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Unit 3 Micro: Revision on Scale Economies, Technology and Prices

Sunday, April 01, 2012

Why do the prices of flat screen televisions keep falling, despite increasing demand?

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Unit 1 Micro: Revision on Producer Cartels

Saturday, March 31, 2012

Here is a planned answer to this Unit 1 question

“Explain how a producer cartel might affect the supply, market price and output levels of a commodity as well as total revenue for producers”

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Unit 3 Micro: Fixed and Variable Costs

Why is the distinction between fixed costs and variable costs not always clear?

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Unit 1 Micro: Brazilian coffee buffer stock hit by falling prices

Thursday, March 29, 2012

Coffee prices

Just a few years ago, Conab, Brazil’s official crop bureau was busy buying up surplus supplies of Brazilian coffee to support the weak global price of high quality arabica coffee. Over the years Conab has accumulated large stockpiles of coffee in their warehouses. Some estimates put the 2002-2003 stockpile purchases at just under 4 million kg together with 1.9m kg bought in 2007-08. The 2009-10 buffer stock purchases are much higher - exceeding 91 million kg. That is a lot of coffee to hold in reserve!

In theory a buffer stock scheme should be profitable when stocks are purchased at a low price and then off-loaded onto the market when prices are higher. Indeed Conab was planning just such a sale earlier this year before favorable weather and the speculators intervened. Better than expected coffee harvests in Brazil have prompted a steep fall in coffee prices and the buffer stock has postponed an intervention into the market.

The coffee price drop is a far cry from last year. Arabica coffee prices hit a 34-year high in March 2011 amid fears of a shortage. Since then, much has changed. From a peak of $3.089 per pound nearly a year ago, prices are down roughly 40 per cent to $1.851 per pound.

Inventories of high-quality beans remain low, but the threat of a shortage has vanished as Brazil is expected to see a bumper harvest this year. This is in contrast to a number of other coffee-growing countries - but Brazil remains a dominant force in the market.

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Unit 1 Micro: The Tax on Beer

Friday, March 16, 2012

In the lead up to the 2012 Budget, this short BBC news video clip looks at the cost of a pint of beer and claims that some brewers have weakened their beer to avoid the higher excise duty on higher-strength drinks. There is a neat explanation of the breakdown of beer costs and students may be surprised to find out the amount of tax they pay if they drink a pint! About 95p from every pint goes to the government.

Higher taxes have been one factor bringing down consumption levels. There has been a 13 per cent decline in alcohol consumption per head in Britain since 2004. The percentage of men aged 16-24 who drank more than 21 units per week has fallen from 32 per cent to 21 per cent from 2005 to 2010

Here is the link And here is the related article from the BBC’s John Moylan

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Unit 4 Macro: Focus on India - World’s Cheapest Computer

Thursday, January 26, 2012

A few weeks ago came the announcement that an Indian business is finally set to launch the World’s cheapest tablet computer. This laptop device will sell for around 18 times less than the price of an iPad in London! How can a laptop be manufactured for less than $US 40?

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Unit 2 Macro: Can China Stay Competitive

Wednesday, January 25, 2012

This new five minute video report from the Financial Times is excellent on the competitive pressures facing many manufacturing businesses located in southern China. Wages are rising quickly and some manufacturing businesses have already moved either to lower-cost locations within the Chinese economy or to other countries such as Bangladesh and Indonesia.

But there are alternative approaches and this video emphasises the decision that some manufacturers have made to stay put but instead to move up the value chain and produce higher-end, higher-priced products for advanced western markets. Businesses are reluctant to move factories and sacrifice the human capital that has been accumulated over in some cases over thirty years.

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Unit 1 Micro: Can the UK Computer Games Industry Grow

Tuesday, January 24, 2012

Britain is one of the world’s biggest exporters of creative products - from live TV shows and music to books, arts, architecture and films the economy has built up an enviable global reputation for excellence and a growing trade surplus to aid our balance of payments.

