shah Alam district.

Secondary research

The last method chosen through the secondary research; which were through internet and library research. This method was conducted to achieve the fourth objective (2.1.4).

3.0 Data Collection and Processing

The following results obtained from the research done. The results are based on the surveys and interviews that represent the whole community of food sellers and bakers in Shah Alam.

3.1 The supply side of the food market sold by the food sellers

The supply curve for the food

Supply is the willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period [1] . Supply refers to the amount of food that the food sellers had sold after the price of sugar increase. In 2010, there are two times when the price of sugar had increased. The first time was on 1st January and the second time was on 16th July. The results show that the supply of food or the amount of sales decreases after the price of sugar had increased on 1st January, but had increased after 4 months. Then when the price of sugar increases by RM0.25 on 16th July, the supply decreases again but had increased after 1 month.

Effect increment of price of sugar on 1st January to the supply of food:

Average price of food (RM)

0 Q2 10% Q1 Average quantity of food

Graph 1

Average price of food (RM)

Q2 10% Q3 Average quantity of food

Graph 2

Graph 1 shows the supply curve of food in Shah Alam after the price of sugar had increased on 1st January. The supply curve had shifted to left, which was caused the lowering supply of food by the food sellers in Shah Alam. The reduction was approximated to be 10%. However, there are 10% increments in the supply of food after 4 months shown by Graph 2.

Average price of food, RMEffect increment of price of sugar on 16th July to the supply of food:

Q4 25% Q5 Average quantity of food

Graph 3

Graph 3 shows the supply curve of food in Shah Alam after the price of sugar had increased on 16th July. The supply curve had shifted to right, which was caused the increment supply of food by the food sellers in Shah Alam. The increment was approximated to be 25%.

The price of food.

To take the price of food as example could be difficult because no specific food is stated here. Hence I will ‘teh tarik’ as example. ‘Teh tarik’ is a type of drink that is popular in Malaysia. It is actually a type of tea that is made by special technique by Malaysian and being drink by all races in Malaysia.

Period of time

Before the price of sugar was not increase

After the price of sugar had increased on 1st January

After the price of sugar had increased on 16th July

Price of ‘teh tarik’, RM per glass

1.20

1.50

Table 1: The increase in price of food

According to the Law of Supply, as the price of a product rises, the quantity supplied of the product will usually increase, ceteris paribus [2] . However, due to the increase in the cost of production per unit good, the supply of the product has decreased. Another reason for this scenario will be evaluated in the next part of the research.

Income of the food sellers

Due to the severity of the situation in the market during the increase in price of sugar, all the income of the food sellers has decreased. The average decrement in income faced by the them was 20% after the price of sugar had increased on 1st January. After 4 months, the average increment in income is 20% back to the equilibrium. Then when the price of sugar increased again on 16th July, the average decrement in income was 30%. After 1 month, the average increment in income is 20%. The average increment and decrement in income after the price of sugar had increased is shown by Graph 4.

The costs of production.

From the interview, all samples reported an increment in the costs of production. The costs had increased for 13.8% after the price of sugar had increased on 1st January and the increment shown by Graph 5. When the price of sugar increased in 16th July, the cost increased to 10.1% from the previous cost. This cost is variable cost. Variable cost is total costs that do vary with the amount of output produced. The market is considered as a short run as the effect if we could see affects only in short run. Graph 5 shows the average variable cost of the production when the price of sugar had increased.

Cost, RM

10.1% AVC3

13.8% AVC2

AVC1

Graph 5 Average quantity of food

The detail on the cost is shown in Appendix

3.1.5 Measures taken by food sellers to overcome the problem.

The measures taken by the food sellers to overcome the cost experienced are :-

Increase the price of the product

Decrease the quantity of product being sold

Decrease the amount of sugar in the product

Extent the sales time

3.2 The demand side of the food market

The demand shows the significance effect of increase in price of sugar to the food market and the sugar market itself.

