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Contestable Markets - Google launches the Nexus One

Wednesday, January 06, 2010

Google has launched the Nexus One a “super phone” designed to challenge the established dominance of smartphones such as the iPhone, Blackberry and Palm Pre. For £330 buyers anxious to own a Nexus One without locking themselves into a lengthy contract with one of the major mobile phone operators can have a phone delivered that can run on any network. 

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Evernote - Freemium and the Marginal Cost of Cloud Computing

Thursday, December 03, 2009

Here is a superb blog from Rory Cellan-Jones on some of the financial numbers emerging from Evernote a business that, like Spotify - has opted for a freemium business model as a way of monetising the cloud computing services it offers.

“So it turned out that back in May, Evernote had 900,000 users, of whom just 12,000 were paying $5 a month for a premium subscription. Today, that’s risen to two million users, with 31,000 premium subscribers. Hmmm - so about 1.5% are choosing to pay - that doesn’t sound a very cheerful state of affairs. But Phil Libin came charging back with a series of spreadsheets and graphs telling a more encouraging story….... what really makes Evernote look like a sustainable business is that its costs are so low - nine cents (about 6p) per user per month. I was surprised that it wasn’t much higher, given the cost of running an ever larger data centre.”

It provides a terrific example of the low marginal cost of adding extra users to the site and the revenue and profit opportunities from converting users of the free service to the paid for model.

Interesting video here from Oxford Entrepreneurs who invited the Spotify founder Daniel Ek to speak to their society a few weeks ago.

Super fast food nation

Thursday, November 26, 2009

The Independent yesterday carried an article on the continued rapid growth of fast food businesses in the UK. Across over 700 UK town centres the number of outlets for EAT, Pret A Manger, Dominos, KFC and Subway is expanding whereas Wimpy, Burger King and MacDonald’s have seen a reduction in outlets (partly a strategic refocusing of where to locate). Total market demand seems flat and perhaps declining.

“In the 10 biggest cities, fast-food outlets soared by 8.2 per cent to 1,456 premises, with London, Edinburgh and Glasgow leading the way…according to the consultancy Allegra Strategies, the value of the informal eating-out market in the UK actually shrank by 0.5 per cent to £40.3bn in 2009.”

Here is the link - there is value here for students looking at the fast food industry as a case study of imperfect competition / contestable markets

Toy Story

Wednesday, November 11, 2009

image
The Go Go Hamster is set to be one of the top toys this Christmas. But this, and other toys in high demand, might be subject to a shortage of supply. Retailers had their fingers burned last year as demand for toys fell by 12% and many were left with excess supply after the Christmas period. Many toy retailers make over 50% of their sales in November-December, but the early stages of global recession reduced demand for toys in 2008, shifting the demand curve to the left so that, in order to clear excess stocks, retailers had to reduce prices. In a textbook example of cobweb theory, many have ordered fewer toys this year thus reducing supply, but in fact the early signs on both sides of the Atlantic and across Europe is that demand is, at least partly, restored, so there is now a risk of excess demand.

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Peak oil theory and economic implications

Sunday, October 25, 2009

There is a highly relevant article on the depletion of global oil reserves and how this might affect UK energy policy in the Telegraph. The article links to concepts such as the marginal cost of extraction of different oil fields and the viability of exploring for oil at different prices.

“The timing of the global peak remains uncertain but the window is rapidly narrowing. Since 1993, the world has produced half as much oil as was produced in the preceding century and now uses as much oil as the UK has ever produced in only 10 months. On current estimates, we have used between 28pc and 56pc of recoverable conventional oil – with much of what remains being located in smaller fields in less accessible locations, or requiring “enhanced recovery” techniques to extract.”

The rest of the article can be found here

Soaring cocoa prices as supply fails to keep pace with demand

There is an excellent article in the Times today about the surge in the world price of cocoa. Cocoa prices have hit a 30-year high as poor weather threatens to drive the price of chocolate up again for Western consumers. Cocoa has reached $3,412 a tonne in New York as concerns deepened about demand outstripping supply for the first time since 1968. This is a really good article to use to consolidate students’ understanding of how shifts in supply and demand can lead to price volatility. And also the importance of price elasticity of demand and supply in shaping price changes.

“The surge in price also indicates that cocoa is increasingly being used for financial investment rather than merely sold to industry”

* What factors are limiting cocoa supply?
* Why is demand from western economies rising - even though many are still in recession?
* Will cocoa farmersd necessarily gain from higher world prices?

Sugar prices and production and investment incentives

Friday, October 23, 2009

World sugar prices are close to a 30 year high with values on the Chicago mercantile exchange hovering just under $30c per pound. For countries whose sugar exports account for a large proportion of their export earnings, the steep increase in world prices has brought about an improvement in their terms of trade and - because demand for many foodstuffs is price inelastic, a favourable change in their balance of trade. A good example of this is the African country of Mozambique, a nation almost destroyed by a long running civil war that eventually ended in the early 1990s but which has also been hit in recent years by severes drought hit many central and southern parts of the country, including previously flood-stricken areas. And where half of the population must survive on less than $1 a day.

