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Aggregate Supply Curve In Malaysia

Since 1970, Malaysia has altered itself from raw materials producer into increasing multi-sector market. Under present Best Minister, Malaysia is wanting to attain high-income status and also to increase value-added development series by attracting investment funds in Islamic funding, technology processing, biotechnology, and services.

The government is trying to enhance local demand and lessen economy's reliance on exports since exports stay an market major effort. As oil and gas exporter, Malaysia has gained benefit from higher world make prices, even though government subsidies is compelled to decrease because of the growing domestic gas and diesel gas cost, mixed with overwrought government funds. The federal government is also looking to reduce its reliance on talk about oil designer PETRONAS as oil and gas section contributes above 40% of government income.

The central bank or investment company retains good international trade stores, and well-developed regulatory system has restricted Malaysia's disclosure to threaten financial device and global financial meltdown. On the other hand, Malaysia could be at risk to fall in product prices or wide decelerate in worldwide economic activity because exports are Gross Home Product (GDP) main element. Primary Minister has lift up potential alterations to the unusual economic and interpersonal favorites with the goal of attract increased investment; however he has attained major conflict, particularly from Malay nationalists and other vested interests.

However, during global financial meltdown in yr 2008-2009, although Malaysian financial system was guarded from the direct effects of financial contact credited to disallowed of new derivatives into the country, the global financial meltdown has transmit uncertainty on the Government's strategies to attain eye-sight 2020 because of collapse in exports and slowdown in foreign direct investment (FDI).

Theoretical Background

Aggregate demand (Advertisement) is aggregate variety demanded for goods and services in overall economy at given general price level. It is symbolized by aggregate demand curve, which illustrates the negative romance effect between price level and total outcome assuming no variation in federal spending, net fees or monetary insurance policy adjustable. Aggregate demand curve is downward sloping because of riches effect, interest effect and exchange rate effect.

At each point along aggregate demand curve, the total quantity demanded is strictly equal to planned aggregate expenditure, which is the mixture of intake, investment and authorities spending. Each point on aggregate demand curve stands for certain degree of aggregate costs that is dependable with equilibrium in goods and money market at given price.

When the aggregate demand curve is transferred along, the change of price level is presumed to cause equilibrium GDP change but other determinants of equilibrium GDP remain constant. When other determinants except price level lead the equilibrium GDP change, aggregate demand curve will move itself. The other determinants of equilibrium GDP are consumption bills, investment spending, federal government expenditure, taxes, net export and money source.

Aggregate source (AS) is total goods and services supplied that are stated in economy at particular overall price level. It is corresponded to aggregate resource curve or 'price/productivity response" curve, which shows positive relationship effect between total output amount provided and overall price level. The curve also does draw out the price and output options of all market segments and businesses in overall economy under given set of circumstances.

In short run aggregate resource, the idea of fixed capacity performs role in macroeconomics. At low end result point in overall economy, there is possible to be surplus capacity in market. A rise in aggregate demand is possible to outcome in increase in amount produced with somewhat or no raise in overall price. Thus, aggregate supply curve may very well be flat at low aggregate end result level. The overall economy maybe works below ability when there is cyclical unemployment even if companies are not holding surplus labor and capital. The short-run aggregate source curve is upward sloping, because the price of a few inputs are supposed to be chosen under auction-like situations, caused by markup costing and/or presumed informational irregularities.

In long run aggregate supply, companies' reaction to a rise in aggregate demand varies from generally increasing result to principally increasing prices as unemployment rate comes, salary and cost of inputs will increase. When overall economy is producing at its maximum capacity, aggregate source curve becomes vertical.

There must be time hold off between change in source price and change in outcome price for aggregate supply curve to slope upward. If suggestions prices altered instantly to end result prices, the aggregate supply curve would be vertical. Wage rates may increase at similar rate as overall price if price level enhances in totally foreseen.

The reasons of the shifts of short-run aggregate resource curve are cost of production, expectation on future price level, economical growth, public plan and weather condition. Meanwhile, the sources of shifts of long-run aggregate source curve are change in labor, capital, natural resources and technology.

Equilibrium price level is the price level at which the aggregate demand and aggregate supply curves meet. Equilibrium price level complements up with equilibrium in the goods & money marketplaces and lays down price/outcome decisions on part of all firms in economy AD/AS agenda is applied to assess the consequences of monetary & fiscal coverage on the market. Potential GDP is aggregate outcome level that may be continued in the long run without inflation. Economists consider costs cover behind price level changes in the brief run; eventually move with the entire price level in long haul. If the purchase price level raises at a fixed rate, inflation may be fully foreseen & included in labor contracts.

Discuss and argument

Aggregate Supply is the total way to obtain all goods and services in an economy. Normally, the aggregate source curve is get like vertical series, also name as traditional range. But, the truth is, this Aggregate resource are divided into 3 range, which is Keynesian range, intermediate range and also classical range.

