Good technique to demonstrate analysis is to find problems with the article.
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1.0 Article Summary
- Borneo Post, "Sugar Importers keeping prices low for consumers" (Bernama 2010)
- Government is reducing subsidies (Bernama 2010)
- Manufacturers have entered into long-term contracts for imported raw sugar to keep price low (Bernama 2010)
- Consumers will pay low prices for sugar even though the Malaysian government is raising sugar prices (Bernama 2010)
- Producers make raw sugar from sugar beets and sugar cane
- Malaysia does not produce sugar but imports raw sugar from Brazil
- Malaysian companies process the raw sugar into white, refined sugar
- Consumers, food companies, and restaurant cooks add sugar to drinks such as coffee, teas, juices, and sodas and add sugar to desserts for pies, cakes, candies, puddings, etc.
- Thesis statement: (I will switch to passive voice to eliminate first person)
- I use supply and demand to analyze which factors cause raw sugar prices to rise
- I examine the elasticity for white sugar, and whether firms would earn greater profits by increasing white sugar prices
- I study the economic impact when a government reduces the sugar subsidies
Note - I do not add any new information here. This connects everything together. Normally, we always write at least one sentence under each heading.
- In this paper, I analyze the demand and supply of white sugar using derived demand.
- Then I analyze the price elasticity of demand for white sugar and whether companies can raise their profits by raising white sugar prices.
- Subsequently, I analyze when a government reduces the sugar subsidies
Note – I wrote these statements in first person, which is not permitted for formal writing. I will switch this to passive voice. (I trained myself to avoid writing in passive voice).
3.1 Demand and Supply
- In the article, "global raw sugar prices continually on the uptrend" (Bernama 2010)
- Does not identify what is raising raw sugar prices
- Article was ambiguous
- I do not know what happened to market quantity
- I only know the market price rises
- I have two markets side by side, called derived demand
- A consumer market and a resource market
- Manufacturers are the suppliers in the consumer market and the consumers in the resource market
- Manufacturers supply consumers with the product but demands a critical resource to make the product
- Consumer market - white sugar market
- Demand function represents the consumers, restaurants, and food companies
- They add white sugar to a variety of products
- Law of Demand – as the market price increases, consumers, restaurant cooks, and food companies reduce their quantity demanded, ceteris paribus.
- Supply function reflects the raw sugar manufacturers
- They refine raw sugar into white sugar
- Law of Supply - as the market price rises, manufacturers boost their quantity supplied, ceteris paribus.
- Scenario 1 - Many things can cause a greater demand for raw sugar
- For example, if consumers raise their demand for sugar and sugar products because their incomes rise
- Many other things could cause a greater demand
- We assume sugar is a normal good
- According to Abler (2010, 20), sugar is a normal and necessity good in Russia, India, and China with income elasticity of demand ranging between 0.64 and 0.8.
- Demand function increases and shifts right in Figure 1
- Both white sugar price and quantity rise
- Sugar manufacturers increase their quantity supplied
- For the sugar manufacturers to raise their quantity supplied
- They must demand more raw sugar in Figure 2
- Demand reflects the sugar manufacturers
- Supply reflects the sugar mills that make the raw sugar
- This market also obeys the Law of Supply and the Law of Demand
- Demand for raw sugar would rise
- Both market price and quantity rise
Figure 2. Malaysian manufacturers demand more raw sugar
- Scenario 2 - Many factors can decrease the supply function for raw sugar
- For example, Brazil could have experienced a severe drought that wiped out its sugar cane
- The supply of raw sugar decreases in Figure 3
- Market price would rise while market quantity falls
Figure 3. A drought reduces the supply of raw sugar
- Malaysia sugar manufacturers pay greater prices for raw sugar and reduce their purchases
- The resource price has increased
- Malaysian sugar manufacturers would reduce their supply of white sugar in Figure 4
- Market price rises while market quantity falls for white sugar
- Consumers, restaurant cooks, and food companies pay greater prices for white sugar and reduce their quantity demanded.
Figure 4. Malaysian manufacturers reduce their sugar supply because a price of a resource has risen
Note: If you have a derived demand, demand or supply usually shift in the same direction in both markets
3.2 Elasticity and Changes in Total Revenue
- Article does not provide enough information to calculate the Malaysians' price elasticity of demand for sugar
- From the Commodities and Trade Division (2002)
- Price elasticity of demand
- Americans -0.11
- Japan -0.81
- Europeans -0.12
- Sugar is inelastic
- Few substitutes for sugar except artificial sugar
- Some consumers refuse to use artificial sugars, such as aspartame, sucralose, etc. because they may induce health problems in consumers
- Sugar comprises a small fraction of income
- Sugar manufacturers raise the price for white sugar, then their total revenue will increase (Hubbard et al. 2010, 105)
- Changes in profits are ambiguous because we do not know how a firm's costs change
- We do not know how the manufacturing costs will change.
