Samsung's New Marketing Strategy

This article is taken from The Star E-newspaper which was published on 5th of October 2012. This article is talking about Samsung will be selling its product in Tesco Extra Malaysia. The new market channel which using by Samsung will influence both Tesco and Samsung’ sales and economy.

Samsung’s products are selling in many merchandise and retail shops in Malaysia. Samsung are trying to make its products available in every place. This can easy its customers to buy its products anywhere. In order to gain the market share, Samsung has been partner with Tesco Extra Malaysia, so their products can be selling in this hypermarket.

‘The Star’ newspaper had published a new about Samsung Company will sell all their products at Tesco Extra. Samsung has partnered with Tesco Malaysia to introduce Samsung World shop-in-shop (SIS) concept retail experience in a hypermarket. This collaborate strategic is known as a good channel for Samsung to promote its product. In a same time, Tesco Malaysia also gains benefit also because of the new department will be set up in Tesco Extra and this can attract many consumers come to visit Tesco. Samsung had mentioned all the latest innovative products will be exhibit at designated Tesco Extra stores. It aims in providing all the customers with a different experience and understanding about all its smart living solution.

The success of Samsung Company because of it had archived and answered the 2 big economic questions. The first question which was already answered by Samsung Company, how do choices end up determining what, how, and for whom goods and services get produced.  In the question of what to produce, Samsung had produced many varieties of goods and services to the customers like audio-visual studio, digital appliances, cameras etc. The variety of the goods and services to the customer is complex and all is focusing on electrical and electronic devices. In order to increase its products, Samsung need to increase the price. This is one of the disadvantages to produce more the products. When the price increases, the demand of Samsung’s products will be decreased. In the question of how to produce, there are several factors of production are grouped into 4 categories which are land, labor, capital and entrepreneurship. Samsung chose Malaysia to produce its products because it feels Malaysia is a prosperity country and the rental is cheaper when comparing to other countries. Set up a new Samsung store which collaborate with Tesco is also a new strategic and channel which can help Samsung to gain more profits. But, it can also increase the Samsung expenses. In order to cover its expenses, Samsung need to increase its price to get profit. When its price increases, the demand of Samsung’s products will be decreased. When the supply is higher than demand, surplus of Samsung’s products will be occurred. Although ‘Samsung World’ which allocates in Tesco extra Malaysia is an good idea to promote its products, I feel there are not many people will buy Samsung’s product at there. Firstly, the price of the Samsung’s products will be higher than other retail shops because Samsung needs to pay Tesco a high rental fee. Thus, Samsung need to impose the rental fee to its products and the price of the products will become higher. In order to achieve the market equilibrium, Samsung needs to decrease its price by decreasing supply. When the price of Samsung products decreasing, the demand will increase. 

Today, Samsung is a well-known Korea company which product many range of home appliances and electronic devices. As we know that, most of the electrical and electronic devices are considered as luxury goods. Besides this, Samsung Company does not just only selling smartphone, it also provides several kinds of home appliances and electronic products, and it’s ranging from mobile phones, digital appliances, digital imaging devices, IT products and audio-visual studio. That means Samsung Company do not provide only 1 kind of product, they will price their products at the cost from low to high according to consumers’ needs. This can be concluded that the demand of consumers to the Samsung products is quite high. But, when Samsung set its price above the market equilibrium, the demand of Samsung’s product will be decreased.  This is because there are many options that provided by other company to satisfy the consumers’ needs. Just like LG and Panasonic can be substitute for Samsung’s products. When the supply of Samsung is decreasing due to need to decrease its own price and the demand will become high, the shortage will be occurred. There will be a lot of black market appear in this time. This is because many people wonder to buy it and the demand will become very high plus the restriction of production, so this can give other seller opportunity to increase the price of the products to get more profit. The higher of the shortage will cause more of the black markets appear.  

