Unit 1 Micro: Revision Presentation on Elasticity of Demand
A slide share revision presentation on elasticity of demand
read more...»Unit 1 Micro: Income Elasticity of Demand
A revision blog on income elasticity of demand
read more...»Unit 1 Micro: True and False Revision Questions on Elasticity
Here is a ten question quiz on elasticity of demand to give you a little extra variety in your revision!
read more...»Unit 1 Micro: Revision on Elasticity of Demand (for Rice)
Here is a planned answer to an exam question
“Assess whether the demand for rice is likely to be price elastic or price inelastic”
read more...»Elasticity of Demand on Apple’s App Store
As an Apple aficionado, I regularly visit the macrumors.com site to keep up to date with the latest news about my favourite computer company, so it was interesting to see this article today looking at the effect on revenue for app producers who put their apps ‘on sale’
read more...»Petrol, tax, and the downward sloping demand curve.
Nearly every country has a tax on petrol, although the amount varies widely. And given that the landed price of petrol is quite similar (see the graph below), it can be seen what effect the tax has on quantity demanded. The results are very much in line what economic theory would predict and there are also clear implications for countries that want to reduce petrol consumption.
read more...»The future’s not so bright for Orange(s)?
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).
read more...»Government Plans to boost the Housing Market
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.
read more...»Applications of Elasticity
Once students have understood the theory of the different elasticities, an important progression is being able to apply it to different markets.
One exercise that I use with my iGCSE and AS groups is as follows:
Unit 1 Micro: Luxury Goods in Action!
Have you got £40,000 or £50,000 to spare on a Christmas present? A hat tip to Freddie Drapkin for spotting these examples of products perfectly suited to status races and ostentatious consumption!
Glass pool table (£39,000)
£45,000 - luxury table football table
World’s largest jigzaw puzzle (£200)
And for the lazy tea drinkers among you - try this!
Unit 1 Micro: University fees and elasticity of demand
When teaching price elasticity of demand, here is a good article on the BBC today on the effect of higher university fees on demand for higher education. Good for discussion of how PED will differ with respect to different types of consumer and for different types of universities, as well as the cross price elasticity of demand with foreign universities.
read more...»From Harrods to Poundland…
Here is a nice example to illustrate the varying effects of the recession on the economy… A growing influx of high-spending foreign tourists powered Harrods through the £1bn sales barrier for the first time… whilst Poundland has also has reported a 26 per cent boost in revenues to £642m. A good example to use in discussion of goods and services that have different income elasticities of demand. Read the article at the FT here.
AS Micro Revision: Banana Prices
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?
read more...»The Elasticity Classic - Smoking
This has to be the most widely used example in classrooms up and down the country when discussing price elasticity of demand.
How about this little twist on it?
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.
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?
Next Generation Laptops - An Inferior Good
Rory Cellan-Jones, the BBC’s Technology Correspondent, does a pretty spectacular demolition job on an attempt by clothing retailer Next to break into the fast-growing market for tablet devices. A very funny piece to camera that manages to highlight when cheap truly means awful! A lovely clip to show when discussing the nature of inferior products in a given market space.
From heart transplants to watermelons - elasticity of demand
Here is a super blog by Jason Welker on aspects of price elasticity of demand - offering some great examples of where demand is either likely to be highly elastic to where consumers are almost immune to changes in the market price.
For another take on price elasticity of demand, a recent Freakonomics blog post looks at pricing for new album releases. A Record Label That Believes in You
Apple, Amazon and The MultAPPlier Effect
With the Bank of England now considering further QE and also urging us all to empty our bank accounts and get out there and spend, spend, spend it got me thinking about the enabling effect of technology, in particular in the area of portable electronic devices. I did toy recently with buying an iPhone, but was struggling to justify the cost. I did however recently succumb to temptation and treated myself to a new 32G Apple Ipod Touch.
read more...»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!
