According to MalaysianDegest return on 29 September 2012 17:41 report about "Reduce sugar subsidy: officers to monitor restaurants" (http://www.malaysiandigest.com/news/36-local2/121352-reduced-sugar-subsidy-dtccm-officers-to-monitor-restaurants.html). Regarding to this article, we knew that the government had reduced the subsidy for the sugar by 20 cent and the previous price for sugar is RM 2.30 per pack. This decision was made by our Prime Minister Dato Seri Najib during The Budget 2013. When this decision become effective, will it affect the supply and demand for sugar? On my opinion, the reduction of subsidy for sugar will affect the supply and also the demand for sugar.
As what state in the law of supply, it mentions that the higher the price of a good, the greater is the quantity supplied. As the price goes up, producers are willing to produce and supply more goods. On the other hand, the law of demand also states that the higher the price of a good, the smaller is the quantity demanded. If the price goes up, consumers will less willing to buy the goods and also not able to afford it. So in the other way of saying this situation is demand will decrease as price rises whereas supply will increase as price rises.
Why does a higher price increase the quantity supplied of a good? It is because the increases of marginal cost. If the quantity produced increases, the marginal cost of the good will also increases at the same time. Supplier or producer will never produce a good if the price of good cannot cover the marginal cost of the good, it must at least cover the marginal cost of producing it. On the other hand, why a higher price will reduce the quantity demanded? In this situation, income effect may become the reason. Government cut down the subsidy for sugar and make the price of sugar goes up. But, the income of consumers may not increase on the same time. So, face with a higher price and unchanged income, people cannot afford to buy anything that they want and normally, when the price of good increase, consumers will choose to give up buy it. So, once sugar has increase the price, consumers may consider to less buying it. For an example, product A had increase the price from RM 2 to RM 5, then consumers had faced the problem of income unchanged and the price of good increase, so definitely consumers will choose to give up or less buy the product.
Next, as we know that, subsidy can reduce the cost of production. Subsidy is a payment made by government to a producer. The main reason to give this subsidy is to decrease the cost in production and make the price of good become lower. A subsidy is just like a negative tax. A tax is equivalent to an increase in cost, so a subsidy is equivalent to a decrease in cost. Let give an example of the effects of a subsidy given by government.
This graph shows that with no subsidy, supplier produce 40 million tons sugar a year at RM 40 a year. After that, government give a subsidy of RM 20 a ton shift the supply curve rightward to S-subsidy. The equilibrium quantity increases to 60 million tons a year, and the price of course falls to RM 30 a ton due to the subsidy given. So, if this show in the sugar production, a production subsidy effectively means a greater production, and as the cost of production is lower, it make chance for those marginal firms to survive in this market. Besides that, it can also create a more competitive market and give consumers have more choices in choosing the products.
Hence, review back to the article, government has reduced the subsidy for sugar. So, it will change the supply and also the demand for sugar. Below is the new graph for sugar supply and demand after the changed in subsidy.
As we can see in this graph, government has reduced the subsidy for sugar. It causes the price of sugar has increases from RM 30 a ton to RM 40 a ton. This make the supply curve shift leftward to s-less subsidy. Whereas the quantity demanded for sugar has decrease from 60 tons a year to 40 tons a year. So, with fewer subsidies, producer will not willing to produce more products, it is the way to prevent loss. The cost for producing sugar has rises, and producer has to bear the cost more without the help from government. Consumers also not willing to buy this thing again and they will choose to give up.
On the other hand, with the increasing price of sugar, it will also affect the price of related goods. It definitely will affect the price of foods and drinks. As we know, foods and drinks are most related to sugar. Many foods and drinks need use sugar to produce it, such as roti planta, the tarik, milo and many more. As long as the price of sugar increase, I believe that the price of foods and drinks will rises soon. Although that government say they will monitor and prevent restaurants to increase the price of foods and drinks but I don’t think this is the long way. Those people will still increase the price on the future time even though it just an increasing price of 10 cent or 20 cent. Maybe now they still can cover the cost of production, but after a long time, they still will move all those cost to us, as a consumer to handle it. They can’t afford the cost rises in a long time, because they need to make profit too.
Last but not least, I believe that this step make by government is to protect the health of people too. Overtaking sugar will causes diabetes and also obesity. The percentage of getting diabetes and obesity are getting higher nowadays in Malaysia. One way to prevent it is less taking sugar. Government also hope that all of the restaurant can reduce the use of sugar in their foods or drinks preparation to make sure consumers won’t excess the sugar intake. So, less taking sugar will not only benefits our health, but also can help us to build a healthy country in this world.
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