Cancel the Subsidies of Sugar

Based on the newspaper- Sin Chew Daily, 29th September 2012, http://www.sinchew.com.my/node/262868?tid=1 . The news indicates that Malaysia government determine cancel the subsidies of sugar.

Sugar prices will officially rise up 20 cent per kg on 1^st October 2012. Besides that, government will eliminate subsidies gradually to give consumers enough time to adapt. Even though sugar’s price rises up did not bring much impact to ordinary consumers but sugar is necessity in the food processing industry. Furthermore, it will bring impact to coffee suppliers because sugar is related to condensed milk, saccharin, coffee powder. There are some reasons to influence demand and supply of sugar, affect of eliminates subsidy and elasticity of sugar.

There are some effects of cancelled government subsidy on sugar. A subsidy is a payment made by the government to a producer but it will enhance the financial burden to our government. According to the subsidy curve, it will create a rise in price and decrease in quantity producer when the line S2 moves to S1. Producer will increase the price of sugar to increase profit when government cancelled subsidy. Quantity of producer will decrease because consumers will reduce the use of sugar when it’s price increase. Moreover, it will appear a decrease in supply when the quantity of demand moves to Q1 from Q2 and producer need to bear the cost by themselves. Government cancel subsidy on sugar will increase the burden of government and food processing industry or decrease the sale of coffee. 

There are some reasons to influence the demand of sugar when government decide canceled the subsidy on it.  Businesses  be aware of sugar’s price will rise up and it can be stored, the opportunity cost of obtaining the good for future use is lower today than it will be in the future. Thence, the demand of sugar will increases before 1^st October because businesses and grocery stores expect future prices of sugar to be higher, they will purchase more now. Besides that, the substitute of sugar such as crystal sugar, saccharin will increase in demand. The quantity demand of substitute will moves to D2 from D1 when the sugar’s price is rise up because some quantity demand of sugar will transfer to its substitute. Sugar is an inferior good is one for which demand decreases as income increases. For an example, when consumers income rises they buy less sugar and higher nutrition, organic sugar.

In addition, there are some factors to influence the supply of sugar. The cost of sugar will be higher when government cancelled subsidy of sugar. The cost of sugar of production rises, the lowest price that a producer is willing to accept for that good rises, so supply decreases. According to supply curve, it will move to left side when production cost of sugar increase. On the other hand, the prices of related goods that firms produce influence supply.  The law of supply explains that the higher price brings forth an increase in the quantity supplied. Thence, the supply of coffee will increases because government cancelled subsidy on sugar result coffee’s price rises up as the same time quantity supply of sugar will increases.  For example, if the demand of coffee increases, the demand for sugar will increase as well. According to supply curve, it will move to right side when the prices of coffee increase.

There are several factors that affect price of elasticity of sugar. Sugar is inelastic on demand because consumers will continue to demand the good even though the price is rise up. The first factor to influence elasticity of sugar of demand is proportion of income spent on the good. An increase in price of sugar is unlikely to decrease the consumer’s demand if a consumer only spends a small portion of their income. Sugar represents a low proportion of a consumer’s income even though the price was raised up, the less inelastic is the demand for it. Moreover, closeness of substitutes is the factor to affect of elasticity of sugar. There are more substitutes for a good, elasticity is higher, as consumers can easily switch to other goods in response to price changes. Sugar has a lot of closer substitutes such as saccharin, crystal sugar, and sugar cane.

Lastly, there are some factors that affect elasticity of supply. The most important reason to influence elasticity of supply is time frame for the supply decision. In the short run sugar producer will only be able to increase input of labor to increase supply of commodities but the supply change will be little because other factors of production such as technology and mechanical may not be increased in the same proportion and may limit the supply. Therefore, the supply of sugar is inelastic in a short run. However, in the long run a firm will increase the input of all factors of production and thus the sugar’s supply becomes more price elastic. Second factor to affect elasticity of sugar’s supply is resource substitution possibilities. Sugar can be produced by using commonly available resources that could be allocated to a wide variety of alternative tasks. Furthermore, sugar can produced in many different countries, proof that the supply of sugar is highly elastic.

In conclusion, there are some factors to affect demand and supply of sugar, influence of cancel subsidy and elasticity of sugar.  The government's decision was reasonable, gradually cancel the allowance to let consumer have enough time to adapt. Besides that, cancel 20 cents subsidy of sugar will not be a significant impact. Consumer should identity government’s decision, then together to reduce the financial burden of our government.

                                                                                                                                  by Chew Chia Yee