Individual Weblog Assignment (Microeconomics): Massimo ── The Italian Baker

          “Massimo”── The Italian Baker Sdn Bhd was fully-owned by Federal Flour Mill (FFM) which PPB Group Berhad holds a 80% stake in this company. In July 2011, Massimo has spent about RM120 million to establish its new baking plant in Pulau Indah, Klang Valley which is situated besides FFM’s flour mill (Adilla,2011). This investment leads the company enjoys a low cost input of resources and also an easy access of raw materials for the baking process (Adilla,2011). The baking plant in Pulau Indah has the capacity to produce 10,000 loaves and 24,000 buns per hour (PPB Group Berhad). Therefore, the mass production in this baking plant is affordable to the demand of bread in Peninsular Malaysia even a whole Malaysia. The Massimo sandwich loaf arrives with 2 different types of sizes in 400grams and 600grams respectively. The white loaf is packed in a blue package while wheat loaf is packed in a green package. Moreover, it also produce chocolate and corn flavour of cream roll bun which represents Malaysian’s favourite as well as blueberry and coffee with cream.

In Malaysia, loaf bread market had classified as oligopoly competitive market due to the components of the market. In the oligopoly competitive market, there is just a few of large firms such as Massimo, Mighty White, Gardenia and High 5. “Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions (Economics Online,2013).” A firm can charge a higher or lower price than its opponents or even create a marketing strategy which will affect the market seriously. In order to compete with competitors, producers must follow the price and the strategy or create another marketing strategy which could be competing with the previous producer.  In real case, these firms have to collect the return of stale bread from market which had been produced over 3 to 4 days. Of course, these returned products had been figured into the operational overhead which had increased the cost of production. This fact can be traced to the strategy of Gardenia which planned to monopolize the market in a few years ago (Anon,2013). Although this issue had brought up a serious affect to the firm, but it could benefit consumers indirectly by increasing the degree of competition. On the contrary, once a price has been determinate, the price will stick since the firms can’t pursue independent strategies (Economics online,2013). For example, if Massimo lowers its product price, the other competitors would be forced to drop their prices to compete with Massimo. However, these firms are no reason to have a price-war, so at the end, they will join together to have a common price to eliminate the price-war which brings up disadvantage to all the houses in this market. The oligopoly competitive market may lead allocation and production to be inefficient, but it may bring up a highly competitive environment between these firms even though just only a few firms in this market making the market uncompetitive.

Loaf bread is categorized as a normal good and it is a necessity for consumers to keep their life. A normal good implies that the demand curve will shift rightward when the income increase. Besides, when the prices of substitute good increase, it will also increase the quantity demanded of bread. Rice and biscuits are the example of substitute goods, these have a same value to consumers when they cease to consume a bread. Therefore, when the price of rice and biscuits rises, the quantity demanded of bread will be increased. Certainly, as the population increase, the demand for bread will be increased as well. A large activity which was held in Malaysia such as F1 competition has prompted a larger consumption and a larger population whose came from the other country to watch F1 competition. Nowadays, more consumers prefer to consume Massimo’s bread because it tastes more soft and better. As the factors which had been discussed, graph (i) shows the demand curve of bread will shift rightward and the quantity demanded will increase from Q1 to Q2, but the price still remain the same. “Demand for necessities tends to be inelastic, since people will have to purchase at least a certain amount of these goods and services no matter how much the price increase (Web Finance,2013).” As you can see from graph (ii), the gradient of the demand curve is almost vertical. Since the price of bread increase from P1 to P2, the percentage change in quantity demanded is smaller than the percentage change in price. In this case, even if Massimo charges the price higher than previously, this act will not affect too much quantity of consumption due to bread is a necessity.

            As the graphs (iii), there are 3 main factors affecting the supply of bread shift leftward. Firstly, price of factor that influences the cost of the product is crucial to the firm to determine the supply of the product. For instance, when the cost of labour or the price of wheat rises, this implies that the cost of production in Massimo will be more costly than the previous. In this situation, Massimo will decrease the supply of bread as the unit profit of the product has dropped. Secondly, the state of nature will also affect the supply of bread where as the weather will influence the harvest of wheat. The less of wheat is available, the less supply of bread will be in the market. Thirdly, if the expected future price of bread rises, the supply of the bread today will decrease and the supply curve will shift leftward. Massimo decreases the supply of bread today to get itself having a sufficient supply in future to engross the profit when the price of bread rises. In addition to this, the supply of bread is more elastic and this means that the percentage change in quantity supplied is larger than the percentage change in price, the supply curve is mostly horizontal, as shown in graph (iv). The time frame for supply decision is the one of factor affecting the elasticity of supply. “In the long run, a firm will increase the input of all factors of production and thus the supply becomes more price elastic (Frank,2012).” This means that existing firms can enlarge the factory or the production line whereas in the short run, it only can change the quantity of labour input. In addition, improvements in technology also lead the supply of bread being more elastic since the firms are more efficient in production with a better machinery.