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Fair Trade given new push by government grant

Tuesday, October 13, 2009

Harriet Lamb the inspirational head of the Fair Trade Foundation is featured in this BBC news video that reports on a £12m grant to the organisation to help promote an expansion of the range of products that fall under the Fair Trade orbit. Welcome news indeed - Harriet spoke at our Economics Conference in June 2008 and listening to her and watching films like Black Gold convinced me never to buy another bag of non Fair Trade tea or coffee ever again if I could help it.

Swine flu vaccines and elasticity of supply

Wednesday, October 07, 2009

The scale of the ordering of swine flu vaccinations by governments across the world is eye-wateringly large! GlaxoSmithKline plc - one of the world’s biggest pharma companies has reported that governments around the world have so far ordered 440 million doses of its pandemic swine-flu vaccine Pandemrix. GlaxoSmithKline has been engaged in a tense race to get new swine flu vaccines onto the market fighting the likes of Sanofi-Aventis, Novartis AG and AstraZeneca to win contracts for public health programmes. For students of the price mechanism it is a fascinating example of many supply and demand concepts at work:

The challenge of scaling up production to meet huge levels of demand - this has involved out-sourcing
The relative importance of fixed and variable costs in developing and manufacturing/distributing a new drug
The elasticity of supply of vaccines to meet short term health requirements
The oligopolistic race to win and protect market share
Economies of scale in production
The balance of power between the major buyers and the multinational drug suppliers
Price discrimination tactics

The Guardian reports that:

“The company makes the vaccine in Dresden and Quebec but the demand is so great – about 60% higher than for usual seasonal vaccines – that it is also outsourcing production to third-party manufacturers.”

According to the Wall Street Journal

“Glaxo hasn’t released information on cost per dose of the vaccine. However, Chief Executive Andrew Witty said in July that Glaxo was charging wealthy nations $10.26 per H1N1 vaccine shot and developing countries less. The drug maker is also donating 50 million doses to the World Health Organization.”

The Independent reports that

“The United States has begun a massive campaign aiming to vaccinate 250 million people against the illness by year’s end.”

And the Times reports that “total booked orders for the drug are worth about £2.2 billion — a significant sales and profit windfall as a result of the swine flu epidemic”

Banana Price War Must Hit Growers

The supermarkets are spinning the latest price war for sales of bananas as a welcome boost to the spending power of hard-pressed consumers. True in the short term - cheaper bananas in my household will simply encourage me to buy more but ultimately throw most of them away. The medium term impact on banana growers is of much greater importance and it is this issue that was addressed in a timely and useful Big Question feature in the Independent yesterday. Here is the link.

The Big Question: Why are bananas so cheap, and what does it mean for producers?

There is a huge amount of economics in the article not least some evidence on the oligopsonistic power of banana growers and the oligopolistic battle for market share among the major retailers:

“Banana production is an operation on a gigantic industrial scale and is dominated by just five huge companies, Chiquita (formerly United Fruit), Dole, Del Monte, Noboa and Fyffes, which control 80 per cent of the global trade between them.”

“Asda - which sells two million kilograms of bananas a week - is charging 46p/kg. On August 25, the price was 84p/kg and 99p/kg last Christmas. Tesco and Sainsbury’s had been forced to match Asda’s price while the cost of bananas at Morrisons has fallen to 57p/kg and 59p/kg at Waitrose.” (Daily Mail)

More here

Daily Mail

Press Association

 

 

 

 

Downturn Drives Hotel Rack Rates Lower

Tuesday, September 15, 2009

Here is a super short article from BBC news on the impact that the recession has had on average hotel room rates in different locations across the UK. Demand and supply side factors impact on room rates in specific towns and cities. More detailed information can be found from this press release from Hotels.com.

“UK hotel prices fell 16% on average making the first six months of the year a great time to staycation. Prices in London were down 12% to £101 on average, in Bournemouth by 14% to £66 on average and in Southampton by 33% to £57 on average.”

It might be worth having a discussion about the reasons for these regional price variations:

Bath £111
London £101
Edinburgh £91
Jersey £90
York £86
Blackpool £59
Southampton £57
Plymouth £57
Nottingham £53

Mature Banking

Monday, September 14, 2009

A post from student Tom Hosking

Where does parmesan cheese come from? It may surprise you to know that it is most likely to have come from a bank! Banks in Northern Italy have been running a cash-for-cheese loan scheme for the past fifty years. This year, demand for the scheme has risen 15% because cheese makers are struggling in these hard times.

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Apprentice Jockeys and Low Wages

Wednesday, September 09, 2009

The tragic death of two apprentice jockeys in an incident in North Yorkshire last weekend has prompted much press coverage of the ambitions and daily lives of the young people who aspire to make it into the intensely competitive world of professional horse racing. It struck me, reading this article in the Times, that the apprentice jockey is an excellent example to use of how a highly elastic supply of young people who want to reach their dreams has an effect on pay and conditions in their own particular labour market.

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The Big Question looks at peak oil theory

Monday, September 07, 2009

The Big Question feature in the Independent asks whether the recent discovery of a giant new oil field by BP undermines peak oil theory? There is a nifty oil supply and demand graphic focusing on known oil reserves. The article also places emphasis on the importance of current and expected oil prices in driving oil exploration and extraction.

