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ECN60104-Economic Concepts To Real World Situations

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Question

Economics concepts are very useful in explaining real world issues. In order to enhance your learning, and to make your studies more interesting and useful, it is strongly recommended that you follow the latest economic debates through the media. This task will assess your ability to apply economic concepts to real-world situations. It comprises of a media review in which you are required to review and critically analyse at least one media article (can be from a newspaper, magazine or any printed media) by using economic concepts and theories.

Requirements:

Part 1

Choose ONE article and prepare a summary of about 300 words. The selected article should be current, that is, from May 2018 ONWARDS. Explain how this issue/article is related to microeconomics. You are required to attach the full article at the back of your write up.
Part 2

Study the article and apply any THREE microeconomic terms/concepts (any topics from Topic 1 to Topic 13). Discuss the relevance of the news item to the THREE concepts you have chosen. You are expected to integrate as best possible the concepts and theories presented in lectures with the material in the article. You are to provide between 3 to 6 proper references and/or citations. This section should not exceed 900 words.
 
 

Answer:

Introduction 

Microeconomics involve the study of the behavior of individual agents. This include behavior of a person, household or single firm in the economy. Demand and supply in the single market, production process, cost, elasticity of demand and supply, equilibrium are some of the vital microeconomics concepts (Mankiw 2014). The paper aims to critically review one recent article drawing reference from microeconomic theories and concept. The chosen article is based upon the electronic industry in Malaysia. The current market scenario and future prospects are discussed with appropriate theories.

Summary of the article 

In the past few years, the electronic industry of Malaysia constituted a fluctuating growth trend. The industry has recently marked a break from this trend. Even after four years of continuous growth, the industry has not yet showed any sign of growth slowdown as declared by Chuah Choon Bin, the chairman of Pentamaster Corp Bhd. There are several factors that contributed to the steady growth of the industry. This include introduction of devices run with Internet-of-Things, smart phones in the mid-range and adoption of electronic mechanism by the automotive industry. The dependency of automobile industry on electronic mechanism has been observed since the last three years. The new generation car models demand high power supply. Steady power supply is needed in the hybrid car model and in electronic car models. Realizing effectiveness of electronic car models, the automobile industry initiated development of such equipment and tested for automotive sensors. With this the automotive industry is projected to contribute 15% of growth of electronic industry in this year as against 10 percent in 2017. The concerned group delivered almost 50 test equipment to the automobile industry with value exceeding RM20 mil. This constituted more than 20 percent of the order received by the company in the first half of this year (thestar.com.my 2018). The company now is negotiating in the market of electronic components by shifting business to Malaysia. After Korea, Japan and Taiwan, Penang is one of the attractive destination of test equipment in Asia. 

 


The electronic industry is also benefitted from trade war between China and US. US has recently imposed heavy tariff duty for import from China. The manufacturers in China now become interested to shipment from Malaysia in order to avoid heavy tariff duty (thestar.com.my 2018). The supply of electronic components however fails to match demand of such components. The supply shortage causes price of the components to soar up.

Analysis of relevant economic concepts 

The article discusses different aspects related to electronic industry of Malaysia. The complete analysis of the article needs to evaluate the related aspects using some relevant economic theories. The theories related to the article include theory of demand, theory of supply, trade war and its impact on microeconomic variables.

Demand 

The theory of demand is one important microeconomics concept especially important for market economies (Carlton and Perloff 2015). The concept of demand is different from the literal meaning of it. A desire in economics is qualified as demand if and only if it is supported by purchasing power. It is the quantity of a particular good that consumer is willing to buy at a particular period of time. Law of demand explains the relation between price and quantity demanded of a good. Given all other factors, the law of demand proposes an inverse relation between price and demand. Apart from price, other factors influencing demand are income, taste and preferences, related goods (substitute and complements) and others (Sloman and Jones 2017). In case of electronic industry here are several factors that causes demand of electronic to increase. One supplementary industry of electronics is automobile. The industry now highly demanded electronics components for the newly developed car models. Most of the electronic components are now delivered to automotive customers.  

 

Figure 1: Increase in demand for electronic components

Demand growth of electronics are further contributed from the trade war between US and China. Because of higher tariff, China’s manufacturers are now preferring shipment from Malaysia. The increasing popularity of smart grid technology in automobile industry is driving up demand for electronics components (mida.gov.my 2018). The electronic motherboards which is made up of semiconductors, integrated and printed circuits offer a higher demand for electronics in the industry.

