Managerial Economics: Palm Oil Production and Market Analysis

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ACTIVITY BOOKLET
CST 620–Managerial Economics
Class Activity
Course Title: Managerial Economics
Student Name:
Student ID:

The tasks shown below constitute 60% of the overall mark. 40% of the overall grade is allocated towards final
exam for this MBA unit
Class Activity 1
Palm Oil Production
Palm oil is used in the production of many goods, including cooking oil, margarine, ice cream, soap,
shampoo and more recently fuel for vehicles. It competes with other vegetable oils, made from soya
beans, rapeseed, sunflowers and groundnuts. While palm oil production takes up 6% of the land used for
vegetable oil plants across the world, it produces 38% of the total output of vegetable oil globally and
accounts for 60% of world exports of vegetable oil.
Palm oil is produced from the flesh of the palm fruit and, at the same time, palm kernel oil is produced
from the kernel or seed. After the extraction of the oils the waste is turned into palm kernel cake that is
then sold for animal feed.
In Malaysia the palm oil industry employs 570,000 people of which 405,000 are engaged in cultivation.
Table 1: Value of Malaysian Trade in Malaysian Ringgit (RM) million
2009 2010 2011 2012 2013 (Jan–Aug)
Palm OilExports 36.9 44.9 60.5 53.0 29.1
Total Exports 553.3 639.4 697.9 702.2 461.4
Total Imports 434.9 529.2 524.3 607.4 426.9

(Source: Department of Statistics, Malaysia)
Malaysian palm oil production could hit a new record high by the end of 2013. Palm oil stocks rose to a
peak in September 2013 as strong seasonal output outweighed rising export demand, lowering prices
that had already fallen by about 5% this year.
Forecasts of growing Southeast Asian output alongside rising supply of competing global oilseeds
dragged the price of palm oil down by 3.5% in September. Prices may fall further if the soya crop in
South America is as good as expected. A lower price of soya beans for crushing into rival soya oil could
take demand away from palm oil.
The strength of the Malaysian Ringgit (RM) could also continue to limit exports of palm oil. Indonesia,
the world's largest producer of palm oil, will keep its export tax for palm oil at 9%, while Malaysia has
decided to keep a more competitive export duty of 4.5%.
a) With reference to Table 1 compare Malaysia’s trade balance in 2011 and 2010. [5 points]
1. The difference between export and import is called trade balance. Higher exports on imports are
defined as surplus in trade and vice versa in case of higher imports on exports.
2. In 2011 total imports are decreasing by 4.9 million as compared to year 2010 and total exports
are increased by 58.5 million as compared to 2010.
3. Malaysia’s trade balance is in favourable condition if compare with year 2010. Because exports
are greater than the imports (Abdullah &Sulaiman, 2013).
4. It is in favourable condition in future also as higher local demand of the palm oil increases in the
local market.
5. Palm oil price may be more declined due to increase in the production of soya oil. This will
adversely affect the price of palm oil. This is called the price elasticity of demand of close substitute
goods. This may become the reason of surplus in trade balance
(b) Analyse, with the aid of diagrams, the impact of an increase in demand for palm oil on the
Markets for palm oil and palm kernel cake. [5 points]

1. Relatively elasticzdemand as a practical approach as demand for plenty of products responds in
the same manner with regard to change inztheir prices.
2. Palm oilzis producedzfrom thezflesh ofzthe palmzfruit and, atzthe sameztime, palm kernelzoil is
the kernel orzseed. After thezextraction ofzthe oilszthe wastezis turnedzinto palmzkernel cakezthat
iszthen soldzfor animal feed. (Abdullah &Sulaiman, 2013).
3. As the demand for palm oil increases the production of kernel cake also increases because it is a
by-product of palm oil.
4. Revenue will also increase of the country because imports are lower than the exports.
5. Growth of the palm oil sector will also strengthen of the country and market become stronger.
(c) How the concept of elasticity could be used to measure the economic relationship betweenpalm
oil and soya oil and what would the measurement show? [5 points]
1. Palm oil and soya oil are substitute products so the demands between both of these are
relatively elastic because of the availability of close substitutes.
2. Elasticity measure the impact of change inzthe pricezof one good with demand of another good
(Mukherjee &Sovacool,2014).
3. Other things remaining constant this concept is based on assumption that relationship between
the demandzof azgiven commodityzwith thezprice ofzrelated commodities,.
4. Expression is : Dx = f (Py)
{Where: Dx= commodity demanded; f = Practical relationship; Py = affected commodity prices
(substitute or complementary).}
5. Commodity demanded and substitute goods have the positive relation between them.
(d) Discuss one demand factor that might explain the change shown in Table 1 in the value
ofMalaysia’s palm oil exports in 2012 compared with 2009. [5 points]

