Wednesday, 23 April 2014

Analysis Essay for Economics - The Outline

Outline - important to organize your ideas before writing the essay.

Good technique to demonstrate analysis is to find problems with the article.

The article is available at:

I am using the Chicago Citation style from:

Make sure you click on the tab for Author-Date. It is hard to see, but it is there.

For students who want the instructor's multiple-choice and essay exams, then please click on the Dropbox link for Economics 100. I also converted the Dropbox into a Shared link. If you download and install their software, they will automatically create a folder on your computer that automatically updates when you connect to the internet.

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)

2.0 Introduction

  • 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

3.0 Analysis


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


Figure 1. Greater demand for white sugar

  • 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

4.0 Conclusion

  • 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.

5.0 References

  1. 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

  2. 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/

  3. 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

  4. Hubbard, Glen, Anne M. Garnett, Philip Lewis, and Anthony Patrick O'Brien. 2010. Essential of Economics. Frenchs Forest: Pearson Australia.

  5. Szulczyk, Kenneth. 2012. The Economics of Government. San Francisco: Scribd. Accessed April 22, 2014. http://www.ken-szulczyk.com/economics_of_government.php

2 comments:

  1. Thank you Dr. Kenneth for posting the answers for multiple choice questions that available in drop box.

    ReplyDelete