Computer games falls squarely into this category but, according to TIGA - the trade association representing the UK’s games industry - unless there is renewed government support, the future of this sector is at risk. TIGA claims that the British games industry is suffering a significant ‘brain drain’ as talented programmers and artists leave the country to work abroad.

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Unit 3 Micro: 3D Printing and a Manufacturing Revolution

Monday, January 23, 2012

Additive manufacturing or 3D printing is an emerging technology that takes product design data which provides a geometric representation of a product such as a pen and that data is then sent over to a machine that allows products to be manufactured ‘on the spot’ typically using additive materials in liquid or powder format.

This TED talk from Lisa Harouni (co-founder of Digital Forming) looks at examples of intricately designed products made using this new and increasingly affordable manufacturing technology. 3D machines can build structures, build replacement parts and parts within parts - the detailed resolution possible is incredible.

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Unit 3 Micro: The Economics of Solar Subsidies

Wednesday, January 18, 2012

Solar Subsidy Prezi

This blog provides a link to a new prezi presentation on the economics of solar subsidies - I have been using it as part of my teaching on aspects of environmental economics for Unit 3 AQA but it might also be useful for unit 1 market failure. I have kept theoretical diagrams out of it and plan to build up relevant analytical concepts such as economies of scale, consumer subsidies, economic and social welfare, government failure et al on a normal whiteboard rather than embed them into the Prezi. I hope it is useful.

Follow the tags at the bottom of the blog entry for more recent articles on solar subsidies such as feed-in-tariffs and other environmental economic resources.

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Unit 1 Micro: Nano Technology and Energy Efficiency

Tuesday, January 17, 2012

Today’s research in the labs can be the harbinger of terrific innovations that change the landscape of consumer product markets in the years ahead. The iPod Nano is a brand but the research behind nano-technology itself might bring about eye-watering improvements in the energy efficiency of devices that are part and parcel of our daily lives.

This brief news report from Al Jazeerah looks at innovation in nano technologies and what might be around the corner. Researchers at IBM have created the world’s smallest magnetic digital-storage device, using just 12 atoms to hold a single data bit of information.

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The future’s not so bright for Orange(s)?

Friday, January 13, 2012

This week, the price of orange juice concentrate on the global market hit a record high, reaching $2.12 (£1.38) a pound (0.45kg).

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Unit 1 Micro: Supply Shortages Drive Peanut Prices Higher

Thursday, December 29, 2011


Supply shortages in key growing regions have caused the price of peanuts to surge to record highs. Peanut prices in Europe are 60% higher than a year ago and the cost of peanuts in the USA has more than doubled in the last twelve months. The price spike is the result of lower production from India, Argentina and the United States.

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Unit 3 Micro: Sub Normal Profits - BP Leaves the Solar Industry

Wednesday, December 21, 2011

British Petroleum has decided to exit the solar energy energy industry claiming that the business has become unprofitable because of excess supply and falling prices. In 2011 a number of solar firms have gone out of business including California’s Solyndra and Germany’s Solon. BP will focus instead on investing in other renewable energy sectors including wind power and biofuels.

Whilst the decision by BP to exit the industry appears significant, infact total global investment in solar power continues to rise. MidAmerican Energy Holdings owned by Warren Buffett have agreed to purchase a $2 billion solar project under development in California and a 49 percent stake in a $1.8 billion plant in Arizona.

Google Inc. and KKR & Co have announced a joint venture to pump money in four California solar power plants with total capacity of 88 megawatts. The powerful search engine business uses a huge anount of energy every year and has committed itself to large scale investment in renewable energy supplies to help power their server farms.


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Unit 3 Micro: Oligopoly and Duopoly in Bus Markets

Tuesday, December 20, 2011

Stagecoach Bus - a leading player in the UK bus industry

The UK Competition Commission has published an important report into the market structure of local and regional bus services in the UK, twenty five years after the industry was deregulated and largely privatised. Coverage of the report can be found here (BBC news).