- Article was not clear about how the firm's cost change (Bernama 2010)
- Government reduces subsidy, which reduces the firms' revenue.
- We know the government raised fossil fuel prices, so if manufacturers use energy, they will pay greater energy costs.
- It stated manufacturers "have to account for capital expenditures" (Bernama 2010)
- Upgrading machinery
- Then they added the following which are not capital expenditures
- Labor costs
- Production costs (which includes labor)
- Manufacturers entered into contracts to lock in low prices for raw sugar (Bernama 2010)
- The problem – if raw sugar prices stay high, when Malaysian firms buy new contracts for raw sugar, the issuers of the contracts will raise the raw sugar price
- Only a temporary solution
3.3 Sugar Subsidies
- Malaysian government subsidizes sugar prices (Bernama 2010)
- Malaysian government does not use price ceilings or price floors because a price ceiling could lead to shortages while a price floor could create a surplus.
- I analyze the subsidy
- The Malaysian sugar manufacturers supply the sugar while consumers, restaurants and food companies demand sugar.
- The intersection between the supply and demand functions determines the market price and quantity with no government subsidy.
- Malaysian government pays a subsidy so Malaysians will pay PS for sugar price.
- Subsidy is the opposite of a tax and shifts the supply curve to the right (Szulczyk 2012, 57-8)
- At PS, consumers want to purchase QS units of sugar (Szulczyk 2012, 57-8)
- For manufacturers to supply that amount, they must receive the PS + Subsidy (Szulczyk 2012, 57-8)
- Subsidy creates a price wedge between the consumers and producers (Szulczyk 2012, 57-8)
- Consumers pay PS while producers receive PS + subsidies (Szulczyk 2012, 57-8)
- Social welfare
- Government must pay producers the total shaded areas in Figure 5 (Szulczyk 2012, 57-8).
- Consumers receive the medium shaded trapezoid as a benefit of the subsidy (Szulczyk 2012, 57-8)
- Producers receive all the shaded areas (Szulczyk 2012, 57-8)
- Since government interfered with the economy, the black triangle represents the deadweight loss to society (Szulczyk 2012, 57-8)
Figure 5. Government pays a subsidy to the sugar manufacturers
- What makes Malaysia unique is the government locks the sugar price at PS.
- Supply and demand functions continually shift, changing the market prices
- However, government will adjust the subsidy so the subsidized price always equals PS.
- Malaysian government reduces the subsidies to sugar manufacturers, shown in Figure 6
- I left the original lines for the original subsidy for comparison
- Consumers pay a greater price at PN and consume a smaller quantity at QN
- Consumers would lose some consumer surplus because the medium shaded trapezoid is smaller
- Although the small subsidy reduces the deadweight loss, black triangle, consumers may not be happy about the rising sugar prices.
- Sugar manufacturers receive a small subsidy from the Malaysian government
- The collect less of all shaded areas
Figure 6. Government reduces the subsidy to the sugar manufacturers
- What makes the article confusing?
- We do not know what is causing the raise in raw sugar prices – greater demand or smaller supply.
- Then many factors can boost the raw sugar demand or reduce the raw sugar supply
- The Malaysian government benefits
- It reduces its subsidy payments to sugar manufacturers.
- The deadweight loss shrinks for a smaller subsidy
- Consumers lose surplus and may not be happy paying higher sugar prices.
- Consumers do not benefit from the higher sugar prices.
- The analysis was not clear whether the manufacturers would benefit from the sugar price hikes.
- They benefit
- They receive greater prices for white sugar
- They reduced their raw sugar cost by using contracts to lock into low prices.
- They do not benefit
- Sugar manufacturers receive a lower government subsidy
- Pay greater costs for capital, labor, and operating costs.
- Abler, David. 2010. "Demand Growth in Developing Countries." OECD Food, Agriculture and Fisheries Papers, No. 29. OECD Publishing. Accessed April 22, 2014. http://dx.doi.org/10.1787/5km91p2xcsd4-en
- Bernama. 2010. "Sugar importers keeping prices low for consumers." Borneo Post Online, August 9. Accessed April 16, 2014. http://www.theborneopost.com/2010/08/09/sugar-importers-keeping-prices-low-for-consumers/
- Commodities and Trade Division. 2002. "4. Sugar and beverages." In Agricultural Commodities: Profiles and Relevant WTO Negotiating Issues. Rome: Food and Agriculture Organization of the United Nations. Accessed April 22, 2014. http://www.fao.org/docrep/006/y4343e/y4343e05.htm
- Hubbard, Glen, Anne M. Garnett, Philip Lewis, and Anthony Patrick O'Brien. 2010. Essential of Economics. Frenchs Forest: Pearson Australia.
- Szulczyk, Kenneth. 2012. The Economics of Government. San Francisco: Scribd. Accessed April 22, 2014. http://www.ken-szulczyk.com/economics_of_government.php