“We simply do not know how much oil is left on the planet. What we do know is that the ratio of reserves to production has remained relatively constant for many years. This isn’t because of new discoveries; rather it is because as prices rise it becomes easier to extract more oil from existing fields; as companies drill, they realise there is more there than they thought. So yields in-crease. Raising recovery rates from 35 per cent to 50 per cent would double world reserves to more than 2,400 billion barrels.”

Here is the article

World Tea Prices Climb to New High

Friday, September 04, 2009

The price of tea on the global market has surged to a fifteen year high. Supply and demand factors are both at work as this short streamed presentation shows

There are over 1,500 different types of tea so discussing what is happening to the ‘world price’ has its limitations! But this is an interesting market to explore for AS students covering as it does

*Market demand and supply factors
*The impact of price volatility
*Do tea producers actually gain from rising market prices
*Price and income elasticity of demand for tea
*Fair Trade and tea pricing policies
*The impact of changing tea prices on demand for and supply of related products
*The significance of world tea prices for macroeconomic performance of major tea exporting nations

Once students have the core supply and demand analysis, this is a topic that we can return to later on in the course and also in revision

Economics of Healthcare - Introductory AS Microeconomics

Wednesday, September 02, 2009

I won’t be alone in choosing the thorny issue of healthcare as an introductory topic in AS microeconomics when we kick off next week. The agenda is vast and it is a topic that can be returned to on a regular basis as students accumulate a body of knowledge, concepts and fine-tune their evaluation skills. There is a streamed presentation available here

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Government legislation week

Tuesday, September 01, 2009

In time for the start of term, there is lots of legislation coming into force this week. There’s the third rise in petrol duty in nine months, starting today, with the return of VAT to 17.5% at the end of year to come – is this the price of going green, or the price of a budget deficit?

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Chris Anderson on Freemium

Sunday, August 30, 2009

With digital products the marginal cost of production is pretty close to zero - Google does not show up on your credit card bill and neither does Facebook. Bertrand predicted in the late 19th century that “in a competitive market, price falls close to its marginal cost”. Competiton is something we take for granted - it exists when you have two similar goods or services produced by mutliple parties. An under-cutting process can take place until the market price edges down towards the marginal cost of production. Now we have a digital economy where the MC of serving one more Tweet or web page is zero. How can you make money in this digital economy?

A recent talk by Chris Anderson at the RSA is now available to view on their web site. His explanation of freemium products is interesting as are his comments on piracy. To Anderson, piracy is an example of the animal forces of the market place because the music companies chose not to make their music free. Piracy is the market place imposing the price of free.

Another article on freemium is available here from the New York Times: Using Free to Turn a Profit

Chris Anderson - Free: The Future of a Radical Price

 

 

Meeting the challenge of food security

Tuesday, August 11, 2009

The government has published a new report on what is needed to meet the growing list of challenges to the cost and security of our food supplies in the years ahead. The era of cheap food seems to be over and agflation - high food price inflation - is something that has hit the pockets of millions of families in virtually every country over recent years. This Independent article flags up some of the key policy issues regarding food supply in the UK - a country whose self-sufficiency is under threat as forty per cent of the food we eat is now sourced from overseas.

“In a list of challenges to UK food security are the changing climate, floods, drought, soil erosion, water scarcities and the breakdown of ecosystems. Global temperatures may rise two to three degrees in the next 50 years, threatening large-scale crop failure in Africa….......British households still spend on average less than 10 per cent of their income on food, compared with 70 per cent in many developing countries.”


BBC news video on this topic

Imbalance between supply and demand drives sugar prices to 28 year high

There is plenty of coverage today of the news that the global price of raw sugar has increased to its highest level since March 1981 on the back of a widening imbalance between world supply and demand.

The hike in sugar prices is a classic market response to a rise in demand for sugar - especially in countries such as Brazil where a growing volume is being used as a (subsidised) source of ethanol - combined with supply shortages caused by low rainfall during the monsoon season in India and China and hail and drought affecting supplies from Russia.

Sugar output in India has contracted by more than 45% over the last year and the country is on the point of moving from being a net exporter to a net importer of sugar if measures are taken to limit existing exports to maintain sufficient supplies for the home economy. Global sugar demand will exceed output by as much as 5 million tons in the year through September 2010, according to the International Sugar Organization in London.

When demand exceeds supply, existing stocks fall and this is a key factor driving prices higher. Speculators can cause the price movements to be exaggerated as they trade in the forward markets to buy up available stocks in the expectation of further price increases.

Independent: Chasing a sugar rush: global deficit drives price rises

Telegraph: Sugar price hits 28-year high

Contestable Markets - Spotify takes on iTunes

Wednesday, July 29, 2009

Here is the latest move in the battle for position, power and profitability in the market for digital downloads. Spotify the music streaming service based in Sweden has submitted an application to Apple for their iPhone that will allow their premium service users to search for music on the Spotify playlists and download their free library of songs onto their mobile phone.

