Louis Vuitton and the Travelling Chinese Consumer

Louis Vuitton and the Travelling Chinese Consumer

Based on an online article by Fung, J. et al (2012) entitled "Louis Vuitton and the Travelling Chinese Consumer", even in its early years, LV’s handbags and luggage have established a symbol of status globally.

 At the initial stage, Louis recognized the people’s demand for flat trunks so that even when the bags are being handled roughly, it will not be damaged easily. Besides that, he only caters to the rich who appreciates his detailed craftsmanship and quality; therefore this free publicity of the rich using his products then gave the public the impression that only the rich uses products from LV so it becomes a status symbol. Subsequently, advertising plays a huge role in the success of the brand to educate the customers to recognize products whether it is a necessity, luxury or an inferior. Two reasons a brand does advertising is firstly to shift the demand curve to the right and secondly, to make the price less elastic. The geographic area that I will be looking into is China.

Firstly, advertising shift the demand curve to the right. This means that people will demand more compared before at a given price. This is because effective advertising such as getting popular artists to wear their brand will help gain attention from the people and this will lead people to have desire to own their own LV products. For example in China, seeing the fact that 10% of the global purchasing power of luxury items comes from China, Louis Vuitton took the initiative to fortify the relationship with the Chinese consumer by having the first ever Asian male, Godfrey Gao to showcase their products. In addition, if the publicity really did its work by increasing people’s desire to own LV products, people will be prepared to pay at a higher price for it. As a result, there will be more people willing to supply LV products to buyers. This is because according to the law of supply, “the higher the price of good, the greater is the quantity supplied” therefore as we can see now, there are many shops selling LV products and also branches opened in almost every mall.

Secondly, advertising also focuses on making the price less elastic. The reason for this is so that every rise in the price will not have any significant fall in the sales of the product. The only way they could do this is by boosting brand loyalty from customers that enjoy luxury products by believing that the competitors’ brands are inferior to theirs.

Hence sophisticated advertisements and campaigns play a major role in further express to customers that there are no close substitutes to the brand. Besides that, by making the brand’s product distinct from the rest will further reassure the customers that no other product can compete with that special brand. For example in 1896, LV introduced its first signature monogram canvas that prevented counterfeits as it was hard to imitate the layout of the canvas because every end of the canvas at the bag will have the same symbol.

Besides that, it is also seen that LV is very particular with their customers in China by finding a comfortable way for their customers to convey their wants by employing Chinese staffs, Chinese speaking staffs and also highly proficient staffs. In addition, LV also set up educational and interactive websites to expand their market to the youngsters. The reason for this is to influence them in their early years to purchase LV products. Subsequently, LV came out with a lower-priced “accessible luxury” items to encourage sales from the young and aspiring buyers who are not financially stable. Moreover, LV was also featured in the National Museum of China entitled “Louis Vuitton Voyages”. Therefore with all these, LV manage to create a brand which is less elastic to price due to their product differentiation, competitive advantage and their value-added services and effort.

Similarly, there are also other factors that determine the demand of a luxury product aside from advertising. Firstly is the income of the people or also known as the income elasticity of demand. Income elasticity of demand measures the sensitivity of the demand for a good or service to a change in income when other things remain the same. This can be calculated by taking the percentage change in quantity demanded over percentage change in income.

                             Income elasticity of demand: Percentage change in quantity demanded

                                                                                          Percentage change in income

There are three ranges of the income elasticity of demand which is greater than one that means the good is a normal good, positive and less than one and negative which means it is an inferior good. When the elasticity of the demand is greater than one, the income is said to be elastic. This is because the percentage change in quantity demanded is higher than the percentage change in income. Hence, there are a lot of substitutes in the market due to the customer’s responsiveness to their income as people are more likely to shift their demand to other products that are more inferior. In this case, LV products are known to be a form of luxury product because the demand for it is responsive to income. According to the article, the demand of luxury items in China has increased due to the increase in their wealth and disposable income hence they could purchase more luxury items.

