Based on the excerpt of news from The Sun on 13th September 2012 saying that, crude palm oil (CPO) prices are expected to hover around RM 3000 per tonne for the rest of the year as demand for the commodity is still sustainable, said Malaysian Palm Oil Board (MPOB) chairman Tan Sri Shahrir Abdul Samad. CPO prices are currently below RM 3000 per tonne, but Shahrir believes that prices will strengthen in the near future. In fact, there are expectations that the price of CPO will surpass the RM 3000 level. There is sustainable demand for palm oil as it is the most efficient vegetable oil and very affordable.
Crude palm oil is one of an important and valuable resources in the market. It is greatly used to produce cooking oil, vegetable oil, margarine, vitamin supplement, soap, moisturizing lotion, candles, and lubricants. Therefore, when any factor that influences buying plan changes, other than the price of the good, there is a change in demand. In this case, there is a change in demand instead of change in quantity demanded because there is a factor other than the price of the good (price remain constant) - an expected future price of the crude palm oil. Let us assume the price of crude palm oil is expected to increase in next month (we can see better demand effect if we assume a month later instead of a few years later), say, from RM 2000 to RM 3800 per tonne, the current demand for people to purchase more vegetable oil and margarine will increase dramatically whereas the future demand will decrease since people can expect the price of crude palm oil will increase after a month later. Simply put, people will want to buy more before price rises and to buy less after the price rises. The change in demand will cause the shifting in the demand curve. Thus, when demand for vegetable oil and margarine increase, the demand curve will shift to the right. For such, a demand curve is the best tool to show the effect of change in demand. FIGURE 1.1 below shows the change in demand of crude palm oil:
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| FIGURE 1.1: An Increase in Demand |
Based on FIGURE 1.1 we can see that if the price of crude palm oil is expected to increase in the next month, the demand for palm-oil related goods such as vegetable oil and margarine will increase today. The consumer will start to buy more cooking oil and store it in the kitchen before the price rises. Thus the demand curve will shift rightwards, in other words, there is an increase in demand when the expected price in future is going to increase. Conversely, if the expected future price of the palm oil decrease in next month, the demand will decrease resulting in the demand curve shift to the left.
In contrast, the supply will decrease today but increase in the future. This is because producers or sellers are greedy in making profits, some of them will withhold the supply now in order to push up the price and then sell to the buyers in the future when the price is increased. Thus, the palm oil market will experience a change in supply. The change in supply is defined as 'when any factor that influences selling plans other than the price of the good changes, there is a change in supply' (Parkin 2012, p.63). Price remain as a constant determinant while the other factor that affect the selling plans is the expected future prices of the crude palm oil. The supply implies in the whole relationship between the price of a good and the quantity supplied of it.
Supply can be demonstrated in the supply curve whereas the term quantity supplied refers to a point on a supply curve - the quantity supplied at a particular price. As similar as the statement made early above, when the market experience a change in supply - the supply curve will shift to the left, i.e. a decrease in supply. Also, the effect of change in supply can be illustrated in a supply curve, refer to FIGURE 1.2 below:
The illustration of the graph above shows the supply curve of supplier or producers behavior when there is an expected future price rises of the crude palm oil. The sellers intend to decrease the supply today and to increase the supply after the price of palm oil has increase in the future. Hence, the supply curve will shift from the original position to the left, which means there is a decrease in supply. Conversely, if the expected future value is going to fall next month, the supply curve will shift to the right which implies an increase in supply.
The overview of the study of an increasing price of the crude palm oil is based on the justification on the model of change in demand and change in supply - it is a two edged argument. To conclude, when the price is at ceteris paribus and all other determinants are changing; in this case - the expected future price of a good, the change in supply and demand will occur. When the price is expected to rise in future, the demand curve will shift to the right which means the demand is increased. At the same time, the supply curve will shift to the left which implies the supply is decreased. To contrast, if price is expected to fall in the future, the demand will decrease and the demand curve will shift to the left. Similarly, the supply will increase and the supply curve will shift to the left.
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