Largely as a result of a long-term process of consolidation through merger and acquisition, the UK bus industry is found to be highly concentrated with five businesses dominating the sector even though more than 1,200 businesses provides services.

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Unit 1 Micro: Empty Housing and Economic Efficiency

Thursday, December 15, 2011

Housing Starts

Channel 4 recently focused on the causes and effects of the hundreds of thousands of empty homes in the United Kingdom. Why is it given persistent shortages of affordable housing that perhaps a million homes lie empty and unused whilst an estimated two million families are in severe housing needs. New housebuilding has collapsed and in Britain we are building 100,000 fewer new houses every year than we need just to keep up with the changing mix of households and demographic change.

An interesting exercise is to show students some of the Channel 4 Campaign videos and then get them to put together policy ideas as to how to reduce the volume of empty homes and reduce the length of housing waiting lists.

Links to some of the Channel 4 videos can be accessed below:

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Unit 1 Micro: Inside a Biscuit Factory

Thursday, December 01, 2011

This five minute video is superb for illustrating economies of scale in the production - we take a trip through the United Biscuit factory to see how millions of products are made every day. The commentary is a little simplistic but as a visual aid it is brilliant. A great example to use of capital intensity in production and the nature of supply curves and the elasticity of supply. Here is the link to use

Government Plans to boost the Housing Market

Monday, November 21, 2011

The Government has announced today a scheme to help first time buyers on to the property ladder. It has been reported widely in the press with mixed reactions. The BBC article outlines the main proposals (here is the link to The Daily Telegraph). It is interesting from a political point of view that this government should chose to intervene in this market, though perhaps we should not be too surprised as it was the Conservatives that brought in the ‘Right to Buy’ legislation in 1980.

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Unit 3 Micro: Unilever hit by rising costs

Sunday, November 06, 2011

Here is a good example of a global giant in consumer products whose profitability has been affected by external headwinds over which it has little control.

The Anglo-Dutch business Unilever - the world’s second-biggest consumer-goods company – has announced that profitability might fall in 2011 even after it increased prices to offset soaring costs for the commodities used to make its products.

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Unit 1 Micro: Costs and Benefits of a Super Sewer for London

Tuesday, November 01, 2011

Thames Water

Thames Water has plans for a super sewer running 20 miles from Hammersmith to Beckton but the plan has come up against intense opposition from many local resident groups. It is a good example to use of cost-benefit analysis in action with a project that will directly affect millions of people living and working in the capital. There is an almost unending list of stakeholders involved in the debate.

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Unit 3 Micro: Economies of Scale and the Kinect

Here is an example of economies of scale in production. Microsoft’s motion-sensing camera the Kinect was one of the fastest-selling consumer electronics device in history when it was launched in November 2010. In a report on the FT’s technology blog, Dennis Durkin, Xbox chief financial officer, is quoted as saying that economies of scale have been the major factor driving down the unit price of Kinect from $30,000-$40,000 when it was under development two years ago to $150 now.

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Unit 1 Micro: Is the Sun Dipping on Solar Subsidies?

Thursday, October 27, 2011

To promote the expansion of renewable energy sources, many governments have introduced subsidies for consumers who install solar panels.

In April 2010, the Labour government introduced generous feed-in tariffs to encourage households to install solar photovoltaic systems. Anyone spending £13,000 up front to fit a system to their home was paid 41.3p per kilowatt hour (kWh) generated – enough to earn them a typical annual income of £900 a year in payments, on top of a £140-a-year saving in reduced electricity bills. The big six energy companies are required by law to pay householders who generate their own energy.

It looks like the days of generous subsidies for solar panels are coming to an end and there is a rush on to install them before the feed-in-tariff system is changed.