               Besides that, due to China’s high luxury taxes and taste, they tend to shop abroad because of the cheaper product, better selection and greater “show-off” value. In one case, LV France had used up their three months of inventory in just one month so they were forced to limit to two leather goods per customer daily. This in turn will cause a surplus in the luxury products back in China and might prompt the government to reduce the tax on luxury products since they need to increase their domestic consumption for the better of their country. Conversely, China’s government is planning to enforce the retroactive taxes on luxury purchases made outside China to bring back their country’s purchasing power.

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Elasticity of sugar and clothes

Elasticity of Sugar and Clothes

According to the news “20 sen more for sugar” which posted at http://thestar.com.my/news/story.asp?file=/2011/5/10/nation/8649957&sec=nation and the article “Minimum impact from fuel and sugar” which posted at  http://thestar.com.my/news/story.asp?file=/2011/12/12/nation/10078389&sec=nation and “Year-end sales help consumers stretch their ringgit” which posted at http://thestar.com.my/news/story.asp?file=/2012/4/3/parliament/11034602&sec=parliament,  it has given a brief idea on the elasticity of sugar and clothes.

The price elasticity of demand is a units- free measure of the responsiveness of how the changes of price of a good effect on its quantity demanded when all other influences on buying plans remain the same. In economics concept, there are 3 types of demand elasticity which are elastic, inelastic and unit elastic. When demand is elastic, a 1 percent changes in price will causes more than 1 percent changes in quantity demanded. When demand is inelastic, 1 percent of changes in price will cause less than 1 percent changes in quantity demanded. When demand is unit elastic, 1 percent changes in price will cause 1 exactly 1 percent of changes in quantity demanded.

            In last year, Malaysia government declared to raise the price of sugar by 20 cents to RM2.30 per kilo. (Kong, 2011). The ministry secretary explained that rises of sugar price purposed to reduce government sugar subsidy by RM116.6mil from RM400mil per year. “The exercise is done in line with the Government’s long-term strategy to rationalize the sugar subsidy in stages.” (Dom 2011). However, the increase of sugar price has not much influence the demand of sugar. The Deputy Minister of Consumer Affair pointed out that although the sugar price increased, it did not give a big effect because each household only used an average 5kg of sugar a month. The deputy noted after calculation, each household only cost RM1 extra per month after the price raised. Relatively, the demand of sugar will not have much change due to price increase.

            In this case, the price elasticity of sugar is inelastic. When the price of sugar increased, the demand of sugar has not changed very much. Means that the percentage of changes in price is more than percentage changes in demand and this is to prove that sugar is very inelastic. Explanation could be the practicality of sugar. As we know, sugar is a basic need in every household and it does not have any substitutes. Sugar can even be the basic raw material in all types of foods and beverage. In this sense, even though the price of sugar had to increase, consumer would not have much choice as sugar is the compulsory good in daily life. The example in last year has given us a clearly view of how inelastic is the demand of sugar by showing a small impact of rising the sugar price to the demand of it. Even the year before last year, cases of sugar price increased had happened for several times. For example in year 2010, price of sugar increased 20 cents in January, 25 cents in July and 20 cents again in December. After few times of increasing, the price of sugar could increase again in year 2011. It shows that the price elasticity of demand in sugar is very inelastic because the addition of price would only affect less of the demand than the percentage increase in price.

            As we had discussed the case of inelastic product, we are now going to discuss the elastic product. An elastic product refers to a good that will be affected very much if its price increases. Let’s say a cloth is selling at RM50 normally and the demand is 10 unit per day, but now due to year-end-sales it only selling at RM40 and the demand jump from 10 unit to 30 unit per day. The above example has shown the percentage changes in price are less than the percentage changes in demand. Therefore the price elasticity is inelastic.

            Months ago one of the clothes brand, Padini has held an annual stocks clearance promotion. The result in it was a huge wave of consumers queuing up at the cashier with bunch of clothes and shoe carried on their hands. One of the brunch manager declared later, the sales of company has increased rapidly compare to normal period. He also mentioned that during normal day, company sales are 50 percents on average, but because of the sale promotion, company sales increased 20 percents to 70 percents.  A single newspaper author published that 78 percents of Malaysian purchase items when they are on sale according to survey. (Rahim, 2011). Director of retail measurement services also said that Malaysian is the most popular country among other 51 countries to look for sale. (Tripathi, 2011). According to online survey, 78 percents of online respondents declared that they purchase items when the products are on sale. (Rahim, 2011).

