Le Crunch Hits the Fringe
Collapsing consumer confidence, increasing competition from other live events across the UK, high ticket prices, dreadful problems with the online ticketing system have all combined to hit ticket sales for the Edinburgh Fringe this August and remarkably there are still many city centre hotels with spare rooms with the Festival just a fortnight away. Normally the month of August is the cue for hotels and B&Bs to hike up their prices to silly levels to take advantage of the influx of people staying for the festivals. But this year things look to be different ...the Scotsman reports that “Hotel and guest house bookings for this year’s Festival are at an all-time low for this time of year….and… Dozens of private flats are still being advertised as available to rent on the Fringe’s website”
My week in Edinburgh for the fringe is always one of the highlights of my year, maybe it will be a little easier to get a table for supper in 2008 and perhaps I should have played chicken and delayed booking hotel rooms!
Apple’s dilemma resolved by falling pound
Earlier this year Apple was accused of engaging in some blatant price discrimination by selling download tracks at a higher price in mainland Europe compared to the UK. They responded by saying that they wanted to bring in a “standardised price” within months. Well now the falling pound against the Euro seems to have done the job for them - according to this BBC report - “exchange rate changes since January mean 0.99 euros now equals 79p, meaning no price cut is necessary, Apple said”
Still no explanation for why download prices are cheaper in the USA? I haven’t downloaded a song from iTunes for months - there is now much more competitoon - but I am happy enough downloading the free podcasts to keep me happy!
Will the sunshine on this solar subsidy?
I spotted this article in the Guardian from a little while back - “The largest rooftop solar power station in the world is being built in Spain. With a capacity of 12 megawatts of power, the station is made up of 85,000 lightweight panels covering an area of two million square feet” It brings into play three important economic concepts - renewable energy as a factor resource, economies of scale in production and also the costs and benefits of government subsidy - Spain has introduced subsidies of €0.42 per kilowatt per hour for investment in solar power - though the level of subsidy may be lowered in the months ahead.
Fares fair?
For occasional taxi journeys from my home to and from Heathrow and to my local station at Slough I am almost completely price insensitive. But in central London I do weigh up the costs and benefits of jumping in a taxi for shorter forays. This is a terrific article on the cost pressures facing London’s metered cabs whose prices are capped by Transport for London. Earlier on this year, the price of metered can journeys was raised by 2.7% - below the CPI and RPI rate of inflation and nowhere near the increase in the cost of fuel at the forecourts.
read more...»Light at the end of the pipeline?
It is not supply that will drive the world price of oil down in the near term - it is demand. Oil prices dropped by the biggest amount in three-and-a-half years yesterday as commodity dealers sold on fears that the world’s leading economies are facing a sustained economic downturn. A firmer dollar and weaker prospects for economic growth should - in the absence of supply shocks to crude production and refining output - bring prices down further providing some relief to motorists, the aviation industry and countless others.
Prices are incredibly volatile at the moment - and the huge number of options contracts tends to increase volatility, with computers programmed to automatically sell once prices reach certain thresholds.
The Guardian: “Fears of recession drive shares and oil prices down”
Botching the Apple launch?
Seth Godin writes about scarcity
“We can learn a lot from the abysmal performance of Apple this weekend. They took a hot product and totally botched the launch because of a misunderstanding of the benefits and uses of scarcity ...Smart marketers understand that scarcity (intentional or not) is a tool, one that can be used to enhance the story, not detract from it”
And gives five principles for how smarter businesses can exploit scarcity
I am told I must now regard my BlackBerry as a inferior products now that the all-singing, all-dancing iPhone 3 has hit the streets - bunkum!
Cross elasticity: Demand for new aircraft
Over twenty airlines have gone bust since the price of aviation fuel started to climb and the turbulence in the global aviation market is likely to lead to a fall in demand for new aircraft according to a report in today’s Times.
read more...»
