Risks of over-capacity in Chinese car making
The Chinese automobile market is now the world’s largest and demand for vehicles is set to continue expanding at a rapid pace as per capita incomes increase. The supply-side capacity of the car industry is being vastly increased partly as a result of inward investment - Nissan, Toyota, BMW, Hyundai, the Chinese automaker FAW and others have all announced plans to build new factories in mainland China. But are there risks of too much investment which could leave the industry with a buffer of excess capacity. This Business Day article says that there is and provides a useful reminder of elasticity of supply in a fast-growing sector - “Projecting market trends is always difficult for auto makers who often need up to two years to build new plants.” A hat tip to Shani Hartley for spotting it. I will post up some charts showing the growth of the Chinese car industry a bit later on today.
Joint Supply - the by-products of Pigs
This is no porky pie - a new TED talk looks at the many by-products made possible from different parts of a pig. Before the sausages have sizzled on your grill, you have already made many pigs! And on the journey to work you’ll come across pig products in concrete and the brakes used on trains…....in total over 185 products are associated with the raw materials from our livestock friends
Greece smoking ban
A new law has come into force this week in Greece banning smoking in enclosed public spaces and tobacco advertising.
It is estimated that more than 40% of Greek adults smoke - well above the EU’s average of 29% - which is perhaps why at a time of fiscal austerity, it is surprising/impressive that the Greek government have pursued this policy. Cigarettes bring in a significant amount of tax revenue (either via indirect or corporation taxes) which will be lost. But then maybe it will save a lot more money via its health bill. (or maybe they are just hoping people will flaunt the rules and collect fines!).
Having said this, this latest attempt to stop smokers, is its 4th attempt in a decade - following a tobacco ban in public places on July 1 of this year too. The demand for habit-forming goods is too inelastic to go away overnight…
Potash - a battle for grey dust that has become gold dust
The market for a particularly lucrative gray dust has been thrust into the spotlight this summer with news of a $38.5bn (£25bn) hostile takeover bid from Australian mining giant BHP Billiton for Potash Corp of Saskatchewan in Canada a business coined by some as the “Saudi Arabia of Potash”!
read more...»Presentation - Wheat Prices in 2010
Here is a new streamed revision presentation that covers key changes in global wheat prices during 2010 and their economic impact. Surging wheat prices impact on producers and consumers of many different goods and services. The market is a great case study in the causes of price volatility and the inter-connected nature of markets.
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Groceries adjucator checks in
The BBC business news site reports on the set up of a new body to police supermarket code of practice for suppliers - catchily called the Groceries Code Adjudicator that will sit within the Office of Fair Trading (OFT).
For many years there has been a long running saga about the buying power (monopsony power) of the major supermarkets when purchasing from farmers. Dairy producers have complained that the supermarkets have squeezed prices to such an extent that they can no longer make money - many have left the industry. The supermarkets respond that many of the complaints come from lobby groups that have no day-to-day experience of the farming/retail relationship. They claim it is simply not in their own interest for commercial relationships with the farmers to threaten the economic viability of the farming industry. The long running row over whether supermarkets abuse their dominant relationship with some farmers and food suppliers will rumble on.
Jim Paice - UK farming minister argues that “The new adjudicator will help to strike the right balance between farmers and food producers getting a fair deal, and supermarkets ensuring their customers can get the high-quality British food they want at a price they can afford.” Critics argue that an adjucator is not needed and it will become another costly quango and a cause of government failure.
Pressure for higher minimum wages in Bangladesh
This BBC news video looks at demands for better pay among the three million or more workers (the majority of whom are women) who work in garment factories in Bangladesh. The country has over 4,000 textile factories and has become one of the world’s biggest exporters of clothing. But for many the jobs available offer long hours and very low pay of around $25 dollars a week - the trade unions are lobbying for average wages three times this figure. Will it threaten the competitive advantage of Bangladeshi producers looking to hold onto contracts from many western buyers?
