The Pros and Cons of Raising Minimum Wage

Chew Wee Li (0311976) - Section 9 - First Article

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The Pros and Cons of Raising Minimum Wage

            Based on the article ‘NPR’, by an NPR staff, on raising minimum wage, minimum wage remains as the hottest topic of America’s economy, ever since the year 1912. Massachusetts became the first place in America to introduce minimum wage, but it would take another quarter century before a national minimum wage was set. President Franklin Roosevelt made it law in 1938, that any hourly worker had to be paid at least 25 cents an hour. It was revolutionary, and very few countries had anything like it. This alternates every few years, making the federal minimum wage to go up, aiding millions of Americans in their daily lifestyles. Moreover, in 1970s, the minimum wage has fallen by around 25 percent. The minimum wage is currently around $7.25. Harkin, a Democrat, has introduced a bill in Congress to raise the minimum wage to $9.88 an hour. For millions of Americans, an increase in minimum wage could make a huge difference, but the battle has not been easy. 

            In 2008, President Obama campaigned on a promise to raise the minimum wage. Apparently, he has not managed to do so. Mitt Romney has said he supports pegging minimum wage to inflation, but recently backtracked, and he now opposes an increase. According to the Economic Policy Institute, if Harkin has his way and the minimum wage was actually raised to $9.88 an hour, it would increase wages for 30 million Americans – 10 percent of the country. This can help improve the country by giving hourly wage earners more spending money. 

            Looking into UK’s change in minimum wage, from £6.08 to £6.19 an hour, those aged under-21 remains unchanged. Meanwhile, VAT will now be levied on sports drinks and hairdresser’s chairs. The government announced in March that the minimum wage would rise by 11p. This 1.8% rise is slightly lower than the typical rise in earnings and the current inflation, which represents the rising cost of living. The freeze in minimum wage for those under 21 means that, the rate for 18 to 20-year-olds remains at £4.98 an hour, 16 and 17-year olds remains at £3.68 an hour, however, the rate for apprentices rises by 5pm to £2.65 an hour. 

            Based on the article ‘The Houston Chronicle’, by David Ingram, on the effects of minimum wage from a microeconomic prospective, minimum wage is a prescribed wage level that must be met or exceeded by employers in all employment contracts, as set forth in the Fair Labour Standards Act. This is known for adjusting inflating prices regularly on a daily basis. Lower-level employees forgo a huge change in getting wages from their companies, especially during an increase in minimum wage. Therefore, the minimum wage has a number of positive and negative effects on businesses, families and individual workers, from a microeconomics perspective. Jobs that acquire unskilled labour see their profit margins diminish and their expenses increase. Generally speaking, this remains as a bigger task to uphold for the upcoming economic growth. 

            Unfortunately, getting an employee seems so much harder now considering the minimum wage for unskilled workers. Decision-making has to be done in a manner that benefits both parties. Part-time workers are now prioritized because of the law on minimum wage. The problem of hiring too many part-time workers is the decrease in the youth department. For example, for every 10 percent increase in the minimum wage causes a five to nine percent decrease in the youth department. This can cause a situation where individuals with little experience who might happily accept a lower wage find themselves unable to find a job. If this trend continues in specific regions, local unemployment could rise, possibly raising homelessness and crime rates as well. 

            The positive thing about minimum wage is getting direct benefit from it, but there is also the negative side to be looked upon. Unskilled workers will be judged discreetly by society, provided that they get the guaranteed wage. Highly skilled and experienced workers on the other hand, gets a boost in income, since a raise in the lowest wage pushes all other wages upward as well. It can be argued that the minimum wage has never been high enough to fully support a family. Furthermore, in the long run, businesses and employees will be affected reacting to the change in minimum wage. Machines will be the next in-line to replace employees and control the increase in wage experiences. This could reduce the number of jobs available in the marketplace for unskilled workers, again resulting in higher unemployment. Younger employees can benefit greatly from the minimum wage. Employees entering the workforce for the first time, with no experience, can count on the minimum wage to provide them the income they need to handle their first expenses. This, in turn, allows heads-of-household more discretionary income to spend on family needs. 