Cross elasticity: Demand for Airline Movie Systems
The increase in the price of aviation fuel is causing airlines across the world to think about how they can control costs and the obvious solution is to reduce the weight on flights to increase fuel economy even if only by a slender amount. US airways has announced that it plans to remove the in-flight entertainment systems from many of its flights in an effort to cut down on the amount of fuel - the 500lb movie systems will be discarded from domestic flights from November onwards - the decisions affects around 200 aircraft and is estimated to save around $10 million a year. It will keep movies in its widebody aircraft for international flights and trips to Hawaii (a different type of consumer demand?)
The decision is possibly bad news for Hollywood movie producers whose revenues from selling the rights for airlines to show movies might take a hit. But much depends on whether other airlines follow suit. Demand for the next generation of super-light back of seat entertainment systems is likely to grow in the coming months.
Price deflation for second-hand cars
The balance of power is tilting firmly towards buyers in the second hand car market to judge from new data which shows that the average forecourt price of second-hand cars has slumped more than 14 per cent in the past year.
The absence of buyers has left dealers worried about being stuck with excess stocks of cars and more buyers are not prepared to accept the advertised windscreen price. Demand has been hit by the loss of consumer confidence, the prospect of much higher vehicle excise duty on older less fuel efficient vehicles and by the rising price of fuel. And double-digit price deflation has been reinforced because many dealers are now able to source their vehicles more cheaply too as families with multiple cars on their drive way look to offload them as budgets are squeezed.
Stabilisers?
Do speculators increase or decrease price volatility in markets? It is a pertinent question and one that I will be firing at my Oxbridge students in one of their essays when they return from a summer of reading on the beach! Tim Harford’s blog alerts me to some new research on futures markets and price volatility in the case of onions (it brought tears to my eyes) and Tim flags up an article he is writing on speculators for tomorrow’s Financial Times magazine.Here is Tim’s article: Why the world needs more speculators
Gasoline prices and taxation
The OPEC website carries a very clear chart which helps to explain variations in the price of gasoline in different countries. In the UK for example over 60 per cent of the cost of a litre of fuel is due to indirect taxation applied by thr British Government. In a sense, high taxes have helped to insulate motorists from some of the dramatic increases in world oil prices - but the contrast with the USA is remarkable. Here is the chart and also the related publication: Who gets what from imported oil?
EU airlines to be included in emissions trading
Airlines will be included in the EU carbon emissions trading scheme and this BBC video provides a good introduction to the issue. All airlines flying into and out of the EU, including non-European carriers, will be included as part of the Emission Trading Scheme, and would have to pay for 15 per cent of their emissions permits from 2012. Will the Americans be persuaded to move towards a global agreement on aviation emissions? How will demand be affected by the expected Euro 2 to Euro 9 increase in the price per passenger for short haul flights?
Good background information is available here from the EurActive website. And here is coverage and comment on the issue from the Guardian.
Cross elasticity: High speed rail and oil prices
Forget a third runway at Heathrow, we need another Terminal at St Pancras! That is the message from Carl Mortished in his world business briefing in the Times this week. Demand for hi-speed rail services is soaring as people desert short-haul flights in response to the fuel surcharges and hassle of getting through security. Traffic growth on Eurostar has increased by over a fifth in the first quarter of 2008 and revenues are up by more than 25%. Consumers are realising the advantages of travelling by hi-speed rail for cities 600 miles or less apart. His article is here:
High-speed trains seize short-haul market as fuel cost cripples the airlines
Cross elasticity: Demand for allotments
From Wrexham to Eastbourne and in virtually every part of the country, the demand for allotment space is rising much faster than local councils can supply. The economics of having your own allotment land have changed significantly in the last few years. Allotments peaked in popularity in the immediate post-war years as people looked to grow their own food and drag themselves out of the restrictions of rationing. But gradually the number of allotments declined as the food availabilty improved, real prices fell and the number of supermarketsexpanded. By the 1980s using an allotment was widely regarded as the preserve of the ‘Good Life’ crowd and those in retirement wanting a way to pass the time.
