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Petrol, diesel prices up by 20sen from midnight”-TheStar (October 1st 2014) Discuss the possible economic implications due to a further increase in the price of fuel Economic costs: 1. Regressive effect. Oil is a necessity and therefore its PED must be inelastic. Whenever the price increases, its quantity demanded will fall but less than proportionate. This indicates that monthly household expenditures will surely increase. The socially most disadvantaged groups will be the one affected as fuel expenditure will now take up a larger portion of their disposable income 1.Standard of living will also decline. As more money is devoted to paying for fuel, it will create more opportunity cost in terms of other spending. As an example, lesser income for children’s education, family’s healthcare, baby’s milk powder, vacation and others 2. Cost-push inflation is inevitable. Higher fuel prices will eventually be passed on by producers to average consumers like us. It is worth noting that everything out there is associated with fuel as they need to be transported from factories to retailers. Employees may also start to bargain for higher pay which can cause the cost-push inflation to worsen 3. Slower economic growth. As the aggregate supply (AS) curve shifts backward, not only the price level increase but we will also witness a fall in real GDP or real income. This is associated with the slowing down of economic activities. If the impact is major, then in the short run, Malaysian economy may experience a stagflation (stagnant growth and inflation) 4. Some firms in the economy will definitely be affected by such ruling especially those where fuel costs make up a large portion of total costs. They may react by cutting workers or worse, go out of business. Logistic firms fall under this 5. A possible fall in price competitiveness. An increase…...

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