Why Buy? Why Not Produce?

According to the article written in thejakartapost.com dated September 17^th, 2012, there explained that Indonesian salt will reach a shortage. Because the prices keep crashing farmers didn’t want to continue their occupation and trying to shift to another field. Profit from the production was only spent on worker’s wages. Even though there is profit, the profit is too low. Even worker’s feel that their wages couldn’t even fulfill their family needs.

Why is it a problem for Indonesia if the farmers find another job? Madura is a place in Indonesia which produce 60% of salt needs for the country. If they shift to another job, salt supply would meet shortage. The government then feels that they have to take actions by importing salt from other countries such as India and Australia which could kill this salt farmer’s business because people would buy salts that the governments imported.

graph 1.1

As illustrated in graph 1.1, theirs is vertical line which represents price and there is a horizontal line which represents the quantity of salt. The D line is demand line. This is the line which represents the amount of goods costumer are willing to buy at any particular price. The D line is drawn based on the demand law which is when 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 greater is the quantity demanded. The S line is the supply line that represent the amount seller would willing to sell in a particular price. This is drawn based on the supply law which is when other things remaining the same, the higher the price of a good, the higher is the quantity supplied; and the lower the price of a good, the weaker is the quantity supplied. Equilibrium is a point which is beneficial for both seller, and buyer because they didn’t received any lost. Indonesia production of salt right now is below the equilibrium which means Indonesia’s salt market is in a shortage. At shortage buyers are willing to buy but the problem is the sellers are unwilling to sell because the price is too low. This is why the farmers have a thought of changing jobs.

So what is the impact if the government imported salt? Salt is a necessity. Amost everyone needs salt. Salt don’t have a substitute. It is a necessity that’s why even though government imported salt and the price goes high, people still consume it. That’s mean the response from the buyers to this price is extremely very responsive (perfectly inelastic demand). What are the effects of residents of Indonesia? Well for the middle to high income people, they will not get to many damaged but for middle to low income people they will receive a major effect which is insufficient income. Their income would not meets the daily needs.

The next question is what should the government do? There are two kinds of problem which the governments have to manage. The first is a short-term problem which is to fulfill the demands of salt the residents of Indonesia need. The second problem is the long-term problem. Governments couldn’t rely on import to often. Indonesia is a rich country. Even if you throw a watermelon bean it could grow into a watermelon tree, that’s what the elder said. Indonesia could produce it’s own salt. Governments just have to pay attention to this field. Farmers didn’t have the passion to do their job because of the crashing price. They need subsides. They need the government to help them doing their job. Also the industries are using a traditional way to produce salt. Governments could take action by giving trainings in how to use machines. They also could subsidize machines for them. The most important thing is that the governments could light up their passion in doing their job by controlling the price. How to do it?

graph 1.2

Well based on graph 1.2, after the government gives help and subsidy to residents they could manage their production and amount of supplied increase. This brings the price to get lower while the quantity supplied increases. The production keeps going until it reaches its equilibrium price where both buyers and seller would get benefit.

What happened if the production positively keeps going and the producer reach the surplus? The seller will gain an excess amount from the sell of the good over the cost of producing. Then the price increases as the quantity demanded increases. This is though a problem for consumer therefore the governments need to take an action.

graph 1.3

What action could the government provide? The government has to put a maximum price of salt to sell for the seller. As illustrated at graph 1.3 the governments take action by setting a minimum price which is above the equilibrium. That means seller couldn’t get more than the maximum price. The bargaining for the price keeps continue until it reaches the equilibrium which means both buyer and seller gets benefits from it.

The conclusion is that the government needs to take action for two problem which is the short term and long term problem. Governments need also to pay attention on the local industry because by producing it ourselves, we could gain more benefit. First, seller could increase their income. That means it will give an impact in macroeconomics point which is increasing Growth Domestic Product because Indonesia people have a better income now. Also the price would not be high for people in Indonesia because there’s lesser tax and lesser marginal cost to produce the goods. If the sales and producing in the country is good, Indonesia could help their local industry expanding their sales to other country by doing exports.

Tiffani Yulita

0311332

Sec 9

Source: http://www.thejakartapost.com/news/2012/09/22/dying-breed-salt-farmers.html