The
article that I have read recently on The Star Online which published on 6th
October 2012 which was mentioned about parents would like the government to set
baby milk as a price controlled item. The news shows that burden for parents are being increasingly
because there is an increase in price of baby milk. Some of them even forced to
buy the cheapest and lowest quality baby milk that available in the market for
their babies in order to save up their living cost. Many parents are unable to
cope with the rising cost of baby formula, since baby milk prices remain
volatile, a suggestion has been made by them, that is the government should
take action and provide a strong price controls for the product.
In my viewpoint, this problem will
occur because baby milk is considered as an inelastic product. This means that
even if the prices of baby milk are high, people will still buy them. Some may
argue that parents can still buying cheaper baby milk sources, but how many
parents would actually take the risk that potentially harming the growth of
their own child? This is why baby milk consider as inelastic. Another
assumption that can be made to prove that baby milk is inelastic is to see the
proportion of income spent on baby milk. In this way, many business firms
understand that when the price of baby milk increases, their total revenue
increases. This business strategy is a concept very simple for firms to use.
Most firms realize that reducing prices for inelastic products will only mean
that they will make less money. Since, prices of baby milk will not be going
lower anytime soon, it is only logical that parents demand a price ceiling to
be imposed.
Price controls are
usually implemented when
policy makers think that the market price of the current price of goods or
services is unfair. Price ceiling is a legal maximum on the price at which a
good can be sold. In anywhere, anytime, of course buyers of any goods always
want a lower price while sellers of any goods always want a higher price, the
interest of these two group conflicts when price ceiling
being implemented.
The price ceiling should be set below the natural market equilibrium price so that it is
effective. When the
price ceiling being implemented, the price of baby milk will fall below the
equilibrium price, in this way parents can purchase baby milk at a
lower price and will likely lead to increased demand. In the other side, when
price of baby milk fall below the equilibrium price, supply can be expected
to drop as suppliers are
unwilling to supply a high quantity at a lower price.
However, when a price ceiling is set, a shortage occurs, it will be represented by a gap
between quantity demanded and quantity supplied. Inefficiency occurs
since at the price ceiling quantity supplied the marginal benefit exceeds the
marginal cost. This inefficiency is equal to the deadweight welfare loss. For
the price that the ceiling is set at, there is more demand than there is at the
equilibrium price. There is also less supply than there is at the equilibrium
price, thus there is more quantity demanded than quantity supplied.
A
price ceiling may cause an increased of the time spent on searching activity as
a shortage of supply occur. When people are unable to buy baby milk, feelings
of frustration that will soon develop into desperation will exists. When people
are desperate, they are willing to do many things in order to get what they
hope to have it. Since a great demand for baby milk exists, black markets will not
let go such a great opportunity to make money. As a result, people will turn to
black markets in order to get baby milk where they will be required to pay very
high prices. An illegal black market will also operate alongside the legal
market for baby milk with a price ceiling. A black market will arrange for
transactions at prices much above the price ceiling as there will be willing
demand at the price due to a shortage created by the price ceiling. In
addition, if the price ceiling is set too low, the prices people have to pay
for baby milk will be even higher. When that happens, the people end up worse
off than they were before the price cap was set.
While a price ceiling is able to
provide cheap goods for consumers, it is riddled with inefficiencies. A price
ceiling below the equilibrium price for baby milk will cause underproduction
and reallocation of resources by the producers with no bring up any benefit for
consumers. This creates a deadweight loss as producer and consumer surplus
shrinks. On the other way round, when the price ceiling being implemented by
the government. This mean that price of the baby milk is actually decrease. The
demand for the baby milk has increased when the price had decreased, but then
demand for the baby milk has decreased as the price had increased. When other
things remain the same, price for goods had increased and the quantity demand
for the good has decreased, is it known as the law of demand. The law of demand
will result from substitute’s effect and income effect. Substitutes effect is
when the relative price which is opportunity cost of a good rises, people will
seek substitutes for it, so the quantity demand for the good decreases.
Therefore, people will buy the cheaper product to replace the expensive product
when they can’t afford the high price in order to save up the living cost.
However, it will leads to income effect in the law of demand. Income effect is
when the price of a good rises relative to income, people cannot afford all the
things they previously bought, so the quantity demand for the good will
decreases. People’s income has not increased but they are forced to buy things
which the price is in the higher price level. The price for the baby milk has
increased by the manufacturers but the people’s income remain the same, people
will not able to afford the previous baby milk they bought, so they have to buy
the cheapest milk which will cause the demand for the previous baby milk
decreases.
Besides
that, even the supply will has some changes. As I know, suppliers will never do
a business without gaining high profit, so it has fulfill the law of supply
that when other things remaining the same, the higher the price of a good, the
greater the quantity supplied. Moreover, the law of supply results from the
general tendency for the marginal cost of producing a good to increase as the
quantity produced increases. Producers are willing to supply a good if only
they can at least cover their marginal cost of production. In this baby milk
case, the suppliers which are the manufacturer will supplier even more
expensive baby milk in the market. Every manufacturer wants to gain profit from
the baby milk and they want to maximize their profit. These actions will not
benefits everyone as not much people are able to afford the baby milk in higher
price, the demand for it will decrease and at the same time the suppliers will
not gain their profit from here.
Last
but not least, I would like to make a conclusion that setting a price ceiling
on baby milk will not be the best solution in order to solve the burden of
parents. Since baby milk is considered a financial burden, there still are many
way the government can use to help citizen to solve the financial problem. The
government can offer help in other areas financially to low and middle income
earners so that the people will have more disposable income such as providing
some exemption on housing loan stamp duty; providing free medical health
check-ups at government hospitals; providing free tuition class for student;
and maybe even reduce taxes. In other words, offering other money incentives
would be a better option such as the government can introduces subsidies for
baby milk products. By introducing subsidies, the government can drive down the
price for baby milk in the market. A subsidy given to sellers to lower down the
cost of production and encourages firms to expand output. Therefore buyers
benefit from lower prices. As the introduction of subsidies happens, this will
cause a movement of the supply curve to the right by the amount of subsidy.
This increases the quantity supplied and decreases the price for baby milk.
However, this method also has its repercussions as the government may incur
more costs as it provides subsidies for the product.
By:
Name: Liew Sin Yee
Student Id: 0314495
Bachelor in International Business and Marketing.
Dual awards in University of west of England.