The substitution effect of demand also indicates that consumers have many choices, once they find out some of the products of Samsung is not suitable to them due to the price is too high they can seek for another products to replace the current 1 which is more cheaper and able to satisfy their needs. LG and Panasonic also provide wide range electrical and electronic products which can substitute for Samsung products. If Samsung set its price higher than these companies, consumers might switch their products to another brand. As a result, there will be a decrease of demand for Samsung’s products. Besides this, the complementary products of Samsung should be increased. This can increase the demand of Samsung’s products. Samsung and Tesco should provide more complement goods and sell them in Tesco Extra. For example, Samsung sell their latest innovative product in Samsung World, in a same time, Tesco can sell its accessories like cable, screen protectors, extension cable, casing etc. This can increase both Samsung and Tesco sales.

Now, I would like to talk about the price elasticity of Samsung and Tesco’s product. Most of the Samsung’s products are electrical and electronic devices. As we know, the values of the electrical and electronic devices are very volatile and flexible. If you buy a latest smartphone which cost around RM2000, after 1 year it will drop a 50% of its original price, it may only cost around RM1000. So, Samsung’s products are very elasticity. If the products which selling in the ‘Samsung World’ is higher than other retailer, its sale may drop due to all the consumers do more prefer cheaper product. In addition, the consumers will also make the price comparison before they buy a product. Unlike Tesco’s goods, it provides our daily necessity like sugar, flour, food etc. Thus all its products which provided by Tesco are inelastic. If Tesco increases its products’ price, the demand of the consumers will not change too much. This is because all the people also need to consume food for survive. As a result, there’s a good strategy and partnership between Tesco and Samsung to promote out their products. 

In a conclude sentence, I would like to give some comments in order to increase both Tesco and Samsung performance. Firstly, we know that Tesco is one of the largest retailer hypermarkets in Malaysia. Retail Samsung products in Tesco are one of the best channel for them. If Tesco can give a good deal for Samsung to promote its products, there’ll be increase the sales of Samsung. This is because Samsung can sell its products in a lower price. This is not only can benefit the Samsung can also Tesco itself. I feel that the increase of the demand of Samsung products in Tesco will also help Tesco to increase its consumer. 

Will Nokia win in this war of smartphones?

This article is extracted from The Star E-newspaper which was published on 5th of September 2012. This article is talking about the launching of new smartphone by Nokia which will be effect the economy and the smartphone markets.

We know that Nokia currently are making lose because there are many others strong companies appear to gain the market share. Does the new Nokia’s weapon will get back its market from Apple, Samsung and Google? Now I would like to discuss about the demand of the smartphone in the market and its price elasticity.

 The 21^st century is the new era of high technology; smart phone is one of the most important multipurpose communication tools in the world. Every people need a mobile smartphone to communicate, surfing and roaming every day. Nokia Company is one of the largest company which produce variety kind of mobile phone. In the past 7 years, Nokia’s was known as biggest and strongest mobile phone producer in the world, but its performance was not so well and lack of creative in these few years. In addition, many mobile phone producers had launched its latest powerful and multipurpose smartphones to gain the market demands. Because the strength of the competitors is powerful, finally Nokia Company had been driven out of the market in these few years.

Recently, ‘The Star’ newspaper published a new about Nokia Company had launched 2 latest smartphones (lumia 920 and lumia 820) which partner with Microsoft to compete against other smartphone producers especially Apple and Samsung. In order to get back its customers and make Nokia brand become more well-known, Nokia must set its phone prices become more affordable. When the price of the smartphone is high, the quantity of demand will be decreased. In a same time, when the price of the smartphone becomes higher, the quantity of supplied will be increased. When the supply is higher than demand, surplus will be occurred. This is because when Nokia set its price higher than other companies and many people cannot afford to buy an expensive product.

Nowadays, smartphone can also consider as luxury good. This is because the price range of a smartphone will cost at US$600 to US$800. As we know there are not only the Nokia Company produces the smartphones. There are many other big companies produce smartphone also, such as HTC, Samsung, Apple, Blackberry etc. If Nokia Company sets its phone price higher than other companies, the majority of consumers will switch their option to another. The switching of the product’s brand is called substitution effect. In the market, HTC, Apple and Samsung are the substitute for Nokia’s products. When all the Nokia’s consumers change their brand to these brands, the quantity of demand of the Nokia will be decreasing. There’s another factor might causes the quantity demand of Nokia decreased is income effect. When the Nokia’s prices rises continuously without any improvement of new idea and quality, consumers may not be able to afford to buy the Nokia’s products and causes the quantity of demand decreased. The change in demand of Nokia’s products can be influenced by the preferences of the consumers. This is because the Nokia’s products are lacked of new idea and creative. Today, we can know that the majority of consumers choose Apple and Samsung as their preferences because their smartphones’ design is more beautiful and attractive.