1. Substitute goods defined as the goods which used on behalf of the other goods for satisfaction
the needs and desires.
2. Substitute good and demanded goods have the positive relationship between them with regard
to price.
3. If goods are used parallel to fulfil a specific want are called complementary goods. There is a
negative relationship between demanded commodity with regard to price of azcomplementary
(Mukherjee &Sovacool,2014).
4. Other things remaining constant Cross demand defined as the connection between the
demanded commodity and price of connected commodities,.
5. Above ofzthe demandzfactors arezthe reasonzbehind thezvariance betweenzMalaysia’s
palmzoil exports inz2012 comparedzwith 2009.
(e) Explain two policies that the Malaysian government might adopt to reduce the problems
associated with a falling price of palm oil and justify which of the two policies you would
1. Import substitution industrialization, to foster industrialization, for previously imported materials
the development strategy is focused to promote the domestic production.
2. For producing innovative, better featured and unique products it is good to adapt differentiation
strategy.
3. Giving special offers may also help to stop the switchovers.
4. Developing customer relations also contribute the organizations by switching over from their
products. (Johari, et. al., 2015).
5. Create awareness regarding to the product is also contributable to reduce the switching over the
product to the other products.
Class Activity 2
Collusion: Exploitation or benefit?

In 2011, two soap and detergent firms, Unilever and Procter & Gamble, were fined a total of €315m
(US$ 220m) for fixing the price of washing powder in eight European countries. Procter & Gamble is
the world’s largest consumer products company. The two firms had colluded over prices for more than
three years. The collusion began when they agreed to implement an industry-wide program to improve
their environmental impact by obtaining their raw materials from sustainable sources. They also agreed
to reduce the amount of packaging they used but to keep the prices unchanged. Then, later, they
collectively agreed to raise prices in Belgium, France, Germany, Greece, Italy, Portugal, Spain and the
Netherlands. This collusion was against the European Union competition laws and was regarded as
‘unfair competition’.
Some information from the 2010 financial report of Procter & Gamble (P&G) is shown in Table 1.
Table 1: Annual Report of Procter & Gamble
2006 2007 2008 2009 2010
Total Revenue US$ million 64416 72441 79257 76694 78938
Profits US$ million 8684 10340 12075 13436 12736
Distributed Profit per
ShareUS$ per share
1.1 1.28 1.45 1.64 1.80
The report states that ‘No company in the world has invested more in market research than P&G. We
conduct over 20,000 research studies every year. Over the past 15 years, P&G had 125 notable
innovations – more than our six largest competitors combined. P&G is the brand-building leader of our
industry with 50 brands that are among some of the world’s best-known household names – and which
together make up 90% of P&G’s sales and more than 90% of profits.

P&G is creating the advantage of large scale by integrating across our different businesses and markets,
allocating resources more efficiently than any small business can do on its own.’
(Source: Adapted from P&G Annual Report 2010)
a) Explain what is meant by ‘collusion’ and when it is most likely to occur in an industry. [5 points]
1. Collusionbmeanslagreement betweenppeople to actltogether secretlyporpillegally in orderpto
deceive orcheat someone.
2. Collusion is the source of oligopoly market.
3. Itpoccursowithinpan industry whengrivallcompaniespcooperatepforptheirpmutualpbenefit
(Castaño, et. al., 2016).
4. Collusionpmostpoftenptakespplacepwithinpthe marketpstructurepof oligopoly, where the decision
of azfewzfirms tozcollude canzsignificantlyzimpact thezmarket asza whole.
5. Unilever and Procter & Gamble adapt collusion forzfixing thezprice ofzwashing powderzin eight
Europeanzcountries.
b) Analyse, using Table 1, whether price fixing benefited Procter & Gamble. [ 5 points]
1. By analysing the table price fixing seems benefited to Procter & Gamble.
2. We can analyse that firms revenue is increased from 2006 to 2008 and a little declined in 2009
but in 2010 it again increased.
3. Company is also able to distribute profit per share so it will help the company to increase its
wealth.
4. Market positioning will also strong with this action.
5. Customer of this firm satisfied because they earn better profit with this company.

c) Suggest why creating the advantage of large scale by ‘integrating across its differentbusinesses’
might benefit a firm. [ 5 points]
1. Economies scales are the methods by a business can expanding their scale of production.
2. Integration helps to take the advantage of up to date machinery.
3. The advantage of integration is the firm get specialized and skilled labour that produces a larger
output and of better quality.
4. By integration firms can enjoy bulk buying of raw materials and selling of products.
5. With the help of integration or merging firms can afford the expenses of experiment and
research. Successful research may help to calculate the future expenses and earning of the firm (Castaño,
et. al., 2016).
d) Is the evidence in the article sufficient to conclude that Procter & Gamble is working against
the public interest? [ 5 points]
1. If collusion is absent then profit were declined more in comparison with last year.
2. No information is provided regarding to cost saving and rivals.
3. They obtained raw materials from sustainable sources and packaging may reduce avoiding
waste.
4. Their name is famous in the market (Hamelin, 2013).
5. A firm is able tozincreasezemployment (Alsos, et. al., 2014).

