Course: IB Economics SL Commentary number: 1 School name: Candidate name: Kolej Mara Banting Ahmad izzat Farhan Bin

Ahmad Latfi

Date commentary was written: 29th December 2012 Section of the syllabus to which the commentary relates: Section 2 - Microeconomics Word Count: 749 Source of extract: http://www.brecorder.com/pakistan/industries-a-sectors/76998fuel-price-hike-could-downsize-cottage-industry-production-.html , Fuel Price Hike Could Downsize Cottage Industry Production

Fuel price hike could downsize cottage industry production ANWAR KHAN KARACHI: The fresh fuel price hike is feared to downsize the existing weak production of cottage industry by 30 per cent in the country as such impact is likely to trigger unemployment and spur the prices of new products upward on the local market, traders said on Monday. Traders criticised the government for the new increase, saying the expensive fuel has weakened the prospects for trade and industry growth. They said the industry output suffered utmost because of the present regime unviable policies in the last five years. Talking to Business Recorder, President All Pakistan Organization of Small Traders and Cottage Industry, Mehmood Hamid cast a bleak forecast for the survival of cottage industry in particularly after fuel price went up, phenomenally. The fresh increase in fuel prices pushed the patrol to Rs105.55 a litre, diesel high speed Rs112.13, diesel light Rs98.84, and kerosene oil to Rs102.21, he said, adding that mammoth inflation is now all set to cripple the cottage industrial output. The trigger-down effects of fuel price surge will soon hit the consumers, he said, adding that increase in fares of transportation is expected as such blow to occur first. He also feared sales of scores of products made at cottage units will also become dearer shortly. The local products of the cottage industry will become more expensive in the face of same cheap imported Chinese products on the local which is largely expected to hit the local manufacturers badly, pointed out Hamid. He said electricity in India and China is cheaper whereas the power tariff is much higher to the neighbouring nations, adding that the flood of products from both countries will have extremely negative impacts on the local industries. He said the public and freight transportation cost are also expected to skyrocket after the fresh fuel increase, which will increase the prices of products. He said the garment industries of Pakistan are feared to suffer from the fresh blow of fuel hike, which is already moving towards closure. Chinese garments have already caused a downturn to the local industries while the fresh hike in petroleum prices are feared to further slow down the output, he said, adding that the poor industrialists will be amongst the chief sufferers from dual impacts.

Economy of a country is determined by the consumer(household) and producer(supplier). Study of demand and supply are very important where they can help a country identify their financial status and also their resources. The article is about how big impact that can happened to the cottage industry production in Pakistan if the fuel price increase. The definition of cottage is a small simple house, while cottage industry means small scale industry carried on at home by family members using their own equipment.

Price of cottage product

S2

S1

Quantity of cottage product Q2 Q1 Diagram 1.1 : Production of Cottage Industry

In Diagram 1.1, the supply curve shifts to the left from S1 to S2 with the same price. With the same price, the consumer will get less quantity of product than before.It is because the fuel is a non price determinant of supply which is in cost of production. The cost of production also is called factor price. If the factor price rises, production costs increase, production becomes less profitable and the firm will supply less. This is due to the increase in price of fuel. In the article, it said that the increase in price of fuel can downsize the existing weak production cottage industry. Besides, fuel is a natural capital which is one of the factors of production. The fuel is used in transportation. After that, companies or firms or producers will find way to cut their expenses to keep away their business from falling down or even become worse, bancrupt. Therefore, one of the solution is to sack their workers. For example, in Britain, the Business Secretary, Vince Cable said that the Goverment was considering allowing firms employing fewer than 10 people to dismiss staff without being held accountable-The Telegraph(telegraph.co.uk). If this can be happened at Pakistan, then it will trigger unemployment which were being feared to be one of the impact that might happened if the cottage industry production become downsized. Human labour is one of the factors of production. When the factors of production of a product become less, the production of the

product will be decrease too. It same goes to this case. When the workers become less, the production of cottage industry also decrease.

Price of cottage product

S2

S1

P2 P1

D Quantity of cottage product Q2 Q1 30% Diagram 1.2 : Growh of Market of Cottage Industy

From the diagram 1.2, the supply curve shifts to the left from S1 to S2. There are a lot of cons than pros will happened if the industry is downsized. For example, if there are less workers or staffs, the production also will decrease. It is because the factors of production decreases and the cottage supply less. In the article also stated that local products of the cottage industry will become more expensive. It is because of the price of cottage products increases from P1 to P2 . Besides, the quantity of cottage products decreases from Q2 to Q1 which is by 30 percent. Besides, in the article also said that the cottage industry product have to face the cheap imported Chinese products. It is because the consumers substitutes the local product with the cheaper product.The short term effects we can see in Cross Elasticity of Demand(XED), if the local cottage products' price increases and the quantity of the local products demanded falls, the demand of Chinese products which is cheaper will increase. It is because the eletricity power tariff in China is cheaper than in Pakistan.

Price of Chinese products S1 S2

P1 P2

D Q1 Q2

Quantity of Chinese products

Diagram 1.3 : The Market of Chinese Products

Diagram 1.3 shows that the supply curve shifts to the right from S1 to S2. It is because highly demand of the products after the local cottage products being substitued by it. The prices also decreases for P1 to P2 while the quantity of Chinese products increases from Q1 to Q2. The long term effects of this problem are the local cottage industry cannot survive, the consumer will completely using the outside cheaper products, and lastly the industry will vanished slowly. For the stakes holder, like producers, they will suffer a lot and lastly have to close their business.Thus they have to find solution to overcome this problem.. For the goverment, they should do something in order to save their market for example give subsidies to the local industry. As for the conclusion, the goverment should take actions instead of just letting the other countries products conquered their markets and together help the locals to survive in the industry.