            Efficient market occurs when the production of bread is equal to the equilibrium quantity, which demand curve measures marginal social benefit is equal to the supply curve measures marginal social cost. As shown in the graph (v), total surplus which is composed by consumer surplus and producer surplus is being maximized. In fact, efficient market occurs just only when there is a perfect competition market. Actually, FFM gets about RM80 million of subsidy from the government (The Malaysian Insider,2013). Thus, FFM can pass the subsidy to Massimo and it has its own flour mill so that the products can be selling at a low price. As elasticity of demand and supply that has been discussed at above, this two factors caused consumers enjoy most of the subsidy as the green region and sellers enjoy least of the subsidy from the government which is the blue region in the graph (vi). Assume that the subsidy per unit of bread is RM0.60, the subsidy lowers the buyers’ price from RM3.00 to RM2.50 and raises the sellers’ price from RM3.00 to RM3.10. It will cause the supply curve shift rightward and increase the quantity demanded of bread from 70 to 75 millions of units. Actually, subsidy from government is to encourage FFM to produce more flour which is beneficial to all of the nations without increase the burden of FFM. In the other way, this act also benefits to all of the consumers as they can buy a bread with a lower price. In conclusion, subsidy makes consumers are able to purchase more units of bread with a same amount while producers can sell more units of bread and get a higher profit from sales. However, the deficiency of subsidy may cause a deadweight loss and the market to be inefficient which the marginal social cost will exceed marginal social benefit.

             Although Massimo has just been established not more than 3 years in market, but Malaysia Productivity Corporation (2011) believes the products of it are competitively priced and meet the requirements of the modern day discerning consumers. Nowadays, Malaysian consumers are tending to consume healthy foods which contain a nutritious ingredient and non-preservation content. Hence, Massimo sandwich bread is a healthier choice than others and it is supported by the smarter Malaysian consumers.  In future, famine issue will become more and more serious due to scarcity of food and unbalance of the population. These firms in the world wouldn’t be able to produce enough of bread to fulfill the demand as much of the population. This fact will bring up a shortage issue of bread and following the prices of the bread will increase sharply just like the prices of rice nowadays.

References

Adilla, F. (2011) Italian Baker Sets Up RM120m Plant. Available from: http://themalaysianreserve.com/main/news/corporate-malaysia/746-italian-baker-sets-up-rm120m-plant [Accessed 11 October 2013].

Anon (2013) History of Baking Industry in Malaysia - Malaysia Baking Industry. Available from: https://sites.google.com/site/breadmakingguide/history-of-baking-industry-in-malaysia [Accessed 11 October 2013].

Economics Online (2013) Oligopoly. Available from: http://www.economicsonline.co.uk/Business_economics/Oligopoly.html [Accessed 11 October 2013].

Frank, L.( 2012) Prelim Topic 3: Markets. Factors affecting elasticity of supply [blog]. 14 June. Available from: http://markets6605.wordpress.com/2012/06/14/factors-affecting-elasticity-of-supply-11/ [Accessed 12 October 2013].

Malaysian Productivity Corporation (2011) Analysis on the Business Transformation of Organizations through Innovation [online]. Selangor Darul Ehsan: Malaysia Productivity Corporation. Available from: http://www.mpc.gov.my/mpc/images/file/Publication%20&%20Case%20Study/ANALYSIS%20ON%20THE%20BUSINESS%20TRANSFORMATION%20OF%20ORGANIZATIONS%20THROUGH%20INNOVATION.pdf [Accessed 13 Oct 2013]

PPB Group Berhad (2011) Annual Report 2011 [online]. Kuala Lumpur: PPB Group Berhad. Available from: http://www.ppbgroup.com/pdf/ppb-annual-report-2011.pdf [Accessed 11 October 2013].

The Malaysian Insider (2013) The Gardenia vs Massimo bread war. Available from: http://www.themalaysianinsider.com/sideviews/article/others-bread-is-too-salt-the-gardenia-vs-massimo-bread-war-sakmongkol/ [Accessed 13 October 2013].

Web Finance (2013) What is Necessities? Available from: http://www.investorwords.com/16632/necessities.html [Accessed 12 October 2013].