            It is very clear from the issue above, consumer do have a choice on clothes. When clothes are in low price or the price decreased, the demand will increase numerously. To explain why this did happened, we can use the economic way. Unlike sugar, clothes are not stapler goods like sugar. A household can live without extra clothes but it can’t live without sugar. If the price of clothes are high, consumer do have a choice not to buy it as they do not need extra clothes since they already have in exist. Therefore the price elasticity of clothes demand are elastic because a slightly changes in price may cause a huge changes in quantity demanded. When it comes to stapler goods like sugar, consumers do not have much choices because sugar is compulsory needed in every household. When the price of sugar is high, consumer can’t decide not to buy because it’s not an option. Sugar is a product that will finish day by day but clothes isn’t. Clothes will remain the same amount even days passed by. 

            After all kinds of discussions, all we can say is, there are so many types of products in the market but every product has its own price elasticity of demand. Some of them may undergo a huge effects of quantity demanded due to a price change but some will only experience a small effects. Therefore economist will have to study about the product elasticity to find out how would the market react to the product.

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Cigarette leads to death

According to Bangkok post online news, published on 22^nd of August, 2012, government has raised taxes on alcohol and cigarettes. Almost everything in the market we buy or earn is taxed. Tax incidence is the division of the burden of a tax between buyers and sellers. The way to calculate how much taxes must be paid is using accounting profit. Normally, government impose taxes on cigarettes to make the prices higher is to reduce the consumption. According to Bangkok post economy news, the tax hike would decrease the total revenue per year. When government imposes a tax on the sale of good, the price paid by buyers might rise by the full amount of tax, by lesser amount than the tax, or not at all. If the price paid by buyers rises by the full amount of tax, then the burden of the tax falls entirely on buyers. Buyers bear the tax. If the price paid by buyers rises by a lesser amount than the tax, then the burden of the tax falls partly by buyers and partly by sellers. Lastly, if the price paid by buyers does not change at all, then the burden of the tax falls entirely on sellers. Sellers bear the tax.

A price floor is a regulation that makes it illegal to trade at a price lower than specified level. If the price floor is set below the equilibrium level, it has no effect. The market works as if there were no price floor. If the price floor is set above the equilibrium level, if has a powerful effect. For instance, price floor must apply to the trading of cigarettes as it can reduce the consumption of cigarette that will affect consumers’ health. Moreover, if the price floor is set below the equilibrium level, the quantity of cigarette demanded will exceed quantity of cigarette supplied. Therefore, shortage may occur. This is what human being will do. People will purchase more even though the goods are not what they wanted due to the drop of prices. One of the main factors that change demand stated that if the expected future price of a good rises, current demand for the good will increases and vice versa.

The division of the tax between buyers and sellers depends in part on the elasticity of demand. There are two cases which are perfectly inelastic demand and perfectly elastic demand. Elastic means consumers are very responsive to the changes of the price. Inelastic means consumers are not that responsive to the changes of the price. For example, tax is imposed to cigarettes which make the prices of cigarette go higher. Smokers are inelastic people. Smokers will still buy even though government increases the price of cigarette or impose a high tax on cigarette. This is reflected to perfectly inelastic demand. Demand is perfectly inelastic regardless of the price. Smokers will sacrifice all other goods and services rather than not consume cigarettes. 

               In the market of cigarette, demand is perfectly inelastic. With no tax, the price of cigarette is RM 9.70 a pack and the quantity demand in a day is 1000. A tax of RM 0.30 a pack shifts the supply curve to S + tax. The price of cigarette raises to RM10 a pack, but the quantity does not change at all. Therefore, buyers pay the entire tax.

