Micro Economics Assessment Two You are to select a newspaper/magazine/web article for economic analysis. The article must relate to one or more of the topics (chapters) covered in the lecture program. The article must also have been written after 1st Oct
Finance & Econ
sample_assignment_1.pdf
Economics 100
Assignment 1
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Table of Contents
1.0 ARTICLE SUMMARY ...................................................................................................................... 1
2.0 INTRODUCTION .............................................................................................................................. 1
3.0 ANALYSIS ....................................................................................................................................... 2
3.1 DEMAND AND SUPPLY..................................................................................................................... 2
3.2 SHORTAGE..................................................................................................................................... 4
3.3 SUBSIDY ........................................................................................................................................ 5
3.4 ELASTICITY .................................................................................................................................... 6
3.5 IMPORTS ........................................................................................................................................ 8
4.0 CONCLUSION ................................................................................................................................. 9
5.0 REFERENCES ............................................................................................................................... 10
Tutorial Day/Time
1.0 Article Summary
The article by GMANews.TV, titled “Rice prices to drop by mid-March, NFA says” was
posted on 10 February 2009. It reports consumers’ reaction to high prices of commercial
rice in the Philippines by queuing for subsidised rice from National Food Authority (NFA)
stores.
2.0 Introduction
With last year’s global rice shortage crisis, consumers are still wary with regards to rice
issues in Philippines and uncertainty remains high in 2009. In fact, the International Rice
Research Institute has warned that “rice prices may increase this year because of high
demand amid uncertainties in production due to tight credit access” (Morales and
Sarmiento 2009).
As various issues pertaining to current rice market situations were brought up in the
article, this report aims to analyse the rice market in Philippines with the aid of economic
theories and models. This report will examine its market in action, discussing demand
and supply, shortage, subsidy, elasticity and imports. In addition, a summary of all
areas discussed will conclude this report.
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3.0 Analysis
3.1 Demand and Supply
Demand is defined as “the amount of goods and services that consumers are willing and
able to buy at a particular price and time” (Nyunt 2008).
Symons (2008) stated that “the rice panic… is being linked directly to overpopulation”
because Philippines has “the highest birth rate in Southeast Asia” with its annual
population growth exceeding 2% and twice that of regional average.
As indicated, the increased population
size in Philippines has simultaneously led
to an increase in number of consumers.
Hence, ceteris paribus, the demand for
rice also increases. The increase in
demand, attributed to population size—a
non-price determinant, is represented by a
rightward shift of the demand curve from
D0 to D1 in Figure 1.1. Hence, new
equilibrium quantity and price increases
from Q0 to Q1 and P0 to P1, respectively. QQ Quantity
Price
D0
D1
S0
P1 Figure 1.1
Rice Market
P0
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Supply is defined as “the amount of goods and services that producers are willing and
able to sell at a particular price and time” (Nyunt 2008).
Arthur Yap, agriculture secretary of Philippines, attributed high rice prices to “the high
price of fertiliser and other inputs in the last planting season” (GMANews.TV 2009).
Rice Market
Price
Quantity
S1 S0
Q
P1
Q
P0 Figure 1.2
D0
Increase in input prices is a non-price
factor that shifts supply curve to the left
from S0 to S1. Supply of harvested rice
decreases because rice producers are
less willing and able to produce at given
output in the last planting season. Hence,
quantity of rice supplied decreases from
Q0 to Q1, resulting in increased price of
rice from P0 to P1, as shown in Figure 1.2.
However, NFA spokesman Rex Estoperez
assures consumers that rice prices are
expected to fall by mid-March “because of
our summer harvest” (GMANews.TV 2009).
With the anticipated summer harvest,
supply of rice is expected to increase,
shown by rightward shift of supply curve
from S1 to S2 in Figure 1.3. Hence,
expected fall of rice prices from P1 to P2 is
explained with increase in quantity
supplied from Q1 to Q2, ceteris paribus.
Rice Market
Price
Quantity
S1 S2
Q
P1
Q
P2 Figure 1.3
D0
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3.2 Shortage
Due to excess demand and limited supply of rice, there has been a resulting shortage
which has consequently led to price hikes in the Philippines since 2008.
At P0, as demand shifts from D0 to D1 in
Figure 2.1 and supply shifts from S0 to S1
in Figure 2.2, there is a resultant shortage,
shown by the shaded region. In Figure 2.1,
quantity demanded (Q1) exceeds quantity
supplied (Q0), likewise in Figure 2.2,
quantity demanded (Q0) also exceeds
quantity supplied (Q1).
Due to the shortage, an upward pressure
is applied on the price of rice, resulting in
new equilibrium at point E where price is
Pe and quantity demanded is Qe, as
shown in Figures 2.1 and 2.2.
Rice Market
Q
Shortage
Pe
P0
Quantity
S1 S0
Q Q
Figure 2.2
.E
D0
Price
Rice Market
Shortage
Q
Pe
P0
D0 D1
S0
E. Figure 2.1
Quantity
Price
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3.3 Subsidy
According to Symons (2008), “A sharp hike in the subsidy for rice growers to buy seeds
has also been promised”. A subsidy can be regarded as negative tax to help reduce cost
of supplying rice (Nyunt 2008).
With production cost lowered by the
subsidy, rice producers in the Philippines
will now be willing and able to produce
more, shown by a rightward shift of supply
curve in Figure 3. Consequently, quantity
supplied increases from Qe to Q1 and price
falls from Pe to P1. The shaded region
represents the total cost of subsidy to the
Philippines government.
