Plywood prices seen to go up

1.0 Article Summary

The article “Plywood prices seen to go up” was written by Jack Wong at thestar Online on 27 March 2010. The article reported that the market of tropical plywood which struggling from low prices in year 2009 are recovering and expected to increase further in year 2010. Statistics and analysis was shown in the article to reflect the situation and factors affecting the plywood market in the country as well as in the world market.

2.0 Introduction

The prices of tropical plywood are low in year 2009 and the year before it is because of the weak demand from the world market, oversupply situation and substitution of softwood in Japan market. The price of tropical plywood has recovered in year 2010 due to the depletion of the inventories in Japan. Apart from that, the increase of the costs of production like the prices of logs, machines, spare parts, power and water supply as well as labours had also lead to the increase of the tropical plywood's price.

This paper will analyse the market situation of the plywood and its relevant issues
from the article by using some economics theories which related to it. The areas of economics that will be cover in this paper include demand and supply, surplus and shortage, elasticity as well as imports. Apart from that, a conclusion will be given for the issues discuss in this paper.

3.0Analysis

3.1 Demand and Supply

Demand is defined as the amount or units of good and service that the consumer willing to purchase with the given price at a period of time, ceteris paribus (Devaris 2008).

Diagram 3.1.1 Diagram 3.1.2

According to Wong (2010), the amount of tropical plywood that import by Japan from Malaysia and Indonesia had dropped for the past few years due to the substitution of softwood in Japan. Hence, especially when the price of softwood had decrease, Japan tends to buy even more softwood and less tropical plywood which leads to the fall in

the demand and the price of tropical plywood, ceteris paribus. As illustrated in Diagram 3.1.1, the fall in the price of the softwood is represented by the downward sloping of the demand curve, D where price fall from P to P1 and the quantity demand increase from Q to Q1. Besides, as illustrated in Diagram 3.1.2, the decrease in the demand of tropical plywood by Japan due to the substitution effect which is a non-price factor is represented by the leftward shift of the demand curve from D to D1. The new equilibrium price and quantity will fall from P to P1 and Q to Q1.

Diagram 3.1.3

Apart from that, as claimed by Wong (2010), the strong demand for the logs, which is one of the raw materials of plywood from China and India had lead to the increase in

the price of logs, ceteris paribus. As illustrated in Diagram 3.1.3, the increase in demand for the logs from China and India due to their preference which is the non-price factor is represented by the rightward shift of the demand curve from D to D1. The new equilibrium price and quantity will rise from P to P1 and from Q to Q1.

Supply is defined as the amount of good and service that the sellers are willing and able to supply or sell at a given price and time (Mankiw 2007).

Diagram 3.1.4

According to Wong (2010), Japan's inventories are depleting as fall from six months of supply to one month of supply. This shows that the supply of plywood to Japan

from Sarawak had decreased and lead to the rise in the price of plywood in year 2010, ceteris paribus. Besides, Wong (2010) also claimed that the world supply of plywood by Malaysia and Indonesia had dropped from 12 million cum to 7 million cum per year due to weak world demand and lead to the rise in the price of plywood, ceteris paribus. As illustrated in Diagram 3.1.4, the reduction supply of plywood by Sarawak to Japan and the world supply of plywood by Malaysia and Indonesia which due to the non-price factor are represented by a leftward shift of the supply curve from S to S1. The new equilibrium price will increase from P to P1 and the quantity supplied will fall from Q to Q1.

Meanwhile, the increase in the price of plywood's costs of production will lead to the rise in the price of plywood itself (Lau, as cited in Wong 2010). This can be shown by using Diagram 3.1.4 as well. Since the price of the costs of production had increased, the producer may have higher burden in producing plywood and hence reduce production. As illustrated in Diagram 3.1.4, the reduction in the supply due to the rise in the costs of production which is the non-price factor is represented by a leftward

shift of the supply curve from S to S1. The new equilibrium price will increase from P to P1 and the quantity will fall from Q to Q1, ceteris paribus.

3.2 Surplus and Shortage

The oversupply of the plywood had caused the fall in the price of plywood and the producers to reduce their production (Lau, as cited in Wong 2010).