Keynesian range appear in the brief run and show a horizontal portion on of the aggreagate supply curve (blue collection), which stand for the market is under the tough economy condition. Platform on stand below, the price level is fixed regardless how many the output have been produce by the united states. When AD change rightward from AD1 to Advertising2, the total end result has increase however the price level stay the same. That is due to the substaintial idle production capacity such as unemployed employee rivalling for available careers can put to work.

The intermediate range, as show in the green line, is the increasing of aggragate source curve when the economy is getting close to full employment end result. When the Advertisement change rightward from Advertising3 to Advertisement4, the end result and also price level increase. This show they have the positive marriage between price level and real GDP. When the price level increase, this had cause the inflation arise. You will discover 3 factor cause this inflation appear, the first one is bottleneck occur because the organization no completely utilise the resources. Example, if the steel industry no totally supply to the metal organization. Bottleneck cause metal company no enough fresh material to create their product and the cost of material become higher, so they'll also increase the price of thier product, so inflation occur. Furthermore, when the business are earning higher income, their employee will have a tendency to require higher wages. The income demand to increase is hardly to reject because company fear the worker will stop or punch. Beside, the company also can pass the cost to consumer side easily because in this level, the unemployement rate is leaner, all people acquired thier job and they're expect higher price of goods as they believe that will be more quality. Lastly is the fact that sometime the firm still using the less produtivity worker or outdate equipment. This will cause the cost of production increase and be higher product price.

Lastly the classical range is happen only in Long run supply curve where the curve is vertical shape, which show that the true GDP remain regular at full career end result at point Yn, regardless of how many the price level acquired increase or lower. When the AD shift rightward from AD4 to Advertisement5, the output remain frequent, but it will cause the price increase, as a consequency economy go through inflation.

The aftereffect of upsurge in Aggregate demand

AD1

AD2

AD3

AD4

AD5

AD6

YN

Aggregate_resource_svg. png

Now we consider the aggregate demand curve is stationary and the factor that influence the aggregate resource curve to transfer. This factor are call non-price-level determinants.

What happen aggreagte supply curve in Malaysia just lately?

During the entire year 2008, the petrol price in Malaysia all of the sudden increase sharpy to US$147. 27, compare to the entire year 2002 which the oil price is only US$20 (Hour, 2009). This issues was cause many household and also firm suffer a lot. As we know that the changes of aggregate demand is bottom on changes in total demand for all final goods and services. In the figures of consumer price index (CPI) got found that every cunsumer use 68% using their income for consuming food, non-alcholic beverages, housing, electricity, gas, transportation and also energy. After the petrol hike in june 2008, the CPI immediate increased to a 27-year most of 7. 7% instead of 3. 8% in-may, 2008, which possessed increase 3. 9% within one month. Increase in type price experienced cause the price level of economy increase, the household purchase power will drop because their real income experienced decrease. For instance, before upsurge in petrol price, one bowl of nasi lemak is cost RM2. 00. but after boost the input price, the seller need to keep higher cost to move the same level of nasi lemak, so they will transfer the cost to consumer by improve the value to RM4. 00. Now, with the same plate of nasi lemak, the customer need to paid dual price, therefore their purchase electricity decrease. In addition, it also will affects the households monetary wealth drop. As a result, the total consumption decrease, aggregate expenditure reduce, and lastly impact aggregate demand drop.

Aggregate resource curve will change predicated on changes in insight price. As we know that most of the firms need the petrol price for carry and deliver their product. When the engine oil price increase, the businesses insight cost will be increase as well, therefore, the companies will supply less outputs. then your short run aggregate supply curve will switch to left, then your price level increase, total end result decrease. If the output lower, the manage will try to reduce the source cost such as layoff some existing labor. Therefore the unemployment rate increase.

Why suppy surprise will take place in Malaysia?

The first reason the impacts the engine oil price shock occur in Malaysia is basically because 80% of the world's petrol reserves are own by state-owned olive oil firms therefore it have a tendency to limited the international companies to gain access to (Hour, 2009). Beside, the cause of shortage of olive oil supply is because of most of the best located field are found in the a few ten years ago and one times this field will also be used up as the fresh material are limited nowadays. Furthermore, how big is the engine oil field found just lately are very small and costly to use. For instance, if we found 10 small olive oil field in seperate location, which means that the organizations need to create 10 rigs compare to a major engine oil field they just need a huge rig.

The suppy distress can solve antomatically?