Spotify say that the free application for the iPhone has met all of the developer guidelines required by Apple. The application will not allow users to buy music from the iTunes online store and herein lies the stumbling block! Will Apple really allow potentially one of its major rivals in the market place to find a home on the ultra-popular iPhone? Their dominance of the mobile phone music market looks too strong and too profitable to allow this new application. Spotify has become tremendously popular within a short space of time - it is claimed that they have over two million users in the UK alone.

*The advertising-funded version of Spotify is free of charge
*The premium service costs Euro 9.99 a month
*Apple has already approved several other music services such as Last.fm, Deezer and Pandora but these are much smaller competitors
*Music technology experts say that one of the main advantages of the Spotify application for the iPhone is offline play - push a button to download your Spotify playlists containing up to 3,333 songs to the app for playing whilst not connected

Here Rory Cellan-Jones from the BBC test drives the new Spotify application

And this Guardian editorial sings the praises of being able to listen to music without paying over the odds

Update: In August 2009 Apple announced that it had approved the bid for an iPhone app from Spotify. Details here

Economics Snapshot - Hedging the Fuel Price

Tuesday, July 28, 2009

Hedging is a way of reducing uncertainty over the future path of volatile commodity prices such as the cost of fuel. One the most important decisions that an airline can take is the extent to which it uses hedging to lock in the price of a barrel of kerosene for a period of six or twelve months.

Ryanair provides a good example of how this can have a decisive effect on profitability. Late in 2008 Ryanair was hedged into paying the equivalent of $125 a barrel for kerosene just as the world price price of oil was collapsing to below $40 a barrel - the result was higher operating costs and a Euro 150 million hit on profits. For 2009 around four-fifths of Ryanair’s fuel requirements are locked in at $62 a barrel which with oil prices nudging up towards $70 a barrel will give the airline much needed breathing space as the recession affects demand for seats and forces many airlines to cut prices still further to maintain a profitable level of load-factor (the percentage of seats on each flight that are filled).

*Ryanair is now Europe’s largest airline having overtaken Lufthansa and British Airways
*In the last twelve months nearly 60 million passengers have flown with the airline
*With a market capitalisation of £4.6 billion, Ryanair is larger than the German flag carrier and easily more than twice the size of BA.
*Ryanair has a 28% stake in rival Irish airline Aer Lingus and has tried several times to take it over - so far without success!

Government Failure: Thai Rice Buffer Stock

Tuesday, July 14, 2009

Over the last twenty to thirty years, buffer stock schemes introduced by national governments or collectives of producers have been riddled with problems. The fiscal costs of buying the storing products purchased at guaranteed minimum prices have come to haunt many governments including those in the EU who paid billions of euros for inefficient and inequitable farm support policies. Here is another example of a misguided price support scheme - the Thai rice mortgage scheme introduced a couple of years ago when global food price inflation was at its most severe.

According to this excellent piece from the BBC, “The Thai government is now sitting on a vast stockpile of rice that it bought at peak prices. As the country is such a big supplier to the world market, it cannot sell all this rice without depressing prices even further.” And the gains have been unevenly spread….“rich farmers in the central plains are in areas with irrigation, so they can grow something like three crops a year…..poor farmers in the north-east, they don’t have surplus of rice to sell, so they don’t benefit from this programme at all.”

More here

Housing recession hits wool prices

I took a break from writing yesterday with a delightful thirteen mile hike from the small Yorkshire town of Lofthouse to How Stean Gorge and pack again following the path of the Gouthwaite reservoir. Along the way I got up close and personal with numerous small herds of cattle and hundreds of sheep many of whom are just days away from losing their coats as the summer shearing season gets into full swing.

Sadly for what remains of the hill farming community of Nidderdale and the broader acres of the Yorkshire dales, the economics of sheep farming has become even more precarious than usual in recent months.

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Race to the Market - Jacko Tribute Books

Monday, July 13, 2009

Here is a superb example of how profit seeking businesses react immediately to a market opportunity.Barely had the dust settled on the untimely passing of the King of Pop when publishers around the world sprung into action to deliver tribute books - but speed is absolutely of the essence for the publishing trade as the ‘market space’ for Jacko memorabilia is likely to fill up almost as quickly as the O2 arena when his tickets went on sale.

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Air passenger duty - a tax too far?

Saturday, July 11, 2009

Airlines and trades unions representing those employed in the aviation industry are lobbying the British government for a rethink about the proposed increases in air passenger duty (APD).

The duty is currently £10 for short-haul flights and £40 for longer journeys, costs which airlines pass on to passengers. Under the government’s plans, the tax will rise to £85 for Australia and £60 to the US by November next year. The revised APD will be based on four bands set at intervals of 2,000 miles from London. This BBC news article provides a useful background on some of the key economic and social arguments relating to the duty and the views of different stakeholders.

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Petrol price war breaks out

Thursday, July 09, 2009

Here is an example of the kind of periodic price war that is characteristic of an oligopolistic market. The Guardian reports that the supermarket chain Asda has cut the cost of unleaded petrol and diesel to 99.9p a litre at all its 176 fuel stations. .Sainsbury’s, Morrisons and Tesco are the other main players in the market, and the Automobile Association believes that they will follow Asda’s lead.