           According to the Star news, the impact of the hike could be significant as any price above RM10 could be a psychological deterrent and may trigger smokers to seek cheaper substitutes. The report also stated that cigarette prices could lead to ‘down trading’ from higher proportion of premium smokers to value-for-money (VFM) brands and from VFM brands to illicit cigarettes. Here comes a black market. A black market is an illegal market that operates alongside a legal market in which a price floor or other restriction has been imposed. As the price of cigarette increase, black market will occur. Illegal arrangements are made between sellers and buyers at price below the price floor.  In this case, authorities really need to buck up and book those irresponsible retailers who doing illegal sales of cigarette, who obviously have no qualms about breaking the law to earn some extra profit. They are not afraid simply because the penalties in place are not strong enough to stop them from dealing in these illegal cigarettes. If nothing is done to this matter, situation would escalate further to the point where such criminal activities would become the norm. 

In the market of cigarette, demand is perfectly inelastic. With no tax, the price of cigarette is RM 9.70 a pack and the quantity demand in a day is 1000. A tax of RM 0.30 a pack shifts the supply curve to S + tax. The price of cigarette raises to RM10 a pack, but the quantity does not change at all. Therefore, buyers pay the entire tax.

           According to the Star news, the impact of the hike could be significant as any price above RM10 could be a psychological deterrent and may trigger smokers to seek cheaper substitutes. The report also stated that cigarette prices could lead to ‘down trading’ from higher proportion of premium smokers to value-for-money (VFM) brands and from VFM brands to illicit cigarettes. Here comes a black market. A black market is an illegal market that operates alongside a legal market in which a price floor or other restriction has been imposed. As the price of cigarette increase, black market will occur. Illegal arrangements are made between sellers and buyers at price below the price floor.  In this case, authorities really need to buck up and book those irresponsible retailers who doing illegal sales of cigarette, who obviously have no qualms about breaking the law to earn some extra profit. They are not afraid simply because the penalties in place are not strong enough to stop them from dealing in these illegal cigarettes. If nothing is done to this matter, situation would escalate further to the point where such criminal activities would become the norm. 

On the other hand, markets do not always achieve an efficient outcome. Market failure arises when a market delivers in inefficient outcome. Market failure can occur because too little of an item is produced or too much of an item is produced. 

  

               The figure above is underproduction. The grey region is deadweight loss. It is inefficient because the production could not fulfill what is wanted by public. Underproduction is a market failure. 

The figure above is overproduction. The grey region is deadweight loss. Wasting of resources occurs there. Companies producing more than what should produce.

With no tax, marginal social benefit equals marginal social cost and the market is efficient. The total of consumer surplus and producer surplus is maximized at the equilibrium level. The tax decreases the quantity, raises the buyers’ price and lowers the sellers’ price. While if marginal social benefit exceeds marginal social cost and the tax is inefficient. Total of consumer surplus and producer surplus is maximized at the equilibrium level. The tax decreases the quantity, raises the buyers’ price and lowers the sellers’ price.

In this instance, government should organize quit smoking campaigns to remind people stop taking in too much of cigarette as cigarette affects people’s health and will lead to many diseases and even death. 

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Tobacco growers wait for WHO decision

Based on the recent news "Tobacco growers wait for WHO decision" reported by New Straits Time, Kelantan’s tobacco grower and curers are protesting against the World Health Organisation (WHO). WHO is coming out with a plan that would threaten the livelihoods and jobs of the people in Kelantan. After doing a critical analysis on this particular topic, I am able to analyze and predict that WHO’s decision does not only cause the people in Kelantan to lose their job but to cause a serious impact on the tobacco market.

If WHO’s plan is approved, this one of the factors that would affect the tobacco market is the number of suppliers of tobacco will decreased. In the supply and demand graph of the tobacco market, the decrease of number of tobacco suppliers will cause the supply to decrease thus causing the supply curve to shift to the left. When all the factors of production are ceteris paribus except the price, there would be a movement along the curve. If there is an increase in quantity supplied, the price would be increased. However, the market equilibrium in the tobacco market would change due to the shifting to the left.