Besides this, the operating system they are using is more comfortable and easy. Operating system plays an important role and can be considered as compliment products of smartphones. This is mean by when the operating system is user friendly, there’ll be a lot of people to buy it. For example, Samsung Company provides more than 1 kind of the smartphones to its consumers such as Windows Phone, Android System and others. So, the Nokia will lose a lot of market to the Apple and Samsung. In contrast, the complementary can be used to increase the demand of Nokia’s products. A smartphone is used in conjunction with operating system, when the operating system of the smartphone is more user friendly, the demand of the smartphone will be higher. For example, the majority of the smartphone users feel iPhone operating system (iOS) is the most users friendly to the consumers, so the demand of the iPhone will be higher. Let say, Lumia 920 (the latest smartphone of Nokia) is using windows operating system which is the latest operating system used on a smartphone and it is developed by Microsoft. Everybody will feel the new operating system is unstable. Besides this, the available of applications for this operating system is not much like Android and iOS system. So the consumers will choose the most stable and user friendly of the operating system. Finally, the consumption on Nokia smartphones will be decreased. In the current view, there is only 1 way to increase Nokia’ sale and meet the market equilibrium, there is Nokia must decrease its price. When the price decreases, it’ sale will be increased.

Next, I would like to discuss about the price elasticity of Nokia smartphone. Elasticity means the responsive of the consumers willing to buy the goods. There will be very elasticity on a smartphones. This is because smartphones can be considered as a luxury goods today. If Nokia phone’s price increases 20%, the quantity of demand will be decreased 30%. Thus, the total profit of Nokia Company will be decreased. The most noticeable reason that we can determine is because there are many phone producer in the market. If the Nokia’s smartphones prices is pricing at above equilibrium price, many consumers will switch it to another brand of smartphones. Thus, it’s quantity of demand will be decreased a lot. The region where Nokia distributes its smartphones will also can cause the elasticity. If the incomes of  the country is much more high, the demand of elasticity of that good is much more higher. Besides, in this smartphone war escalates also forces all the smartphone producers to give a best good and services to the consumers. For instance, Nokia’s warranty policy is not easy to the consumers as they need send their phone to the original manufacture and wait for several weeks. Not like iPhone, all its consumers able to change a new device once they found there is a problem against on it within the warranty period. The competitive of the market make it more elasticity than a normal mobile phone. There’s another benefit of this competitive market, it can create equilibrium efficiency. Thus, the price of the smartphones wouldn’t be too high when it achieves equilibrium efficiency.

In a conclude sentence, I would like to give Nokia Company some suggestion. In order to increase its consumers, Nokia must set its price under the equilibrium price without decrease its quality and service. This can be improved Nokia’sales and gaining more reputation. Besides this, the price range which is under the equilibrium price easy to compete with other company. Although the profit is lesser but it can attract many peoples to own it. When Nokia go back its track and become famous brand again, it can set its selling price much higher to gain more profit. 

Economic Problems faced by Proton

            Automobile is considered as one of the fast consuming product all around the world. The first vehicle to move under its own power is designed by Nicholas Joseph Cugnot and constructed by M.Brezin in 1976. Now, automobile was created with design, innovation even with style. Automobile had evolved into one of the biggest industry in the world of creating various products of cars from low range to a extreme high range series of cars. In the 20^th century, majority of 70% household purchases automobile for transportation purposes, for business users they would make use of automobile to earn their income such as taxi and bus. Transportation would be a very big issue for people all around the world, people would purchase automobile just for their private transportation like to work, class or even meeting people. Therefore automobile plays a very big role for the public to achieve their personal needs.

