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Economics Practice IA

Fixing maximum price will ensure smartphone rebates reach target group
 News
2012-12-31 17:27(By Fadzli Ramli)
KUALA LUMPUR, Dec 31 (Bernama) -- Rebates of RM200 for youths purchasing
smartphones priced up to RM500 as announced by the government recently should not
cause distress among the group.

According to the Malaysian Communications and Multimedia Commission (MCMC), the


objective of the package was to help youths who were less able to access the 3G high-speed
internet.

"Those who can afford phones worth RM500 and more are not the target group for this
package," said MCMC chairman Datuk Mohamed Sharil Tarmizi when announcing the
package last Tuesday.

The statement clearly showed the government's desire to ensure the rebate was given to the
target group, who are youths who cannot afford to buy smartphones worth over RM500.

The fixing of a maximum price of RM500 was supported by Malaysian Youth Council
president Mohamed Maliki Mohamed Rapiee, who felt that youths who could afford
smartphones worth more than RM500 need not apply for the package so those who needed it
could fill the RM1.5 million quota offered.

Mohamed Maliki also advised youths to learn to look at the needs of others too instead of
looking at their own only.

Malaysian Muslim Consumers Association (PPIM) secretary-general Datuk Ma'amor Osman


also agreed that the requirements set and stringent monitoring by the government will ensure
the package is enjoyed by the target group.

Ma'amor added that youths also need to look at the cost incurred after owning a smarthphone
such as the bill for calls and internet usage.

Announcing the rebate when tabling the 2013 Budget in September, Prime Minister Datuk
Seri Najib Tun Razak said it was the government's effort to give 1.5 million youths access to
information with an allocation of RM300 million for this purpose.

This noble effort was used by the oppositon claiming the intiative was carried out to help
various quarters to sell off the old stocks of smartphones.

However, the government remains concerned about the anxiety of the youths although it may
be caused by lack of understanding regarding the initiative's objectives and target group.

To resolve this, Information Communication and Culture Minister Datuk Seri Dr Rais Yatim
announced that he will raise the youths' concern regarding the package to the Cabinet on Jan
2.
Federation of Malaysian Consumer Associations (Fomca) president Datuk N.Marimuthu said
the Youth Communication Package was a form of assistance like other subsidy provided by
the government.

"We need to see this smartphone rebate as a goverment subsidy and each government
needs to manage their subsidies well and ensure the target group benefits from it," he told
Bernama.

He added that if the government does not put a maximum price for smartphones which can be purchased, they fear
youths who can afford sophisticated smartphones will use up the RM1.5 million quota instead of those who need it
most.

The article is about the Malaysian government placing a price cap on


smartphones with a price tag of more than RM 500. Price caps are government-
imposed price control or limits on how high a price is charged for a specific good
or service. Its purpose is to protect consumers from conditions in which make
the commodities overly expensive therefore increasing the quantity demanded
in the market. To carry on with the price ceiling that is imposed on the market
for smartphones the government must be prepared to offer subsidy to cover for
the shortage that will exist within the market. Subsidy is a grant or financial aid
granted by the government to producers in order to decrease the cost of
production or the supply of the good or shortage. Shortage is a situation in which
the demand for a good exceeds the supply in a market.

According to the article, the Malaysian government and the Malaysian


Communications and Multimedia Commission intends to target 1.5 million
youths with the package/proposition it has offered to facilitate access to
smartphones and 3G Internet speed for youths who could not afford it at prices
more than RM 500. The government are prepared to offer a rebate of RM 200 for
youths purchasing smartphones priced up to RM 500
Pr
S

500 Pe

300 P1

D
Qt
Q1 Qe Q2
The graph above depicts the smartphone market scenario occurring in Malaysia.
The price equilibrium is at RM 500 with an unspecified number on its quantity.
The Malaysian government has placed a price ceiling of RM 300 which has
increased the quantity demanded to Q2 and decreased the quantity supplied Q1.
It’s a direct correlation to the law of demand in which states that ceteris paribus,
as the prices of a good increases the quantity demanded decreases and vice
versa. This creates a shortage in the market, because the prices have decreased
significantly the quantity demand for the good has also significantly increased
far from the quantity supplied in the market for smartphones. In order to reduce
the shortage that exist within the market, the government must grant subsidy to
producers to close the shortage of supply for smartphones. With the calculation
of granting rebates of RM 200 from smartphones priced up to RM 500 to 1.5
million youths in Malaysia, the totally subsidy that is required to cover the
shortage comes to RM 300 million. The government is however limited to a RM
1.5 million quota.