Is Asda really the price leader in the UK petrol retail market - Morrisons has already followed suit by dropping prices to what is considered to be the psychologically important price of 99.9p per litre or less. Most supermarkets engage in price-matching in local areas so if a rival’s prices are going down, then they will go down as well - to some economists this is a form of hidden price fixing.

Or is this move part of a wider phase of price competition across the supermarket chains, using ultra-low profit margins on fuel to entice customers into their stores? The report says that the number of petrol stations in the UK has fallen to about 9,000, from a peak of 30,000 three decades ago and that smaller independent petrol stations would struggle to match the firepower of the big supermarkets. A 2p drop in the price of petrol saves the average UK family £4.34.

The average charge per litre for unleaded has been 103.8p, ranging between 99.9p and 115.9p.The average for diesel was 105.3p, ranging between 99.9p and 117.0p.

Two VAT Stories - Sports Goods and Restaurants

Wednesday, July 01, 2009

Changing the rate of value added tax (VAT applied to a product should bring about a change in the retail price of a good or service to the consumer. The current rate of VAT in the UK is 15% following a temporary cut from 17.5% in November 2008. Today the Public Health Commission has started to lobby for a reduction in VAT to the min rate allowed under EU law - 5% - for products such as sports equipment. The justification is that lower prices will increase the affordability of leisure products and help encourage more people to follow a healthy life style. As always a reduction in an ad valorem tax will have a great impact on the price of more expensive equipment - for example the £1000+ cost of a concept 2 rower compared to an entry level tennis racket. The arguments are raised in this BBC news article.

Across the Channel the cost of eating out will fall as a result of a cut in VAT by the French government. Value-added tax (VAT) has been reduced from 19.6% to 5.5%, in an attempt to increase consumer spending and create thousands of jobs.

On a different matter I didn’t realise until last week that VAT is applied to razor blades - one reason (but not the main one) behind the scandalously high prices that the likes of Gillette and Wilkinson Sword charge for their cartridges.

Petrol-Diesel Price Difference Narrows

Tuesday, June 30, 2009

Crude oil prices are heading towards $75 a barrel as speculators bet on a stronger-than -expected global economic recovery and naturally prices for fuel on the forecourts are heading northwards too. But an interesting feature of the latest price changes is the narrowing of the price premium that drivers with diesel-fuelled vehicles must pay. Apparently the closing of the gap is due to a relative abundance of diesel fuel stocks on the international market.

The name comes from German inventor Rudolf Diesel, who built the first diesel-powered engine in 1892

Mobile Takeovers - Who will gain if five becomes four?

Monday, June 29, 2009

The press is full of coverage about a possible takeover bid by Vodafone for T-Mobile UK which is currently owned by Deutsche Telekom. Nothing is certain yet - but if a takeover goes ahead and is allowed by the competition authorities, Vodafone will have around 40 per cent of the market for mobile phone users in the UK.

The approximate market shares would look something like this:
Vodafone 40%
O2 (owned by Spain’s Telefónica) 27%
Orange (owned by France Telecom) 22%
3 (owned by Hutchison Whampoa) 8%

If Vodafone and T-Mobile become one business there is one obvious cost saving (or synergy) - namely that the merged business would have to run only one mobile network instead of two, for example, so Vodafone could aim to secure significant savings in capital and operating spending. For any would-be purchaser the risk is over-paying for a business, there are plenty of examples of the ‘winners’ curse’ in past takeover bids.

The mobile phone market is a classic case of an oligopoly with just a handful of corporations dominating the market - but you do not always need a large number of operators to create genuine price and non-price competition in the industry. Indeed the UK is the only major European market with five mobile operators, and some analysts claim that the fierce battle for market share has had the effect of cutting profit margins and reducing the profits needed to reinvest in rolling out the next generation of mobile phone technology and improving the speed and reliability of a mobile phone network that needs to cope with an ever-increasing number of data-rich applications.

Having four rather than five major players looks on the surface to be reducing competition, but perhaps all of the remaining businesses will gain from higher profits at a time when the recession has hit the demand for new handsets and mobile phone services. Vodafone is a giant in the industry reporting revenues of £41bn for the year to March 31, 2009 and an operating profit of £11.8bn.

In the mobile phone service provider market there is always a balance to be struck between economic efficiency and welfare. Competition keeps prices down for consumers and helps to make fast mobile connections more affordable to millions. But the businesses themselves must be able to finance investment on enormous networks and generate a sufficient rate of return for their shareholders. It will be interesting to see how the competition authorities respond to the next wave of consolidation in the industry.

Cadburys, Cocoa and Coconuts

Monday, June 01, 2009

Here is a terrific example of how a long established business sees an emerging economy not just opportunity for growing sales and profits but also as a centre for production.

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Trade Secrets at Irn Bru

Friday, May 29, 2009

Here is a good example of the importance that some busineses attach to their trade secrets!