Figure 1.1

Based on the figure 1.1 of the tobacco market in Malaysia, we are able to observe that when there is a decrease in supply the supply graph would shift to the left. The shifting to left of the supply would cause a shortage in the original price, consumers and suppliers would then negotiate again until they reach market equilibrium. What will be affected is the market equilibrium price. The equilibrium price of tobacco will increase to RM2.5 per tobacco from RM1.5 per tobacco and the equilibrium quantity of tobacco will decrease from 10 million quantity of tobacco to 5 million quantity of tobacco.

When resources are not used efficiently, there would be a market failure in the tobacco market. The labors in the tobacco market in Kelantan are worried about their future and some even went to protest against World Health Organization. Labors who went to protest against WHO would cause an inefficiency to produce tobacco because they are absent for work and the maximum production would be affected, this is known as underproduction of tobacco. A market failure would then cause the government to step in to the situation to solve the problem.

But what will the government do in order to solve this? The government would set up a price ceiling which is to regulate the price and quantity of the tobacco market.

Figure 1.2

As seen in figure 1.2 of the tobacco market in Malaysia, a price ceiling prevents the suppliers to charge consumer at the price higher than a specific level set by the government, which is the area above the price ceiling. The government puts the price ceiling below the equilibrium price of tobacco, because it will have a powerful effect as it forces the supplier to set its price at a lower level so that consumers are able to enjoy the goods. Therefore, suppliers are not able to charge the consumers at RM1.50 when the quantity supplied and demanded is 10 million of tobacco per week. They are only able sell at RM1.00 when quantity supplied is 5 million of tobacco per week.

When the price ceiling is imposed, a shortage would actually arise in the market of tobacco because suppliers of tobacco are not willing to sell when the price is too low and consumers are willing to buy more when the current price for tobacco is low.

Figure 1.3

Based on figure 1.3, price ceiling would actually encourage the existence of a black market. Black market is illegal and it works along with the legal market when governments impose a price ceiling. Due to the shortage, tobacco consumers would be very desperate and are even willing to pay a higher price in order to get the product as seen in Figure 1.3 where the maximum black market price per tobacco is RM 2.20. This would then further encourage the arising of a black market because suppliers are able to earn more.

However, when the law in Malaysia is enforced by the authorities, the appearance of a black market would actually be at a very low rate. When the authorities start to arrest people who deal in the black market, people would be afraid to be involved in the black market. Besides, the loyalty of the people towards the country can also affect the black market. When the people in the country are against the black market and obey the law of the country, the likelihood of a black market to arise is very low.

Some consumers would actually search for other alternatives of tobacco instead of wasting their time on search activity. They know with the shortage around, it is hard to look for tobacco and suppliers would to tend charge a higher price and try to cheat their money. Therefore, instead of wasting time, they would turn to the closest substitute of tobacco which is cheaper. This causes the demand curve to shift to the left due to the substitution effect.

Figure 1.1

Figure 1.4

In figure 1.1, the supply curve shift to the left due to the decrease in supplier, after the shortage arises.it caused the black market to arise. Consumer starts to look for alternatives because of the shortage, therefore in figure 1.4 the demand curve shifts to the left due to the substitution effect.

When both the demand and supply of curve of tobacco shifts to the left, the equilibrium quantity would decrease. However the tobacco’s change in equilibrium price is left uncertain because when there is decrease in demand lowers the equilibrium price of tobacco and the decrease in supply raises the equilibrium price of tobacco in the tobacco market. Consumers and suppliers would then start negotiating until both parties agrees to the price, which means opposing forces balance each other.

However at the end of the day, it all depends on whether WHO’s decision would be approved which would affect the tobacco growers and curer. If it does, then this would be the consequences of their action and the effects on the suppliers and consumers of the tobacco market.

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Minimum Wage

According to the secretariat of the National Wages Consultative Council, minimum wages is defined as ‘basic wages’ to be as determined under the Act. It is stated that employees’ wages must reach the minimum amount of RM900 per month. This Act will be implemented next year.

