Economics Q&A: Should the CAP be scrapped?
The Common Agricultural Policy is a system of farm support that was set up by the EU to assist the agricultural sectors of its member states. The CAP accounts for nearly half of the EU’s budget, at approximately £48bn, and combines direct subsidy payments and price support schemes. Economic welfare is concerned with levels of human well-being, and can be achieved through an efficient allocation of resources, thereby maximising consumer and producer surplus.
read more...»US pay day loan firms set for rapid expansion in the UK
The financialisation of the British economy continues apace. This article in the Guardian reports that US pay day loan businesses (regulated loan sharks to you and me) are planning a rapid and sizeable entry into the UK consumer credit market. In part this might be because in the UK there is little or no effective regulation on what they can charge.
Cash-strapped families often denied credit by high street banks are vulnerable to the heavy marketing of these businesses - students will know of one of them Wonga the shirt sponsor for Blackpool FC. The typical pay day loan is around £75 to £750, which is deposited in their bank account in as little as 15 minutes, to be repaid in around two to four weeks but with interest rates that can easily reach 30% a month or higher.
The pay day loan market might be a good case study for students wanting to understand more about the demand for credit and discussions about whether there should be a maximum price or cap on the interest rates that can be charged.
EU Economics: Hopes for a low carbon future in Europe
With EU carbon emissions market has closed since the middle of January after hackers stole €30m of permits the economics of a EU wide carbon tax has been given fresh prominence in recent weeks. Charles Hart evaluates the arguments for and against a tax on emissions in this super applied micro essay. After the essay there are some links to recent blog posts and other resources on carbon trading and carbon taxation.
read more...»How Much Do I Earn?
Many colleagues are teaching labour market economics around this time of year! Accessing up to date information on mean and median salaries for different occupations can open up all kinds of interesting discussions and starter activities. We did one of these at the TeachECON events last autumn involving a starter called How Much Do I Earn?
read more...»5 Fresh Links: Reforming the EU Common Agricultural Policy
The economic, environmental and social issues arising from farm support in developed and developing countries often figure in final year teaching for A2 economics. We are looking at this at the moment as part of our teaching of the economics of the EU. Here are five fresh links on the vexed question of how best to reform the Common Agricultural Policy of the EU - including two recent videos from BBC news.
read more...»Changes in Real Prices
This is a graphic I use each year when looking at changes over time in indices of consumer prices for different goods and services. Using data drawn from the published Retail Price Index since 1988 (the base year) I print this chart out and explore in classroom discussion some of the economic factors behind the divergence in prices for rail fares, cigarettes, household repair services, clothing and electrical items. We discuss the impact of changes in indirect taxes, unit labour costs, economies of scale, trade and globalization effects and the intensity of competition among other factors. Eagle-eyed students spot the upturn in clothing prices and link it to the rising world price of cotton. Others notice the strong seasonality in clothing prices and the annual hike in rail fares!
I have copied the latest chart into a PowerPoint file for colleagues who might want to use it
Shorting the market - the vultures target HMV
A few weeks back we focused on the problems facing UK retailer HMV. Weak sales and a difficult financial position have made the business a target for hedge funds who decide to short the stock anticipating a further fall in the company’s share price. This Guardian article looks at the stocks on the UK FTSE that lead the list of shares being targeted by the short-sellers.
Short selling is a strategy used by investors who expect the price of a stock to fall. It involves selling shares by borrowing them from another institution and then betting that they can buy them back at a lower price and profit from the difference. Short selling became a high profile and controversial tactic during the global financial crisis when many fragile banks were the targets of the stock market vultures and some were forced to accept nationalisation and emergency financial support.
Economics Q&A: Can economics provide answers to the crisis of collapsing stocks in global fishing?
The UK is one of many countries that now face a dilemma when it comes to fish stocks and their sustainability. In the UK we now consume over 385,000 tons of fish per year whilst on a global scale only 10% of large fish stocks that existed in the 1950s are still present today; this include both cod and tuna. Stock depletion has become a larger issue because of the increases in fishing technology – especially in long-line fishing which is the main technique used in Japan.