            Malaysia had their own automobile industry and one of it is named as Proton. The full name of Proton is Perusahan Otomobil Nasional Berhad and it is formed on May 7 1983. Its is use to manufacture, assemble and sell motor vehicles and related products, including accessories, spare parts and other components of their own automobile. Proton then produced the Malaysia’s first car the Proton Saga. It is officially launched on July 9^th of 1985, and it is the first Malaysian car which is promoted by our Prime Minister Dato’ Seri Mahathir Mohamed. Its model then continue producing such as the Wira, Waja, Satria, Iswara, Perdana and the Juara. Proton focus on the engine range from 1.0, 1.3, 1.5 , 1.6 , 1.8 and 2.0 litre. Proton was then well known in Malaysia and a lot of people purchase it because it is cheaper compared to the other entire automobile because of the tax that had been raised by the government for non-local automobile. Proton then marked their products to internal and external countries. It had then became worldwide for all the people around the world to purchase but unfortunately, Proton faces some quality standard problems. Proton faces trouble and had lost a lot of fortune due to a few factors which is when the automobile release the price is quite high and people is expecting standards from the industry. Secondly the quality doesn’t reach the standard of the price and consumers will start to neglect Proton products. Thirdly, due to lack of technology, Proton can’t follow up other automobile company’s creation, material and innovation to give the public a surprise.

            One of the main causes that make Proton in trouble is because of their competitor Perodua. Perodua has surpassed Proton in sales and become number one, and because of this Proton had to be compared to them due to the pricing and quality they gave in to automobile industry. Just one example, Myvi launched by Perodua reach limits where all the consumers feel satisfy because of its pricing and quality. It is all around Malaysia and had been awarded the most teen usage vehicle in Malaysia. Proton should develop more on their research team because they somehow produce vehicles that people don’t really desire. Here is a graph of protons financial income statement from the year 2006 to the year 2010:

This is a graph from the year 2006 to 2010 about proton. From the day proton launched in 1983, proton had been rising highly until the year 1995, but from that year it had continue its dropping until 2003 and had been going up and down until 2006. There were a lot of factors that causes this to happen. First is the financial crisis during the year 2000 and then people had lost interest to Proton because of its quality. Proton had struggled in survive by keep upgrading their automobile and even come out new automobile. Second is the competitors such as Perodua Berhad, this automobile industry killed a lot of Proton consumers because their quality is slightly better than Proton and even cheaper compared to some of the Proton vehicles. Based on the graph since 2006 the revenue dropped rapidly in the year 2007 and slowly raised back until the year 2010. You can see from the owners equity in the balance sheet in the year 2007 which dropped a lot then going up and down until 2010. Based on the shareholders graph, the shareholders leaked a lot of interest towards Proton since the year 2000, the share price had been going down rapidly then rise back by the promotions or event that Proton made. In the year 2006 to 2007, the shareholders earning had lost had dropped approximately 15%. In the year 2008 it had raised back a 5% but unfortunately in the year 2009 it dropped another 10%. In 2010 they manage to save it up back another 8% but for the shareholders they still faces loses and this would cause them to doubt whether Proton will do good in the future or not.

            In conclusion, Proton should analyze more on their consumers or even carry out a better research on the consumers nowadays. They should come out with a strategy of market their products. For the economic situation, their currently doing better than before, but they would have to put in much more effort to win people’s heart as Malaysia’s number one car brand. Here are a few more suggestions for myself for proton to improve. First they should hire a professional from automobile industry to give them an advance training on their innovation and designing to win people’s heart. At the same time improve the services in every Proton outlet for the consumers that had already purchase Proton to enjoy after buying services better than other automobile industry. Besides that, proton could go in other fields like giving out sponsorships to people who need them to increase Proton’s fame to create a better brand image. Lastly, use better materials to produce Proton’s automobile to create a better quality of vehicle and make Proton the best car company in Malaysia.