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The Supply-Side Benefits of Imports

Wednesday, May 13, 2009

Many students on introductory economics courses hold on to a rather naive view that exports are good and that importing is negative for economic performance. Exporting for its own sake (mercantalism) carries obvious risks as countries that have accumulated huge trade surpluses have found out. And access to cheaper imports of goods and service can have a very liberating effect on the supply-side of the economy. Lower priced imports create competition for domestic industries and allow home-based manufacturing businesses to source cheaper intermediate and capital goods.

You would expect the Economist to support trade liberalisation - but this feature in the Economist is worth reading for students who want to understand some of the supply-side benefits of reducing import tariffs.

“As part of those reforms, India slashed tariffs on imports from an average of 90% in 1991 to 30% in 1997. Not surprisingly, imports doubled in value over this period. But the effects on Indian manufacturing were not what the prophets of doom had predicted: output grew by over 50% in that time. And by looking carefully at what was imported and what it was used to make, the researchers found that cheaper and more accessible imports gave a big boost to India’s domestic industrial growth in the 1990s.”

The rest of the article is here - The merits of imports

World cocaine market ‘in retreat’?

Tuesday, May 12, 2009

image

According to this BBC report, years of government intervention by the Serious Organised Crime Agency to cut supplies of cocaine has been successful in reducing supply and so raising the price of the drug.

SOCA have followed a strategy of working in South America, the Caribbean, across the Atlantic and with European partners to intercept the suppliers. Wholesale prices have risen from £39,000 per kilo at the end of last year to £45,000, which would indicate a shortage of supply causing the equilibrium price for a demerit good to rise, reflecting some of the negative externalities and moving closer to the social cost.
However, unfortunately there may also be a case of government failure in the form of unintended consequences:  data collected by the Forensic Science Service suggests that almost a third of police seizures are now less than 9% pure, the lowest recorded purity level.

The implication is that drug gangs are maintaining their supernormal profit by using increasing amounts of chemicals - so-called cutting agents - to dilute cocaine powder sold on the streets of Britain. They include the cancer-causing drug phenacetin, cockroach insecticide and pet worming powder. As a result, street prices are remaining fairly stable says Drugscope director Martin Barnes. “What is happening is that dealers are maximising their profits by selling a product that is potentially more harmful and much less pure and a lot of people buying it probably don’t realise that’s what’s going on.”

Servicing the Car Makers

Our motor vehicle industry appears to be in a fragile state, rarely a day goes by without one manufacturer or another locked in talks with the government about loan guarantee schemes or other emergency measures designed to prop up production in a sector hit by falling sales and the challenge of an industry with huge global capacity. The Society of Motor Manufacturers and Traders estimate that nigh on 800,000 people are employed in the motor vehicle industry in the UK. But how many of them have jobs on the production line itself, physically assembling the vehicles? The answer is smaller than you might think.

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Revision: Network Economies of Scale

Monday, May 11, 2009

The power of networks is becoming increasingly recognised in the economics of long run costs, revenues and profits. Network economies rarely figure in mainstream AS and A2 economics textbooks but they will have to eventually as the sheer scope of network effects is understood.

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Sewage - The Fuel of the Future?

Monday, May 04, 2009

Waste not want not.

Monopolistic water and sewage companies rarely get a good press but here is a fascinating news story in the Times. Severn Trent, one of the UK’s largest water suppliers which supplies water and waste services to 3.3 million households is researching ways in which the hundreds of thousands of sewage sludge that is generated every year in the UK can be turned into a biomass fuel to produce heat and electricity. The economic incentives to consider this have been boosted by a combination of subsidy, taxation and regulation.

On the subsidy front, since 2003, Renewables Obligation Certificates — a form of subsidy to accredited generators — have been available for electricity that is generated by burning biomass fuels, which include wood, straw or sewage gas and sludge.

On the tax side - the government has gradually increased the size of the landfill tax which covers disposal of waste in landfill sites - the tax is set to increase by 20 per cent to £40 per tonne, up from £32 in 2008. In 2010 it is set to rise again to £48 per tonne.

Regulations now ban the disposal of sewage sludge at sea.

The Times reports that

“About 347,000km of sewers collect more than 11billion litres of waste water in the UK every day. This water is treated at about 9,000 sewage treatment works across the country. Roughly 62 per cent of the country’s sludge is treated and recycled into a type of fertiliser known as biosolids, which is used to fertilise more than 80,000 hectares of British farming land every year.”

This is a good example to use in exam questions because the incentives to develop innovative schemes to find economically viable forms of renewable energy often require a combination of policies working in tandem rather than a single ‘big bang’ approach. Government policies towards waste can be found here.

 

Passing the burden - Sainsbury’s and their suppliers

Monday, April 27, 2009

AS micro students grappling with their revision on government intervention will come across the issue of who ends up paying for an indirect tax. The conventional view is that a supplier faced with an excise duty or other tax can consider passing it on by raising the final price to the consumer. Price elasticity of demand and supply come into play in deciding who eventually bears the burden of an indirect tax.

Here is a slight twist. Sainsbury’s has written an email to their suppliers of alcholic refreshment more or less insisting that they aborb the recent hike in duty announced in Darling’s budget. According to a report in the Daily Telegraph:

“Duty – April 2009” sent to its beer and cider suppliers prior to the Budget, J Sainsbury said that it would be “replacing” any lines on June 1 “that we cannot maintain margin on” following the announcement of an increase.”