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Unit 3 Micro: Ofcom gives stamp of approval for flexible pricing in mail

Friday, October 21, 2011

Changes are afoot for the UK household mail industry - a sector that is often used by teachers as an example of a near monopoly in the UK. In 2010, 16bn letters were delivered to 28.2m addresses. Royal Mail was responsible for delivering over 99% of these. The total UK household and business mail market comprises around 16bn items and £6bn to £7bn per annum of revenue. Royal Mail has a market share by revenue of over 90%.

Just a few years after deregulation of the sector, the industry regulator Ofcom has produced a consultation document that is likely to give the Royal Mail more freedom in setting the prices of stamps. At present, the Royal Mail loses more than £2 million a week operating its letters business. Increasing competition from new entrants for bulk mail sorting allied to a shift towards email and text have contributed to a 25% decline in postal volumes since 2006. Household spending in Britain on postal services has fallen to just 40p a week. The 2010 Hooper Report on the postal sector, mail volumes are expected to continue to decline globally by between 25% and 40% in the next five years

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Unit 1 Micro: Teacher Update on New Regulations

Saturday, October 01, 2011

The end of September has brought a raft of new or changed regulations affecting different markets. Here is a summary of some of them for students and teachers wanting to keep up to date:

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Unit 3 Micro: Amazon launches the Kindle Fire

In the increasingly competitive and contestable market for tablet devices, leading online retailer Amazon has launched the Kindle Fire.


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Unit 1 Micro: Exercise on Equilibrium Market Prices

Tuesday, September 27, 2011

I have produced a classroom exercise on changing conditions of supply and demand and how they might affect equilibrium prices. This is available to download as a pdf file using the link below.

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Unit 1 Micro: Exercise on Market Supply

Monday, September 26, 2011

This is an exercise to test understanding of the conditions of supply in markets. You can download the resource by clicking below.

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Unit 1 Micro: Cotton Prices and the Retail Price of Clothing

Wednesday, July 13, 2011

How does the world price of raw cotton affect the cost of buying new clothing on the high street and in the supermarkets? The answer is that the price of natural fibres is a key raw material into manufacturing garments and home furnishings. If prices rise, this increases the costs of production causing an inward shift of supply for clothing and furnishings at a given market price.

The world price of cotton has been rising steeply in recent times. As our chart below shows, raw cotton prices are well down from their peak in the spring of 2011, but the index is still more than twice the level of two years ago.

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Unit 1 Micro: Economics of Volatile Corn Prices

Tuesday, July 12, 2011

Corn is a soft commodity along with the likes of coffee, tea and rubber. Referred to as “yellow gold”, corn is used in products ranging from cereals, snack foods, salad dressings, soft drink sweeteners, chewing gum and peanut butter. Little wonder that shifts in the world price of corn can have a noticeable effect on the prices that we may for many popular foods and drinks.

The world’s appetite for corn is strong. In recent months there has been a surge in the global price of corn, indeed at the end of June 2011, corn prices were up 74 per cent on a year earlier. Super-high prices affect the price of feed for livestock farmers and eventually lead to more expensive foodstuffs for consumers, including millions of people in the world’s poorest countries exposed to persistent and life-shortening food poverty. Robert Zoellick, President of the World Bank has said that high and volatile food prices are “the single gravest threat” facing developing countries at the current time.

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Unit 3 Micro: Oligopsony - Dairy Losses Drive Farmers from the Fields

Sunday, July 10, 2011

Hats off to the herd! Milk production in the UK is expanding yet many dairy farmers have or are likely to leave the industry over the next five years unless raw milk production becomes more economically viable. Can the stakeholders in the sector reach fresh agreement on sustainable contracts for the near 40 million litres of milk produced every day?

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The Future of Food Retailing? Tesco in South Korea

Monday, June 27, 2011

Here is a fascinating short video on the techniques and tactics adopted by Tesco as they sought to become South Korea’s number one offline and online food retail store.