Economic problems faced by Nokia

Mobile phone had become the number one worldwide communication tool for all types of people. Mobile phone is one of the highest demand products in business field. This is just simply because of the technology upgrades in the mobile phone. Mobile phone contains various type of communication, from ages it grew from a very large size to a small easy using product nowadays. In the pass, mobile phone is just black and white and its only function is to call and type “sms” to communicate or leave a message for people. For the latest technology, phones are now filled with so many applications and services such as Bluetooth, infrared, the WIFI service, and even changing your phones function. Smart phone is the latest product that is highly demanded from the public. Famous company such as Apple, Samsung, and Blackberry is currently holding the highest mobile phone and services demand in the world. In the past memory, none of these companies produces a better phone then this famous company “Nokia”.  We all knew that Nokia had been doing well in their service just because of how they manufacture all their products. Nokia was the world's largest vendor of mobile phones from 1998 to 2012. However, over the past five years it has suffered declining market share as a result of the growing use of smart phones from other vendors, principally the Apple’s Iphone and devices running on Google’s android operating system.

In 2012, Nokia had release a new product which is the Lumia 920. It is a smart phone but it receives a lot of negative feedbacks and a lot of disappointment towards the public. In September 6^th, Nokia launched their new product the Lumia smart phones and they receive massive thumbs down from their investors. It is stated that Nokia puts a lot of hope in the device by putting in effort in the outlook of their product by putting sporting bright colours , a bigger screen and technology that reduces blur and shakiness in pictures and video but it turned out because people are looking for something more dazzling not evolution. Nokia badly needs a hit because in the past 18 months Nokia faces operating losses approximately 3 billion pounds forcing the firm to cut at least 10 thousand jobs. Its share of the global smart phone market has dropped to less than 10 percent from 50 percent during its peak before the iphone arrived in 2007.

Here is Nokia’s interim report by april 19^th 2012

Summary Financial Information

Based on the graph we could see that Nokia is facing economic problems in 2012, judge by the net sales that had decreased approximately 30%. Based on the operating profit, it faces decline and went into a negative figure. Let us look further into the devices and services graph which is the second category. On its net sales, Nokia faces lost about 40% just by 1 year, this will be a major problem because most of the consumers either lost interest with Nokia mobile phones or there is a better option besides Nokia. Let us divide into 2 categories which are the Smart Devices net sales and Mobile Phone net sales. For Smart Devices net sales it had decrease over 52% from 2011 to 2012, in the other hand Mobile Phone net sales had decrease 32% from 2011 to 2012. It just takes one year for Nokia to burn its hand and it would be a mystery for Nokia to make a come back for the company’s future. In my research, there are 3 main factors that cause Nokia in to such a trouble:

1)      Nokia is burning cash

2)      Nokia’s dumb phone which is the mobile phone business which is the largest is now in a race to the bottom

3)      Nokia’s latest product the Lumia

Nokia is burning Cash

Based on the chart above, Nokia’s net cash went down 24% from 2011 to 2012 which is just a year. Which means year by year the net cash and other liquid asset will decrease by 2 billion pound. “We learn Microsoft provided $250m in "platform support payments". If you back this amount out, you see Nokia's operations have in fact consumed $1.15bn, a significant fraction of the company's $6.4bn net cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.” (Jean Louis Gassee Monday 23 April 2012 09.53 BST)

Nokia’s dumb phone which is the mobile phone business which is the largest is now in a race to the bottom

As the graph above, 16% of mobile phone’s volume had decrease which is not a good sign. The bad part is the average selling price of mobile phone had dropped 18% which is even worst that causes Nokia mobile phone profit to be dropped madly. Nokia is now losing to almost all of the other mobile company especially the release of smart phone which causes the biggest impact towards mobile phone industry. Their only hope would be launching their new smart phone to save Nokia itself. Therefore the Lumia series had been their innovation, but as for Nokia’s smart phones net sales and production are also decreasing badly by 50% for net sales and 51% for production.

Nokia’s latest product the Lumia

Due to the rumours and reviews had been quite negative, this causes major problem for Nokia. “Things don't get better when, according to Reuters, mobile carriers in Europe pronounced themselves ''unconvinced", finding the new Lumia smartphones "not good enough". It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.” (Jean Louis Gassee Monday 23 April 2012 09.53 BST) There are also big rumours like the existing Lumia smart phones won’t be upgradable to the next OS version the Windows 8. There were so many negative feedbacks that would cause big problems for Nokia to stand up and defend themselves.