Supply 

In microeconomics, supply refers to the available quantity of goods and services that suppliers willing to offer corresponding to different price at a given point of time. Law of supply proposes the relation between price and quantity supplied of a commodity. This implies as price of a good increase supply goes up and versa. This produces an upward sloping supply curve. The positive relation between price and quantity supplied is explained by two factors. One is profit motive and other is entry of new firms (Hill and Schiller 2015). As price increases, given the cost profit increases. This encourages the existing suppliers to increase their production. Increase in profitability of the market attracts new suppliers to join the market. The combined effect of these two factors cause supply to increase in response to price.

 

Figure 2: Effect of supply shortage in the electronics industry

The balance of supply and demand determine equilibrium in the market. If supply falls short of demand, there is shortage in the market resulting in a rise in price (Cowen and Tabarrok 2018). The market of electronic components now suffering a shortage. The demand for electronic components are rising mainly due to an increased demand from automotive industry. The supply however fails to increase in line with causing a shortage of electronic components. Both the consumer and industrial segments are experiencing a lack of supply. As the distributors are running out of stock, companies have to outsource demand to the open market to meet the demand.  

Trade war and its impact 

Trade war occurs when one country imposes trade restriction in the form of import quota or tariff and its trading partner retaliates by taking similar kind of trade protectionism measures (Ross 2016). In response to growing trade deficit President Trump has imposed heavy tariff on goods imported from China and some other nations. This has triggered trade war between China and US. The ongoing trade war has a positive influence on the electronics industry of Malaysia. China now avoids trading with United State and prefers to explore production or import from Malaysia.

Economic analysis of the article 

The article focus on growth of electronic industry in Malaysia and discusses factors that contribute to the steady growth of the industry. The industry faces a growing trend in its demand which stimulates the growth of the industry. Automobile industry has a crucial role to play here. The environmental concerns resulted from burning of fossils fuels increases popularity of hybrid and electronic cars. Electronics components are used in the new models of cars. The safety technologies, semiconductors, integrated circuits and for other part, electronic components are used. Automobiles companies are focusing on developing more and more equipment that push up demand. The growth of automobile industry thus pulls up the growth of electronic industry as well. Demand is expected to be dominated by the spread of smart grid technology in the Asia pacific region especially that in India and China. Growth of automobile industry in these regions raise demand for the industry’s product. The breakdown of China and US trade relation significantly influences demand for the industry (bbc.com 2018). As the manufacturers show their interest in importing from Malaysia, the industry experiences a further stimulation in demand. The consumers and industry however might suffer from a shortage in the supply of electronic parts. Following a steady growth in demand, supply fails to match the demand. This incurs an upward pressure on price of electronic components (Nicholson and Snyder 2014). The scenario is analyzed in the following figure using a microeconomics framework of demand and supply.

 

                                                                      Figure 3: Demand-Supply framework for electronic industry

The demand for automobile components are shown by the downward sloping curve DD. The corresponding supply curve is SS. With a growth of demand for electronic components, the demand for automobile shifts outward to D1D1. The higher demand leads to an expansion of electronic industry as reflected from an output and price growth of the industry (Mochrie 2014). At the given supply, shortage in the market is given by EF. In order to meet the shortage some of the demand are outsourced to the open market.

Conclusion 

Electronic industry is Malaysia is experiencing a steady growth in the past years. Microeconomics tool of demand and supply are used to analyze the scenario of automobile industry. Rise in demand is the main contributing factor for industry growth. One source of growing demand is the growth of automobile industry. Automobile industry accounts for a considerable share in electronic industry’s growth. The share is expected to increase further in this year. An exogenous factor contributing to rising demand in the industry is US-China trade war. The supply of electronic components however lags behind the demand causing prices for electronic components to increase. 

 

References 

BBC News., 2018. China to respond 'resolutely' to US tariffs. [online] Available at: https://www.bbc.com/news/business-45294162 [Accessed 28 Aug. 2018].

Carlton, D.W. and Perloff, J.M., 2015. Modern industrial organization. Pearson Higher Ed.

Cowen, T. and Tabarrok, A., 2015. Modern principles of microeconomics. Macmillan International Higher Education.

Hill, C. and Schiller, B., 2015. The Micro Economy Today. McGraw-Hill Higher Education.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Mida.gov.my., 2018. : MIDA | Malaysian Investment Development Authority :. Electrical and Electronics. [online] Available at: https://www.mida.gov.my/home/electrical-and-electronic/posts/ [Accessed 28 Aug. 2018].

Mochrie, R., 2015. Intermediate microeconomics. Macmillan International Higher Education.

Nicholson, W. and Snyder, C., 2014. Intermediate microeconomics and its application. Nelson Education.

