Increased in Wheat Prices and Maid’s Pay (a Micro-Economics Perspective Report)

Topics: Supply and demand, Price elasticity of demand, Elasticity Pages: 6 (2030 words) Published: February 11, 2012

1. Micro-economics is the study of the choices that individuals and businesses make, the way these choices interact in market, and the influence of governments.1 This report analyses the micro-economics of 2 newspaper articles - “Bakeries Raise Prices As Cost Of Wheat Soars” and “Pay Hike As Supply Of Maids Dries Up”, based on perspectives of micro-economics theories, principles and concepts.


2. Summary of Article. This article highlighted the issue of bad weather (“Land” – a Factor of Production) and how it affected the basic commodities needs of the people (consumers). Bakeries raise prices due to the increase in cost of wheat and related commodities. This rise was due to the global shortage of wheat because of bad weather in wheat producing countries and the imposition of bans on exports through government interventions. The price of flour has risen from S$29 to S$32 per 25kg in just 2 months. Rise in prices of soya beans and sugar led to further increase in prices of flour-based products. This burden is being transferred to the consumers. An increase in price of 5% to 10% is seen in flour-based products for both local and export sales. If bad weather continues, the increase in prices of these weather dependent crops will continue to rise. Consumers will have to spend more or choose other alternatives since the next price review will only be done in 6 months’ time.

3. Factors of Production. This article illustrates ‘How’ goods and services are produced (one of the 4 categories of Factors of Productions):

a. Land. Wheat is grown on land and depends on weather for their growth and harvesting. Bad weather such as floods in Australia or drought in Russia where majority of the world’s wheat and other crops are produced, have great impacts on the quantity for harvests and exports. Russia’s ban on export had caused the world’s supply to fall rapidly since October 2010. Likewise, weather anomalies caused an increase of approximately 30% in the price of wheat-related goods such as soya beans and sugar over the past year. In a nutshell, weather and the natural environment play a dominant part in prices of crops by influencing supply.

4. Micro-economics Concepts. The concepts which are applicable to this article are:

a. Diversifications. There is a need for diversification of supply in order to achieve price equilibrium. It was reported that big companies and supermarkets were able to hold the prices of wheat related products because they have supply from more places.

b. Cross Elasticity of Demand. Cross elasticity of demands measures the responsiveness of the demand for a good to a change in the price of a substitute or complement, other things remaining the same. With increase in wheat prices, the percentage change in quantity demanded of other wheat related products such as cakes or roti-prata will be affected directly by the percentage change in price of bread as they are substitutes of each other.

c. Elasticity of Supply. From the supply angle, wheat are produced from common resource (good weather), and are from various countries. When these countries are affected by weather at almost the same time (as in Russia and Australia), the elasticity of supply equals to zero, i.e. perfectly inelastic, at least till the next harvest and prices will keep on increasing as shown.

d. Cost of Production. Changes to prices of FoP will cause changes to cost of production. An increase of 6% to 10% is seen in price of a bag of 25kg flour, resulting in higher cost of production for bakeries. For example, a confectionary in Ghim Moh was forced to raise prices of its bread products for the first time in 22 years (i.e. from S$1.30 to S$1.50).


5. Summary of Article. In this article we examine the effect of micro-economics’ demand and...
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