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...»Lesson Worksheet - Cross Price Elasticity of Demand
A lesson worksheet / test on cross price elasticity of demand is available here. The test has a mixture of short answer questions and multiple choice questions on cross price elasticity of demand. An answer key document is also available
Test
Cross_Price_Elasticity.pdf
Answer key
Cross_Price_Elasticity_Key.pdf
Lesson Worksheet - Income Elasticity of Demand
This lesson worksheet / quiz provides multiple choice, short answer and fill in the blank questions on income elasticity of demand
The quiz can be downloaded here (in pdf format) along with a quiz with answers included
Quiz
Income_Elasticity_Demand.pdf
Quiz with answers
Income_Elasticity_Demand_Key.pdf
Supply and demand of nuts
A good article in the Telegraph on supply and demand factors affecting the price of nuts.
Profiteering from Icelandic Volcano
The Times features a very interesting article about the reaction or the percieved reaction of travel companies offering substitute forms of travel in the UK. Is the customer being ripped off? Is this price discrimination at work in the market?
Travel companies have denied profiteering from the volcanic dust cloud as stranded holidaymakers face paying premium fares to get home after the Easter break.
Channel ferry firms and Eurostar trains were fully booked this weekend as the Eyjafjallajökull volcano continued to pump ash into the atmosphere and aircraft were grounded across Northern Europe.
read more...»Supermarkets accused of price gouging
The Guardian today carries a story about alleged price gouging by the supermarkets. Tesco and Asda refute the charge but they are said to have lifted the prices of a number of necessary purchases for many household goods in the lead up to Christmas.
“Both supermarkets, according to Bridgeman, would be able to use their sales data or information from loyalty cards to identify those purchases customers feel they have to make at Christmas and then target these categories for some steep rises “to extract maximum profit” from shoppers who have neither the time nor capacity to go elsewhere. So household cleaning goods, shaving products, toiletries, lightbulbs, batteries, pickles, sauces, herbs and spices typically consumed at Christmas, favourite seasonal drinks, hangover and indigestion pills, and must-have family presents were all categories seeing dramatic hikes on some lines”
Price gouging involves charging more for consumers whose demand is price insensitive, in other words the price elasticity of demand is low. This would allow the retailers to achieve a higher profit margin on their sales as they extract consumer surplus and turn it into extra producer surplus. The accusation is a strong one more so because many thousands of families on lower incomes may have suffered price hikes at a time when budgets are already under enormous pressure from the effects of the recession and rising utility and energy bills.
More here: How supermarkets can cut ‘thousands of prices’ but your bills may go up
2009 - a desperately difficult year for airlines
This BBC news article highlights some of the key economic challenges facing the global airline industry as we move further in 2010. IATA reports that world airline passenger traffic dropped by 3.5% from a year earlier, while freight traffic fell 10.1% as the downturn hit demand. Losses have mounted and the industry continues to have to weather many uncertainties such as the likely strength of a rebound in global tourism, freight and business travel and the volatility of aviation fuel costs. This in the week when Japanese Airlines filed for bankruptcy. IATA has forecast that airlines will lose $5.6 billion (£3.5 billion) on a net basis this year after losing $11 billion in 2009.
Price elasticity of demand for stamps
The BBC reports that PostComm - the postal service industry regulator has given initial backing for Royal Mail to increase the cost of a standard first-class stamp by three pence. This would take the price up to 42p. At the same time, standard second-class stamps may rise by 2p to 32p. How will consumers respond to the price change? For many the price hike will have little effect - most of the stamps that I buy can be reclaimed as stationery expenses. But many smaller businesses spend heavily on mailshots as a part of their marketing. A rise in mail costs may cause them to consider making more effective use of their customer databases so that - for example - a 3000 mail shot volume is better targeted than before. Do you think that the price elasticity of demand for stamps is price inelastic - at least in the short term?
The Royal Mail is subject to a price cap agreed with their industry regulator. Since the Royal Mail?s current price control was agreed in 2006, the Royal Mail has lost 9% of its mail volumes over the three year period to April 2009, largely through shrinkage of the total market including 20% of stamped mail. The Royal Mail has also had to face up to increased competition as the postal market has been fully opened up to competition.
Shrinking mail volumes has the effect of reducing capacity utilisation of their collection, sorting and delivery capacity and leads to a rise in the unit costs of the business. The Royal Mail is required by law to operate a universal service across the UK; it is a business that requires substantial economies of scale to remain profitable.