The grant of subsidies in this case is to increase the production of smartphones


therefore closing the gap between the quantity demanded and the quantity
supplied. However in granting subsidies there is always an opportunity cost
which is the loss of potential gain from another alternative when one alternative
is chosen. In granting subsidies for the purpose of reducing the shortage in the
market for smartphones, the government could have instead offered its subsidy
to focus on much more critical and pressing issues within the country like
hunger or poor education, hence more people have access to food and education
instead of smartphones. In order for the government to cover for the subsidy
they have granted, there may be higher taxation for the upper economic class.
Despite there being all the drawbacks, there are still numerous advantages to
subsidy such as increasing revenue for producers, make goods more readily
available, growth of a particular industry, etc.

If the government manages to cover the shortage of RM 298.5 million, than the
overall situation of placing a price cap on smartphones is overall beneficial in the
market. In the scenario of a perfect market where there is no shortage,
consumers is highly benefited from the price cap for being able to gain a much
more easier access to affordable smartphones. As suppliers, they do not suffer
any type of loss nor benefit from it as they will receive equal an equal amount of
revenue from the subsidy granted by the government. However outside the
market, parties including the government and other parties not involved in the
market will be the ones to pay. The government must suffer from an opportunity
cost in which could have helped tackle much more pressing issues within the
country as the inability for some youths to access 3G speed internet isn’t exactly
the most relevant issue. Society must also suffer from higher taxation in order to
cover for the subsidy of smartphones therefore the price cap is not the most
efficient solution to the issue.
INTERNAL ASSESSMENT CRITERIA – ECONOMICS
HL/SL
(for individual commentaries excluding criteria F)

10/14 marks

NB – marking based on ‘Best fit model’, highest level does NOT imply faultless
performance)

Criterion A: Diagrams 1 marks

This criterion assesses your ability to construct and use diagrams.

1 Relevant diagrams are included but not explained, or the explanations are
incorrect.

2 Relevant, accurate and correctly labeled diagrams are included, with a


limited explanation.

3 Relevant, accurate and correctly labeled diagrams are included, with a full
explanation.

 L2 Clear title with axes fully labeled – either Title or P of… and Q of …… NOT
just P and Q
 L3 Arrows showing direction of any shifts or changes
 L3 Full explanations of how the diagram relates to dynamic changes in your
article – specific reference to positions on the diagram, shifts and arrows
showing dynamic change

 Wherever possible include data/information from the article although this is not
essential for L3

Criterion B: Terminology 2 marks

This criterion assesses your ability to use appropriate economic terminology.

1 Terminology relevant to the article is included in the commentary.


 Some key terms are defined or they are defined incorrectly.
2 Terminology relevant to the article is used appropriately throughout the
commentary.
 Key terms are defined correctly – at least 2 probably three definitions
(no more than four)

Criterion C: Application 2 marks


This criterion assesses your ability to recognize, understand and apply economic
information in the context of the article. It measures the degree to which your
questions and analysis are relevant to the article you have chosen.

1 Relevant economic concepts and/or theories are applied to the article.


 Linking directly to the article
2 Relevant economic concepts and/or theories are applied to the article
appropriately throughout the commentary.
 Referring specifically – quoting/figures/data from article

Criterion D: Analysis 2 marks

Analysis means using economics to express economic understanding. This criterion


assesses your ability to explain and develop appropriate economic theories and/or
concepts in the context of the article. It measures the quality of your arguments, the
logical presentation of your discourse, and the consistency of your commentary. You
must be able to address essential elements or the structure of a specific economic issue
using economic theory.

1 There is limited economic analysis relating to the article.

2 There is appropriate economic analysis relating to the article.


 Logical and consistent
3 There is effective economic analysis relating to the article.
 Detail and depth

Criterion E: Evaluation 3 marks

This criterion assesses your ability to synthesize your analysis in order to make
judgments that are supported by reasoned arguments. “Evaluation” implies a judgment of
a theory and an application of the theory to a given situation, with awareness that the
theory may not provide an accurate description.

1 Judgments are made that are unsupported, or supported by incorrect


reasoning.

2 Judgments are made that are supported by limited reasoning.

3 Judgments are made that are supported by appropriate reasoning.

4 Judgments are made that are supported by effective and balanced reasoning.

Possible approaches:-

 reasoned arguments considering different sides of an issue – most important


 assess short-term and long-term implications of strategies or decisions
 examine the impact on different stakeholders / groups – most effected
 identify the most important consequence, impact, advantage, disadvantage,
and/or solution, justifying the reasons for your choice
 question the validity of data or a particular theory, in terms of whether it is
appropriate, reliable or relevant
 examine the real-world effectiveness of policies through limitations of non-
economic constraints upon specific economic theory in reality