But now the combined effect of rising food prices, growing concerns over the environmental effecs of food miles and demand for locally-grown organic produce has prompted a fresh wave of demand for scarce allotment space.
read more...»EU plans cut in VAT for local ‘labour intensive services’
Caterers, care homes and constructin firms will be among those interested to hear that the BBC reports that the EU Commission has unveiled plans to allow EU states to lower VAT rates for local service businesses, including restaurants and builders. Currently the minimum standard rate of VAT in the EU is 15%, although there are many exemptions. This would be a good example to use when discussing the effects of VAT on market supply for different goods and services in the AS micro course. The Guardian reports that “Zero-rated goods, such as children’s clothes in Britain, will be unaffected.”
Shipping freight and derived demand
Freight ships are one of the best examples I know of a service whose demand is derived from the simple need among exporters and importers to transport their products around the world. So when the global economy changes gear and the chill-winds created by record high oil prices and a slowdown in consumer spending start to bite, it is more or less inevitable that the major shipping businesses will feel the pinch.
The Telegraph carries a report on this today. Ships are leaving Asian ports not full to to capacity a sign perhaps that the increased costs of shipping products is starting to limit demand for freight services.
Apparently the index to watch out for is the Baltic Dry Bulk Index - a measure of commodity-shipping costs - and this bell-weather measure has fallen sharply in recent days hinting of a shift in the balance between supply capacity and demand for ships to move the major raw materials by sea.
Too much freight capacity in the industry? Or a really important lead indicator that 2009 will be a really tough year for the global economy?
Oil prices and demand for scooters - cross elasticity
High gasoline prices is having a classic cross-price elasticity of demand effect. Sales of bicycles, scooters and motorcycles are up. Sales of sport-utility vehicles are down as consumers respond to the changing real cost of getting about town using a motorcar.
Market demand for scooters is said to be soaring in many parts of the USA - here is a link to an article in the Dallas News. Pure economics and a certain nostalgia seem to be two driving forces behind the shift in the pattern of demand. And as sales of scooters rises, so too does the demand for complementary services such as motorcycle-safety courses and scooter riding equipment such as helmets, gloves and motorcycle jackets,
Expectations and oil prices
The debate rages about who is responsible for the 100% increase in the price of a barrel of crude oil over the last year - speculators? fundamental supply and demand factors? Or a combination of influences on the market. Martin Feldstein’s article in the Wall Street Journal today is excellent in linking price volatility to the low price elasticity of demand and supply in the market in the short run.
read more...»Whisky in demand but supply is inelastic!
The Times carried a good story today related to elasticity of supply in the Scottish whisky industry…
read more...»Price anchoring
There is a really good article on price anchoring and the iPhone in the Washington Post today.
read more...»Dynamic pricing in car parks
BBC London today carried news of an excellent example of dynamic pricing in action.
read more...»The role of signals
Siganlling is an important function of the price mechanism. In this Econ Talk podcast, Robin Hanson of George Mason University talks about the phenomenon of signalling—the ways people spend resources to convey information about ourselves to others. Recommended.
Pain at the Pumps
My diesel-powered Citroen has spent a pretty long time parked and unused in recent weeks. Save for occasional visits to the supermarket I have tried to use the car as little as possible as fuel prices have spiked higher and higher. At the margin, it makes much more sense for me to pay for a £14 return rail ticket from home to Oxford for a lunch engagement or a £90 return train journey to Manchester for the recent student workshops than sit sweating and increasingly stressed in the car for several hours getting from A to B.
read more...»House prices down, rents up
There is an excellent article on the BBC website for those taking the housing market paper in two weeks. Property rents are rising faster than inflation whilst house prices are falling – how can that be explained. As always, it is a combination of supply and demand factors.
read more...»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
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?