Ross, R.J., 2016. After the Cold War: Domestic Factors and US-China Relations: Domestic Factors and US-China Relations. Routledge.

Sloman, J. and Jones, E., 2017. Essential Economics for Business. Pearson.

Thestar.com.my., 2018. ‘Electronic industry is not slowing down’ - Business News | The Star Online. [online] Available at: https://www.thestar.com.my/business/business-news/2018/08/27/electronic-industry-is-not-slowing-down/ [Accessed 28 Aug. 2018].

Thestar.com.my., 2018. Joint statement by governments of China and Malaysia on bilateral ties - Nation | The Star Online. [online] Available at: https://www.thestar.com.my/news/nation/2018/08/20/joint-statement-by-governments-of-china-and-malaysia-on-bilateral-ties/ [Accessed 28 Aug. 2018].

‘Electronic industry is not slowing down’

GEORGE TOWN: After four years of steady growth, the rather volatile electronic industry is not showing signs of slowing down, Pentamaster Corp Bhdimage chairman Chuah Choon Bin said.

Since the introduction of mid-range smart phones and Internet-of-Things (IoT) devices and the adoption of electronic functions into the automotive industry, growth has steadied, Chuah said.

“The growth was supported by demand from the new generation cars and the high demand of power electronics devices in the hybrid and electric vehicle (EV) car control system.

“We noticed the trend three years ago and started to develop test equipment for testing automotive sensors,” Chuah said.

 “The group delivered about 50 test-equipment with a value of more than RM20mil to the auto industry, which is more than 10% of the RM200mil worth of orders we have received in the first half.

“In the second half, there would be another 70 test-equipment with a value of more than RM30mil that needs to be delivered to the automotive customers,” he said.

According to Chuah, the group is now negotiating with electronic component makers about relocating to Malaysia.

“Penang is one of the top destinations in Asia after Korea, Taiwan, and Japan known for its test-equipment,” he added.

The US-China trade war is also expected to have a positive impact on the industry as Chinese manufacturing companies explore production and shipment from Malaysia to avoid the hefty import duty imposed by the US on China-made products. Managing director Alvin Mui said the rising demand from the automotive segment has created a shortage of electronic components since last year.

“The scarcity of electronic components has become more acute this year, impacting the supply to the consumer electronic and industrial electronic segments. We have to source in the open market now, as our distributors are out of supply.

“The price of components has soared a hundred times due to the supply situation,” he added.

According to a Market Research Future report, automotive smart display market is expected to reach US$9.78bil by the end of 2023, growing at a compounded annual growth rate (CAGR) of 12.56%.

“The growing popularity of smart display in the automotive industry to enhance safety technologies and to provide wireless connectivity is driving the demand for semiconductors, integrated circuits and printed circuit board assembly (PCBA) products, popularly also known as electronic motherboards.

“Asia-Pacific, in particular the economies of China and India, is expected to dominate the smart display market for automotive during the forecast period.

“Low manufacturing cost and the high demand for vehicles in the region will also drive up the demand for new vehicles in Asia Pacific,” Mui said.

For this reason, the contribution from the group’s automotive business segment has grown over the past two years.

“We supply electronic motherboards and cables to the automotive industry. We expect the contribution to be even more significant over the next two years,” Mui says.

On the impact of the US and China trade war, Mui said the group is now in talk with a few China-based producers of electronic components who expressed interest to engage PIE to produce for them.

“If they produce and ship from China, their products will face a hefty import duty on entering the US.

“We are, however, selective about producing for them. We will only pick customers with value-added electronic components that could yield a reasonable margin, and which require minimal labour for the production process.

“We hope some of the deals can be sealed in the near future so that they can contribute in 2019,” he added. Chief executive officer Datuk Heng Huck Lee says contrary to slowing down, both electronics and semiconductor industries are anticipating further growth in the coming years.

“Mid-range smart phones and devices, IoT products, the next generation of smart televisions, which are a breakaway from 4K and 8K resolution, and the roll out of 5G infrastructure will drive the growth of the electronic and semiconductor industries.

“Our smart sensors and laser modules to the automotive sector are expected to drive revenue and profitability.

“We are hopeful that the automotive sales contribution will generate 10% to 15% segment of the group’s revenue by 2020 from less than 3% presently,” he added.

According to Heng, the US-China trade issue would benefit Malaysia. Globetronics has received enquiries from potential Chinese manufacturers interested to engage with Malaysian manufacturers to produce for them.

“Any relocation or transfer of manufacturing operations to Malaysia will benefit our local electronic and semiconductor players,” Heng said, adding that Globetronics is now talking to two potential companies.

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