The video is a good resource to use when teaching aspects of labour markets and globalisation in developing countries
AS Economics Revision - Stocks and Prices
In many AQA AS microeconomics exams, the focus of the stimulus materials is on a market or inter-related markets where prices have changed and which raise interesting questions about the causes of price volatility and arguments for and against some form of intervention.
One aspect for students to consider is the relationship between stocks of a product and the direction of changes in market prices.
Stocks (also known as inventories) are products ready for sale but not yet purchased. They might include finished output 9such as new cars) or inventories of components, work in progress and raw materials.
Movements in inventories can trigger price changes. In our two examples we focus on the market for copper and for crude oil. In both cases look to see how prices move when there is a noticeable reduction in stock levels, perhaps reflecting a rise in market demand set against an inelastic short-run supply. When stocks are low, prices are bidded up not least in commodities markets where speculators look to make speculative purchases when they feel that the balance of power in a market is tilting in favour of the seller (i.e there is excess demand and stocks are declining).
A market where inventories are high is one where, ceteris paribus, there is downward pressure on equilibrium prices.
Orange tries to make the broadband market more contestable
Less than two months since its merger with Deutsche Telekom’s T-Mobile, Orange has made a strategic decision to allow BT to take over Orange’s fixed-line infrastructure and integrate it into it’s own network. Orange’s present broadband network reaches about 65 per cent of the population and the decision to use BT’s network is designed as a way to challenge the dominant providers in broadband in the UK. The industry is an oligopoly with the leading three firms taking over seventy per cent of the market according to the latest data.
Market share in UK broadband
BT Retail 27%
Talk Talk 23%
Virgin Media 22%
Sky 13%
Orange 5%
O2 3%
Others 7%
Orange has invested hundreds of millions in building up a broadband network and installing equipment in local exchanges but they have opted to outsource the network provision to BT and focus instead on selling broadband services. Orange has nearly 30 million mobile phone customers in the UK after joining forces with T-Mobile, but has slipped behind in broadband with around 840,000 customers.
OFT report finds welfare gains from liberalising pharmacies
The OFT has produced a new report looking at some of the welfare and efficiency effects of the decision to liberalise the retail pharmacy industry in the UK. The report finds that “Partial liberalisation of the pharmacies market has brought significant benefits for consumers, including shorter waiting times, a greater choice of pharmacies and extended opening hours….the number of pharmacies operating in England has risen by nearly nine percent. Fears that enabling easier entry would lead to large numbers closing have so far proven unfounded.”
The wider availability of supermarket pharmacies on spending by consumers on over the counter medicines has led to conservatively estimated annual savings of around £5m. In the UK retailers have been free to set their own price since resale price maintenance (RPM) on branded OTCs such as pain killers and flu relief tablets was abolished in 2001.
The largest share of any one company is now that of Boots (18.3 per cent), following the merger with Alliance Unichem (owner of Moss Pharmacies) to form Alliance Boots in 2006. In-store supermarket pharmacies – account for almost 7 per cent of the total.
Making trainers in the UK? How to compete with the world
A cross posting from Jim
This has to be one of the best short business videos ever produced by the BBC. The New Balance factory in Cumbria is quite different. It makes running shoes and other trainers to compete with the low labour-cost factories in the Far East. The 2 minute video highlights some really important points about how it competes effectively.
Terrific stuff. Some possible follow-up or discussion questions below:
- Why does the New Balance factory need to undertake a “relentless search to boost output & improve productivity”
- What is meant by contiunous improvement?
- “If you love your job, it goes a long way to making people good workers” according to Billy Edgar. To what extent do you agree with this view?
- Evaluate the importance of location to the success of the New Balance factory
- New Balance wants to triple the factory output from 1 million to 3 million pairs of trainers per year. Outline the main challenges New Balance will have to overcome if they are to achive this objective
Apple’s Revenues
A stunning and clear illustration here of the surge in Apple revenues and the component parts. An entire ico-system has developed around the Apple suite of products. In the final quarter of 2009:
Revenues $15.7Bn
Profit $3.3Bn
3m Macs sold
9m iPhones
21m iPods
And now the iPad .... kindling for the Kindle.