            The vast majority of economists believe the minimum wage law costs the economy thousands of jobs. Teenagers, working in training, college students, interns, and part-time workers all have their options and opportunities limited by the minimum wage. Adults who currently work for minimum wage are likely to lose jobs to teenagers who will work for much less. Workers need a minimum amount of income from their work to survive and pay the bills. Abolishing the minimum wage will allow businesses to achieve greater efficiency and lower prices. Businesses have more power to abuse the labor market. However, non profitable charitable organizations are hurt by the minimum wage. Elimination of the minimum wage would mean more citizens and fewer illegal would be hired for low-pay hourly jobs, leading to greater tax revenues and less incentive for illegal immigration. It can also drive some small companies out of business. Moreover, it forces businesses to share some of the vast wealth with the people that help produce it. The minimum wage creates a competitive advantage for foreign companies, providing yet another obstacle in the ability of American companies to compete globally.

Banning of Housepipes Affects Water Shortage

Chew Wee Li (0311976) - Section 9 - First Article

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Banning of Housepipes Affects Water Shortage

            Based on the article by ‘The Economist’, on banning hosepipe use, this remains as a poor solution to water shortage. Every household is facing a dilemma after the ban came into force on April 5th. Considering the change in weather in England, the problem with water shortage occurs mainly from dry winter seasons. The government has come up with a law on anyone caught using a hose casually will be fined £1,000. And for those who wanted to own a luxurious fountain or swimming pool, can forget of getting one now. 

            Fortunately, water shortage happens because of the methods used in transporting it, not by its consumption. The outlook for scarcity is ignored when two in seven people went against the rule of forbidding hoses. Moreover, water firms have discouraged plans to set up hose hotlines enabling customers to steal from their neighbors. Metering is able to counter this issue efficiently, providing that thefts for hoses do not rise consistently in any neighboring area. 

            The law of low in supply and high in demand states that prices in unregulated market would rise. With the value in goods rises, consumers will still purchase basic goods because it remains as a necessity for them. The Internet provides many ways in handling this issue without being caught by the law of the country itself. One of the few examples are avoiding dengue cases by cleaning the front lawn at a weekly basis, or even blasting away potentially slippery moss that is concern by both safety-and-health reasons. Methods in gaining what they want vary and leading only to one goal, profits. Water can be used as long as it is utilized professionally, and not in wastage. In result, the hose ban aims to maintain its market price by reducing the quantity of water consumed. 

            What about the heavy water users? Another bright idea would be initiating flexible contracts with heavy water users. This can reduce water shortage during periods of drought and charging them for each liter they have used. Water companies on the other hand, will lose more money but gains more water at hold. This is regarded as a surplus. Heavy water users must then purchase water at a much higher price. Another alternative would be back to metering again, pricing all water users according to availability. It is true that by doing so, will be a much expensive plan, but it can be a very successful establishment once corrected. 

            This brings us to maintain a balance between supply and demand in supply chain. Fresh water, petroleum, metals, and crops rely on supply chains. Without the quantity, quality, and location of these resources, the supply chain’s consistency and logistics costs would deeply be affected. Based on the article ‘Supply Chain: Management Review’, by John. E. Bell, on Natural Resource Scarcity in the Supply Chain, since the beginning of Industrial Revolution, resource scarcity has typically been overcome by the ability of technology to find substitute products or discover new sources of natural resources. Judging by the rate of global demand and the scarcity of resources on the planet, substitutions may not overcome the imbalance. The question now is how will managers of tomorrow construct and manage a supply chain that is uncertain of natural resource scarcity? 

            Our every day products consumed consists of industrial and services processes from natural resources. All of these processes occur around the globe. This is broken down to non-renewable or renewable resources. Non-renewable resources include minerals that cannot be reproduced in an instant, while renewable resources can be re-generated in quick amounts of time. The main problem with non-renewable resources is the global affect to unpredicted change in weather, from deforestation and open burning, to dumping waste into river streams. For example, to meet local demands, coal is transported to overseas as it is locally scarce and provides much use to the economy section. Unless a substitute is found to replace coal, the prices for resources may rise up and, thus changing the supply chain regularly. 