In effect - they are telling them to aborb the tax or risk being delisted by the supermarket. Given Sainsbury’s monopsony power it is clear where the balance of influence lies in the relationship. Is Sainsbury’s decision asymmetric? Did they pass on the 2,5% decrease in VAT to their drinks department customers last Autumn?

More here

Selling Cheese to the Chinese

Saturday, April 11, 2009

Savvy businesses target the emerging middle class in emerging market countries whose income elasticity of demand for consumer goods and services is strongly positive. The FT reports today that “British dairy producer Milk Link owner of the Stilton brand, has signed a two-year deal with Yili Group to export Stilton – the first direct exports of the cheese to China. The cheese will be sold in supermarkets along the Chinese east coast, including branches of Tesco, Wal-Mart and Carrefour , while quarter-wheels will also be sent to upmarket hotel chains.”

Two balance of payments aspects here

1/ The direct export of tangible products to the Chinese economy - China accounts for only 2 per cent of total UK exports overseas at present

2/ The use of Tesco (UK), Wal-Mart (USA) and Carrefour (France) as distribution channels - made feasible by direct investment into the Chinese economy

Also worth mentioning that Milk Link is a cooperative of dairy producers - so successful export promotion into emerging markets will provide a flow of extra revenue for UK farmers who are licensed to make Stilton.

There is still a long way to go! Total cheese exports from the UK to China – mostly (processed) cheddar – accounting for just three tonnes in 2008.

More cheese please Gromit

 

Electric cars - subsidise the consumer or producer?

Thursday, April 09, 2009

We can expect a battery of articles in the days and weeks ahead on government incentives to grow the UK electric car market. Gordon Brown is reported as favouring a sizeable subsidy for consumers to purchase electric vehicles - according to the FT, buyers of electric cars will be offered discounts of more than £2,000 – paid for by the state – under plans by Gordon Brown to make Britain a leading centre for manufacturing “greener” vehicles.

 

read more...»

Q&A:  Which indirect taxes give the government to most revenue?

Sunday, April 05, 2009

Which indirect taxes give the government to most revenue?

For the UK government value added tax provides the biggest source of revenue. In November 2008, VAT was cut from 17.5% to 15% on a temporary basis in a move by the government designed to stimulate consumer spending – the decision was said to be worth around £12 billion of lost tax revenue for the UK Treasury.

There are many other indirect taxes and our chart below highlights six of them. As you can see the flow of tax revenue from indirect taxes on tobacco provides a very important source of money for the UK government. Together these six indirect taxes add nearly £20 billion annually into the government’s coffers.

In a recession where consumer spending is falling and where there is a chance of a period of persistent price deflation, the UK government will see a fall in revenue from indirect taxes.

More revision notes on indirect taxes can be found here

USA triples the tax on cigarettes

Friday, April 03, 2009

I will resist the temptation to roll out the usual cigarette puns .... smokers fuming over tax rise etc etc ...but the news that the Federal tax on puffing away has risen so much remains of interest to economists….

The US government has introduced a huge rise in the tax on cigarettes - reported here by the BBC. For a 10-pack carton, the tax leapt to 10.06 dollars from 3.90 dollars.

It is a good example of how large scale increases in indirect taxes are needed to have a significant impact on demand and the timing of the tax hike is also interesting - is it better to raise taxes during an economic slump when household budgets are under great strain? Does this give people just the right incentive when they might be considering cutting back or stopping altogether? Note too that the article mentions how the extra tax revenue will be used - to pay for health care for uninsured children - an example of ‘earmarked’ or hypothecated taxation at work. Always assuming of course that the tax jump does lead to more revenue coming in.

Keep in mind that this is a federal tax and that individual states can (and do) levy their own supplementary duties on packets or cartons of cigarettes. With the combined city, state and recently raised federal tax, smokers in New York City pay about $10 per pack - $4 higher than in many southern states and a clear incentive for smuggling!

Higher taxes, health warnings, bans on smoking in public has reduced per capita consumption in the USA from almost 4,300 annually in 1965 to below 1,700 now but the market remains highly profitable.

Taxi licences and excess supply

Wednesday, March 25, 2009

Taxi drivers in Reading are facing an uncertain future after the council increased the number of taxi licences from 120 to 180, despite falling demand as a result of the economic downturn. A local association representing taxi drivers the Reading Taxi Drivers’ Association says that this move is highly dangerous, with cab drivers having to wait on average over an hour for a fare, resulting in more hours being worked to take home the same pay. In effect a cut in their real wage rate.

read more...»

Negative mulitplier effects of a brutal outlook for carmakers

Saturday, January 17, 2009

There seems to have been grim news from the car industry every day for the last week or so. Nissan and Jaguar are shedding jobs. In November Honda said they would shut down production for February and March, and today said they will extend that to cover April and May as well.

read more...»

Our Daily Bread

Saturday, January 10, 2009

In a similar vein to Manufactured Landscapes, Our Daily Bread is a no holds barred documentary on industrial farming and food processing. It is available for purchase in DVD format through Amazon UK.

read more...»

