Microeconomics Report: Tenaga Nasional Berhad Analysis, Malaysia

This report provides an in-depth microeconomic analysis of Tenaga Nasional Berhad (TNB), the primary electricity provider in Peninsular Malaysia. It begins with an introduction to microeconomics, defining its scope and objectives, and then identifies TNB's market structure as a monopoly. The report...Read More

PRINCIPLES OF
MICRO-ECONOMICS
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Contents
INTRODUCTION...........................................................................................................................3
Introduction to company and its market structure identification............................................3
Rationale behind chosen company being in the market structure based on its structure.......4
Market Structure.....................................................................................................................6
Demand and Supply...............................................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................12
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INTRODUCTION
Microeconomics refers to a branch of economics which deals with the study conducted
on the behavioural characteristics of firms and individuals in relation to decision making process
taking into consideration two facts that resources are scarce and human wants are unlimited.
Micro economics is generally concerned with the optimum utilisation of resources through
effective allocation of resources which are scarce and also taking into account the interaction that
takes place between firms and the individuals (Albarran, A., 2016). The major goal of this
branch of economics is to conduct analysis of the mechanism of market so as to decide and
establish relative prices for products and services and allocate the limited and scarce resources
amidst the alternative and varying uses. Microeconomics reflects the conditions under the scope
of which free markets conduct desirable allocation of resources. It also takes into account the
market failures in those situations wherein market fails to deliver effective and efficient results.
Micro-economics is a concept which works and operates in total contrast to macro-
economics that is a branch of economics which involves “the sum total of economic activities
taking into account the various issues related with inflation, growth and unemployment as well
as the national policies which relate to such issues" (O'Hara, 2014). The principles of
microeconomics largely deal with the effects of policies related to economics such as fluctuating
tax levels related to micro-economic behaviour and thereby relating to the aforementioned
aspects of any national economy. Majority of the modern macro economic concepts, theories and
approaches have been built on micro foundations which imply that they are based on certain
basic assumptions associated with micro-economic behaviour. This report is based upon Tenaga
Nasional Berhad which is the only company that is indulged in supplying of electricity to the
local households with in Malaysia. This entity is headquartered in Kuala Lampur This report will
explore the market structure of this enterprise along with the reasons behind this company being
in this market structure. Further this report will gain a look into the ways in which this enterprise
strives to achieve equilibrium in short run and long run.
Introduction to company and its market structure identification
Tenaga Nasional Berhad is the only electric utility enterprise present within Peninsular
Malaysia and this organisation is also recognised as being the biggest public listed power supply
company within Southeast Asia. Operating within electric power industry, this organisation
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feasibly and successfully employs over 35000 employees at present. Further this enterprise had
an overall operating income of RM 5.89 billion by the end of the year 2013. Also, the worth of
total assets owned by company in 2013 was RM 99.03 billion and net income of entity was RM
4.61 billion. Tenaga Nasional Berhad earned enormous revenue of RM 37.13 billion in the year
2013. Looking upon the figures mentioned just before, it can be stated the scale of operations is
not small and the success of the enterprise reflects in its revenue and operating incomes.
Tenaga Nasional Berhad enjoys monopoly within the industry owing to being the single
most company which is functioning and operating within Malaysia dealing in this sector. This
organisation serves more than 8.4 million consumers throughout Peninsular Malaysia and the
eastern state of Sabah through Sabah Electricity Sdn Bhd. Tenaga Nasional Berhad’s major
activities are ascertained to be generation, distribution as well as transmission of electricity. The
other major processes and functions taking place within this company comprise of testing,
repairing as well as maintenance of the power plants, provision of engineering facilities,
acquisition as well as construction facilities for power unites associated goods, assembly and
production of very high voltage switch gears, trading, coal mining and many more. This
organisation has its operations spread across geographical locations such as Mauritius,
Malaysia, India, Pakistan and Indonesia.
Looking at the above mentioned information, it can be seen that company operates at a
very large scale and provides products and services across various places spread across the
globe. Further this is the only electric company within Malaysia due to which it enjoys
economies of scale. Being the only player within the industry, this company derives benefits out
of the market structure in which it operates, that is, monopoly (Franklin-Johnson, Figge and
Canning, 2016). Enjoying the monopoly position, this enterprise has built a large customer base
which possesses least influence as well as the authority to carry out negotiations upon the
products and services offered by organisation.
Rationale behind chosen company being in the market structure based on its structure
Present company, Tenaga Nasional Berhad is one of the largest and only companies who
are engage in the process of supplying electricity to households in Malaysia. Company opted to
remain only direct electricity supplier directly to Malaysian consumers as to run their activities in
a monopoly business sector. Monopoly market provides basic feature to company that are
mentioned below in brief:
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 It allows a firm or an organisation to produce goods and services without facing a close
substitute. In context with this, Tenaga Nasional Berhad or commonly referred to as TNB
simply offer their services as an only electric utility company without having a close
substitute.