            There are seven forces that shape the current scarcity level of natural resource. Substitution, recovery, discovery, and reclamation are the one’s which decrease the resource’s scarcity level and aid in continued availability. However, consumption, degradation, and competition, increases a resource’s scarcity level. Recently speaking, these current forces have proven to play as an important role to create local or even global scarcity. Unlike back in the past days, technology is limited to commit any motives for substitution or discovery. New materials are created in order to substitute for a scarce resource, but soon find that challenging mainly because of the growing consumption and competition caused by the increased levels of population and economic growth around the world. 

            Scarcity is already a major factor to companies and industries all over the globe. Major corporations are taking precautions in avoiding any unwanted usage of scarce resources to save the environment. Corporate Social Responsibility (CSR) contributes the best to their consumers and environment with returning and recycling recyclable products. However, there are signs from around the world that resource scarcity is a major threat in supply chains. As a result, companies have to think ahead and counter this major crisis. Manufacturing companies can now feel the pressure with the drop in scarcity of resources on keeping up with demand. Scarcity is already making a significant impact to the supply chain without us realizing it. 

            The recovery of scare resources prevails when managers apply other approaches to appeal to this daily problem. By doing so, the supply chain will not be deeply affected, regardless whether the change be good or bad. Strategies are created to avoid the use of scarce resources in product designs while increasing the focus on recovery and reclamation. Moreover, rules on when and how to use scarce resources in product and service supply chains can be a really handy tool for the average working Joes. Educating the stakeholders with industry and government policies could manage the impact of natural resource scarcity well.

Complicated Sweetness

Teh Fu Min (0906A72754) - Section 9 - First Article

Complicated Sweetness

            Everyone needs sugar. Sugar is the basicity in cooking. We can’t live without sugar. Imagine if our meal is pure salty, tasteless, we as Malaysian make sugar as a basic necessity in life. But when time goes by, the price of sugar gradually increases. Never once did the price go down.

            We consume sugar no matter where we eat, homecook, mamak, restaurants, fast food, etc. Even with the current popular bubble milk tea shop, chatime, there’s plenty of sugar in it too. Hence, the demand of sugar in Malaysia does not drop even if the price increases slightly. People will not just stop consuming sugar because the price went up for 10 cents per kilo. We either buy a cheaper brand or we just don’t care.

            Why are the prices of sugar going up? Actually, world prices of sugar have been rising since 2008, and are now the highest in 28 years, although at 30 cents per pound, they are still half of the levels they reached in 1981, which at that time was something like 60 cents per pound. But over the past year alone, the world prices have roughly doubled. So why didn't we notice until now? Because unlike in the case of rice or oil, sugar expenditures constitute a very small portion of the household budget. The factors that contributed to the increase in world prices naturally have to do with a combination of demand and supply factors. For one there has been reduced production in Brazil and India – which are two of the largest world sugar producers – due to bad weather, as well as, the diversion of sugar resources to ethanol production in the case of Brazil. On the demand side, there is not only the growth of population, but also the stronger presence of what is called the "sweet-tooth" in consumers who are eating more candy and sweets. As far as Philippine prices are concerned, the Sugar Regulatory Administration has mentioned the rising costs of production and the influence of the world price on mill gate prices. And to that must be added that there has also been a not insignificant diversion of sugar resources to ethanol production, which in turn has been partly influenced by the effort to avoid agrarian reform. 

            The good news, however, it is expected that the increasing prices of sugar will encourage sugar producers to increase their production by devoting more acreage to it, diverting from other crops, and then the prices of sugar will come back down. What goes up must come down. Since 1st of of January, Malaysia sugar price increased from RM1.45 to RM1.65 per kilo in peninsular and RM1.75 in east Malaysia. As we known, our government was still maintaining a subsidy of RM0.80 per kilo. However they said that the government would remove the sugar subsidy in order to minimize the sugar intake and meanwhile reduce the diabetic cases in our country. I am sure that this hike in sugar price will cause the price of every sugar made product to be increased. So, do you think who is suffering in the end? In my opinion, the rise in diabetic cases is just an excuse to work out the plan. Eating less sugar is absolutely good for health but not at the expenses of putting burden onto the public. 