In long haul, the oil price shock can be solve automatically if the government or central lender does not implement any policy. Once the petrol price increase, the source price for the supplier will be increase, then your short run aggregate suppy will transfer left, price level increase from Po to P1, aggregate result will decrease from Yo yo Y1. In the long term, the drop in the full total output may cause the firms want to layoff the employees to lessen their cost, so the unemployement rate in market will climb. The purchase price expectation of employees for higher wage will drop and cause the businesses have more money to increase more outputs to supply. So the brief run aggregate suppy curve will alter back to from SRAS1 to SRASo. Therefore, the price level and also total end result are back to equilibrium level and the stagflation is solve.

P

YN

Y1

P1

P0

LRAS

SRASO

ADo

Y

SRAS1

The supply surprise can solve by government?

Although the essential oil price surprise can be solve in long term, however in the short term the resident are go through a lot especially for the reduced income family as well as the unemployement rate increase swiftly. The umemployed resident are rely upon the money in their cutting down take into account survive. If the purchase price level increase more higher, they is caught with high cost of living with no compensation from the federal government. So, government must put into practice the expansionary fiscal insurance plan to solve the unemployement. When inplement this insurance plan, the Aggregate demand curve will move rightward from ADo to Advertisement1. Then your price level increase from P1 to P2, total productivity will increase back to equilibrium level of result from Y 1 to Y2, and now Y2=Y1. The purchase price level experienced increase higher than before, and the result back to equilibrium level, and the bigger inflation happen.

SRASO

SRAS1

ADo

AD1

LRAS

P

Y

YN= Y2

Y1

P1

P0

P2

Factor to shift the aggregate demand curve

Aggregate demand(Advertising) is the total range of demand of goods and services in economy. The AD is nearly equal with aggregate expenditure(AE). The factor will have an effect on the Advertising curve are based on equation of aggregate costs, AE=C+I+G+NX. Inside the Advertising curve, each point is representing certain level of AE that same with the equilibrium in money market at given price. When AD curve is moving along, price level change as due to the change of equilibrium GDP but other determinants are remain constant. When reverse course, change of other determinants change the equilibrium of GDP, Advertisement curve switch itself. Therefore, the other determinants are ingestion spending, investment spending, administration spending, taxes, world wide web export and money source.

The quantity of money supplied at a given price level will affect the Advertisement curve. When money source is increase, the curve switch to the right from Ms0 to Ms1. The interest rate will drop from r0 to r1. The eye drop because of the increase of investment spending and the AE increase cause the true GDP increase. AE curve switch upward show that the output will decrease. At the end, the Advertisement curve will switch right from Advertisement0 to AD1 to remain the price at the constant.

P

AE=Y

AE1

AE

Y

Y0

Y1

I

r0

I0

I1

Md

r1

r

r

Ms0

Ms1

Md

M

r0

r1

P

Y

AD0

AD1

P0

Y0

Y1

In the others hands, if there are spending great shock, means the government spending is increase, this will influence the Advertising curve change to the right. Shown from the graph below, when the upsurge in government spending at any given price level, the AE curve will alter upward and go up the true GDP. when the true GDP higher the given price level, it cause the Advertising curve switch to the right from Advertisement0 to AD1.

P

Y

AD0

AD1

P0

Y0

Y1

P

AE=Y

AE1

AE

Y

Y0

Y1

G

Why oil price surprise will affect aggregate demand curve?

Aggregate demand is dependant on changes in total demand for all final goods and services. Through the oil price great shock, the essential oil price increase in Malaysia. This increase of engine oil price cause the purchase price level of market increase. The purchase price level affect the real income lower and decrease the purchase electricity of household. Home purchase electricity drop imply that the consumption cut down. Consumption spending is one of the factor to move the Advertisement curve. When utilization decrease, it switch the Advertising curve to the left from AD0 to Advertisement1. Therefore, the purchase price will decrease from P0 to P1 and the end result also reduce from Y0 to Y1

AD1

P0

AS

AD0

P1

LRAS

P

Y

Y0

Y1

How to solve the aggregate demand automatically?

If the federal government or central bank do not put into action any policy during the shock of the petrol price, this has to solve the aggregate demand automatically. After the aggregate demand shift left from Advertisement0 to AD1, the price and the outcome were reduced. When the productivity drop, the work lower and unemployment increase. This have an impact on the expected price drop and the wage rate decrease. At the same time, the brief run source curve change to the from AS0 to AS1. By the end, in the long run, output will return back from Y1 to the natural result Y0, but the price could keep on cut down from P0 to P1 and P2. This cause the deflation appear throughout the market.

Y0=Yn

AD1

AS1

P0

AS0

AD

P1

LRAS

P

Y

Y1

P2

How the federal government or central loan company solve the supple shock?

When the supply impact solve by automatically, it will stay back again the outcome value but the price decrease constantly. This affect the complete market economy and become deflation. The deflation will make the economy down and this will make put up with to the whole country. Therefore, federal should execute the policy to solve this problem. To shift back again the aggregate demand curve, federal need to use the expansionary fiscal insurance policy. This insurance policy can transfer the aggregate demand curve to the right from AD1 back again to AD0. Over time, the price back to the natural price P0 and the productivity also differ from Y1 to the natural output of Y0.