Price floor is imposed by government that makes it illegal to trade at a price lower than a specified level. When a price floor is applied to labor markets, it is called a minimum wage. This is to take care of welfare of people in the society. If the price floor on a market is set below the equilibrium price, there would be no effect because the price floor does not constraint the market forces. The market would work as if there were no minimum wage. If the price floor is set above the equilibrium price, it has powerful effects because there would be conflicts between the law and market forces. Prime Minister Datuk Seri Najib Razak has stated that companies must embrace minimum wage as a strategy and an opportunity to revitalize their businesses. Workers or employees have been eagerly awaited piece of legislation as they have cherished a hope for a higher income. On the other hand, employers are concerned that it might increase the cost of production so that their businesses may not be viable anymore.

For each of us, the labor market is the market that will influence the jobs we get and the wages we earn. For example, we assume that companies are the employers and they decide how much labor to demand. The lower the wage rate, the greater the quantity of labor demanded. Conversely, households decide how much labor to supply. The higher the wage rate, the greater the quantity of labor supplied. The law of demand states that while other things remaining the same, the higher the price of a good, the smaller is the quantity demanded and the lower the price of a good, the larger is the quantity demanded. Changes of price would only affect the movement along the curve. In this instance, Employees can negotiate with employers or labor unions might turn to governments for a higher wage rate.

In a labor market, when the wage rate is at the equilibrium level, the quantity of labor demanded equals the quantity of labor supplied. There is neither a shortage of labor nor a surplus of labor. At a wage rate above the equilibrium wage, the quantity of labor supplied will exceed the quantity of labor demanded. Employers will not demand for labor due to the high wage rate they need to pay to employees. Employers think this will increase their cost of production. The demand of labor determines the level of employment and the surplus of labor is unemployed. This is due to the legal wage rate cannot eliminate the surplus; therefore the minimum wage creates unemployment.

       In illustration of figure 1.1, wages paid by employers to employees cannot go lower than the minimum wage which is 9 dollars. Employers are not allowed to pay anything under the price floor. The area under the minimum wage is called illegal region which is no government policies occur in that region. At the minimum wage of 9 dollars per hour, 20 million hours are hired but 22 million hours are available. Point A to point B is the unemployment. If the rate of unemployment is high, so do the rate of crime in Malaysia.

      According to the Star news, one of the reasons why market forces have not worked is the presence of millions of foreign workers. Malaysia perhaps is the only country that made it extremely difficult for knowledgeable workers to work here but has welcomed millions of low-wage and unskilled workers. This has suppressed wages as Malaysian workers have to compete for low wages.

      Additionally, is the competitive market efficient? Markets do not always achieve an efficient outcome. Market failure happens if too little of an item is produced which is underproduction and if too much of an item is produced we called it as overproduction. The real reason why Malaysian’s productivity is low is not because of workers are not productive. It is due to the fact that employers have been successful in suppressing labor wages. Furthermore, there is no incentive or allowances to be paid to employees and no investment in research for productivity improvement.

      If the construction workers who still use hand-assembled timber formwork to construct flyovers or the toll operator who manually hand out tickets, how do they increase the output? Employers would not waste their money to invest in machinery because it is more profitable to employ cheap labor and this can reduce their cost of production. For example, two women in their sixties in Incheon Airport in Korea can manage the luggage trolleys, while in KLIA we have an army of Bangladesh. This is definitely not because of women in Korea eat a lots of ginseng but they have a machine that collects trolleys magnetically and tows them along.

     A minimum wage will not hurt Malaysia’s competitiveness. According to the Star news, our competitors in 1980s, Taiwan, Korea and even Hong Kong, have minimum wage systems while in Singapore, the head of trade union movement is a government minister and hence the country is able to implement an inclusive wage policy that has a wage level of more than three times higher than Malaysia and productivity growth has transcend us.

      In order to be a high-income nation, government of Malaysia has to be serious and change the policies of being a low-wage country and restructure employment to create productive jobs to decrease the number of unemployment. This will benefit the country with higher wages and lead to a higher purchasing power of consumers that will increase domestic demand and more businesses for local companies. 

                                                

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