            Actually, it’s a wrong timing for the government to remove sugar subsidy now since citizens are facing hard to survive in this high inflation period. I don’t think they are solving the problem for citizens but put more burdens to us. If they want to remove, better not this time, try to postpone the implementation to some other day in future. Besides, they should think properly because sugar price increased will affect food prices to be increased as well. It’s no doubt that the number of diabetes cases is increasing but the government ought to educate the people to use less sugar rather than just simply removing sugar subsidy. 

            The sugar price increased would not have desirable effect on sugar consumption. People would still be drinking their coffee and Milo no matter the subsidy is removed or not. Just take a look at the tobacco industry. The prices of cigarettes have been increased few years ago, but there is no sign of people quitting. 

            The government has decided to maintain the current sugar price despite the hike in the commodity's price in the world market, Domestic Trade, Cooperatives and Consumerism. Sugar is sold at RM2.30 a kilo now. By retaining the price, the government subsidy for sugar will increase by more than two fold to 54 sen a kilo from 20 sen at present. The total subsidy for sugar will swell to RM567 million this year from RM262.41 million last year. Ismail Sabri said the government has to increase the sugar subsidy to keep the current price level. "If sugar price is raised, it will trigger a spiral effect, causing the prices of other products to also rise.” "As such, the government has decided to maintain the sugar price so that the people will not feel the pinch eventhough sugar price has increased in the global market," he said. 

            Is the SRP of sugar at P52/kg reasonable? Well, if we compare this price to the prices prevailing for example in India which is a very large producer of sugar the answer is yes because the prices in India come up to 51.50 rupees/kg which is about P52/kg in the Philippines. If we are comparing that P52/kg with the landed price of imported sugar, including tariff, the answer is also yes because that price would be, including the retail mark up, something like P68.12/kg. 

            Conclusion, we as citizen of Malaysia could not be more thankful that our government and other parties are controlling the price of sugar for the benefits of consumers. We would not want to see that the price of sugar affects our food heaven in the market which is the only good thing in Malaysia, we have all variety of food. 

Car Taxation in Malaysia

Teh Fu Min (0906A72754) - Section 9 - First Article

Car Taxation in Malaysia

            We Malaysians love cars. It’s probably the first major purchase we make as soon as we land a job. But we still complain that cars in Malaysia are overpriced. Ever wondered why? Where does all the money go? Are we willing to pay that much money?

            Let’s say my dream car, the Volkswagen GTI, in UK it cost about 24 thousand pound which is around 120 thousand ringgit, but in Malaysia it cost about 215 thousand ringgit. That’s twice as much, why do cars in Malaysia cost so much? We Malaysians love our cars but more than love our cars, we need them. We need these cars to work, study, or anywhere else. We can’t just depend on public transportation. The question is though, with more and more cars in the market, why do cars still cost so much? So much that we need to take loans from bank in order to buy these cars which are similar to those kind of loans for houses. But unlike houses, across a period of time the prices of cars won’t go up, they go down. So when we finish paying for the car, the car maybe worth nothing.

            Based on an article, The Royal Malaysian Customs director-general today came out in support of maintaining car taxes, saying it added up to RM7 billion annually to the Treasury that was used to aid development projects nationwide. “About RM6 billion to RM7 billion are collected annually just from vehicle’s excise duty. Imagine how many schools and hospitals we can build with that amount of money,” Datuk Khazali Ahmad was reported as saying by English-language daily The Star today.

            Malaysians pay extreme prices for cars mainly because of the protection afforded to national carmaker Proton since 1984. Car buyers must pay import and excise duties as well as sales taxes that translate into some of the highest car prices in the region. Excise duties, which form the bulk of car taxes, are imposed on foreign-made and local-made cars alike. A recent income survey found that a household earning RM3000 a month could spend up to 50 per cent of its income on maintaining a car. A cut in car duties — which currently run as high as 105 per cent — could help stimulate the economy by boosting disposable income and reducing household debt burden.

            The demand of imported car will swing based on the market. When the economy is good, people intend to buy imported car although local made car is much cheaper. This is because some people had the mindset that our local automobile industry facilities is not that advance. Based on one of the article by the star, local cars are giving more problems and need to be repaired compare to imported cars. Many more are buying imported branded cars because they are showing off and they can’t pay their loans according to time.