AS

LRAS

Y

AD1

AD0

Pn=P0

P1

P

Y0=Yn

Y1

Conclusion

The essential oil price shock in 2008 acquired brought a huge impact for Malaysia's current economic climate. After rising in essential oil price, companies need to pay higher type price for the creation purpose. Thus, firms sold their goods for higher price which causing consumers' purchasing power lowered and the aggregate demand decrease. The increasing source prices also creating firms to create less output which might cause the unemployment rate increase.

In short run, government can put into action the expansionary fiscal plan to solve the unemployment problem. However, the purchase price will increase even greater than before which can cause hyperinflation. If the government or central lender does not implement any policy during the oil price shock, the condition will be resolved automatically over time but it might cause consumer to go through a whole lot in the short run.

We recommend Malaysia authorities to develop reasonable oil price preparing tool, obtain cheap oil from overseas country, searching different resources, give subsidies to companies and increase wage rate of staff in order to reduce the results of increasing engine oil price.

Throughout this project, we have a better understanding about the aggregate demand and aggregate supply and in a position to use it in real economy situation. We'd also discovered how to work in a team effectively and effectively in conditions of cooperation and time management to be able to accomplish the duty given.

Recommendation

Increasing in olive oil prices is a significant issue that may affect aggregate resource and aggregate demand which bring large impact to Malaysia's overall economy. Appropriate ways need to be used order to minimize the consequences of increasing olive oil price in Malaysia. Our recommendations are as follow:

Reasonable Oil Price Setting Instrument

First, government needs to develop reasonable essential oil price setting instrument which may ensure the engine oil prices are establishing within a range which is sensible and affordable for residents, and allow reasonable profit for engine oil industries. You can find three aspects that needs to be taken into account while determine the essential oil cost range, which are the consumers' purchasing power, an estimation of profit for oil sectors in fair level, and the international engine oil prices. With the help of this system, Malaysia's olive oil prices could be more realistic and reasonable which may prevent uncontrollable increasing of olive oil prices in Malaysia. If the petrol prices are occur a reasonable level, there will be no large impact on the aggregate demand and aggregate supply curve.

Obtain Cheap Essential oil from Foreign Country

In order to minimize the impact of high petrol price, government is suggested to search for the new resources of low-cost engine oil from other country. Malaysia's government can transfer cheap and poor oil from international country and refine it to become better quality essential oil which is qualified to concern to the marketplace with lower cost. The reservation of the cheap essential oil in a certain amount is also necessary in order to avoid Malaysia from being the sufferer of increasing prices in the cheap engine oil. With the available of cheaper petrol (source), businesses will boost the aggregate way to obtain the outputs which might prevent shortage of goods in the market. When there can be an increasing output in the market, the price of the goods will be reduced and the aggregate demand will increase to a certain level.

Searching Alternative Resources

High engine oil price problem only can be fixed by associate work of both administration and individual. To be able to lessen the impact of high olive oil price, the business should try to do some exploration or discover the alternative of the engine oil like bio gas and electronic bike and really should try to technology so that the product of the organization can be produce on other alternatives. In this example, the business can decrease the quantity of the oil which used to produce the productivity. Then, the dealer or provider wouldn't normally reduce the quantity of supply which influences the aggregate source shift left. On the other side, aggregate demand also relatively would not be affected that your curve shift to the left because the buyer can continue steadily to consume the product in the standard price.

Give Subsidies

Once the olive oil prices increase, it'll directly or indirectly have an impact on the whole creation cost, including the fee of the travelling or other else. To be able to solve it, the government should provide subsidies to the supplier or provider to be able to control the marketplace price. After the suppliers receive the subsidies from authorities, they will not increase the retail price of their products given that they want to keep up their organization's earnings. By implementing this strategy, the inflation problem can be averted because the distributor would not increase the price of product due to the higher insight price. Hence, the aggregate demand and aggregate resource wouldn't normally be infected.

Increase Wage Rate

In the market, increasing oil prices can lead to inflation problem in Malaysia. This issue will induced our citizens have problems with financial burden and their purchasing electricity will decrease. In this case, government can raise the amount of minimum wage in order to make certain the organization provides the expense of living to the staff. This assists the employee have the ability to maintain their basic needs in their daily life but the high oil price situation happened in Malaysia. Person that using the vehicle during the daily life, the oil price increase will immediately increase their daily expense. Purchasing electricity of the individual will be decreased and finally it will have an impact on the aggregate demand change to the left because consumer consume less than before. After increasing salary rate, this issue can be solved and the curve of the aggregate demand will back to original.

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