Microeconomics Individual Assignment

Malaysia National Petroleum Corporation be called for short is Petronas. Petronas is a national oil and gas company that was established in August 17, 1974. Petronas pertain to state-owned enterprises and it was fully owned by the Government of Malaysia. Petronas also agreed with Petroleum Development Act passed by Congress to grant the all Rights of ownership and control of oil resources in Malaysia. Apart from that, Petronas have been designated as the territory of all oil and gas development company. As a wholly government-owned holding company, Petronas grasp all the country’s oil and gas resources, it also has the responsibility to develop and add value to these resources. Through three decades of development, Petronas has grown into a multinational integrated oil and gas company, owns 3 subsidiaries under Petronas Trading Co., Ltd, Petronas Gas Ltd and Malaysia International Shipping Co., Ltd. There have more than 100 subsidiaries in overseas and it was ranked among Fortune Global 500’s largest corporations in the world (CNN Money, 2013). The income and profit of Petronas also ranked as 133^th and 16^th respectively in the world.

National Petroleum is engaged in a wide spectrum of petroleum activities, including upstream oil and gas exploration and production, downstream oil refining, petroleum products marketing, trading, gas processing and liquefaction, gas pipeline network operation, marketing of liquefied natural gas, petrochemical manufacturing and marketing, transportation, automotive engineering, ship materials and industrial investment. Petronas provides the main source of government income, with 45% of the government budget dependent on the state oil company dividends and the government actual balance has 5% deficit of Gross Domestic Product (GDP) in 2011. Malaysia National Petroleum Corporation built the Petronas Twin Towers as its headquarter which was officially opened in August 31, 1998 – Malaysia’s 42^th National Day (Petronas, 2013).

Microeconomics is considered to one of the primary of economic topics. It discusses about how the main consumers, individuals, corporations and industry use the limited resources to satisfy the unlimited needs and wants. Therefore, we must understand about microeconomics to use resources efficiently. In conjunction, there are some relevant concepts which are demand and supply, short and long run production, elasticity, determinants, market structure and government intervention. Let’s talk about demand of supply within Petronas. Demand and supply is an important factor to determine price in a market. So, demand and supply can be regarded as the backbone of an economy in market. The law of demand means in ceteris paribus, when the price of goods is increase, customers will less the quantity demanded of those goods; if the price decrease, customers will higher the quantity demanded. On the basis of Petronas, it seen as an necessary goods. But, people will only consume when car is out of oil. People also will not buy more petrol just because Petronas is cheap as there have no sense if they are not going to use it. Besides, petrol price of Petronas is controlled by government in Malaysia, so the price will not be affected randomly by the quantity demanded in short run. Although that, Petronas is not the only one petroleum company in Malaysia, therefore, demand of Petronas will be affected by its competitor which people prefer to. They are Essos, Shell, Caltex, etc. In addition to this, population, expectations of the future and the price of complementary goods will also affect the demand of Petronas (Monalisa, 2013).

Expectations about the oil price fluctuation in future, it will affect the demand of Petronas seriously. For example, Prime Minister Datuk Seri Najib Razak announced that RON 95 petrol will increase RM0.20 to RM2.10 per litre and diesel will rise to RM2.00 in September 04, 2013 (Zurairi AR, 2013). After the news, most of the people swarm into Petronas to “enjoy” the last cheap petrol in the previous of that night.

So, the demand of Petronas increases rapidly in that night. According to complementary goods, petrol is the complementary goods to vehicle. When the price of vehicle decrease, people will higher the quantity demanded of vehicle. In this case, demand of Petronas will going up with the price drop of transportation. For example, Perodua will launch promotion to decrease the price of its car during every June of the year (Perodua, 2013).

As a result, consumers are able and willing to buy vehicle under Perodua. When the quantity of vehicle is increase, the demand of Petronas will also be rose automatically.

Why when the prices of Petronas went up, demand of Petronas still remain unchanged below a fixed level? It is because petrol is necessary goods and there are not so many good substitutes for petrol that will make consumers to buy. This issue is closely related to a microeconomics concept – elasticity. Elasticity is the measure of sensitivity of variable between price and quantity demanded. For price elasticity of demand, Petronas just like daily life essentials for consumers, even if government increase the price, they will still consume a lot of petrol on schedule. Thus, Petronas is relatively inelastic. As the price of the Petronas gasoline increase, the quantity demanded for it will not decrease very much.