Unit 3 Micro: Economies of Scale in Solar Power

Friday, May 27, 2011

How about this for economies of scale in the renewable energy industry? A new photovoltaic park has opened in Les Mées in France, By the end of 2011, solar panels will cover 200 hectares and produce around 100MW, making it the biggest solar array in France.

A2 Micro: High and Low Marginal Cost Products

Thursday, May 19, 2011

Marginal cost is the change in total cost from supplying an extra unit or supplying to an extra consumer. In some markets and industries there is a clear marginal cost to producing for the next user. In others, the marginal cost is negligible, bordering on zero. How might this impact on the nature of supply and pricing?

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A2 Micro: Innovation in Markets

Wednesday, May 04, 2011

This is a revision presentation covering aspects of innovation in markets. A PDF version of the presentation designed as a handout can be downloaded here.

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AS Micro: Importance of Elasticity of Supply

Saturday, April 23, 2011

This revision note considers some areas of the AS micro course where price elasticity of supply can become important in your analysis. The document can be downloaded below:

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A2 Micro: Changes in Costs and Profits

At A2 level you are expected to be able to use analysis diagrams to show the effects of changes in short and long run production costs on a firm’s prices, profits and output. This two page revision note available to downlaod in pdf format looks at changes in costs and how they might affect pricing in imperfectly competitive markets. Download using the link below

AS Micro Revision: Public and Private Goods

Thursday, April 21, 2011

What should the state sector of the economy provide?  How much should be left to the private sector allocating scarce resources through the incentives of the price mechanism? Is the provision of public goods the most important reason for accepting the existence of government involvement in the economy? These questions revolve around the idea of public and private goods – please understand the key characteristics of public goods and why they might not be provided optimally by the private sector – giving government a role in financing them for our collective (social) benefit. A one page revision note on public and private goods designed for AS (Unit 1) micro economics can be downloaded here. Revision_Public_Private_Goods.doc

Key AS Micro Terms: Costs and Profits

Saturday, April 16, 2011

This blog provides revision definitions of concepts related to production, costs and profits and also links to recent revision blogs and revision presentations for students taking their Unit 1 Economics papers. Click to the bottom of the blog for the related revision posts.

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Key AS Micro Terms: Prices

Friday, April 15, 2011

The price mechanism figures heavily in the AS micro syllabus. Below we have provided definitions of some key terms and also link to recent blog items and revision presentations

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Peter Day at the Faber-Castell factory

Wednesday, April 13, 2011

The humble pencil - I have one in front of me now - is on the surface just about the simplest product one could make. But how is it manufactured? Would you be able to do it? I for one possess virtually none of the skills required to create a pencil but fortunately the wonderful Peter Day from BBC Radio 4’s In Business has been investigating the enduring success of two of the world’s most successful pencil businesses - including a visit to the Faber-Castell factory in Germany. There are some super images from the factory on the BBC Business News Facebook Page - great for visual learners who want to understand more about the production line process.

Unit 3 Micro: Solar Panels and Economies of Scale

Monday, April 11, 2011

General Electric has announced plans to invest $600m in building the largest solar panel factory in the USA - using the latest “thin-film” technology acquired when it bought the US firm PrimeStar Solar, General Electric is aiming to utilise economies of scale to bring down the unit (average) cost of manufacturing solar panels. This BBC news article looks at the background to the announcement.

The piece highlights one of the advantages of vertical integration. General Electric has agreed to buy Converteam, a French company that makes equipment to allow electricity from solar and wind power to be used by the national energy grid. This will mean that General Electric can offer customers a complete package including solar panels and products to connect them to the electricity grid. Chinese solar panels are cheaper (with lower manufacturing costs and a subsidy from the Chinese government) but they do not have this advantage.

AS Micro: The volatile price of crude oil

Saturday, April 09, 2011

Few commodity prices are watched as closely as the international price of crude oil. Brent crude is currently trading at over $122 a barrel - the highest price for over two years. Our Timetric chart is constantly updated and will always show the latest price. We have included below links to many of our recent blogs on the economics of oil prices and some of their micro and macro economic effects.

