Prices of Petrol and Diesel in Malaysia

1.0 Introduction

Microeconomics is a branch of economic analysis that are deals with human behavior and the choices of the small units in economics. It is firms in undertakes to understand the decision-making process of firms and households. It is also concerned with the interaction between sellers and individual buyers and all the factors that had influence the choices that are made by buyers and sellers. In particular, microeconomics had focuses on the patterns of supply and demand and also the output in individual markets and the determination of price. There are two different distinct areas in the field of economic will be study that is microeconomics and macroeconomics.

Microeconomics studies on how the pricing of element services such as profits, interest, wages and rents are all determined in the market. It is also on how scanty resources are distribute for the production of several products. People who have any wish to start their own business or who want to learn the rationale behind the pricing of the particular services and products. On the other hand, macroeconomics analyzes the accumulate behavior of the whole economy. It studies not just only individual economic units but all the arrangement which are deals with accumulates such as trade cycle, inflation, national income, deflation, public finance and others. Demand and supply including all those important concepts and it is a principle of economic of pricing. Demand and supple concept are using to determining all the prices of goods.

Demand is the willingness and ability to buy specific quantities of goods in a given period of time at a particular price. The law of demand states that the higher the price of a good, the lower the quantity demands for that good and vice versa. It also states that there is a reverse relationship between quantity demanded and price. A demand schedule for the graphs had also represents a functional relationship between quantity demanded and price.

Supply is clarifies as the willingness and the ability to produce or sell particular services and goods in a given period of time at a particular price. (DevigaVengedasalam, KarunagaramMadhavan and RohanaKamaruddin, 2008) The difference between demand and supply is the word of sell and buy. The law of supply states that the higher price of a good is the quantity supplied for that good and vice versa. The supply schedule for the graphs had also represents a functional relationship between the quantities supplied and price when the other determinants are assumed that all constant.

Elasticity is an important concept that can be measured by all the students that are majoring in economics. There are four types of elasticity that is income elasticity (YED), cross price elasticity (XED), price elasticity of supply (PED) and price elasticity of demand (PED). It is a measurement of the proportion of responsiveness of any variable to the change in one of the factors of determinants.

2.0 Demand and Supply

On October 2, 2014 petrol and diesel price are increased by 20 cent per litre by Malaysia Government as in line with the federal government’s subsidy rationalization policy. The new retail price of RON95 will be RM2.30 and diesel will be RM2.20 per litre. This change had affected the demand and supply for all the Malaysian consumers.

For petrol, the determinants of supply for this case that had happen is the government policies. The supply of goods is also influence by the carry out of various government policies such as subsidies and taxes. If the government charges the sales tax on goods, this will result in the higher cost of production and this will also decrease the supply of goods. Then, the proviso of the subsidies will encourage all the sellers to supply more as the subsidy will reduce the cost. For an example, if the government gives subsidies for goods, the supply of goods will increase. Under these circumstances, the supply of petrol will decrease. “Although fuel prices have increased for March, prices at farmers’ markets will be still be lower as compared to other markets,” (Ismail, 2015). The government reduces the subsidy rate of petrol. (Themalaymailonline, 2014).From this, it can be seen that the future price of petrol will decrease in demand and supply.

For additional, income is the determinant of demand. It can be using to influence the consumers making a decision to buy products or goods or services are the income of consumers. The evident for this determinant is the level of income in country under analysis or appropriate region. The goods that are known as normal good are books, cars, shirts and house. In additional, inferior goods are those salted fish, low-grade potatoes and low-grade rice. The higher income of a consumer getting, the higher quantity of the product they will buy. In fact, when the price of petrol had increase, the demand for petrol is decreasing as the price of related goods is cheaper such as bicycle. This is because consumer having the choice of making a decision to make a desire for things. The demand for petrol in Malaysia is decreasing as the income for every consumers in Malaysia is decreasing or even remain constant. For a better know, the labor market in Malaysia also can be concerned. A worker’s day can be divided into hours of leisure and hours of work. Besides of that, workers are also be assumed that they have the flexibility to choose their hours for working and leisure. After the year 2013, the minimum wage for Malaysian is not increasing. (MOHR- Minimum Wages, 2013). The minimum wage in Peninsular Malaysia is RM 900 for monthly and RM433 for hourly. Besides, the minimum wage in Sabah, Sarawak and Labuan is RM 800 for monthly and RM3.85 for hourly. (MOHR- Minimum Wages, 2013). As the demand of petrol is decreasing, the number of public transport in Malaysia is increasing. This will happen because all the Malaysian only willing to use on those transport that will not using up the need of petrol.