            In Malaysia, a cut in car duties — which currently run as high as 105 per cent — could help stimulate the economy by boosting disposable income and reducing household debt burden, analysts say. Their comments come after Pakatan Rakyat’s (PR) made an electoral pledge to slash the hefty excise duties and taxes on cars that have caused Malaysians to bear some of the highest sticker prices in the world. Economist Datuk Mohd Ariff Abdul Kareem said that consumers will be “very happy” with the tax cuts as cars, which are currently priced far above what consumers in many other countries pay, will become more affordable. Now with the Global University of Islamic Finance, the move to put more disposable income in people’s pockets would help the economy as it becomes more dependent on domestic consumption to drive growth. The senior economist suggested one way was to shift the tax to the petrol pump so that consumers are taxed by how much they drive rather than on the car itself. Such a move could also help boost the usage of public transport. Malaysians are currently paying eye-watering excise duties of between 65 and 105 per cent on cars they buy on top of 10 per cent in sales tax, which means that if a Malaysian consumer pays RM100,000 for a car, as much as RM55,000 goes to the government. The duties are a lucrative form of revenue for the federal government but have also helped push up household debt levels in Malaysia which, as a percentage of Gross Domestic Product (GDP), are the second highest in Asia. Apart from the duties, a system of APs is given to a select number of companies and car importers, allowing them to bring in cars and charge up to RM40,000 for the permit to the customer.

            After long story, the main reason of why cars cost so much in Malaysia is because we have the National Automotive Policy (NAP) in another word, we have Proton. Hence, all the taxes we payed is not just for creating a national car, it’s about creating a national automotive industry. So the gamble was to create a high technology industry that Malaysia can use to industrialize, so in order for that to succeed, we as Malaysian need to buy a large amount of local car. So in order to encourage us to buy local cars, the government put in taxes, approved permit (AP), on imported cars to raise the price of those cars.

Why Do Companies Offer ‘Buy One, Free One’ Offers?

Jackie Phoong Kah Wai (0312734) - Section 9 - Second Article

Why Do Companies Offer 'Buy One, Free One' Offers?

            Based on the article ‘Buy one free one- A price experiment?’ in Economics for Business by Fraser I. and Mc.Graw, I have decided to write on how big companies price their products based on the price elasticity of demand for their product.

Credits to Veley, Bradford.

            How does a firm indicate a pricing plan that offers the best price in the interest of achieving the firm’s objectives and what are the factors that are involved in this decision making? A firm can maximize the amount of profit made, maximize the market share for the firm’s product or maximize the firm’s total revenue. These objectives cannot be achieved simultaneously as there is often a trade off. For example, a firm may wants to maximize market share for a product by attracting a larger customer base by reducing the price of the product. The firm could be sacrificing profit by lowering its price. Therefore, we would assume that the best price is achieved when the firm meets its preferred objective.

Simple diagram of equilibrium price determination.

            How exactly is the price determined? We often use demand and supply curves to determine the equilibrium price which is the point at which both the curves meet. Is the equilibrium price the best price in the interest of the firm and consumers? Many may think that equilibrium price is the price that both parties agree on but then the equilibrium price is not often the best price if the objective of the firm is not achieved. 

            When a national supermarket is selling wide range of products from household items to beverages, a small change in price can generate huge changes in total revenue. Firms are expected to price items relative to their cost structures. If a firm wished to make profit, then the price must certainly be greater than the costs. If the firm is optimizing for market shares which is to increase quantity sold in the market, then the price set cannot fall below the cost of making product or a loss is incurred.

            To understand consumer behavior, a demand curve is used to represent the quantity demanded by the market force. According to the law of demand, the higher the price of the product, the lesser is the quantity demanded while everything remains unchanged (ceterus paribus). On the other hand, while price falls, ceteris paribus, the quantity of the product demanded by consumers will increase. 