Jimmy’s Global Harvest
A warm woolly hat tip to Himesh Patel from the Heathland School, Hounslow for spotting this superb resource that will be available for a while on the BBC iPlayer. Himesh points out that Jimmy’s Global Harvest: Brazil on BBC1 last night was an excellent epsiode that explained how Brazil produces biofuels using its crop harvest. The show goes through the full production phase from harvest to final product. If you teach anyone sitting the AS Micro paper next week, it is extremely useful for the evaluation of biofuels as an alternative to traditional fossil fuel energy. In addition it is pitched at the correct level enabling access for all students. The link is here Pay particular attention from 22.12 mins (where the biofuel begins). Definately something to recommend students to watch.
Salt Union and Elasticity of Supply
The Big Freeze has caused a huge rise in the demand for grit to treat road surfaces. Most of this demand comes from local authorities and inevitably the supply-side of the market has found it difficult to match production with demand.
The Salt Union is the dominant supplier of rock salt to use on Britain’s roads. Their mine at Winsford in Cheshire is the UK’s biggest rock salt mine and is capable of extracting 30,000 tonnes per week, it has nearly 140 miles of roads some 200 metres below ground. But their plant has been working at full capacity since mid December and the Salt Union has admitted that - despite working 24 hours-a-day seven days-a-week at a maximum output of 30,000 tonnes a week, it is not possible to sustain the unprecedented level of repeat orders coming in. The potash mine at Boulby in Cleveland is the other big source of rock salt in the UK, it too is working at capacity and has opted to divert planned exports to local authorities because of unexpected depletion of stocks. The third main supplier of rock salt comes from Northern Ireland - the Irish Salt Mining and Exploration Company
Stocks of rock salt have dropped sharply and the main supplier is working at capacity - two factors that have made the short run supply of rock salt highly inelastic in response to strong demand. The free market price of salt ought to rise in such circumstances and there is evidence that local councils who have flexible salt supply contracts with the Salt Union are seeing a rise in the cost of salt per tonne. This BBC magazine article tries to unearth some of the detail on salt contract prices.
Contestable Markets - Google launches the Nexus One
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.
read more...»Evernote - Freemium and the Marginal Cost of Cloud Computing
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
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
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.
Peak oil theory and economic implications
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
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.
read more...»Fair Trade given new push by government grant
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
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
Downturn Drives Hotel Rack Rates Lower
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
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.
read more...»Apprentice Jockeys and Low Wages
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.
There are large hurdles (or barriers to entry) for people wanting to be a fully-fledged professional jockey. Last year less than 6% of apprentices made it into the professional ranks. For the humble apprentice desperately looking for rides and that all-important chance, the basic salary is likely to be little more than £10,000 a year for a job that involved huge hours many of which are at unsocial times plus the hard graft of traveling around the country from one course to another.
The Times article talks about “an endless supply of young talent” seeking one of the very few (and highly coveted) apprenticeship schemes. In other words, the supply of labour into the market is highly elastic at a relatively low wage rate. Little wonder that Trainers can employ apprentice jockeys at a low wage rate - and also take a slice of their riding fees.
According to the Times article:
*Until their success dictates otherwise, apprentices earn the basic stable lad’s wage. This starts at about £158.87 for a 45-hour week, rising to £214.94 between the ages of 16 to 21
*Generally, a trainer will take half the riding fees generated by his apprentice while paying half of his expenses. The riding fee on the Flat is £103.45
The passion of young jockeys also invites a discussion with students of the non-pecuniary aspects of work - the paradox being that many of the hardest jobs, both in physical effort and risk - are those that are deeply attractive to plenty of young people and thus carry virtually nothing in the way of compensating financial incentives.
The Big Question looks at peak oil theory
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.”
World Tea Prices Climb to New High
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
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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