According
to an article taken from ‘The Star’, The government would not increase the
price of fuel nor reduce the original subsidy for the RON 95. In Malaysia, the
price of petrol is one of the 20 cheapest in the world with the subsidy of thee
government. The price of RON 95 petrol is priced at RM1.90 per litre after a
RM1.09 subsidy. The price of petrol is comparably affordable compared to the
price of in countries like Thailand, Indonesia, Philippines, and Singapore
where the price ranges from RM3.00 to RM5.85 per litre. Consumerism Minister
Datuk Seri Ismail Sabri Yaakob mentioned that if the petrol price were to be
increased, the prices of all goods will rise simultaneously; this is going to
form a huge burden to the consumers. The impact on the goods might multiply
tremendously because the production costs from raw materials to final goods are
already high, not to mention the selling price to the final consumers.
According to the Law of Demand, when the price increases, the quantity demanded
decreases. Apparently, this law fits well in this situation. For example, when
the government announces that the petrol price will rise from a particular
morning. Most likely the petrol station will be surprisingly crowded the night
before. The demand will drop obviously on the first day of price hike, however,
people that has a car and need to drive has to choice but to continue
consuming. Alternatively, people might well switch to other options that does
not require or require less petrol, for instance taking public transport,
switching to a smaller car, using hybrid car, use NGV gas instead of petrol. In
Malaysia, when income increases, people tend to improve their lifestyle and
enjoyment for example buying a new or bigger car. In this case, the marginal
benefit for this group of people is higher. As a result, petrol- a complement
good will be demanded more as they are willing to pay for the price.
Then again, when the price of petrol decreases, the supply decreases. As the
price in the global market increases, Malaysia government still remains a low
price for the citizens. Hence, the demand and supply appear to be higher all
the while compared to other countries. Nevertheless, there was once where there
is shortage in supply of petrol, where a few petrol stations in Klang Valley
were ‘out of stock’. That is due to the 10 cents reduction in price during the
Hari Raya season. In order to minimize the loss caused by the 10 cents
reduction, petrol stations kept less than 50% of the amount they use to keep
previously. Additionally, suppliers expect the future price to be higher, so
they tend to decrease the supply until the price rises and earn more profit. As
suppliers produce more, the marginal cost increases. Suppliers are only willing
to sell more when the price is high enough to cover their high marginal cost,
at least.
The short term demand curve of petrol shows a very steep line. It appear to be
highly inelastic (elasticity less than 1) because no matter what the price is,
people will still have to purchase it due to the fact that fuel used in cars
cannot be easily replaced with other substitutes. Elasticity measures how
responsive people are towards the change in price. Are people going to stop
driving because the price went up? Or quit our job and get a job somewhere
nearer to the place they stay? There is nothing we can do but to accept the
fact and pay the price. In other words, even there’s a huge change in price,
the demand will only have a slight change. But, in the case of different brand
of petrol, for example if Shell increases their prices and Petronas remain, the
customers are more likely to switch to Petronas. This is because when consumers
are sensitive towards the price, they are unconcern about the brand.
With the subsidy of Malaysia government, citizens’ burden had lightened a lot.
Thus consumers should have appreciated that because there is no such high
subsidy in other countries. The opportunity cost of the subsidy is not able to
allocate resources on other investment or subsidizing for a better health care,
housing, education, public transport, and etc. Yet, the government had still
decided to subsidize more on petrol so that it brings more marginal benefit to
the country.
In conclusion, besides the Law of supply and demand, the government is
manipulating the price of petrol. At times, politics factor may also affect the
prices, or cause unwanted shift of demand curve which affects the entire
economic condition of the country. However, it is believed that the rapidly
developing technology will eventually make us less dependent on petrol. For
example hybrid or even solar energy car instead of relying on petrol which is
slowly becoming scarce. The government can also come out with new fuel subsidy
plans such as rebates for purchasing petrol.
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