            This negative relationship between price and quantity demanded is often a key factor in price determination. Why do firms use offer such as ‘buy one get one free’? They do so as they are reluctant to reduce the price of their product. Reducing price of a product will likely to induce a retaliatory price war from rivals thus making the market more and more competitive and loss may incurred for all firms in the market itself. As society is more materialistic and brand-aware, lower prices may be a signal to the market that the product is of inferior quality. A ‘buy one get one free’ offer allows the price to be maintained but the effective price for consumers is halved. Under this offer, consumers are more willing to demand for the product thus boosting sales which in turn increasing market shares even if there is no profit maximization.

Relationship between price elasticity of demand and total revenue.

            Does this ‘buy one get one free’ offer always work? To clarify this, we need to be able to measure the price elasticity of the product. Price elasticity measures the response of demand to a change in price. There are three types of price elasticity which are elastic, inelastic and unit price elastic. When the price elasticity is elastic, a small change in the price will lead to a large response in the quantity demanded. The price and the quantity demanded always have a negative relationship. For inelastic price elasticity, a small change in price will result in a smaller response in quantity demanded. With unit elasticity, the portion of increase in price will be equal to the portion of decrease in quantity demanded and vice versa.

            To calculate total revenue, the price of a product is multiplied by the number of units sold. So, when should we increase or decrease the price in order to maximize revenue? When the demand is elastic, we should opt to decrease the price of the product because a small drop in price results in a large increase in quantity demanded. Even if the price of an individual good has been lowered, the total revenue increases as there is more quantity demanded. For example, we cut price of product by a 10% but there is an increase in 30% for quantity demanded, the total revenue will increase. If we were to increase price for a product that is price elastic, a slight drop in price will induce a sharp drop in quantity demanded thus lowering total revenue. On the other hand for demand inelastic product, we should increase price if we were to maximize revenue. A large increase in price will only results a small drop in quantity demanded. Although the firm loses some market shares, each product is generating higher revenue contributing to higher total revenue. When the firm decrease price of the product that is demand inelastic, a sharp decrease in price only attract a small amount of new customers thus total revenue is less than before. To put it simply, dropping prices raises total revenue if demand is inelastic while prices should be increased in order to increase total revenues if demand is inelastic. The best price occurs when price elasticity is unitary which is exactly in between the elastic and inelastic region. With unit elasticity, total revenue does not change as either increase or decrease in price will affect the total revenue as the change in quantity demanded is always proportional.

            Depending on the firm’s objective, firms may not always target price elasticity equal to 1 as they may not have revenue maximization as their objective. They may wish to maximize market shares or profits. Changing of price involves planning of new pricing plans and the communication of price changes to retailers of the product. As a result, change can be costly as a reduction in price could lead to price war from competitors. Furthermore, price elasticity of demand of a product may be wrongly interpreted thus making a wrong decision having total revenue falling. Therefore, it is important to understand fully on how to measure the elasticity of demand for a product.

Does a Higher Price Attract Higher Demand?

Jackie Phoong Kah Wai (0312734) - Section 9 - First Article

Does a Higher Price Attract Higher Demand?

            Based on the article ‘Does higher price attract higher demand?’ in Economics for Business by Fraser. I and Mc.Graw, I have decided to write on how tastes and preference affects shift in the demand curve and not a move in the demand curve.

Price elasticity of demand graph.

            As economics students, we learnt that there is always a negative relationship between price and quantity demanded. The law of demand states that consumers buy more of a good when the price is lower but less if the price is higher when all other factors remain constant (ceteris paribus). However, there are certain problems that arise when this relationship is strictly adhered to. For example, designer clothes and perfumes would not be purchased if they are priced too low. Does this mean that a positive relationship do exist between price and willingness to demand luxury items? The answer is no, since all products have a negative demand curve even as this seems to be an appealing idea. Even if you are rich, you would not have infinite income to spend as you will still have a budget constraint.

            Assuming you are very rich but with a budget constraint of RM 500 000. Your designer clothes cost RM 250 000 a year, beverages another RM 100 000 and private jet as your transportation another RM 100 000 annually. If your designer decided to increase the price of the clothing to RM 300 000 a year, you are faced with choices to be made as your spending cannot exceed the budget. If you continue to purchase the same amount of designer clothes for RM 300 000 annually, you will have to cut back on the amount of beverages and/or jet usage. Alternatively, you could purchase less of designer clothes amounting to RM 250 000 while maintaining the quantity of beverages and jet usage. Another choice is to reduce all three spending amounting to the budget, perhaps spending only RM 275 000 on designer clothes and the extra RM 25 000 can be reduced from the amount of beverages that you drink and jet flights. 