3.2.1 The demand for sugar when the price of sugar increased.

The demand for sugar had increased when the price of sugar increased on 1st January. Even though, the price of sugar increase again in 16th January, the demand for sugar continue to increased. Hence the demand curve shifted to the right for both situations.

Price of sugar, RM/kg

D1 D2

0 Q1 30% Q2 Quantity of sugar, kg

Graph 7 : The demand for sugar when the price of sugar increased from RM1.45 to RM1.65 on 1st January.

Price of sugar, RM/kg

D2 D3

0 Q2 10% Q3 Quantity of sugar, kg

Graph 8 : The demand for sugar when the price of sugar increased from RM1.65 to RM1.90 on 16th July.

3.2.2 The demand of food after the sugar price had increase

Average price of food Average price of food

P P

D2 D1 D2 D3

0 Q2 10% Q1 0 Q2 10% Q3

Average quantity of food Average quantity of food

Graph 9 and 10 : The demand of food after the price of sugar had increased on 1st January and the demand after 4 months.

When the price of sugar increased on 16th July, the demand of food increased by 15%.

4.0 Evaluation

In this section, we will investigate the behaviour of the demand and supply and how exactly it had affected the food retailers and bakers in Shah Alam when the price of sugar increased.

4.1 The market mechanism of sugar when the price of sugar had increased

From the law of demand, it states that the higher the price of the goods, the lower the demand for it, ceteris paribus and vice versa. However, when the price of sugar had increased on 1st January and 16th July, the demand of sugar continues to increase. Hence the law of demand cannot be used.

To study the demand of sugar, we need to find the elasticity of demand of sugar. Elasticity is a measure of responsiveness. Elasticity of demand is a measure of how much the demand for a product changes when there is a change in one of the factors that determine demand. In this situation we will consider the price elasticity of demand (PED). PED is a measure of how much the quantity demanded of a product changes when there is a change in the price of the product. To calculate PED, we need to use the following formula:

In this, situation there are two calculations because there are two changes in the price of sugar. The first situation the price of 1 kg of sugar increased from RM1.45 to RM1.65. From the data processing, we take 30% as the percentage increased in quantity demanded of the product. This percentage is gained from the average of increase in demand of sugar in groceries store around Shah Alam. Using the information gained, we can calculate the PED.

From the calculation above, we could see that the value of PED is bigger than one and does not reach infinity, hence we can conclude that in this situation, sugar has elastic demand which when there is a change in the price of sugar leads to greater than proportionate change in the quantity demanded of sugar.

How about in the second situation? Is the demand of sugar still elastic? To investigate this, we need to calculate the value of PED in the second increase of sugar price from the last price. In the second increment, the sugar price increased from RM1.65 to RM1.90. The percentage increased in quantity demanded is 10%.

From the second increment, we could see that the value of PED is between zero and one, therefore we could say that sugar has inelastic demand. Then a change in the price of sugar leads to proportionally smaller change in the quantity demanded of sugar. Hence we can make a conclusion that, even when the price of sugar is raised, the quantity demanded will not fall too much or it may even increased but still not too much by comparison. The total revenue gained also will increase if the price of sugar increased.

Sugar is a necessity product and there is no substitute for sugar, hence the demand for it elastic. However, the market of sugar does not follow the law of demand. To explain the reason of the increment of demand of sugar even the price is raised is because the situation in Shah Alam even around Malaysia. The consumers are afraid that government will raised the price of sugar again. Therefore in the first situation, the demand is inelastic, however when the price of sugar increased again, the market of sugar shows it is slightly back to normal although it is still not follow the law of demand.

The second reason is because the consumers are afraid of sugar shortages. Malaysia provides subsidies for their sugar but not country around it. Therefore smuggling of sugar occurred in Malaysia. The third reason is because festive season. In the second situation, the consumers are getting ready to have Hari Raya Aidilfitri which is one of the main festive seasons in Malaysia celebrated by all Malaysian people even though is a celebration for Muslims. Thus a lot of sugar used for preparation in this celebration causes the demand of sugar increased although the price of sugar is increased.4.2 The market mechanism of food when the price of sugar increased in short run.

