Price Theory : Market Equilibrium

Chicken is often used by Malaysian in their daily meals. It brings nutrients in our body but sometimes the price of it can be really surprising. During non-festive seasons, price of chicken is normal. Because the demand of the chicken is not high. It matches with the sellers’ plan how much will they produce. There is no price increase or decrease of the chicken.

But during festive season especially Hari Raya Aidilfitri. The demand for chicken increase drastically. Customers want to buy more than usual as they will celebrate with family and friends. It creates an excess demand and shortage of chicken occurs when the seller sets the market price lower than the equilibrium price.

To overcome the price problem, the government put a legal limit on how high the price of the chicken can be, that is called the price ceiling or maximum price. To make it effective, it must be set below the market equilibrium. For example, the normal price of the chicken is RM 7.00 per kilo and the price can increase to RM 8.50 per kilo in the wet market.

Not only that, the price of the chicken is not always high or in normal price. It can decrease in one period of time. For example, during the development of H5N1 avian influenza that killed a man in China around early this year. Even though the virus is not in Malaysia, Malaysian government take precaution by screening the temperature of every passenger in the airport after landing. Because of the bird flu, some Malaysian citizen cut down the amount of chicken in their meals. This situation creates an excess supply and surplus occur when the producers sets the market price above the equilibrium price.

This is why the producers have to decrease the price so the supply comes back to normal and the original equilibrium is made. The price floor is set by the government to make it legal to put a limit on how low the price of the chicken can be. The price floor must be set above the normal equilibrium price to see a big difference.

Consumer surplus is the difference between the price customer willing to pay and the actual price of the product. For example, the maximum price of the chicken is RM 8,50 per kilo, but the customers willing to pay more just to get the product.

Whereas producer surplus measures willingness of the producers to supply goods and the price they actually receive. The example given as, the actual price of the chicken is RM 7.00. But due to the bird flu, customers are not willing to buy at the price.