Horizontal differentiation and Malaysia

However, to produce goods and services, we need resources, including labor, land, entrepreneur, capital and technology. Resources are said to e scarce because their supply is limited. In the next five years, the challenges faced by the commodities industry are not only from the industry itself but also threat from other industries. 3. 2. 1 Land use Concept of land in economy refers to natural resources in this world. Land supply is constant. Commodity is a land and labor incentive sector. The expansion of commodity plantation will affect other economic activities such as the development of residential and commercial areas and agriculture.

However, the growth of population requires more land for residential and commercial area. Moreover, the total land area which is suitable for agriculture is reaching its saturation point. To figure out issues of land, I am using theory of production which is production possibility curve to explain land-use constraints on expansion of commodity plantation. Production possibility curve is a graph showing the maximum output that can be produced by using the economic factors of production that available.

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Production by plantation Graph 1 Changes in technology, indifference curve switch to the right Graph 1 snows combinations of output that can be produced by the country efficiently by using the economic resources available. Land available permits country to produces combination between production by plantation and residential/commercial area along point (a) to point (c) at ICC line. Point (d) is a combination that country cannot produce. In long term, ICC line can switch to ‘C” when level of technology changes. To shift right the ICC line, our country must go by research and development (R&D) in order to develop a new technology. . 2. 2 Sustainability issue Malaysia needs to develop a special brand for commodities that reflects the quality of high value added products which are sustainable at a competitive price. I am using theory of product differentiation to figure out the sustainability issue. In international market, firms from each country compete against each other by produces differentiated products. It is because to ensures sustainability of their products. Economists distinguish between two types of product differentiation: vertical and horizontal. Vertical differentiation is about inferiority or superiority.

Two products are vertically differentiated when consumers consider one product better or worse than the other. Horizontal differentiation is a situation involving two products such that mom consumers view one as a poor substitute for the other and thus will buy the one even if its price is higher than the other’s. The challenges will be facing in future is horizontal differentiation which is a part of barrier to entry. Without the quality of high value added product, our country cannot compete in international market even though our country’s products prices are lower than the others.

Panel (a) Price Panel (b) Graph 2: Horizontal differentiation and Malaysia firm’s demand curve Panel (a) shows that the Malaysia firm’s demand curve with low quality in high value added product. The demand is quite sensitive to a change in its own price and the prices of its rivals. A given increase in price, from P to P, holding competitor’s prices fixed, lead to a large reduction in the quantity demanded. Moreover, when competitors reduce their prices, the firm’s demand curve shifts leftward, from D to D’, by a large amount. Panel (b) shows that the Malaysia firm’s demand curves with high quality in high value added product.

The firm’s demand is not as sensitive to a change in its own price, and when competitors cut their prices, the firm’s demand curve shifts leftward, from D to D’, by a relatively smaller amount. . 2. 3 Labor and productivity issues For the past few years, other producing countries such as Thailand, Indonesia and Vietnam had taken over Malaysia as the main producer for palm oil and rubber. With cheap labor, these countries are able to export raw commodities with lower prices than Malaysia. Therefore, due to high production cost, the exports of our raw commodities were unable to compete in global market.