Microeconomics Individual Assignment

In the market, some of the industries have barriers of entry which rejects some firms from participating into some markets, Some of the fields that have barriers in entering would be the oil and gas industry. In Malaysia, there are several brands of oil and gas companies who runs the petrol stations namely Petronas, Shell, Petron, Caltex, Mobil, Esso, and Bh petrol. However, the petrol price in Malaysia is being controlled by the Government of Malaysia and it is also affected by the international oil prices.

Petronas is a company wholly own by the Government of Malaysia (Petronas, 2012), while the others are public listed companies with their headquarters located in other countries, such as Petron, which is from Philippine and Shell, which is from Netherland. The price for the petrol in Malaysia is controlled by the Government of Malaysia by way of a subsidy for petrol in Malaysia (Asia News Network, 2012).

In this market, which also known as an oligopolistic market which is dominant by a small group or a few companies in the market, in which the prices will be set or compared between these few companies only due to the limited selection. The reason behind this is because of the barrier of entering the market. There is difference between competition and barriers of entry, as the competition would make the market more effective and efficient because of the competition between each firm that would hope to maximize the profit and also satisfy their customers’ needs in order to keep their customers to continue on using or purchasing the product they are selling. However, the barrier of entry would block the firm from entering due to the huge amount of manufacturing costs, expensive material costs, and also from the government regulations (Betsy, 2012). In the petrol market, company would have to invest in the research of petroleum and harvesting, which needs large amount of money to set up the factory for the production of petrol. Furthermore, countries that sell oil and gas had already sign contracts with these existing oil and gas companies to provide the oil that they need to further process into petrol, diesel and others. There is also another reason that restricts the other firms from entering the petrol market that is the government. The government is not a firm that seeks for profit maximization therefore they would want to meet the best expectation of petrol consumer of petrol because it is a need for most of the people around the world who own a car.

Figure 1 Oligopoly Market

The figure above shows that how does an oligopoly market price making looks like. The best profit maximization for setting the price is when marginal cost (MC) meets with the point of marginal revenue (MR) which would be the best number of sales which maximises the firm’s profit and therefore selling at the price that lands on the average revenue (AR), also recognized as demand (D) for the oligopoly market is the most ideal because the characteristics of oligopoly and monopoly markets are almost the same as they are both the price makers in the market which means they have either less competitors or no competitor.

Figure 2 Subsidy

However, because of the subsidy from the government, consequently, the price has been decreased from the original higher price to a lower price, which would be more affordable for the consumer purchasing the item. As a result, as shown in figure 2, the demand is increased due to the lower price that is being subsidized by the government. Furthermore, the firms in the market would also supply the amount that is needed in the market as they are still getting the price that should be received by them at the price that they planned to sell.

According to The Star (2012), the government subsidy for the RON95 petrol disputes with the fluctuation of the global petrol price in the market as they announced that the price of RON95 will be remain at RM1.90 per liter regardless if the changing global petrol price. Therefore, there is a price ceiling for the RON95 petrol in the market which limits at RM1.90 per liter correlating with the subsidy given by the government.

Figure 3 Price Ceiling

           According to figure 3, the price ceiling is capped at RM1.90, therefore, the price would not go up any higher than RM1.90. The main purpose of having a price ceiling is to limit the firm to go any higher than the ceiling to protect the consumers benefit, as they would be able to purchase at a lower price which is more affordable as compared to the main idea of firms to maximize profit for the company.

            The price elasticity of demand can be used to determine how sensitive is the price affecting the quantity of demand in the market. In elasticity, there are five categories including perfectly inelastic, inelastic, unit elastic, elastic, and perfectly elastic. For price inelasticity, the price changes in the market only deals a little impact to the quantity demanded because it is a need for the consumer, however for price elasticity it means that the price changes in the market will make a great impact in the quantity demanded because it is a want for the consumer which is not a necessary item for them.

Figure 4 Summary of Registered Vehicle

As for the example being discussed previously, petrol has become a need in the market for a person who owns a car, they would not be able to use it without fuelling petrol for their car. In Malaysia, figure 4 shows the summary of reports for the total number of cars that is being registered in Malaysia (MAA, 2013). According to Motor Trader (2013), the total registered cars in Malaysia for year 2013 has reached 22 million and the population in Malaysia is only around 27.4 million. This shows that almost everyone in Malaysia owns a car resulting in petrol as the main consumption for cars has become a need in order to drive car.

As a result, the price elasticity of petrol would become an inelastic price demand in the market due to the characteristic of petrol that has become a need for the people in Malaysia who are driving a car. Therefore, the changes of price in petrol would not affect much the quantity demanded in the market which would leading to stability of the quantity demanded which in turn would increase or decrease in a predictable growth which would allowing the oil and gas company to supply enough petrol to fulfil the demand in the market.

Figure 5 Perfectly Elastic

However, in the market because of the subsidy from the government has made a price ceiling for RON95, which makes the elasticity for RON95 becomeing a perfectly elastic demand in the market. As figure 5 shows that the quantity of demand is a horizontal line in the market which demand can be at any point above, but the market equilibrium point is at the point depending on the total number of supply provided by the oil and gas company which that would be the maximum quantity provided in the market available for the consumer to purchase.

Moreover, in future the quantity of petrol demanded would become elastic to the price because petrol is not a renewable source hence it would exhaust one day. This would lead to a new trend seeing that the petrol is depleting making it scarce thus its price would increase rapidly due to lesser supply. The price increment would make petrol unaffordable for consumers leading to a big impact to the market.

In conclusion, petrol is one of the restricted items in Malaysia’s market that has subsidy from the Malaysian government and had been set a price ceiling of RM1.90 per litre for RON95. Furthermore, it is inelastic to the price demand in the market as it has become one of the needs of people in Malaysia which is indispensable. In additional, when petrol is being fully harvested, it the market would result in a great change that impacts the market creating a different situation. Therefore, scientists are looking for another substitute item to replace petrol in order to decrease the total number of petrol being consumed in the market. Hybrid cars are introduced to lessen the role of fuel being the primary consumptions for vehicles by way of the car using both electricity and fuel to generate energy.

Reference List

Asia News Network, 2012. RON95 petrol subsidy to continue. [online] Available at <http://www.asiaone.com/News/AsiaOne%2BNews/Malaysia/Story/A1Story20120610-351614.html> [Accessed on 5^th June 2013]

Betsy Gillette, 2012. Innovation America’s Journal of Technology Commercialization : Competition vs. Barriers to Entry. [online] Available at <http://www.innovation-america.org/competition-vs-barriers-entry> [Accessed on 5^th June 2013]

MAA, 2013. Malaysia Automotive Association. [online] Available at <http://www.maa.org.my/info_summary.htm> [Accessed on 5^th June 2013]

Motor Trader, 2013. Motor Trader : 10 facts about Malaysia’s vehicle population. [online] Available at <http://www.motortrader.com.my/news/10-facts-about-malaysias-vehicle-population/> [Accessed on 5^th June 2013]

Petronas, 2013. Petronas : About Us. [online] Available at <http://www.petronas.com.my/about-us/Pages/default.aspx> [Accessed on 5^th June 2013]

The Star, 2012. The Star Online, RON95 petrol subsidy to continue. [online] Availble at <http://thestar.com.my/news/story.asp?file=/2012/6/10/nation/11451141&sec=nation> [Accessed on 5^th June 2013]