According to the article (The Star 14 October 2010), Rubber prices hit new high on tight supply, natural rubber prices in Malaysia climbed to a new high. Official data showed The Malaysian Rubber Board centrifuged latex price rose 1% to RM7.62 a kg. It is the highest rate since the previous peak of RM7.71 a kg. That should be good news for local rubber plantation owners, who are mostly smallholders but not for rubber glove makers. The glove makers company – Top Glove Corporation’s has been hit with this whammy from rising latex input cost. Besides, the tyre grade Standard Malaysian Rubber 20 (SMR 20) rose 2.4% to a new high of RM11.65 a kg. Meanwhile, concerns over tight supply due to weather havoc and increased purchases from China.
The rubber prices had increased and the article stated that this incident is a very good news for the local rubber plantation owner. Why? This basically link to the law of supply. The law of supply says the higher the price of good, the greater is the quantity supplied; which mean that the price of the rubber increase, the supply of the rubber plantation owner would be greater. It is beneficial to the rubber plantation owner because with the high price of rubber, the rubber plantation owner can earn higher profit compare to the previous profit. When their profit is going up, they are willing to supply more goods to earn more and more profit. The law of supply results from the general tendency for the marginal cost of producing a good or service to increase as the quantity produced increase. Producers are willing to supply a good only if they can at least cover their marginal cost of production. Meanwhile, rubber producer already has an inelastic demand with their good which shows that their market would not decline easily and stabilizing to cover their marginal cost of production. Inelastic demand of rubber gives the rubber producer increase their total revenue with the increasing in rubber price.
The example of a supply curve for rubber :
From my understanding of a supply curve, the example of supply curve for rubber is shown above. At point A, the rubber priced at RM7.22 with 20 thousands of rubber pack a week for quantity supplied. However, at Point B, the cigarette is priced at RM7.62 with 22 thousands of rubber pack a week for quantity supplied. A supplied curve says, a rise in price, other things remaining the same, bring a increase in the quantity supplied and a movement up along the supply curve. Thus, with the price went up, which is movement up along the supply curve from point A to point B, the quantity supplied increased by 2 thousand of rubber pack a week.
In other angle, we see about the demand site. The natural rubber prices increase cause the price of goods of rubber materials made will also increase. Let’s take an example of tyres, in increasing price of rubber, the price of tyres will also increase, meanwhile, the demand of tyres might possibly decrease. The law of demand says, the higher the price of a good, the smaller is the quantity demanded. It might be the income effect of human being. When the price of a tyre rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the tyre decreases. The demand decrease may also affect the total revenue of some goods of rubber materials made seller. Because of the price increase, the demand is slowly become elastic and the seller’s total revenue would also decrease. To protect their revenue earned, the sellers may fix their goods to the previous price and pay the entire tax or price. In results, most people will seek for the cheaper good and it cause the demand slowly inelastic which can increase the seller’s total revenue and profit.
For rubber, the effect of climatic conditions can bring into a great influence on market supply. According to the article, they have a weather havoc that causes a tight supply. This is because the unfavorable weather condition will lead to a poorer harvest, lower yields and therefore supply is decrease and lead to a tight supply. When supply decreases, the quantity decrease and the price rises. Changes in climate would affect the prices of rubber and rubber are often used as ingredients in the production of other rubber products such as glove and tyres. For example, higher rubber prices can lead to an increase in the price of glove and tyres. In this period, price of all the rubber made product will increase. Thus, during the bad condition season, the supply of rubber will decrease and the price of rubber will increase, the supply curve will shift to the left.
As a result, rubber price increase that beneficial to supplier is link to the law of supply and the movement along the supply curve will move upwards. Because of an inelastic demand for natural rubber, the suppliers are profitable when the price of natural rubber is increased. Demand for rubber product may decrease because of the increasing of price. Climate condition can lead a certain product increasing the price.
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