Budget plan

According to The Star newspaper, 29^th of September 2012 front page with the title “for our well-being” was discussing about the Budget 2013. Why do government come out with budget plan every year? Why did they set budget? In microeconomics, budget is actually a important component. It provides a forecast of revenues and expenditures. It also control the resourses we used. It involves trade offs between two or more goods. Budget 2013 is set by the government and being passed to the legislature department and finally getting the approval from the president. Budget 2013 proposes benefits for the well being of all strata of society, covering various sectors and pople of different age groups. The Government states that nobody is left out in Budget 2013. In my opinion, budget 2013 brings the economy of the country to a higher level. I am going to write some of my opinions in terms of microeconomics which is being affected by this budget 2013 programme.

Firstly, according to budget 2013, the government is raising the individual income limit for personal loan under My First Home scheme from RM3000 to RM5000 which means individuals whose income is RM5000 and below would be able to apply for the housing loan. As we all know, the price for houses is increasing year by year because the rich often buy houses for investment purpose. The demand for houses is increasing causing the demand curve to shift to the right. When demand curve shift to the right, new equilibrium price is set as shown as graph below:

Although the price of houses keep increasing but still income of the individual do not increase as fast as the housing price. Many of them cant afford to own a house ended up with renting houses for their accommodation. Before the government raise the income limit for applying loans, quantity demanded for the houses is very low for the low income group individuals as price is too high for them to buy. Therefore, government introduce this scheme and now increase the income limit for applying loans. This is to help the low income group people to own a house. The graph below is to show the demand of low income group from owning a house:

Figure 2.2: The demand curve is shifting to the right, demand for houses for the low income group increases.

Other than that , for those who is buying their first residential, they still able to have 50% stampduty exemption which  means cost of buying a residential is lower down. Quantity of housing demand will be increasing as the cost is lowered down based on law of demand. This scheme enables lots of graduates who just got their first job to get their own residential. In my opinion, government should also set a maximum price for the residential because no point giving these subsidies if the demand continue to increase the price will increase also. Maximum price will stabilized the market price of the houses so that everyone is affordable. Maximum price is the price fixed below the equilibrium price in attempts to stop price from rising to an unacceptable level.

Before that, government subsidizing sugar by a higher price. Subsidies is government’s financial grant to lower the cost of production. When the government  introduce subsidies for the sugar, cost of production of  sugar is low, the supply of sugar will increase, supply curve shift to the right.For example, initially cost of production of sugar is RM5. When government gives subsidy for RM1.20 the cost of production of sugar is reduced to RM3.80.When the cost is reduced, producers will produce more sugar, supply curve shift to the right , equilibrium price will be lower down as shown as graph below:   
         

 Unfortunately government reduced the subsidies by 20 cents. From the graph shown below, when the government reduce the subsidy, cost of production increase, supply curve shift slightly to the left as production of sugar will be costly. The producers will reduce the supply then. Consumers will have to pay more when the subsidies is removed 20 cents. When price increases, quantity demanded is decreasing.

Consumer surplus is calculated based on the area of the triangle below the demand curve. Consumer surplus means difference between the willingness consumer want to pay for a product and amount that the consumer actually pays. For example, consumers willing to pay RM8 for the sugar but the equilibrium price is ony RM3.80 after subsidies. The difference of RM 4.20 which the consumer did not pay is called as consumer surplus. From the graph, it is shown that when subsidies is removed by 20 cents, the consumer surplus is being reduced as shaded in the graph. 

 Figure 2.5

The government  also give RM200 one-off rebate for one 3G smartphone for those aged 21 to 30 with RM3000  and below monthly income. The price of the smartphone was initially RM1500 for example. Government gives RM200 off for smartphone which means price of a smartphone will be only RM1300 for those aged 21 to 30 . When price decrease, quantity demanded will be increasing according to law of demand.

     As the government giving discounts for smartphone, the demand for normal mobile phones will decrease, demand for normal mobile phones will shift to left. The company of normal mobile phone will lower down the price to create a new equilibrium price to prevent oversupply of mobile phones in the market. The demand curve of a mobile phone shift to the left is due to the substitution effect of the smartphone which have the better function than mobile phones and also consumers will be getting RM200 rebates from the government.    

 Figure 2.7

Individual income tax rate to be reduced by  1% for chargeable income for each group between RM2500 and Rm50000. When the income tax rate is reduced by 1%, savings from the income will be more. 1% may not be much but still will affects the demand of some of the goods and services. Demand for overall goods and services will be increasing, shifting the demand curve to the right, spending in the country increases.         

For those goods and services which is necessities, income elasticities for it will be equals to one. For necessities,income  tax is reduced by 1% means income increases by 1%. When income increases by 1%, unitary elasticities of income goods will be also increase by 1%. Other than that, people may also spend some of their income on luxuries  goods. Thus, demand curve for luxury goods will shift to the right.

Before the income tax is reduced, people may tend to have their meals at home because homecooked food is cheaper compared to dining in a restaurant. Some of the restaurant may also charge us tax so eating at home is definitely cheaper. When income tax i lowered by 1%, we may tend to go to dine in a restaurant. Demand for dining in a restaurant will be increasing shifting the demand curve to the right. Leisure activities may also increases as in watching movie in a cinema , karaoke with friends in the karaoke centre. Demand for leisure activities will be also shifting to right.

In a conclusion, government brings out the budget 2013 benefit more on the moderate or poor family. It doesn’t brings much effect for the rich ones.

by: tee mei cheng