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AS Micro: Prices for New and Second Hand Cars

The prices of new and second-hand cars as measured by the consumer price index have changed in absolute and real terms in recent years as the chart below shows

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AS Micro Revision: Banana Prices

Friday, April 01, 2011

This revision note covers supply and demand factors that help to determine the world and domestic retail price of bananas. Despite rising world prices, the UK retail price of bananas has actually fallen in recent years. Can students explain why? What effect does intense competition within the UK food retail sector have on the prices we pay?

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Apply - Vertical Integration and iPad Pricing

Monday, February 21, 2011

A half term hat tip to Henry Wingfield for spotting this super article in Wired magazine. It discusses how Apple is able to keep the iPad at the $500 price point and looks at how the company is vertically integrated and the importance of its retail stores. Have a read here.

Economics solar power government subsidies

Wednesday, February 09, 2011

A timely and relevant video here on the economics of the government feed-in-tariffs (or subsidies) for companies and individuals putting up solar panels on their roofs. Solar power is an industry booming with over 10,000 installations in the first six months since housing associations were given subsidies to install solar panels in many of their properties. The video looks at the costs of installment of a system and the electricity it generates and how much extra electricity is generated into the national grid. How important will solar power be in promoting energy independence? Peak solar output from the UK does not correspond with peak demand for electricity (from 5pm to 7pm on a winter’s evening). How many of the solar panels are made in the UK? Who really benefits from feed-in-tariffs? Rather like the CAP are the major commercial benefits skewed to large businesses willing to put up big-scale solar installations in empty fields?

WTO finds Boeing guilty of using illegal subsidies

Tuesday, February 01, 2011

This is one of the longest running disputes in trade history. Europe and the US have been fighting for more than six years over each other’s subsidies for large passenger aircraft in the duopolistic battle between Boeing and Airbus. Now the World Trade Organisation has found that Boeing received at least $5bn (£3.1bn) in illegal subsidies and was only able to launch its 787 Dreamliner with such support. Airbus has als been found to be in breach of receiving illegal state aid. Reuters provides useful background here.

Economics Q&A: How might rising food prices affect food retailers and manufacturers in the UK?

Sunday, January 16, 2011

Food retailers are service sector businesses selling food products to consumers. The leading retailers in the UK are Tesco, Sainsbury’s, Asda (Walmart) and the Co-Op/Somerfield. Although the food retail industry in the UK is dominated by a handful of national chains, there are many others including thousands of small-scale retailers. And discount retailers that have done well in recent years including Aldi and Lidl.

Food manufacturers process foodstuffs into new products and they rely on buying raw materials from wholesalers. Good examples to use might be Nestle, Heinz and Sara Lee.

The larger retailers manufacture some of their own-label foods although they may choose to out-source this to another manufacturer. And likewise, some food manufacturers have their own chain of retail stores or outlets - for example Gregg’s the Baker or Domino’s Pizza.

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Heard the one about the £250,000 fish?

Tuesday, January 11, 2011

I was browsing some back copies of the Guardian today, and came across a good example of markets in action. Last week a tuna fish fetched over 32 million yen at an auction in Tokyo.

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Background on Value Added Tax

Friday, December 31, 2010

On January 4th, 2011, VAT in the UK rises from 17.5% to 20.0%. This Guardian article provides some background on the history of direct and indirect taxes.

According to the FT

“Value added tax is an indirect consumption tax assessed on the value added to a product at each point in the cycle of production and distribution. It is a consumption tax because it is ultimately borne by the consumer, who pays a fixed percentage of the final sale price of a product. VAT is not collected in full from the final seller of the product. The seller deducts from its VAT liability the amount of tax it has paid to other VAT-registered business further up the chain. VAT is therefore collected fractionally from different businesses.”

The rise in VAT will add to the record level of petrol prices - petrol has both excise duty and VAT applied to the final price. This BBC article explains the impact

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