P2
Price
Quantity
S + subsidy
S
Q
Pe
Rice Market
Figure 3
Subsidy
P1
D
Q
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3.4 Elasticity
According to Nyunt (2008), elasticity is “a measure of responsiveness of quantity
demanded or quantity supplied to one of its determinants”.
Price elasticity of demand (PED) is “the responsiveness of quantity demanded to a
change in price” (Sloman 2006, 48). Demand for rice is price inelastic because it is an
essential food product—a necessity in the diets of Filipinos; hence, changes in its
consumption are not significant with changes in price.
Inelastic demand for rice in the Philippines is
represented by a steep downward-sloping
demand curve D0 in Figure 4.1. It can be
observed that there is a less than
proportionate or insignificant decrease in
quantity demanded from Q0 to Q1 even
though price has increased greatly from P0
to P1, ceteris paribus.
Income elasticity of demand (YED) measures the responsiveness of demand to changes
in consumers’ incomes (Sloman 2006, 58). Rice is a normal good for majority of Asian
countries; hence, YED for rice is positive in value because when income rises, demand
for rice will also increase. In the Philippines, demand for rice is income inelastic because
changes in quantity demanded will be less than proportionate since there will still be rice
consumption no matter how consumers’ incomes may change. From the table below,
income elasticity of rice, a type of cereals, at 0.387 is small (0<YED<1).
P1
P0
Price
QuantityQ
D0
Rice Market
Figure 4.1
Q
Source: http://documents.wfp.org/stellent/groups/public/documents/manual guide proced/wfp187903.pdf
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Price elasticity of supply (PES) is “the responsiveness of quantity supplied to a change
in price” (Sloman 2006, 57). Not only is rice a staple and necessity in the Philippines, it
is also a primary product whose production is seasonal with long gestation periods.
Therefore, its supply is also inelastic. The main factor affecting PES is time period so in
the short run, with changes in price or demand, supply cannot be changed easily.
P1
P0
Q
SD
D0
D1
Figure 4.2
Domestic Rice Market
Quantity
Price In the very short-run, rice supplied by
producers or farmers in the Philippines is
perfectly inelastic (PES=0) because rice
takes months to grow and when
harvested, its quantity cannot be
changed. With rice supply at SD, as
shown in Figure 4.2, any change in price
of rice such as from P0 to P1, quantity of
rice supplied will remain at QD.
Although a producer of rice, the Philippines
government has to import rice from other
countries to meet all of its rice needs.
Given time in the short run, with imported
rice supplies from the global rice market,
supply of rice in Philippines remains
relatively inelastic at SSR though not
perfectly so like SD, as shown in Figure 4.3.
Rice Market
QSR
P1
P0
QD Quantity
S
D0
D1
Figure 4.3
SSR
Price
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3.5 Imports
The “world’s largest rice importer” is Philippines (Symons 2008) and for the lean months
of 2009 (July—September), 500,000 metric tons of rice have already been imported
(GMANews.TV 2009). The imported rice contributes to the government’s buffer stocks
which are “stocks of a product used to stabilise its price” (Sloman 2006, 80). Therefore,
if rice prices do not fall by mid-March as expected, NFA will “bring it out to stabilize
prices in the market” (GMANews.TV 2009).
In Figure 5, before trade of rice, consumer
surplus is region E while producer surplus
is regions A and B. With the import of rice,
consumer surplus increases to regions B,
C, D and E while producer surplus
decreases to just region A. As such, total
surplus after trade increases from regions
A, B and E to include regions C and D
gained. Hence, domestic producers of rice
will lose while domestic consumers gain
from increased consumer surplus and
lower prices.
Rice Market
QDD QDS Q Quantity
Price
Figure 5
DD
DS
P
Pe
A DC
B
E
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4.0 Conclusion
In conclusion, the rice market in Philippines faces fluctuating demand and supply,
adding to uncertainties and fear of shortages in 2009. Despite the Philippines
government’s intervention through subsidies and imports, consumers and producers
remain sceptical. As there are many contributing factors affecting the rice market, the
analysis of the article, using economic concepts and theories, is based on the ceteris
paribus assumption. Hence, although not true reflections of the rice market in real world
context, the assumption helps in the explanations while the economic models aid in
anticipating effects on the rice market depending on the causes or factors involved.
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5.0 References
GMANews.TV. 2009. Rice prices to drop by mid-March, NFA says.
http://www.gmanews.tv/story/148050/Rice-prices-to-drop-by-mid-March-NFA-
says# (accessed March 28, 2009).
Morales, N. J. C., and R. S. Sarmiento. 2009. Rice supply, imports for 2009 secured —
Yap. http://www.gmanews.tv/story/144643/Rice-supply-imports-for-2009-secured-
-Yap# (accessed March 23, 2009).
Nyunt, H. H. 2008. Economics 100. http://203.59.97.2/myibt/ui/main.php (accessed
March 3, 2009).
Sloman, J. 2006. Economics. 6th ed. England: Pearson Education Limited.
Symons, E. 2008. Arroyo pressured on birth control as rice shortages create chaos. The
Australian, April 21. ProQuest. http://proquest.umi.com.dbgw.lis.curtin.edu.au
(accessed April 6, 2009).
Table: Income elasticity by food groups in the Philippines [Image]. n.d.
http://documents.wfp.org/stellent/groups/public/documents/manual_guide_proced
/wfp187903.pdf (accessed April 1, 2009).
- 1.0 Article Summary
- 2.0 Introduction
- 3.0 Analysis
- 3.1 Demand and Supply
- 3.2 Shortage
- 3.3 Subsidy
- 3.4 Elasticity
- 3.5 Imports
- 4.0 Conclusion
- 5.0 References