Taxes kill Smokers?

     In the past, people can buy cigarette and smoke almost everywhere, even in the hospital. Cigarette advertisement is everywhere as well. And now, people is aware that smoking might leads our health into risk and the disadvantages of smoking. So advertisement of cigarette and strictly banned and smoking is restricted in many places public places. In today’s world, everyone knows the bad side of smoking. It causes lung cancer, breathing difficulties, heart disease and many more.  Besides that, smoking can shorten your life by 10 years or more. Tobacco contains nicotine, something that is highly addictive. People smoke is due to few reasons, some of them think they are cool, some of them smoke is because of their friends or parents. . Addiction, is the main killer which makes people continue lighting up their cigarettes. Once you are addicted to smoking as a habit, it is very hard for you to stop. That is why it is better for you not to start smoking at all.

     Theories of demand of cigarette is based on addiction. Many economist theorized that the use of tobacco is not appropriate for predictable economic analysis. Myopic addiction model assumes heavy smoker is shortsighted and theorists predict that factors like price and income, will affect the demand of cigarette. The income elasticity of demand measures how the quantity demanded of a good responds to change in income, other thing is still remain the same. Individuals tend to ignore or discount the future costs including monetary and health-related. They state that, while the decline in prices will increase consumption and prices rise, will reduce consumption, the impact of price rises will be far less than the impact of any price decline. Some people quite smoking is due to financial pressure, and some of them is because they value their health. Different people have different kind of perspective.

     The estimates of elasticity. The price elasticity of demand is a unit free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. There is a certain extent on the demand of the particular goods, respond by changing its price. Reduce the consumption of tobacco products, according to the size of the price increases, the increase in tobacco tax is considerable. In 1999, the World Bank review concluded that, all other things being equal, prices rose about 10%, with an average reduction of tobacco consumption in the developed countries of about 4% and 8% in the development countries.9 its recent $ 10 -86 published research reports, analysis and review of the study of the price elasticity of demand for tobacco products in 2001, Calais and List11, found that the average price elasticity of -0.48, which means that, on average, 10% of the prices subsequently reduced to 4.8% of consumption. Later studies found similar flexibility.

Calculating price elasticity of demand

Percentage change in quantity demanded

Percentage change in space

     Government applies tax on cigarette due to the market failure. In competitive markets, underproduction or overproduction arise when there are price and quantity regulations, government will set price ceiling and price floor to the certain good. Taxes and subsidies, externalities, like penalty on externalities when market is inefficient. Public goods and common resources, monopoly and high transaction cost. There is a strong proof that adding the price can decrease the demand of tobacco products. Increasing tobacco tax is the best way to decrease the demand among the youngsters. There are two types of taxes, tax incidence and tax on sellers. Tax incidence is the division of the burden of tax between buyers and sellers. If the price rises by the full amount of the tax, buyers pay the tax. Next is the price rises by lesser amount than the tax, buyers and sellers share the burden of the tax. There is a tax on sellers.

     In year 1988 California voters overwhelmingly support 99 Proposition California Tobacco Tax and Health Promotion Act, to increase the state cigarette tax by 25 cents per pack, and specify the health and education projects, including a statewide20% of the tax revenue with new media campaign to reduce smoking. Legislative impact assessment tax increase in cigarette sales of more than 27 packages per person consumption decreased, while sales revenue fell by less than eight groups per person because of the media campaign flexibility. The division of the tax between buyers and sellers depends on the elasticity of demand and supply. Perfectly inelastic demand is buyers pay the entire tax, perfectly elastic demand is sellers pay the entire tax while the more the demand, the larger is the buyers’ share of the tax.

     All in all, it is good that the government has increase the price of cigarette so that they will be less people who buy cigarettes. This shows that the government cares the health of the people. They are unable to raise the price too high due to the price ceiling. Price ceiling can be called as price cap. Price ceiling is a regulation that makes it illegal to charge a price higher than a specified level. This will lead to decrease in smoking but not stop completely. As tobacco is playing an important role in certain country economy. This will cause the economy to decrease because the government has raised the tax of the tobacco. 