Diagram 3.2.1

As illustrated in Diagram 3.2.1, the oversupply of plywood is represented by the surplus gap between the demand curve, D and the supply curve, S above the equilibrium price where the producer produced at price P1. Therefore, due to the

excess supply in the market, there will be a downward pressure on the price of plywood. The producers will start to supply less while the consumers will demand more due to the fall of price of plywood and eventually reach to the equilibrium point, E and the price and quantity is Pe and Qe where the market cleared. Assume that there's a shortage of plywood in the market. As illustrated in Diagram 3.2.1, the shortage of plywood is represented by the gap between the demand curve, D and the supply curve, S below the equilibrium price. Therefore, due to the shortage, there will be an upward pressure on the price of plywood and eventually reach to the equilibrium point, E and the price and quantity is Pe and Qe.

3.3Elasticity

Elasticity is defined as the measurement of the responsiveness of the quantity demanded or quantity supplied to one of its determinants (Mankiw 2008).

Due to the availability of softwood which is the close substitute to plywood, Japan had reduced its import of plywood from Malaysia and Indonesia (Wong 2010). This

shows that the price elasticity of demand for plywood will be elastic and more than 1.

Diagram 3.3.1Diagram 3.3.2 Diagram 3.3.3

As illustrated in Diagram 3.3.1, the price elasticity of plywood is represented by a flatter demand curve, D. When the price of the plywood increase from P to P1, the quantity demanded for the plywood will fall at a greater percentage than the price increased of plywood from Q to Q1, ceteris paribus. At the same time, the cross-price elasticity of demand between the price of the plywood and the demand for softwood is positive realated. The increase in the price of plywood shown in Diagram 3.3.1 will lead to the increase of the demand for softwood as shown in Diagram 3.3.2 which represented by the rightward shift of the demand curve from D to D1. The new equilibrium price and quantity will rise from P to P1 and from Q to Q1, ceteris

paribus. The same situation also indicates an upward sloping demand curve for softwood as illustrated in Diagram 3.3.3 which when the price of plywood increase from P to P1, the quantity demanded for softwood will increase from Q to Q1, ceteris paribus.

3.4 Imports

Japan is one of the main importers of timber and timber products which include plywood from Sarawak (Japan Main Importer of Sarawak Timber 2002).

Diagram 3.4.1

As illustrated from Diagram 3.4.1, the import of plywood into the Japan market will lead to the price to fall from P to P1. Due to the imports, the consumer in Japan will

increase the quantity demanded for plywood from Q to Q2 while the local producer of plywood in Japan will reduce their supply from Q to Q1. The total imports of the plywood into the country will be the gap between Q2 and Q1. The consumer surplus will increase from area A to area A+B+D+E. The producer surplus will decrease from area B+C to area C where area B is transferred to consumer surplus.

4.0 Conclusion

The prices of plywood are uncertain due to the various factors affecting it. The rise in the price of plywood may be helpful in the industry. The assumption of ceteris paribus is adopted in analysing the economics theories available in the article. Although it may not be hundred percent reflecting the real plywood market in the world, it helps to assist the explanations of the economics concept in the particular situation.

5.0 References

Devaris. 2008. Managerial Economics BADM 4300- Unit III: Demand Functions & Elasticites of Demand. www.sg.inter.edu/.../badm4300module3.ppt? (accessed April 18, 2010).

Japan Main Importer of Sarawak Timber. 2002. The Sarawak Tribune, February 21. Borneoproject. http://www.borneoproject.org/article.php?id=355 (accessed April 18, 2010).

Mankiw, N. G. 2007. Chapter 4: Supply and Demand: Brief Principles of Macroeconomics.http://www.crawfordsworld.com/rob/HEGArchive/Economics/MankiwChapterNotes/HEGMankiw04Notes.htm (accessed April 18, 2010).

Mankiw, N. G. 2008. Principles of Microeconomics. OH: South-Western Cengage Learning. Googlebooks. http://books.google.com.my/books?id=fIj2bLjFn-

oC&pg=PA90&lpg=PA90&dq=definition+of+economics+elasticity+by+mankiw&source=bl&ots=mRjnYxb5Xu&sig=AZW3LNzgO7YJlJLS7qfBM8O3VH8&hl=en&ei=mzPIS6XqEMKyrAfg69H8CQ&sa=X&oi=book_result&ct=result&resnum=8&ved=0CB8Q6AEwBw#v=onepage&q&f=false (accessed April 18, 2010).

Riley, G. 2006. AS Markets & Market Systems: Cross Price Elasticity of Demand. http://tutor2u.net/economics/revision-notes/as-markets-crossprice-elasticity-of-demand.html (accessed April 18, 2010).

Wong, J. 2010. Plywood prices seen to go up. Thestar online, March 27. Thestar. http://biz.thestar.com.my/news/story.asp?file=/2010/3/27/business/5936527&sec=business (accessed April 18, 2010).

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