            From the example above, it is important that we understand that when one product has its price increased, this limits how much money you can spend on all goods and services that you like to consume. You have to make choices and a trade-off is occurred between quantity of designer clothes, beverages or number of flights. If you decrease the quantity of clothes purchased in order to retain consumption of the beverages and jet service, the demand curve for designer clothes should have a negative slope. This is because an increase in price of a product will cause the quantity demanded for the product to be decreased according to the law of demand.

            Therefore, how do we explain the positive relationship between price and quantity demanded for a luxury good? As more and more consumers are brand-aware and prefer products that have an element of exclusivity as they want to achieve a certain status by purchasing a certain product. Most consumers view high price tag on a product indicates not only that the product is exclusive but also a sign that the product is special as it is harder to be afforded by most people. A low price would not achieve the same image as consumer will think that product is easily available for all thus they perceive it as a non-exclusive product. High price tends to attract particular consumers into the market. This leads to the demand curve for that product to be shifted out to the right as shown in the diagram below thus affirming that there is a positive relationship between price and quantity demanded for the product is associated with a change in tastes and preferences.

            Most firms that have strong brand equity thus commands premium prices for their products but they still have a large customer base for their products as the demand for these products are tied to tastes and preferences even there are cheaper alternatives. In order to maintain their products’ exclusivity, they keen to avoid their product being sold at discount prices under most circumstances even if their products have no demand. The high price of the product and the distribution of the product through licensed retailers which are strictly regulated are deliberately managed in a way to promote the product’s high-quality image. Firms usually will develop their products to fulfill consumers’ tastes and preferences to an extent that consumers will always expect their products to be expensive and more exclusive than cheaper alternatives. A high-price image of a product must be protected as low price would have detrimental effect on consumers’ tastes and preferences. This will in turn results the demand curve for the product to shift to the left, reducing the amount of products sold if the price is lowered.

            In conclusion, the taste and preference for a product would only shift the demand curve to the right if there is a positive improvement or that there is shift of the demand curve to the left when there is a switch in taste and preference. When demand curve is shifted to the right, more products are being sold at any given price. When demand curve is shifted to the left, fewer products are being sold at any given price. Change in tastes and preferences can only be reflected in shifts in the demand curves and not movement along the demand curve.

The Great Consumer War: A Tale of Two Smartphones

Imrann Teo (0303740) - Section 9 - Second Article

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The Great Consumer War: A Tale of Two Smartphones

The Apple iPhone and the Samsung Galaxy smartphones held side-by-side.

            Recently, Apple won Samsung in a legal case which cost Samsung $1 billion, just one of the many ongoing conflicts between the two mega corporations, but one which brought into the limelight this whole issue based on consumerism. An article on TechCrunch posted on October 7th, 2012 by Ingrid Lunden discussed this corporate war and its impacts on the consumer by looking at some surveys done by other organisations. I want to further dissect this complicated situation and discover what effects it has not only on the consumer, but on the companies themselves and how it affects some economies.

Just a decade ago, smartphones were considered as novelty devices, but are now considered necessities for many people. With the advent of social networks and mobile internet, technologies such as social networks provide further incentive to the consumer, as more people gain access to instant, unlimited information, an indispensable advantage in today’s competitive world. At the forefront of this burgeoning market are Apple Inc. and Samsung Corp., two of the largest and most popular smartphone producers in the world, with Apple holding 17% of the global smartphone market share, and Samsung holding 33%. The two iconic brands of smartphones from those companies are Apple’s iPhone and Samsung’s Galaxy. An on-going issue is the war between Apple and Samsung, as they fight for control over the global smartphone market. Both Apple’s and Samsung’s line of branded smartphones have powerful influences on economies and consumers, and this in turn is affected by many economic principles, namely, the laws of demand and supply, the price elasticity, and oligopoly market characteristics, as Apple and Samsung can be considered oligopolists in the smartphone market.