Although it is so, there have also some factors that determine the elasticity of demand. They are nature of goods, availability of substitutes, alternative use, possibility of postponing consumption, proportion of income spent, price-level, force of habit, durability of commodities and time period (Monalisa, 2013). Among the factors of time period, it will affect the price elasticity of demand of Petronas. For example, after rising of petrol price, the immediate effect on demand was small because people still need petrol for their cars in short period. In the long period, people will plan and find another way to reduce the consumption of goods. An example would be, people will change their car into more fuel-efficient car or heating systems that used in gas heater. As a result, the price elasticity of demand within Petronas will become relatively elastic in the long run.

On the other hand, price elasticity of supply of petrol is relatively inelastic. Gasoline is different with another goods, this is similar with the land supply. In the short run, the change of the petrol price effect on supply was small because quantity supplied of petrol is difficult to improve.

Petronas, adapts an oligopoly market structure. In oligopoly market, there only have the small number of manufacturers and they are monopolized by few manufacturers. Therefore, every policy of each vendor will affect the profits of other manufacturers. As a result, all of the vendors will be contained with each other, which is the most significant feature of oligopolistic market. The reason of mutual restraint, when vendors are making their own strategic decision, they have to anticipate the possible reactions of other manufacturers. For instance, Malaysia’s petroleum market is mainly monopolized by two petroleum companies – Petronas and Shell. Furthermore, they are producing goods with homogeneous product. Therefore, profit of Petronas not only decided by its price setting and sales, but it also will affected by strategy of Shell. When Petronas is considering have a markdown to increase sales, they also need to consider whether Shell will follow them to decrease the price of petrol. If not, Petronas just only can grasp the increasing of sales. Otherwise, Petronas not only fail in cutting price to increase sales, they also will suffer losses in competition. And the three main characteristics of oligopoly are small number of large firms, identical or differentiate products and barriers to entry (AmosWeb Encyclonomic, 2013).

In Malaysia, government set price ceiling within some goods, such as gasoline, diesel fuel, eggs, etc. Price ceiling is regulated by government to restrict the market in a certain limit because government think that the equilibrium price in market it too high. For this reason, government controls the highest price to protect the welfare of consumers. For example, government limited the price of diesel and this caused severe shortage of diesel fuel in that time. As a result, users of diesel petrol were seriously affected. At last, shortage is likely to cause people consuming in black market. In fact, the black market price is higher than the normal market price because sellers will add the costs to avoid the law. In addition to this, there also have another four types of government intervention, such as taxes, subsidies, tariffs and wages (Lorenzo von Matterhorn, 2013).

In conclusion, economics discuss how individual and firms interact with each other to satisfy their needs and wants in real world. But beyond that, economics actually applies to our daily life to allow us to make every decision which is beneficial. Economics also act a key role in giving us a new perspective to facing all the challenging problems. Hence, Petronas will continue to use and develop new technologies to maximize opportunities strengthen its capabilities to become a leading global exploration and production player. 

(1474 words) 

Reference list:

AmosWeb Encyclonomic (2013) Oligopoly, Characteristics. Available from: http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly,+characteristics [Accessed 23 October 2013].

CNN Money (2013) Fortune Global 500. Available from: http://money.cnn.com/magazines/fortune/global500/2013/snapshots/6418.html?iid=G500_fl_list [Accessed 23 October 2013].

Lorenzo von Matterhorn (2013) Types of Government Intervention. Available from: http://www.ehow.com/list_7214447_types-government-intervention.html [Accessed 23 October 2013].

Monalisa (2013) 6 Important Factors That Determines Changes In Demand. Available from: http://www.preservearticles.com/201105287208/factors-that-determines-changes-in-demand.html [Accessed 23 October 2013].

Monalisa (2013) 9 factors that determines the elasticity of demand. Available from: http://www.preservearticles.com/201105307213/9-factors-that-determines-the-elasticity-of-demand.html [Accessed 23 October 2013].

Petronas (2013) Corporate Profile. Available from: http://www.petronas.com.my/about-us/pages/corporate-profile.aspx [Accessed 23 October 2013].

Perodua (2013) Perodua Promotion for July 2013. Available from: http://www.perodua-price.com/perodua-promotion-for-july-2013/ [Accessed 23 October 2013].

Zurairi AR (2013) Price For RON95 Petrol, Diesel Up by 20 Sen From Midnight. Available from: http://www.themalaymailonline.com/malaysia/article/price-for-ron95-petrol-diesel-up-by-20-sen [Accessed 23 October 2013].