case study chilly 1

7/30/2019 Case Study Chilly 1

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Q1. Show the above relationship of price and quantity of chilies in a sketch diagram to

illustrate the effect of its bumper harvest. Explain your Diagram. (3 marks)

Advancement of science and technology had lead to the invention in breeding new species of

high yield and constraint to diseases. Producers in Pahang and Terengganu that had started the

plantation using the new species had resulted in higher chilly production compared to producers

in Cameron Highland, Kelantan, Kedah, Selangor and South-east Johor. This increases the

supplies of chilies from the producers in Malaysia. Producers in Pahang and Terengganu that

using this new species are producing more quantity of chilies (bumper harvest) with fixed

amount of resources such as land and water which affect less cost of production consumed and

gain more profits.

The initial equilibrium price and quantity are P0 and Q0 respectively. The market equilibrium is at

e0 where the intersection of demand and supply curve. Bumper harvest of chilies leads to an

increase in supply of chilies at all prices. The whole supply curve shifts to the right from SS 0 to

SS1. As a result price falls from P0 to P1 and quantity demanded also increase from Q0 to Q1.

New market equilibrium point at e1.

Quantity of chilie(per kilogram)

SS0 SS

1

Price per kilogram (RM)

of chilies

P0

DD0

Q0 Q1

P1

e0

e1



Q2. What is the purpose for the government to implement a price stabilizing policy on

chilies as reported? (5 marks)

The market equilibrium is affected due to bumper harvest which increases the supply of chilies

in the market. This cause the supply curve shift to the right and equilibrium price of chilies per

kilogram falls. Quantity demand of chilies increases and customer will buy more chilies at a

lower price. Then many producers of chilies will have extremely lower income.

The government helps out the producers to protect their income by implement price stabilizing

policy on chilies which is the price floor. Price floor is minimum legal price of chilies per kilogram

set by the government above equilibrium price so that the price wont falls further below

equilibrium price and producers can still produce chilies and gain profit.

When the producers have a lower income, they do not have sufficient money to pay more

wages to the workers who works for harvesting the chilies. Thus, the workers received fewer

amount of wages as the price of chilies falls and producers incurred losses. Government

implements the price stabilizing policy to protect minimum wages of workers from falling below

certain levels. Producers can hire more workers when there is minimum wages.

Q3. Discuss the disadvantages of price policy sets by the government as stated in the

report.

The price stabilizing implemented by the government is price floor. Price floor is minimum legal

price of chilies per kilogram set by the government above equilibrium price. The customer

needs to pay at a higher price above the equilibrium price. For an example, if the equilibrium

price of chilies for 3 kilogram in the supermarket is RM 21. Due to price floor imposed by the

government, customer has to pay at the RM 23 for 3 kilogram of chilies.

Rising of the selling price of chilies creates a surplus, where the quantity supplied is greater

than the quantity demanded. When surplus occurred means that there in inefficient use of

scarce resources, when this resource can be used to produce something that is more valuable

to the society rather than producing something that exceed the user want.

There a waste of chilies produces due to price floor. Therefore, the governments cope with the

surplus through FAMA and its agencies buying the excess chilies produced. However, there are

many chilies that need to be stored, FAMA required to buy a large inventory and hired workers

to manage the storing of the excess chilies in the inventory. The cost of buying and storing the

inventory falls on the taxpayers. Government imposed higher tax rates so that the amount of taxpayment received from taxpayers will be used to finance the cost of buying and storing the

surplus. This is unfair for the taxpayer.



Q4. Sketch in a separate diagram to show price stabilizing policy that has been

implemented by the government on chilies. Explain how it could be effective.

The price stabilizing implemented by the government is price floor where a minimum

legal price of chilies per kilogram is set above equilibrium price by the government. Due to

increase in supply of chilies, the price of chilies per kilogram falls. Thus the producers gain

lower income because many customers buy the chilies at a lower price than the equilibrium

price. In order to protect the producer’s income and minimum wages of workers from falling

below certain levels, the government imposed price floor.

The equilibrium price and quantity are P0 and Q0 respectively. Suppose that the

equilibrium price P0, is RM 21 and equilibrium quantity is 3 kg. The market equilibrium is at point

e0 where the intersection of market demand and supply curve. At this point quantity supplied of

chilies per kilogram equal to quantity demand of chilies per kilogram, which is 3 kg. The supplier

also sold chilies at a price that customer willing to pay for 3 kg which is RM21.

Horizontal line at Pf shows the price floor set by the government which is above

equilibrium price, P0. Let say Pf is RM23. So, at any price of chilies per kilogram (RM 21.50, RM

22, and RM 22.50) that sold above the equilibrium price RM21, will ensure that the production of

chilies can continue to be made and producers do not incurred losses. Quantity supplied QS are

greater than the quantity demanded QD (Surplus).

Quantity of ch(per kilogra

Price per kilogram(RM) of chilies

P0

Q0

Pf

Qs

QD

DD0

e0

SS0

Price floor

Surplus

case study chilly 1

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