Prices - Supply and Demand

All hands to the pumps?

The Financial Times reports today that Saudi Arabia is stepping up crude oil production by 300,000 barrels a day. And there are signs that other members of OPEC are starting to press for an increase in OPEC oil output as prices rise above $127 per barrel and the steep rise in oil costs hurts many developing countries. This FT article provides a bit more background on some of the tensions within the cartel. Saudi Arabia is often called a swing producer within the OPEC cartel - adjusting short run production to help the cartel meet its price targets / objectives. It seems that Saudi is justifying the new boost to output on the grounds of compensating for reductions in production from other OPEC members. Goldman Sachs has raised its average price projection for crude in 2009 to $148 a barrel.

Will food prices start to fall?

Hugh Pym reports on a decline in the index of global food prices which hints that the recent upwards spiral in the cost of foodstuffs might be coming to an end. Have the underlying supply and demand factors changed? Will food producers around the world respond to the sharp rise in price to give us a supply response large enough to lower the risks of further social and economic upheaval?

Madonna gives thumbs up to ticket touts

The Financial Times reports today that the pop star Madonna is “endorsing the sell-on of concert tickets, condemned by some concert promoters as scalping or touting, by making two leading companies in the secondary ticket market official partners for her forthcoming Sticky & Sweet tour of North America and Europe.....Secondary ticketing companies enable the public to trade their tickets online with customers who are prepared to pay above their face value. The company takes a cut of about 10 to 15 per cent.”

What do you think of secondary markets for tickets to sports events and live concerts? There are all sorts of arguments on both sides and secondary ticket agencies tend to have a rather dire reputation; images of shady touts patrolling venues looking for buyers immediately spring to mind. But if you have bought a ticket to an event weeks or months in advance and then find your circumstances have changed, why shouldn’t you have the option of using a legal secondary market?

Demand and Supply Revision Challenge

I have just tried this exercise with the illustrious 12.1 of Dulwich College......

Draw a demand and supply diagram and show a shift in one of the curves (e.g. demand shifting outwards).

Give the students 5 minutes to think of as many causes of this shift.

1 point awarded for each correct cause; 3 points for one no one else has thought of.

12.1 came up with these 15 causes of demand shifting outwards:

1. increase in income – particularly luxury goods
2. increase in wealth (housing market or stock market boom)
3. increase in price of substitute
4. decrease in price of complement
5. increase in population
6. successful advertising campaign
7. anticipation/speculative demand – e.g. anticipation of scarcity
8. increase in popularity/fashion
9. Veblen effect – ‘snob’ effect, ‘must have’ good
10. change in legislation (e.g. compulsory safety equipment or emissions technology)
11. falling interest rates
12. easier credit availability
13. increase in quality of good
14. anticipation of inflation – consumers bring forward purchases
15. appreciation in exchange rate in market for imported goods which are a substitute for domestic goods

After the break we are doing the same for supply shifting inwards..... lots of good revision points already on linking the correct curve to the correct determinant!

Here are the answers for supply shifting inwards:

1. higher costs (wages, rent, raw materials, land, machinery/physical capital)
2. labour strike
3. natural disasters – particularly agriculatural-based/LEDCs
4. war
5. higher indirect taxes
6. lower or removal of susbidy
7. supply restrictions
8. cap on emissions
9. change in incentives away from producing this good
10. resources moved into other industries
11. increased scarcity of resource, e.g. oil – linked to higher costs
12. greater monopoly power/less competition
13. decrease in factor mobility
14. changing goal of seller – e.g. withdraw from particular market
15. appreciation in exchange rate increasing prices of imported raw materials and finished goods – ‘imported inflation’

Many thanks to Alex, Atin, Will, Clive, Arvin, Liam, Keval, Neal, Matt H, Matt S, Thomas......

One of the positives from rising food prices

The Financial Times reports that

“Afghanistan’s opium crop is forecast to shrink by as much as half this year after 2007’s record harvest, counter-narcotics officials in Kabul said, as evidence emerges that some poppy farmers are switching to legal crops because of rising food prices.........Anecdotally, a lot of farmers have calculated that, with wheat prices being what they are, they can make money out of planting wheat.”

The fall in output is also the result of climatic conditions and also the lagged effects of the bumper opium crop last year which in turn led to a sharp fall in prices

The rest of the article is here

Buy to let - a problem of over-supply?

The Financial Times carried a super short piece on the buy to let market today - ideal for students preparing for AQA Unit 3 - Markets at Work. According to the piece

“Rents are tumbling on some city centre flats (in cities such as Liverpool and Nottingham) as buy-to-let investors pay the price for oversupply.....The news will make uncomfortable reading for investors who bought into the boom in development of buy-to-let flats in these city centres, only to find that capital values and now rental income are falling......The cost of renting compared with the cost of servicing a mortgage on an equivalent flat or house has narrowed significantly over the year to the end of March, with both increasing. Rental costs were 75 per cent of mortgage costs in the first quarter of 2007, rising to almost 81 per cent in the first quarter of 2008.”

Have a read of the article and think about the position from the point of view of the buy to let landlord - what are the costs and benefits of their investment in the property market - and also from the point of view of tenants looking for somewhere to live.

(i) Using a supply and demand diagram, explain how a situation of over-supply can occur and what happens to prices as a result

(ii) What might happen to the property market in Nottingham if some buy-to-ler investors decide to sell some of their stock of properties?

The rest of the article can be found here

Asian Rice Crisis

The credit crunch is rivalled, arguably, by increasing food prices as a cause of economic (and human) concern in 2008.

This article from the BBC looks at some of the implications and you can watch/show videos on the rice crisis here.

Inter-related markets: Farmland prices

There is an excellent example of the inter-relationships between markets in today’s Independent.

“The price of farmland is rising at its fastest rate for more than 30 years ....Arable land, in particular, has become so profitable that its average price has soared from £4,000 an acre in January last year to £5,500 an acre today.....The increases are being fuelled by the astonishing demand for agricultural holdings at a time when food prices are at an all-time high and when very little farmland is coming up for sale ....The price of wheat and other cereals has more than doubled in 12 months. While that means the cost of food is going up, it has also improved the profitability of arable farming and made it an attractive investment. At the same time, Britain’s agricultural land is attracting interest from abroad.” The rest of the article can be found here

Plenty of microeconomics here - the inelastic supply of farmland coming onto the market; the relationship between returns from financial markets and the demand for other assets including farmland; the impact of rising food prices on the profitability of owning and farming arable land. Will this help to stop the flight from farming in the UK? Or are there dangers in amateur landowners looking to buy up land as a lifestyle choice?

Revision: Stocks and Prices

Many AS microeconomics questions revolve around the volatility of soft commodities such as coffee, crude oil, rubber and tea and harder commodities such as iron ore, copper, tin and platinum. It is important to be aware of the important link between stocks and changes in market prices, especially in an age when commodities have become a new asset class with much more speculative activity than before.  Stocks are also important in many other sectors of the economy – for example the property market and the market for carbon permits.

Revision note
Revision_Stocks_Prices.pdf

Powerpoint charts
Stocks_and_Prices.ppt

Goodbye to White Goods?

Cast an eye round your kitchen appliances - how many of them are white? For years I have been teaching about the white goods industries - those that manufacture dishwashers, freezers, washers and driers - students have taken the mick and accused me of teaching a spoof lesson (I try to do this once a term!). Well perhaps they are right for there seems to be a distinct change in the demand for appliances of different colours if the USA household goods market is any guide.