As a result many of the once inaccessible fish reserves have become economically viable to fish as boats are more fuel efficient and require less labour. In a fully functioning market the decline in supply of the product would cause an increase in price and act as a disincentive for consumers to purchase the product meaning that the industry would reach a sustainable equilibrium. In this case however there has been a deep market failure resulting from the tragedy of the commons. The sea, and its fish, is a common resource either on a global scale or on a national scale within a country’s own territorial waters. There are very few established property rights over the sea meaning that rational economic agents have an incentive to plunder the seas resources causing the falling fish stock levels.
read more...»Tesco - Time to start a price war!
Here is some pure gold dust for students of competition and strategy in the food retailing industry! A leading analyst (Dave McCarthy at Evolution Securities) has written a lengthy research document building the case for Tesco to launch an aggressive price war - permanently cutting prices on hundreds of different items. Much of the case for the price discounting is reproduced in this Guardian article and key arguments are that Tesco is better able to withstand the hit on group profits from doing it, and that lowering the returns from the sector will help to bring an end to the land grab and building programme that ultimately may not be in anyone’s interests.
Has Tesco lost its way recently? Sainsbury’s was the best performing supermarket over the Christmas period. Its like-for-like sales were up by 3.6%. I have stopped shopping at Tesco partly because the retail experience is so dire (the mega store in Slough is just about the most soulless place on the planet) and also because Sainsbury’s and Waitrose have significantly raised their game in keeping products available on the shelves and in extending their value range. The Waitrose “Essentials” range has been a big success.
A new CEO provides a window of opportunity for a change of direction at Tesco and this analyst believes that Tesco needs to exploit first mover advantage before the rivals become too strong to absorb future price wars.
Read: Analyst advises Tesco to launch a price war to damage the competition
Consumer surplus from the web!
A hat tip to Tim Mercer from Ashcombe School for spotting this resource - an interesting article from this month’s McKinsey quarterly looking at the consumer surplus that currently exists in the world of ‘free’ on the Internet and how companies might seek to ‘monetize’.
Heard the one about the £250,000 fish?
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.
Economics Q&A: What are some of the benefits and drawbacks of a period of rising world food prices
A sustained rise in the global prices of foodstuffs is called agflation. As our chart below shows, the Economist’s index of global food prices has shown high volatility in recent years, there have been two sizeable and steep increases in food prices and a downturn in the wake of the 2009 global recession. And now the United Nations Index of Food Prices has now risen back above levels last seen in 2008 at a record high.
A period of rising food prices affects both the demand and supply-side of an economy. And the impact will depend on many factors including:
(i) The patterns of trade for one or more countries e.g. whether a country is a net exporter or importer of food
(ii) The importance of food production and exports in economic activity e.g. the share of value added contributed by farming, food processing and other food-related industries
(iii) Average incomes for a given country / region and the percentage of incomes that must be spent on food to ensure a modest but adequate lifestyle
(iv) Possible effects of rising food prices on variables such as inflation, interest rates and the exchange rate
China limits rare earth exports
China (which produces about 97 percent of the global supply of rare earth metals) has announced that it plans to restrict exports of rare earths by 10% for 2011 and it is also increasing export taxes for some rare earth elements to 25 percent in 2011.
These moves raise fears that shortages of rare earths will drive prices higher and make many hi-tech consumer goods more expensive.
read more...»Pricing tricks and behavioural economics
Martin Hickman’s Consuming Issues column in the Independent this weekend has a piece on some of the tactics used by retailers to take commercial advantage of many of our behavioural biases.
These pricing tactics include:
read more...»On the first day of Christmas -
There are lots of aspects of economics in this little story from the Independent on Wednesday 1st December. The final section of the report into the effects of the early snow falls is about Christmas tree shortages, and links to this BBC story about Nordmann fir trees, and the two together contain several references to the A level syllabus:
read more...»AS Micro Revision - Market Forces and Resource Allocation
Here is a revision presentation on market forces and resource allocation, which should be particularly useful for AS economists preparing for their AS microeconomics paper.
Revision presentation on Market Forces and Resource Allocation
Orange, iPads and the Lock In effect
A really good example of pricing and contract lock-ins here from the BBC’s Rory Cellan Jones who tweeted this afternoon that Orange sells iPads at £199. Then £27 per month for 2 years . So total cost=£847. Compared with £769 for full-price ipad +£10per month pay as you go. A super pricing example to use when looking at oligopolistic markets
Watch out for the £7 chocolate bar!
