Tuesday, October 30, 2007

The Economics of Oil Muffin Price

Let's talk about a commodity, a muffin. This week the price of muffin goes up significantly and sets a new record after 20 years. People raise their eyebrow. Some point out that it is the work of muffin cartel, but it seems implausible since like any cartel, its member tends to break the agreement, produce muffin above agreed number, much more when the price is high.

It turns out that there is a sharp increase for demand of muffin coming from new growing-rich customers, Rizal and AP, while at the same time, the demand from traditional muffin eaters, the Manager and Aco, remains high. On the other hand, the muffin producer, Ujang (and his cartel gang) and Sjamsu (outside the gang), due to some technological capacity problem, can not increase the supply.

No wonder, as any Econ 101 student understands it well, the price goes up. Neither speculation nor conspiracy theory is at play.

Now, for some reason, you want the price of muffin down. One way to do that is to boost the supply, which is as we know, Sjamsu and Ujang can not make it. The alternative is then to reduce the demand of muffin. Econ 101 tells you that the rise of price will automatically bring substitution effect --Rizal and AP and Manager and Aco would somehow eat less muffin and more schone, sooner or later. The price signal itself would lead you to the new equilibrium (how much muffin, schone, and any other goods to consume) based on the new scarcity problem. It is called the market mechanism, an invisible hand.

Now, do you think an answer on how to tame soaring muffin price is to ask for a deliberate collective sacrifice from Rizal, AP, Aco and Manager to reduce their appetite for muffin; Sjamsu and Ujang to add up production, no matter what; and the Manager to stop bullying Ujang's friends: is a plausible one?

Hint: read one of op-eds in Kompas daily, page four, Monday, Oct 29, 2007. It's available online, too.

14 comments:

  1. without missing your point here it's not 'schone'; it's 'scone'. although it's a short version of 'schoonbrot'. okay i know, whatever... :)

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  2. Detta, thanks. It's rectified. How I badly need an editor here :-)

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  3. let you, ap, aco, ujang, sjamsu, manager and others in the cafe agree that if i borrow muffin costing Rp10,000/muffin from the cafe today, i have to pay Rp11,000/muffin next month.

    i then sell the muffin i borrow from the cafe for Rp10,000 and put the money (10,000) in the bank today. next month, if i get Rp13,000 from my saving, i can earn Rp2,000 next month after paying back Rp11,000/muffin.

    thanks for nothing. :)

    the rise of the commodity price as long as lower than the price of the money will lead to me earning something.

    is the commidity market equilibrium easier to control that money? i think so. since it's hard to determine "muffin lending rate".

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  4. sorry i mean the rise of the price of the money.

    even "muffin lending rate" is lower than "money lending rate", people can still earn something from nothing by borrowing money and lending muffin.

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  5. This comment has been removed by the author.

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  6. I'm sorry for what looks like comment spam, but apparently html coding doesn't work very well with these comment forms, so I have been forced to redo the original comment, twice.

    Anyway, I love markets, and I do believe that the best solution for the rising cost of muffins is by letting the market do its thing, and find a new equilibrium for muffins, scones, cookies, brownies, danishes, and all the other baked goods that can be eaten as muffin substitutes.

    However, I do understand why some people try to come up with "quick fix" solutions, because people want to eat, they want to eat well, and they want to eat cheap. And right now, there is no cheap and reliable substitute for muffins.
    There are the scones that require a massive amount of land to mass-produce and also cause shocks in food crop prices.
    Then, there are cookies, which are actually much better and more efficient than muffins, but people are protesting the planned construction of cookie factories because of paranoia on health hazards.

    So, I guess I can relate to some people's impatience, although it does lead to some absurd propositions.

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  7. i'd say let's do rationing instead. fuck 'em, they want muffin, they've to behave themselves. otherwise they can just stare at my muffin or buy second hand muffin at the black market.

    sometimes, you just have to be strong, you can't trust the market to be rational when dealing with important stuff like muffins.

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  8. The problem become complicated when scone is still more expensive now and still need further research to be mass produced at affordable price.

    The muffin is an input factors to numerous kind of food consumed by the masses with little substitutability. So an increase in muffin is likely to have effect on inflation.

    It is good (if not wishful thinking) that the muffin producer, which already close to capacity, could increase production and people would consume less muffin. But that is not how market economy work.

    Well, if price of muffin rose persistently high then other food will use muffin more efficiently since it is more costly not doing so.

    While waiting for the scone to come at affordable price. Then there is a case for muffin producer, which flush with money, to offer cash transfer to some of the poorest consumerst oassist them through the shock and give breathing time for adjustment.

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  9. what we see now is high demand, but also high inventory.

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  10. Anymatter, if you can get the bank interest earning, why can't we? I'd rather to sell it to anyone who can pay the muffin now, and save the money to the bank, just like the way you do.

    Fik, you want to eat well and cheap too. Alas, as an English proverb goes: you can't have your cake and eat it too. If you can't find affordable scone around, just eat muffin less, and be more efficient with that.

    It's a good news for anti muffin pollution enthusiasts, no? They should be glad for this.

    T/s, rationing won't help. It is costly and will lead to even more muffin shortage.

    Berly, on what basis that Ujang and Sjamsu should give you the cash transfer? The high price of muffin, and its substitutes, is not their fault. It's the market and they just provide to the ones who needs muffin most, the highest bidder.

    And don't you realize that that kind of "good intention" for subsidy lead to the overconsumption of muffin, hence higher prices.

    KJG, and what's wrong with that? Taking reserve inventory is costly, risky, and has its own limit. If one finds much cheaper scones, or the high energy muffin (that one muffin for one week equals to everyday muffin), the hoarder would be doomed.

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  11. rizal, what i tried to show here is a possibility of creating commodity forward and futures markets for muffin, which in fact are really happening for some commodities, including oil. cheers.

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  12. Anymatters, yes, I can see that, too. But even the commodity future and forward market (and any market for speculation), can not escape the basic supply and demand, can't it? For instance, how come today's cone is IDR 10K, not 5K, and a week later IDR 11K, not 15K?

    Anyway, it's a good insight to set the expectation into the muffin equation. Thanks!

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  13. such markets may not influence demand curve, but may influence supply curve. eg. muffin producers may avoid or halt to supply more muffins since the futures/forward market is not available or the forward price is not favourable. if they keep producing and there's no way to hedge the price, the price goes down and it's not good. hopefully, this makes sense.

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