Source: International Data Corporation.

It would be worthwhile to discuss the price elasticity of demand of these smartphones before continuing. Either one of these smartphones, the iPhone or the Galaxy, are very close to each other in terms of substitutes. Therefore, if the iPhone were to increase in price by a large amount, the demand for Galaxy phones would definitely increase by a lot. This is because the two products are differentiated only by a few factors, such as design and brand. Their features and functionalities are relatively similar. In terms of proportion of income spent on these goods, these smartphones are fairly expensive for an electronic device, especially for young adults (the main demographic for these devices), thus one can expect that this contributes to the high elasticity of the prices of these devices. Furthermore, these phones can be considered luxuries, because a person would only actually need simple phones without the added features to make calls and receive messages. It is clear that the price elasticity of demand for smartphones plays a vital role in this battle of corporations, and it influences many of the decisions of these companies.

            Apple Inc. is one of the highest valued companies in the world right now, and being based in America, it has great power over its economy. However, the Apple iPhones are only designed in America, the company actually outsources almost all of the production to Foxconn, a Chinese manufacturer. One of Foxconn’s largest factories, in Shenzhen, actually employs upwards of 300,000 employees. Providing so many jobs has definitely reduced the unemployment rate in that region, and has also raised the living standards of the employees. There is however, no shortage of supply of workers for the factories, because the Chinese people are rapidly transforming themselves from farmers to more industrial jobs. This high supply of workers means that the wages of these workers are comparatively lower than that of other countries, conforming to one of the basic principles of supply and demand. The executives at Apple stand by their decision to outsource, saying that "the speed and flexibility is breath-taking, there's no American plant that can match that.” The cost of producing smartphone parts in China has to be lower than the cost of transporting those parts to America, otherwise Apple wouldn’t have outsourced at all. By cutting costs on production, Apple is able to provide their products at a cheaper price, their iPhones, which in turn increases the demand for them.

The Foxconn factory in Shenzhen, China.

            Apple and Samsung are both players in a large oligopoly. Other oligopolists in the smartphone market would include RIM and Nokia. Having dominated the market, these few sellers have to know what each and every one of their competitors are up to, because every decision made by them will affect every other seller. They are limited by the information they have about their competitors, and many of them go to great lengths to acquire that information. These few companies are very large and completely interdependent, one of the key features of an oligopoly. An analogy for this situation is chess, where each oligopolist has to predict and calculate the many moves and countermoves his competitors can make. For example, if one of the corporations plans a price reduction, the other oligopolists may well follow suit, triggering a dangerous price war. Thus, it can be seen that the oligopoly that Apple and Samsung find themselves in is a highly dynamic market has pushed them into somewhat of a corporate war, where they both have to play their cards smart and fast in order to become the victor.

Source: Euromonitor International, (2012).

It may be helpful to give a brief overview of the smartphone market and how the income effect has a part in it. The global market for smartphones began maturing in the late 2000’s, but in 2012 have begun experiencing slight stagnation of demand due to greater amounts of saturation of smartphone brands. Now, the demand has shifted to late adopters of the device, most of who are from lower income groups. Examples of these lower income groups come from countries like China and India, with huge populations; definitely a market these global smartphone manufacturers need to get into. This is one of the reasons why Samsung structures its brand of Galaxy phones around various income demographics in order to capture a lot of the demand of the global market. Apple has yet to cater to lower income groups, which is one of the weaknesses of their line of smartphones. However, such countries with large low-income populations are experiencing rapid economic growth and increasing standards of living and income. As China, India and Brazil’s massive populations are better able to afford goods, they will be able to purchase better smartphones, resulting in a gigantic market of consumer to reach. These countries are a figurative gold mine for smartphone oligopolists like Apple and Samsung.

Therefore, it has been shown that the Apple and Samsung definitely have considerable influence on economies, and are governed by many microeconomic principles. Their smartphones are at the forefront of this rapidly expanding market. It remains to be seen who will emerge victorious in this war of consumer electronic devices, seeing as to how these devices are so similar in function to one another. As tensions escalate between these two corporations, we can only imagine what will happen next.