For diesel, government policies is the determinant of supply that is same with the determinant supply for petrol. The supply of goods is also influenced by the implementation of several government policies such as subsidies and taxes. If the government imposes sales tax on goods, this will result in the increase of cost and this will decrease the supply of goods. Then, the proviso of subsidies will encourage all the sellers to supply more as the subsidy will reduce the cost. For example, if the government provides subsidies for goods, the supply of goods will increase. Under these circumstances, the supply of diesel will decrease. Through all of these, it can be seen that the future price of diesel in demand and supply is decrease.

In additional, income is the determinant of demand for diesel. The evident is the level of income country under analysis or in an appropriate region. As all the Malaysian knows that diesel is more expensive than the petrol. In this case, the consumers also have more choice to choose or make a decision in individual. Same as the determinant of demand for petrol, the increase of the income of consumer, the quantity of demand also will increase. The demand of diesel in Malaysia is decrease as the price of diesel had already in a higher price than petrol so that the consumer will be lesser and lesser. And this may lead to the firms because in originally diesel already less people use because of the high price. After the year 2013, the minimum wage for Malaysian is not increasing. (MOHR- Minimum Wages, 2013). The minimum wage in Peninsular Malaysia is RM 900 for monthly and RM433 for hourly. Besides, the minimum wage in Sabah, Sarawak and Labuan is RM 800 for monthly and RM3.85 for hourly. (MOHR- Minimum Wages, 2013). This also may increasing the number public transport in Malaysia.

2.1 Graph Demand and Supply of Petrol

2.2 Graph Demand and Supply of Diesel

2.3 Types of Elasticity

Price Elasticity of Demand (PED)

A measurement of how much the quantity demanded of a good responds to a change in price of that good. It shows the relationship between the price and quantity demand and also had provides an accurate to calculate the effect of a change in price on quantity demand. Then, the price elasticity of demand is calculated as the percentage change in quantity demand divide by the percentage change in price. This equation can use to do the calculation that is about the effect of price changes on quantity demand and on the income that received by the company before and after any price change. After that, the value of price elasticity can classify in five types, such as elastic, inelastic, unit elastic, perfectly inelastic and perfect elastic.

The level of response of quantity demand to a change in price can be varying considerably. The quantity demanded changes proportionately more than the price, the value of price elasticity of demand is greater than 1 that is elastic. The percentage that changes in quantity of good is greater that the percent change of that goods price such as petrol. When the quantity demand of PED is less than 1, is call inelastic and the quantity demand is move proportionately less that the price of good. Next, when the value is equal to 1 is called as unit elastic, and the quantity of demand is moving about the same amount as the price of good such as insurance package. When the quantity demand of PED is equal to 0 it is a perfectly inelastic, the price of good and the quantity demand is remain same such as coffin. In addition, when the quantity demand of PED is equal to infinity it is perfectly elastic that means has a small change in the price that had lead to huge change in the quantity demand such as housing.

Cross Price Elasticity of Demand (XED)

Cross price elasticity of demand is show the relationship between two services or goods. Cross price elasticity of demand can defined as a measurement responsiveness of the quantity demand of one good to change in the price of another good. In additional, the cross price elasticity of demand can calculate as the percentage change in quality of good1divided by the percentage change in price of good2. Then, cross price elasticity of demand may be negative or positive value, depend on whether the goods are substitutes or complements.