Will a collapse in global cocoa production bring an end to chocolate as an affordable treat and giver of blood sugar? This article from the Independent today was timely as I am teaching price volatility in commodity markets in my AS micro class as a prelude to discussions abour price intervention strategies such as maximum prices / buffer stock schemes etc. I have attached my class homework as a word file in case it is of use to colleagues.
Cocoa Economics (AS micro)
Cocoa_Economics.docx
Here is a highly relevant section from a new report from Commodities Now
“World food prices have been trending higher as emerging markets have increased their share of global food demand due to rising populations and incomes. Food products are having to compete for finite resources such as water, land and fertiliser inputs and are increasingly being used for alternative applications such as bio-fuels. As an example, ethanol now accounts for approximately one-third of annual corn output in the US, up from 5% a decade ago.”
More here and some links to useful news articles.
Successors to Roosevelt and Kruger - Marine Parks of the Sea
Charles Clover, author of The End of the Line - the inspiration behind the award-winning documentary film of the same name, was on splendid form in a talk to the school Geography Society tonight. After showing an abridged version of the powerful film he led a discussion on issues raised by the End of the Line. What is clear is the immediacy of the global fishing crisis. One way or another this will be resolved in our life time and the consequences of measures designed to protect and rebuild fish stocks and aqua-diversity will impact on billions of people around the world.
Accoding to Clover, the EU continues to be a black hole when it comes to successfully managing fish resources - if ever there is an example of government failure this is it. To save the Blue Fin tuna we need to set aside 20% of the Mediterranean and in some areas of the North Sea, replenishing haddock and cod stocks will require upwards of 50% of fishing grounds to be closed and the process of large-scale decommissioning of fishing capacity must continue. There is a stark paradox that fishing fleets can now make more money by fishing less because we are already way beyond the point of maximum sustainable yields. The “economic effort” required to catch one single fish in the North Sea has risen by 97 per cent over the last hundred years.
Investment in marine reserves offers much hope for the future and British money is leading the way in this. Charles Clover is President of the newly established Blue Marine Foundation and they have already had a major success. The Marine Protected Area (MPA) around the British-owned Chagos Islands will cover some quarter of a million square miles of sea around the archipelago in the Indian Ocean and include a “no-take” reserve banning commercial fishing. It appears to have been secured with a major investment from the Bertarelli Foundation.
Economics at the Movies - The Yeo Valley Rap
This new rap produced on behalf of Yeo Valley foods in Somerset is cool, fun and has gone viral! The brief was to get across the healthy nutritional qualities of Yeo Valley products to a younger generation and this old timer thinks that they have done a great job! Quite apart from using it as a useful ‘bridge’ in a lesson I have brought it out when teaching elasticity of supply (the time it takes to switch from non-organic to organic farming when responding to changing market demand). And also barriers to entry in A2 micro - organic produce requires a licence/accreditation from the Soil Association.
read more...»The Market for Potash
This is a superb BBC news report on the rising demand for and prices of potash.
Potash is shorthand for potassium carbonate - a potassium compound often used in agriculture and industry. Potash is the third major plant and crop nutrient after nitrogen and phosphate and the vast majority of the annual global supply is used as a soil fertilizer. It is a product with virtually no close substitute making the demand insensitive to the ruling market price - the price elasticity of demand for potash is very low and high prices make the product hugely profitable to supply
read more...»Price mechanism in action - student car insurance
Here’s a great example of the price mechanism in action - on a topic that should be highly relevant to many A Level Economists. As our accompanying chart shows, the cost of buying car insurance(as measured by the retail price index) has risen by a staggering 40% in the last year, with even bigger increases being registered for young drivers wishing to insure their own car or be added to their parent’s policy.
This BBC video shows one such customer whose pride and joy (a Ford Fiesta) cost him just £700, but whose annual insurance premium is over £2,000. Suppliers are raising their prices and (in some cases) withdrawing from the market altogether for this “risky” group of customers. A great way for a lesson to combine supply and demand curves with some citizenship advice too 
One aspect of the rising cost of car insurance is an increase in the number of uninsured drivers on the roads - higher premiums have made insurance unaffordable for many and some choose to take the risk of failing to insure their car. But accidents involving uninsured drivers has the follow-on effect of increasing the premiums that law-abiding motorists end up paying - a negative externality.