A Hike in the Price of Petrol

In this modern era of globalization, oil is playing an extremely important role in today’s world. It is one of the major sources of energy. There are a lot of daily activities which we cannot carry on if there is no exist of oil, a very good example like mobile transportation, buses, cars, airplanes. Without oil, we cannot start up our engine and travel wherever we want, this bring a major convenient to humankind. Cooking, something which related to oil as well. We need gas to cook our daily meal, gas and oil are extracted from the source.  

Undoubtedly the demand of oil is increasing time by time although the current price is very high. The basic understanding for demand is something that you want and something which you can afford. Besides that, you must have made a definite plan to buy it.  There are six main factors which will affect the demand of good directly. The price of related goods, expected future prices, income, expected future income and credit, population and preferences. There are many reasons which cause the growth of the demand of oil. The demand of oil is inelastic because everyone needs oil in their daily life. With the expansion and industrialization of the countries, their oil consumption grows with the economy. At this instant, both China and India are the main nation when it comes to growing economies. Other countries that are under developing are changing their oil habits as well. Moreover, there are reasons which brought up the price of oil. Oil is extracted from fossils which stay under crest of the earth thousands years ago. Every day, people are consuming in a large quantity and as time flies it becomes incredibly costly. Furthermore, population is getting higher compare to the past, this will affect the price of oil as well. There are few factors which will affect the demand curve. The law of demand states that the lower the price of the goods, the higher the quantity demanded and same to the higher the price of the goods, the lower the quantity demanded.

Substitution effect is when the relative price of a certain goods or services increase, people will look for the substitutes for it, therefore the quantity demanded of the goods or services decrease. A substitute is a good that can be replace of another good. There are few alternatives to replace the current oil. Biodiesel, propane, hydrogen, battery power, and ethanol, those are the substitution goods for oil. Biodiesel is the most common substitution goods for oil so far. Biodiesel engines run on greases and it consume every day. Due to the environmental issue, people change diesel to biodiesel. Although biodiesel still produces carbon monoxide like gasoline, but just a lower level of it. Furthermore, propane is one of the substitutions of oil as well. It is one of the most used gases in United State of America. 200,000 propane vehicles are being driven on the road until today. Propane is not the best alternative because it is produced as a derivative of gas and petroleum refining. Next is hydrogen, it can easily produced by nuclear and it is environment friendly because water is the only thing it exhaust. Believe that this technology will be widely use in further future. Not only that, battery power is getting common as it can combine with any gasoline vehicles and turn into a hybrid car. The major advantage of a hybrid car is that they can save a lot of energy. The battery will recharge itself whenever the driver uses the brake system. As everyone know that ethanol is made up of sugar. But, the main problem of using the alternative is the transportation problem. The prices of this alternative are reasonable and acceptable. Thus, buyers will have more variety to choose between the actual good and the related good.

The supply of oil cannot last forever. The basic understanding for supply is when a firm supplies a good or service, the firm has the resources and technology to produce it. They can profit from producing it an has made a definite plan to produce and sell it. the current largest supplier of oil is Saudi Arabia. They are not willing to share with the world exactly how much they left and how long more they can actually supply. Other countries they are almost completely finish with their oil like United State of America and other develops countries. In 2004, Mexico announced that the producing speed of oil of their largest oil field and the second fastest producing field, Cantarell Field started to decline. In the year of 2002, they produced almost 2.1 million barrels per day but as the time pass in year 2008 they can only produced 1million barrels per day (Trading today 2012). As you can see the production of oil is decreasing dramatically. Prices of oil will increase in the future as well. In the law of supply, the higher the price of good, the greater the quantity supplied and the lower the price of a good, the smaller is the quantity supplied. A producer is willing to supply a good only if they can at least cover the marginal cost of production.

In conclusion, a market is arrangement that enables buyers and sellers to get information and do business with each other. A competitive market is a market that has many buyers and many sellers so no single buyer or seller can influence the price.

Will people reduce the usage of electricity if the price of electricity increases?

Energy firm SSE, which trades as Scottish Hydro, Swalec and Southern Electric, will increase its domestic electricity prices by an average of 9% from 15 October in United Kingdom.

