CHILLY PRODUCTION Reported on August 2000 250 growers (producers) produce fresh chilies on 50, 000 hectares of land,

from June till mid December. Region involves are Cameron Highland, Kelantan, Kedah, Selangor and South-east Johor. Wet Market : 1 kg of chilies = RM 6.00 1 kg of chilies = RM 7.00

Supermarket :

Advancement of technology increased the chilies production. Regions that try the new species are Pahang and Terengganu. Bumper harvest (Unusual large harvest) increases the producers revenue. Governments intervention by implementing price stabilization and create surplus of chilies (Demand is low compared to the supply of chilies). FAMA and its agencies must buy the persistent surpluses and ends up with a large inventory. Then the cost of buying and storing the inventory falls on taxpayer. Large and low-cost producers benefit more in this situation. In 1999 1 kg of chilies = RM 4.00 till RM16.00 Price per kilogram of chilies (RM) Quantity of chilies supplied (per kilogram)
In Cameron Highland, Kelantan, Kedah, Selangor and South-east Johor In Pahang and Terengganu (New species of high yield)

6 12 18 24 30

1 2 3 4 5

3 4 5 6 7

CASE STUDY EC0 415 CHILLY PRODUCTION

PREPARED FOR: MADAM NG PHAIK LIAN

PREPARED BY: NUR HAZIMAH BT KHALID CS231 20112487 54

Q1. Show the above relationship of price and quantity of chilies in a sketch diagram to illustrate the effect of its bumper harvest. Explain your Diagram. (3 marks)

Price per kilogram (RM) of chilies SS0 SS1

P0 P1

e0 e1

DD0 Quantity of chilies (per kilogram) Q0 Q1

Advancement of science and technology had lead to the invention in breeding new species of high yield and constraint to diseases. Producers in Pahang and Terengganu that had started the plantation using the new species had resulted in higher chilly production compared to producers in Cameron Highland, Kelantan, Kedah, Selangor and South-east Johor. This increases the supplies of chilies from the producers in Malaysia. Producers in Pahang and Terengganu that using this new species are producing more quantity of chilies (bumper harvest) with fixed amount of resources such as land and water which affect less cost of production consumed and gain more profits. The initial equilibrium price and quantity are P0 and Q0 respectively. The market equilibrium is at e0 where the intersection of demand and supply curve. Bumper harvest of chilies leads to an increase in supply of chilies at all prices. The whole supply curve shifts to the right from SS 0 to SS1. As a result price falls from P0 to P1 and quantity demanded also increase from Q0 to Q1. New market equilibrium point at e1.

Q2. What is the purpose for the government to implement a price stabilizing policy on chilies as reported? (5 marks) The market equilibrium is affected due to bumper harvest which increases the supply of chilies in the market. This cause the supply curve shift to the right and equilibrium price of chilies per kilogram falls. Quantity demand of chilies increases and customer will buy more chilies at a lower price. Then many producers of chilies will have extremely lower income. The government helps out the producers to protect their income by implement price stabilizing policy on chilies which is the price floor. Price floor is minimum legal price of chilies per kilogram set by the government above equilibrium price so that the price wont falls further below equilibrium price and producers can still produce chilies and gain profit. When the producers have a lower income, they do not have sufficient money to pay more wages to the workers who works for harvesting the chilies. Thus, the workers received fewer amount of wages as the price of chilies falls and producers incurred losses. Government implements the price stabilizing policy to protect minimum wages of workers from falling below certain levels. Producers can hire more workers when there is minimum wages.

Q3. Discuss the disadvantages of price policy sets by the government as stated in the report. The price stabilizing implemented by the government is price floor. Price floor is minimum legal price of chilies per kilogram set by the government above equilibrium price. The customer needs to pay at a higher price above the equilibrium price. For an example, if the equilibrium price of chilies for 3 kilogram in the supermarket is RM 21. Due to price floor imposed by the government, customer has to pay at the RM 23 for 3 kilogram of chilies. Rising of the selling price of chilies creates a surplus, where the quantity supplied is greater than the quantity demanded. When surplus occurred means that there in inefficient use of scarce resources, when this resource can be used to produce something that is more valuable to the society rather than producing something that exceed the user want. There a waste of chilies produces due to price floor. Therefore, the governments cope with the surplus through FAMA and its agencies buying the excess chilies produced. However, there are many chilies that need to be stored, FAMA required to buy a large inventory and hired workers to manage the storing of the excess chilies in the inventory. The cost of buying and storing the inventory falls on the taxpayers. Government imposed higher tax rates so that the amount of tax payment received from taxpayers will be used to finance the cost of buying and storing the surplus. This is unfair for the taxpayer.

Q4. Sketch in a separate diagram to show price stabilizing policy that has been implemented by the government on chilies. Explain how it could be effective. Price per kilogram (RM) of chilies SS0
Surplus

Pf P0

e0

Price floor

DD0 Quantity of chilies (per kilogram)

QD

Q0

Qs

The price stabilizing implemented by the government is price floor where a minimum legal price of chilies per kilogram is set above equilibrium price by the government. Due to increase in supply of chilies, the price of chilies per kilogram falls. Thus the producers gain lower income because many customers buy the chilies at a lower price than the equilibrium price. In order to protect the producers income and minimum wages of workers from falling below certain levels, the government imposed price floor. The equilibrium price and quantity are P0 and Q0 respectively. Suppose that the equilibrium price P0, is RM 21 and equilibrium quantity is 3 kg. The market equilibrium is at point e0 where the intersection of market demand and supply curve. At this point quantity supplied of chilies per kilogram equal to quantity demand of chilies per kilogram, which is 3 kg. The supplier also sold chilies at a price that customer willing to pay for 3 kg which is RM21. Horizontal line at Pf shows the price floor set by the government which is above equilibrium price, P0. Let say Pf is RM23. So, at any price of chilies per kilogram (RM 21.50, RM 22, and RM 22.50) that sold above the equilibrium price RM21, will ensure that the production of chilies can continue to be made and producers do not incurred losses. Quantity supplied QS are greater than the quantity demanded QD (Surplus).