Average price of food, RM

S1 S2

Average quantity of food, Q

10%

Graph 11

Graph 11 shows the average demand and average supply of the market of food when the price of sugar increased on 1st January. E1 was the equilibrium of the market of food when the price of sugar is not increased while E2 and E3 shows the new equilibrium when the price of sugar increased.

The movement of D1 and S1 looks insignificant; however the reduction is big enough to cause the income of the food retailers to decrease significantly. There was 10% decrement for both supply and demand. This was caused by three factors which are substitutes, real income and government intervention (campaign).

Average price of food, RM There are wide range types of foods; hence there are a lot of substitutes. When the price of food increases, consumers tend to find other substitutes causing the demand curve to shift to the left from D1 to D2. The second factor is real income of consumers decrease. When the price of sugar decreases, many goods increase their price due to production cost increased. Therefore real income of consumer decreased and they choose to decrease the amount of ready food to buy and rather cook by themselves (Appendix). The third factor is government intervention which is the campaign. One of the main objectives of government to increase the price of sugar is to create awareness among consumer to decrease the amount of sugar consumed. This is also the objectives of 5M campaign which to decrease the amount of sugar and oil consumed. From this campaign, the consumer avoid from buying ready food because the food sold contains a lot of oil, sugar and it is not healthy.

Graph 12

Average quantity of food, Q

15%

25%

Graph 12 shows the demand and supply side of food when the price of sugar increased on 16th July. The graph shows that the demand and supply curve shift to the right. The supply increased by 25% while the demand increased by 15%. This is due to festive season stated earlier. The consumer had to increase their demand for food as it were necessity for them. Aware of this situation, the food retailers increased the food supply to generate more income.

From the surveys conducted the public are aware of the increment in the price of sugar and of course the price of food. All people being asked admit that they are aware of this situation. Most of them decreased ready food because there are a lot of choices in Shah Alam. There are many wet markets, supermarkets and hyper markets. The consumer can buy raw materials and cook their food themselves and save their money.

However, when the festive season came, there are traditions in Malaysia where there are markets that sell variety of ready foods in this season. Therefore many consumers increased their consumption of ready foods because of the festive season.

4.3 The burdens that increased price of sugar had caused to the food retailers.

From the interviews conducted, the increased price of sugar affects the income of the food retailers and increases the cost of productions.

Graph 13 shows the income of the food retailers. To calculate the income of a firm, the formula being used is:

Average price of food, RM

Average quantity of food, Q

At the beginning, the income of the food retailers was P1E1Q1. This was the equilibrium level of income of the food retailers. At this level, the food retailers can support all type of costs. The food retailers live a comfortable life until their income decreased to P1E2Q2. The grey area is the loss that the retailers had to face which is around 20% percentage loss from the real income.

The loss faced caused the retailers a big burdened. They had to decrease their expenditure because of less income. Not even the price of sugar had increased but other materials that needed for production of food also increased. The retailers need to decrease their living expenses to resort the loss income. They also might need to use their savings especially the retailers that handle small business. They will faced big impact as they did not gain a lot of income compared to larger business.

The retailers reported that they did not agree by the decision of the government especially when the price of sugar increased, the demand for it increased as the consumer are afraid of shortages. This also affects them as they cannot find the supply of sugar. For small retailers who used to buy sugar at mini market had to travel to find other suppliers as shortages of sugar happened. Even at the hypermarket, sugar supply is limited and each people restricted to buy only 2kg of sugar. This has increased the cost of production and also affects their emotion and the productivity.

They had to take few measures to repair this situation. Among the measures taken, they had to extend the sales times and this actually burdened them as the labour cost increased. When they follow the government campaign to decrease the amount of sugar, this change the taste of the product and caused the taste of the consumer changed too.