 As company provide their services in monopoly market structure they become price
maker for the overall industry which is required for consumers to accept (Franco, 2017).
 In addition to this, another attractive feature provided by monopoly market is entry
restriction, in present context, Tenaga Nasional Berhad enjoy restrictions of entry of other
industries that can be in the form of, legal, artificial, economical and institutional.
 Monopoly market structure offer Tenaga Nasional Berhad a facility to take ownership of
scare raw material which directly plays an effective barrier for other firms in order to
enter in electricity market in Malaysia.
Being the sole player within the electrical power industry as well as looking upon the
above mentioned features that reflect the resemblance between monopoly market structure and
Tenaga Nasional Berhad, it can be said that TNB is rightly enjoying the benefits, characteristics
and features of monopoly. Besides this, all the above mentioned features of monopoly market
structure allows Tenaga Nasional Berhad to control the market price of electricity in Malaysian
market and simultaneously control the prices of their products and services in order to gain high
profits and ensure their sustainability for a long duration of time.
Advantages of Monopoly Market Structure for TNB and Malaysian Government:
Tenaga Nasional Berhad enjoy single most electricity provider in Malaysian economy
who distributes electricity in each home in that country. TNB have significant economies of
scale so as to have a comprehensive network as there is no sense to have two points of electricity
cables running in the same street. There are some certain advantages of monopoly to both
Tenaga Nasional Berhad and Malaysian Government:
 Monopoly benefits Malaysian economy and Tenaga Nasional Berhad to avoid duplication
which in result avoids any kind of wastage of existing and future resources. This structure
will effectively benefit Malaysian government as there is a problem of fake product exits
in country.
 Tenaga Nasional Berhad enjoys economies of scale while running their activities in
monopoly structure as on this they are the only supplier of a product in a market. This
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will aid company to discriminate their pricing strategies in economically weaker section
and provide benefits to consumers.
 Malaysian Government effectively enjoy major source of revenue from Tenaga Nasional
Berhad as it is the only electricity provider in the country and pay required revenue to the
government in the form of taxation.
 While conducting their operations in monopoly market structure Tenaga Nasional Berhad
make efficient amount of profit that can be effectively be utilized in research and
developmental activities and to maintain their status of monopoly organisation.
TNB as a Natural Monopoly
In Malaysia, TNB acts a perfect example that can be related to natural monopoly as firm
is the sole electricity provider to every household in the entire country. Tenaga Nasional Berhad
termed as a natural monopoly because of their high start-up costs in order to set power grids
along with power stations. TNB is one of the significant electricity service providers on Malaysia
and owns a license to perform their functions in the monopoly market for the last initial 21 years.
As a natural service provider TNB enjoys the full control over price and thus have the power to
increase the price without any reasonable reason without worrying about consumer deficiency as
it the only electricity provider. TNB acts as a price maker as without facing a threat of any
competitor or substitute. Moreover, customers in Malaysia are not that much sensitive to the
price fluctuations in electricity as TNB run their operations as an only organisation who offer
electricity services in Malaysia with having a fair inelastic demand curve. Therefore, firm have
the all possible right to charge higher prices for the electricity. In reference to the natural
monopoly, TNB have inability to charge electricity rates at profit-maximisation price in which
Marginal Revenue (MR) is equal to the Marginal Cost (MC) which is a point of profit
maximisation output which is economically beneficial too (Albarran, A., 2016).
By evaluating all the above discussions it has been effectively evaluated that with the
features and strong advantages of monopoly. Market Company chooses this structure in the
market to run their business operations and gain both productivity and profitability on
simultaneous way (O'Hara, 2014).
Market Structure
Firms operating within monopoly market exist as the single most firm which manufactures
products as well as services which have no close alternatives or substitutes. Some other
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monopoly companies operating and functioning within Malaysia are Syarikat Bekalan Air
Selangor Sdn. Bhd (SYABAS), Keretapi Tanah Melayu (KTM), Telekom Malaysia (TM) and
many more. Tenaga Nasional Berhad possesses extensive control of market owing to which they
are the real price maker and the customers are found to be the price takers. The organisation
earns supernormal profits within the long run (Dixon, Meyer and Day, 2014).
As a monopoly company is found to be the only organisation which is in the marketplace,
the demand curve of firm is also found to be the market demand curve, that is, P = D = AR. The
demand curve in this instance is a downward sloping line. A monopolist company is going to
manufacture at the point when MR = MC because this is the situation which yields profit
maximising output (Jia, Zhu and Wang, 2015). Yet the prices shall be charged at amount more
than AC so as to reap the supernormal profit.