Activity 3
Discuss how a government might achieve a more equal distribution of income. [15 points]
1. The income of a country is divided equally among different groups of the society is defined as
Income distribution.
2. Countries income is divided among the population with the help of distribution method.
3. It gives the opportunity to the citizens to become successful.
4. Factors are unequally distributed so it is hard for market system to distribute the income equally.
5. The ways and the amount of redistribution is the concerning point for the policy designers.
(Bertola, et. al., 2014).
6. Measurement factor for income equality or inequality:
Gini coefficient – income inequality is measure in numerical form.
Lorenz curve – it displays the population’s incomes proportion

Lorenz curve – curves bentness shows the unequal distribution of income. As the curve bent deep the
distribution of income become high. Complete equality is shown by the 45 degree curve. – 1% of
population receives 1% of population’s income & so on.
Formula of Gini coefficient is: A / (A+B)
Values of Gini coefficient are lies between 0 and 1.
If coefficient value is lower the inequality becomes also lower and vice versa.
7. For redistributing income taxation is very popular method. 2 types of taxes are there:
 Direct taxes are placed directly to individual’s income and wealth is defined as direct taxes.
 Indirect taxes are levied on producers after they pass it to customers in the form of higher prices
are defined as indirect taxes. (e.g. VAT) (Björklund, et. al., 2012).
8. Taxes are:
 Progressive – With every rise of a person’s income average rate of tax also rise
 Regressive – With every rise of a person’s income average rate of tax declined.
 Proportionate – Tax is being constant on average rate.
9. Taxes are the first step in redistribution of income and collected taxes are passing on to the poor
is the second step for the government.
10. Government used the collected taxes to give the facility for desired goods viz. Health, education,
infrastructure with sanitation & clean water facility at free of cost. By this step government can provide
these goods and services to low income peoples in easy approachable way.
11. Another method for redistributing the income is to generate the income by taxes in the form of
higher rate of tax levied on rich peoples and lower rate of tax from the poor peoples by this income’s
flow is redistributed from rich to poor people. (Carvalho &Rezai, 2015).

12. Great short time solutions are progressive system of tax including transfer payments viz.
Subsidies, disabilities & unemployment benefits.
13. But, a fair long run policy would be to improve the approach towards to education and
healthcare, which may create more jobs and lower corruption.
14. A better improvement in the area of education and health is long term policy for generating
employment and minimize the corruption.

References
Abdullah, N. and Sulaiman, F., 2013. The oil palm wastes in Malaysia. In Biomass Now-Sustainable
Growth and Use. IntechOpen.
Alsos, G.A., Carter, S. and Ljunggren, E., 2014. Kinship and business: how entrepreneurial households
facilitate business growth. Entrepreneurship & Regional Development, 26(1-2), pp.97-122.
Bertola, G., Foellmi, R. and Zweimüller, J., 2014. Income distribution in macroeconomic models.
Princeton University Press.
Björklund, A., Roine, J. and Waldenström, D., 2012. Intergenerational top income mobility in Sweden:
Capitalist dynasties in the land of equal opportunity?. Journal of Public Economics, 96(5-6), pp.474-
484.
Carvalho, L. and Rezai, A., 2015. Personal income inequality and aggregate demand. Cambridge
Journal of Economics, 40(2), pp.491-505.
Castaño, M.S., Méndez, M.T. and Galindo, M.Á., 2016. Innovation, internationalization and business-
growth expectations among entrepreneurs in the services sector. Journal of Business Research, 69(5),
pp.1690-1695.
Hamelin, A., 2013. Influence of family ownership on small business growth. Evidence from French
SMEs. Small Business Economics, 41(3), pp.563-579.
Johari, A., Nyakuma, B.B., Nor, S.H.M., Mat, R., Hashim, H., Ahmad, A., Zakaria, Z.Y. and Abdullah,
T.A.T., 2015. The challenges and prospects of palm oil based biodiesel in Malaysia. Energy, 81, pp.255-
261.
Mukherjee, I. and Sovacool, B.K., 2014. Palm oil-based biofuels and sustainability in southeast Asia: A
review of Indonesia, Malaysia, and Thailand. Renewable and sustainable energy reviews, 37, pp.1-12.