Beware the return of the Gazunderer
The fragility of the UK housing market becomes more apparent with each passing day. And anecdotal evidence of the balance of power shifting towards buyers and away from sellers comes with news of the return of the gazunderer!
read more...»Lifting the cap on tuition fees - a question of price elasticity?
The latest review of university funding has recommended that the cap on tuition fees be lifted giving universities more freedom to raise annual tuition costs well above the current level of £3,290 a year.
To what extent will a rise in the private cost of studying for a degree lead to a substantial fall in market demand from UK-based students? This BBC news feature makes for interesting reading and links in well to the concept of price elasticity of demand - the responsiveness of demand to a change in the market price. There is little doubt that the cost of taking a university education will rise substantially in the years ahead and this raises hugely important questions about the impact on demand and the effect on students from poorer backgrounds who might be priced out of a degree.
It seems that Business Secretary Vince Cable has already come out against introducing a Graduate Tax - one of the main alternatives to raising tuition fees. The issue is debated here in this discussion on the Radio 4 Today programme. There is more background on the university funding issue here.
Further articles on the economics of a graduate tax can be found here.
University course fee increases ‘could deter students’ (BBC news)
Let’s hear it for the girls!
My better half and I recently popped along to the cinema to see ‘Made in Dagenham’.
The film is set in the late 1960s and depicts the true story of the 200 female machinists and their fight for fair pay at the Ford plant in Dagenham, Essex in the late 1960s. The film is an archetypal feel-good piece of social history, and packed with interesting Economics. Teaching to the syllabus alas does not always afford us the luxury of discussing relatively recent Economic history – this is a real shame. An appreciation of these events I feel can really help to bring several topics alive. Encourage your students to go and see the film – it’s all there:
1/ Monopsony – In the late 1960s Ford employed 55,000 people in Dagenham – 54,800 of them were men
2/ Trade Unions and the Supply Side – wage negotiation and industrial action
3/ Legislation – The dispute was a catalyst for what became the 1970 Equal Pay Act: something that still provokes controversy; today – 40 years later – pay disparity still remains an issue (always extra fun to discuss this in an all boys’ school!)
Cinemas are also of course excellent places in and of themselves as regards turning the restless mind to Economics issues. This particular establishment provides sofas for customers to lounge upon, and one is able to order items from the menu via a handy waiter/waitress service. This of course has several ramifications re the business model the firm operates. I marvelled at the application of cross price elasticity as I took in the outrageous prices on the menu! My thoughts turned to price discrimination as I pondered the ticket price! I glanced round approvingly at the civilised audience, gathered together in part via the power of the price mechanism!
I can’t finish without mentioning the fact that the soundtrack during an advert for a well known brand of Corn Flakes was provided by one of my favourite bands … Primal Scream, a Scottish alternative rock group. I almost choked on my Sauvignon Blanc as I vacillated between thoughts of ‘sell out!’ and the use of multiple revenue streams to maximise the value of a well-known product. I have to tell you – the irrationality of the fan won the day …. Oh Bobby, how could you?
Are the Chinese to blame for rising wine prices?
The Chinese seem to be getting the blame for a lot these days, so it comes as no surprise to read this headline
read more...»Samsung’s Galaxy Tab
Joseph Schumpeter would be proud. The creative side of his destruction is still going strong - Samsung have released a “tab” to rival Apple’s iPad - but is it any good or is it just wasteful expenditure recreating the same? On “paper” it seems better with more capabilities than the iPad… but brand loyalty can be a big attractor…
See the video clip comparison here.
Scotland nudges towards minimum alcohol price
Here is a good 5-minute discussion here of the 45p a unit minimum alcohol price proposed in Scotland.
It offers a good application of some of the main AS micro topics - since it is targeting consumers for whom alcohol is a problem, the highly price inelastic demand for alcohol will probably mean the 45p minimum price is not a huge disincentive.
Paradoxically, since minimum prices only work if the free market equilibrium price is currenly below the minimum price, what it may actually cause is a shift towards higher strength alcohols that are already above the 45p a unit! There’s the law of unintended consequences for you!
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…
Toll roads not the solution for congestion
According to a report out today, the UK’s only private motorway toll, the M6 Toll, has not significantly cut congestion.