Graph 1
Electricity is found to be an essential utility. The demand for electricity is relatively
inelastic as in the case of this, any change in prices does not directly impact upon the quantity
demanded in market. Thus, the demand curve strives to look steep (Gilberthorpe, E. and
Papyrakis, 2015). For instance: When the price of electricity tends to increase, consumers are
not left with any choice but to accept it that Tenaga Nasional Berhad is the only company which
offers this utility.
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Graph 2
Malaysian GDP growth was expected to get raised by about 4.5% in the year 2013
together with the population of 29 millions (Mei and et. al., 2016). Owing to such enormous
figures, demand for electricity is highly expected to rise by around six to eight percent in a
period of next two years.
Graph 3
Demand and Supply
The above graph tends to show the demand and supply curve for electricity where the
vertical axis on the graph represent the prices while the horizontal axis in this graph represent
the quantity demanded. At a point where supply collides with demand, market equilibrium is said
to be reached. In such a case, when shortage of electricity supply occurs, it is reflected at point
Q3-Q1 (Dizdaroglu, 2015). At the price P3, demand is found to be higher than supply. This
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means that customers are desirous to pay much higher than what TNB is actually wanting to
supply. This can be the result from increase of manufacturing cost when government of this
country planned for removal of the subsidy is relation to electric. It is observed that in case the
subsidy is removed, the actual cost of power is bound to be more than 40 sen per kilowatt-hour
(kwh) in contrast with the present rates of 33.54 sen / kwh (Lewandowski, 2016).
When demand for electricity increases, the demand curve of this utility shifts towards the
right while when quantity supplied declines, the supply curve tends to shift towards the left. This
caused the market prices of the utility to rise. There was an increase of 7.12% electricity tariff by
1st June 2011 which significantly increased the burden upon low income group (Dillahunt and
Malone, 2015).
CONCLUSION
On the basis of above report, it can be concluded that microeconomics is a branch of
economics which deals with study of behavioural characteristics. Also, it has been analysed that
any organisation that operates as a part of economy can belong to one or more of the four market
structures, monopoly, perfect competition, imperfect competition and oligopoly. Further, it has
been ascertained that the select company is a monopolist firm which enjoys the benefits of being
the only firm within the industry. Further, it can be said that although the selected company is a
privatized company, yet it is partially owned and managed by the powers of government. The
importance of existence of this enterprise is significant for the society as they are rendering
essential utility across various geographical locations. Although the organisation is facing
immense rivalry from independent power producer (IPP) like YTL Power International, Genting
Sanyen, Kapar Energy but still it possesses the power to gain a high stake in consumer market
within the country.
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REFERENCES
Books and Journals
Albarran, A. (2016) The media economy. Routledge.
Franco, M. A. (2017) Circular economy at the micro level: A dynamic view of incumbents’
struggles and challenges in the textile industry. journal of cleaner Production. 168.
pp.833-845.
O'Hara, P. A. (2014) Political economy of systemic and micro-corruption throughout the
world. Journal of Economic Issues, 48(2), pp.279-308.
Dixon, S., Meyer, K. and Day, M. (2014) Building dynamic capabilities of adaptation and
innovation: A study of micro-foundations in a transition economy. Long Range
Planning. 47(4). pp.186-205.
Jia, L., Zhu, Y. and Wang, Y. (2015) June. Architecture design for new AC-DC hybrid micro-
grid. In 2015 IEEE First International Conference on DC Microgrids (ICDCM) (pp.
113-118). IEEE.
Gilberthorpe, E. and Papyrakis, E. (2015) The extractive industries and development: The
resource curse at the micro, meso and macro levels. The extractive industries and
society. 2(2). pp.381-390.
Mei, S., and et. al. (2016) Paving the way to smart micro energy internet: Concepts, design
principles, and engineering practices. arXiv preprint arXiv:1612.09500.
Franklin-Johnson, E., Figge, F. and Canning, L. (2016) Resource duration as a managerial
indicator for Circular Economy performance. Journal of Cleaner Production. 133.
pp.589-598.
Lewandowski, M. (2016) Designing the business models for circular economy—Towards the
conceptual framework. Sustainability. 8(1). p.43.
Dizdaroglu, D. (2015) Developing micro-level urban ecosystem indicators for sustainability
assessment. Environmental Impact Assessment Review. 54. pp.119-124.
Dillahunt, T. R. and Malone, A. R. (2015) April. The promise of the sharing economy among
disadvantaged communities. In Proceedings of the 33rd Annual ACM Conference on
Human Factors in Computing Systems (pp. 2285-2294). ACM.
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