Based on the law of demand, the higher the price of a good, the smaller is the quantity demanded and people might not use it anymore if the price is too high. However, electricity is different because it is a product that people will use it daily and the quantity demanded will still be affected but not in a huge amount. The law of demand results from substitution effect. If the price of electricity increases, I believe that people will buy solar panels to be installed at their home and they will decrease the usage of electricity because solar panels generate electricity. Besides that, income effect is also a result of the law of demand. Despite the increasing price of electricity, I believe that people from low end or medium end family will buy fan instead of buying air conditioner because air conditioner consumes more electricity compared to fan but high end family will not bother about the increasing price of electricity. There are six main factors that change demand which are the prices of related goods, expected future prices, income, expected future income and credit, population and preferences. . If the price of electricity remains the same and the quantity demanded for electricity is increasing, the quantity demanded for electricity will exceed quantity supplied which leads to shortage of electricity. Electricity is considered as normal goods because if the income increases, the demand of electricity will increase too. Moreover, if the population increase, the usage of electricity will be higher and therefore the quantity demanded for electricity will increase. However, if the price of electricity increases, the demand of electricity will decrease and the producer of electricity will not run out of supply because the usage of electricity decreases. Equilibrium in a market occurs when the price balances the plans of buyers and sellers. From my point of view, if the price of electricity increases, there will be no shortage of electricity and hence equilibrium can be achieved since quantity demanded and quantity supplied are equal.

            The price elasticity of demand is a units-free measure of the responsiveness of the quantity demanded of a good to a change in its price when all other influences on buying plans remain the same. The price elasticity of demand on electricity is inelastic because if the price of electricity changes it will not affect the quantity demanded of electricity. Electricity is a daily use product therefore people will still use electricity although the price increases. Without electricity, people can’t do many things such as use computer, operate machines, watch television and many more. Therefore, I predict that people from low end and middle end family will protest on this issue and hope that the government will consider on cancelling the plan on increasing the price of electricity. As electricity is a normal good, when people have increase in their income, the demand of electricity will increase as well and therefore, it will manage to avoid the surpassing of quantity supplied and approach equilibrium position. However, electricity is categorized as necessities because there are no other valid sources that can replace electricity and hence, it is an inelastic demand. Income elasticity of demand measures the responsiveness of demand to a change in income, other things remaining the same. Electricity is considered as normal good therefore, the income elasticity of demand is positive.

            A price ceiling or price cap is a regulation that makes it illegal to charge a price higher than a specified level. Price ceiling will lead to market failure such as underproduction or shortage of electricity and black market will occur. The obstacles to efficiency that bring market failure and create deadweight losses are price and quantity regulations, taxes and subsidies, externalities, public goods and common resources, monopoly and lastly high transactions costs. I believe that if the government impose price ceiling on electricity, the quantity of electricity supplied will decrease to less than the efficient quantity. As the quantity electricity supplied decreases, a deadweight loss will occur and arises. Besides that, producer surplus and consumer surplus will shrink. There will be a potential loss from increased search activity. From my opinion, price ceiling will only bring negative effects to both producer and consumer due to both of their surplus shrinks. Moreover, consumer will face shortage of electricity if price ceiling of electricity occurs and therefore creates a black market in electricity.  A black market is an illegal market that operates alongside a legal market in which a price ceiling or other restriction has been imposed. Black market will sell the electricity at a much higher price when shortage of electricity occurs. Hence, discrimination will occur if the price ceiling of electricity is imposed. Other than that, there is no tax imposed on electricity and therefore with no tax, marginal social benefit equals marginal social cost and the market is efficient. Total surplus which is the sum of consumer surplus and producer surplus is maximized. Lastly, with the increasing of price in electricity, I predict that there will be some people protest on this issue and hope that the government will establish subsidy to the producer of electricity so that the price of electricity will decrease instead of increase. A subsidy is a payment made by the government to the producer. Subsidy will lead to some effects for example an increase in supply, a fall in price and increase in quantity produced, an increase in marginal cost, payments by government to producers and insufficient overproduction.