Mostly the measures taken do not help them but since food is a necessity and due to festive season, the demand increased. After four months, the demand increased heading towards equilibrium and so does the supply curve. The income increased as it was nothing happen. Fortunately, festive season came and the demand for food increased significantly. This helps the food retailers to gain back their loss profit.

Aside from that, 50% of the consumer did not agree that by increasing the price of sugar, the citizen will decrease the consumption of sugar while the other half agree that by increasing the price of sugar, consumption of sugar will decreased.

Not many consumers are aware that government decrease the subsidy to remove the deficit faced even though this research being carried at capital city of Selangor which popular with factory industry. This shows that public is unaware of the country’s situation and hence government interventions are needed to create awareness so that the public could help the country to increased the GDP.

5.0 Conclusion

Clearly this research has answered the research question. The food retailers did experience a lot of problems when the price of sugar increased.

Even though Shah Alam is the capital city and there is a sugar factory, the food retailers still faced sugar shortages. The cost of production increased the income are lowered. Their emotion are also affected but only in short run. The living expenses being reduced and their way of life changed.

Although, there are few measures taken, it still cannot repair the problems. Fortunately, the market of food had recovered by itself and fixed the problems faced. The demand increased and the income of food retailers increased. The loss is recovered.

Government should be aware of the impact that could cause the food retailers and should give awareness to the consumer the problems faced by the country. The consumer should understand the burden faced by the food retailers and do not blame them when the price of their product increased. Maybe the consumer could decrease the consumption of import good and increase the consumption of local good instead to help the country. With this, the government does not need to decrease the subsidy.

APPENDIX A : INTERVIEW QUESTIONS

How many percent did your sales (quantity) have decreased when the price of sugar has increased?

1 JAN 2010

16 JULY 2010

Do you increase the price of your product after the price of sugar has increased? (YES/NO)

By how much percents did your cost of production increases?

Why is your cost of production increases? It is only because of sugar or (and) any of the reasons stated below? If there are by how much percents for each?

Labor cost (e.g wages)

Kos pekerja (cth upah atau gaji)

Shortage of suppliers

Kekurangan pembekal gula

Cost of increase in the price of other products

Kenaikan harga bahan lain

Others

Lain-lain

Did you experience any loss due to the increase in price of sugar? If YES by how much percents?

Can you get the supply of sugar easily just like before the price of sugar has not increase yet? If no how do you overcome this problem?

What are the measures that you take to improve the sales or to overcome the increase on the cost of production? Please tick any answers.

Lower the price of your product

Extent sales time

Decrease the quantity of your product being sold

Decrease the amount of sugar in your product

Others (please state)

Do you agree that the increase in price of sugar can promote healthier lifestyle? Why do you think that way?

Do you know about country deficit?(loss) Do you agree that by decreasing the subsidy can fix this problem? Why?

Do you agree with the removal of the subsidy by the government?

What is your opinion? Is there other ways to manage the deficit (loss) that Malaysia faced? If there, can you state what are they?

APPENDIX B : SURVEYS QUESTIONS

1. How many pack of sugar do you buy in a month before the price of sugar is not increase?

( ) 1-2

( ) 3-5

( ) more than 5

2. Do you decrease the amount of sugar consumption when the price of sugar has increase?

( ) Yes

( ) No

3. Do you know the effects of over consumption of sugar to your health?

( ) Yes

( ) No

( ) Not sure

4. Do you know that the government is planning to remove or decrease the sugar subsidy?

( ) Yes

( ) No

( ) Not sure

5. Do you know that the government is planning to remove or decrease the sugar

subsidy because they want to promote healthier lifestyle?

( ) Yes

( ) No/

( ) Not sure

6. What is the effect of increase in sugar price to the price of other products? Did their price

increase?

( ) Yes

( ) No

( ) Not sure

Strongly

Disagree/

Neither Agree/

Nor Disagree/

Agree/

Strongly Agree/

1

2

3

4

5

Do you agree with the removal or decrease of sugar subsidy?

Do you agree with the removal or decrease of sugar subsidy can help to promote a healthier lifestyle?

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