Costs of Supply - Organic Farmers Divided

Monday, December 22, 2008

As the recession bites, so sales of organic food have started to slump and with it the premium prices that truly organic farmers can command in the market-place. The tough economic climate seems to be causing a deep divide within the organic farming community about whether the rules on the use of organic feed should be relaxed as a cost saving measure for producers facing an uncertain future.

The article in the Times today entitled “Let us bend the rules, say organic farmers” is a great example of how organic farmers face differences in the conditions of supply compared to producers who rely on conventional mass production methods.  According to the article, average organic feed prices are £320 a tonne compared with £160 a tonne for conventional feed.

With hundreds of farmers converting some or all of their production to organic methods in response to the rise in organic products sales over recent years, the Soil Association and the Organic Farmers and Growers are trying to persuade the government to relax the regulations imposed on organic suppliers that allow them to trade under the organic quality mark. But hard core organic producers argue that to do so would dilute the brand reputation and cause confusion (information failure) among consumers.

It is interesting how in a recession there are increased pressures on so many different stakeholders. The depth of the downturn in 2009 will create much suffering among producers - but the very best, the most flexible and the most robust should be able to survive without sacrificing their principles or their standards. Organic produce will always be more expensive than conventional farm output - are we about to see yet another industry lobbying for government support to tide them through difficult times?

Crude oil prices and rig counts

Friday, December 12, 2008

Each week Baker Hughes releases a count of the number of active drilling rigs in the international oil and gas industry. Their data has been available for over sixty years and is regarded as a barometer for the oil services industry in particular as a lead indicator of demand for the capital equipment used in drilling, producing and processing hydrocarbons.

Why look at rig counts?

Partly because the number of active rigs might reflect a market-driven response to changes in oil and gas prices and also expectations of future price movements. When crude oil carries a high price in world markets, the profitability of drilling for oil from known reservoirs ought to improve and we might expect to see an expansion in the number of active rigs.

That said there are many factors that affect how many rigs are in operation – it is not simply a question of rigs changing in response to market demand for oil.

Technological change affects the number or rigs needed to develop a reservoir and also allows new known reserves to be exploited – for example the deepwater areas off the west coast of Africa.

Climatic conditions can affect the logistics of drilling schedules including the ability of oil producers to move rigs and establish new drilling sites.

Some reservoirs are only available for exploitation on time-limited leases – and as these leases come to an end, so more rigs might be brought into use.

Our chart shows that in recent years there has been a substantial rise in the world total of active oil rigs – indeed since 2002 the number has grown from around 2,000 to over 3,500 with the number of US-based rigs more than doubling although this figure is still less than half of the peak at the end of 1981.

I have added to the chart an index of global crude oil prices using the Goldman Sachs Commodity Index data series. To what extent do you think that the oil rig count reflects movements in global crude oil prices? Is the volume of active rigs a useful measure of the supply-side response to the recent boom in prices? And what impact might the sudden and dramatic fall in prices have on the number of rigs in operation as we head into 2009? The Times reports today that world crude oil demand will fall in 2009 for the first time since 1983.

Economics of fishing

Wednesday, December 10, 2008

The BBC today has two stories on the economics of fishing. Firstly the government has announced a £5m plan to fund the de-commissioning of some of the UK’s in-shore fishing fleet in a bid t oreduce what the government regards as fundamental excess capacity in the industry.

£5m fund to scrap fishing boats

This BBC video looks at the background

Secondly the rising stocks of cod in the north sea has led in part oa rise in the size of the annual cod quota given to scottish fishermen by the European Union as part of their common fisheries policy. But the thorny issue of discarding excess fish remains unsettled. The quotas refer to landed cod which encourages fishing vessels to dump much of the fish they have caught before they reach home in order to avoid fines for over-fishing. The result is a deadweight loss of scarce resources in an industry already suffering from the long term decline in fish stocks.

Fishermen land cod deal at talks

See also “Scots anger over discarded fish”

 

Economies of Scale - Giant Wind Farms

Wednesday, December 03, 2008

This BBC article on the granting of permission for a giant wind farm off the coast of North Wales might be a good example of the importance of economies of scale in making renewable sources of energy more cost efficient. And heading to the web site of the Gwynt y Môr Offshore Wind Farm accesses some resources on the potential costs and benefits of a scheme that might provide electricity for up to 500,000 homes. If construction goes to plan, the wind farm will start to produce power from 2012.

Frozen Pizzas and Theory of the Firm

Thursday, November 20, 2008

A big hat tip to my colleague David Fox who alerted me to this superb three-minute BBC video which takes us inside the Goodfella’s pizza site in Naas, Republic of Ireland - a fully-integrated plant that produces over two million frozen pizzas every week! There is so much in this video. I suggest showing it a couple of times and then gathering together the contributions from students and turning it into a mind map or a word cloud - perhaps using wordle

I tried with one group and they came up with

Capital intensity
Automation
Bulk purchase of ingredients
Economies of linked processes.
High labour productivity (very small workforce)
Standardised products - important for branding
Quality control
Bulky capital
Economies of increased dimensions
Minimising wastage
Perfectly elastic supply
Constant cost

A great short video resource!

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