While, if the good A is substitute for good B, when the price of good A increase, thus the coefficient value is positive. For example, if the price of coffee increases, the consumer may purchase more tea and less coffee. In opposite, when the price of another good is decrease, the demand of substitute goods will fall. In contrast, if the good C is a complimentary good for good D, demand for good C decline when the price of good D increases. For example, when the quantity demand of car is increase, the quantity demand of fuel also will increase. If the price of complement falls, the quantity of demand of other good rise. So, the complement goods in cross price elasticity of demand will be negative. In summary, when the degree of elasticity for good XY is negative, the types of goods is complimentary; when the degree of elasticity for good XY is positive, the types of goods is substitute goods; when the degree of elasticity for good XY is equal to zero, , the types of goods is no related goods.

Income Elasticity of Demand (YED)

Income elasticity of demand can defined as a measure the responsiveness of quantity demand for good to change in the consumer income. The income elasticity of demand can be calculates in the equation of the percentage change in quantity demand divide by the percentage change in income. Income elasticity can used to predict the potential of market. The one of the determinants of consumer demand is income. Income elasticity has shown the changes in income are leading to the change in demand. YED also can use to classify the goods such as luxury goods, inferior goods, necessity goods or normal goods.

When a high value of income elasticity for one good, the producer of good can predict to increase in sales or decrease when the elasticity coefficient fall. When the income elasticity coefficient is more than 0, its’ degree of elasticity is elastic and had reveals that it is a luxury good. Luxury goods are the product that are highly desire and associate with wealthy people who bought for some reasons such as to support their status. For example, Gucci, Dior, and LV. When the income elasticity is less than 0, it shows it is an inferior good. Its’ degree of elasticity is negative elastic. The demand for the inferior good is go down as the income is increase such as bus. This is because when the income of people decrease, they just can afford to take a ride but not buying a car. The decline of bus is when the income of people increase.

When the income elasticity is greater than 0 and less than 1, it is a normal good and that is the one where demand is directly proportional to the income. Normal goods are the items that income and demand will increase at the same time such as Nike shoes and Polo T-shirts. For example, Polo T-shirts having a normal price so that people are going to make more income to buy it. When the income elasticity is equal to 0, it is a necessity good, this is because the change of income did not affect the good. Necessity goods are the goods or service that are consider to be live in living, such as water, food, and medical care. However, if the price of necessity goods is increasing, people are still buying them because it is necessary for them.

Price Elasticity of Supply (PES)

Price elasticity of supply is a measurement of the responsiveness in the quantity supplied to a change in price of that good. PES can be calculated in the equation of percentage change in quantity supplied divide by the percentage change in price. There are several factors that can affect the elasticity of supply that is the flexibility of seller to produce, perishability, technology improvement, availability and mobility of factors of production and time period. PES is necessary for all the company to know about how quickly and effectively to it that can respond to change all the market condition, especially to the change of price.

The price elasticity of supply can be divided into five types of supply curve. When the price of elasticity is greater than 1 it is elastic and that means the quantity supply is moving proportionately more than the price. When the PES is less than 1it is inelastic which means the quantity supply is moving proportionately less than the price. When the PES is equal to 1 it is unit elastic, which means the quantity supply is moving at the same amount as price. When the PES is equal to 0 it is perfectly inelastic which means that regardless of the price and the quantity supply remain the same. When the PES is equal to infinity it is perfectly elastic and it means that a huge change in the quantity demand that is led by a small change in the price.

Graph of Price Elasticity of Demand

Graph Price Elasticity of Supply

3.0 Conclusion

In the future, the price of the petrol and diesel will decrease. Next is the type of the elasticity can help all the people to classify the goods in the market such as necessity goods, luxury goods, normal goods, inferior goods, substitute goods and complimentary goods. And also this concept is important and applicable. After that, the value of PED and PES can be classify as six elasticity, such as perfectly elastic, inelastic, unit elastic, elastic and perfectly elastic.

The concept of demand and supply is important because it is the basis of economic of pricing. For the elasticity concept, it is also very important for the business man so that they can change the market or condition for their business.

However, if the future price of petrol and diesel is increasing the government should increase the income of consumer, decrease the tax or provide the subsidiaries on the petrol and diesel. So that the consumer can make a better decision for individual.