Global food prices and the terms of trade
Agflation refers to a sustained increase in the general price of foodstuffs and in recent years we have become accustomed to seeing the prices of many basic staple products rising. The era of cheap food looks to be over for now on the back of significant demand-side factors, not least rising population levels, higher per capita incomes and speculative demand for foods as prices have become more volatile. Supply-side factors are also important in explaining strong inflation in food prices. Both sides of the market are discussed by Ambrose Evans-Pritchard in his column in the Telegraph today “Food will never be so cheap again” - plenty of applied microeconomics here in addition to the huge number of macroeconomic issues that the trend rise in food prices has caused. One of the big changes in a switch in the terms of trade away from food importers towards food exporters. But do higher food prices necessarily cause agricultural supply to expand?
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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
Walmart and Amazon Price War - Hyper Efficiency and the Consumer
A well publicised price war has broken out in the United States between Walmart and Amazon. Wal-Mart’s $10 promotion applies to the top 10 books coming out in November but the company is also selling 200 best-sellers for 50% of their list price. In a move that has sent shock-waves through the book industry, Wal-Mart has announced it will be selling 10 forthcoming books for just $10 each including Sarah Palin’s autobiography. As is often the case when an aggressive price war breaks out in an oligopolistic market, online bookseller Amazon matched the price cut within hours causing Wal-Mart to cut again to $9. Amazon returned the favour and Walmart has sinced shaved one cent to $8.99! The FT reports that Walmart’s website, the second busiest in the US after Amazon, has also cut prices by 50 per cent on 200 best-sellers.
The battle comes at a time when both Walmart and Amazon are under pressure from Google who are rolling out an online site capable of delivering e-books to any device with a Web browser, with an initial library of about half a million titles.
How long the price war will last is open to question. The October-December season is a hugely important time for all booksellers - the festive period is the peak time for sales and the intense battle for market share comes at a time of great change in the industry - not least the rapid growth of e-readers and online libraries. Some book publishers fear a price anchoring effect on their industry - namely that Walmart slashing prices and rivals following suit will lead book-buyers to expect new titles to cost $10, a low prices that would force the publishing industry to re-scale its entire business, including the advances paid to writers and ultimately affect the range of titles on offer.
For the giants of the book retailing industry, the economies of scale and drive for hyper efficiency in getting products to the market are simply a way of reinforcing their market dominance.
But what about the impact on smaller independent booksellers most of whom can never hope to compete on price but who provide light and shade in the book selling industry.
It is a reminder that there are different types of efficiency. Allocative, productive, dynamic and social. The latter two may be damaged if the price war escalates and many smaller booksellers go under. This BBC world service news interview focuses on some of the cultural issues of the rise of the giant retailers. Chris Doeblin from the independent Book Culture shop in New York City accepts that supermarkets will bring the price of books down - as they have with food prices - but at a (social) cost to many of us.
Guardian: US bookshops urge regulator to investigate online price war
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Speculators and Exceptions to the Law of Demand
To what extent are speculators responsible for the increasing volatility of commodity prices? Expectations of price movements for globally traded commodities can have a huge impact on demand in the markets and the bets that speculators make on the forward prices of commodities such as oil can lead to rapid price hikes. We saw this with food and oil in 2008 - with enormous consequences for consumers and producers in developed and developing countries - and perhaps we are seeing this again as 2009 draws to a close. The world price of crude oil is already heading north again towardsa $90 a barrel.
This BBC world service audio report is a good resource on the impact of speculation and its possible links to exceptions to the law of demand where a rise in actual or expected prices can bring about an expansion of market demand.
“The International Food Policy Research Institute in Washington has studied price movements and concluded that they couldn’t all be explained by the fundamentals. And, perhaps most damning of all, a big-time speculator is now identifying speculation as one of the causes in the movement of the price of oil.”
Airlines scramble to find new revenue streams
The days of the all in one ticket price - a simple means of flying from A to B are looking like a distant memory. The global aviation industry is set to lose up to $30bn this year and with average ticket prices continuing to decline and capacity utilization falling, the airlines are falling over themselves to find extra ways of getting passengers to part with their cash.
New wheezes include asking passengers to pay for the right to choose a seat, together with the growth of charges for baggage check-in and meals on board. If you are willing to pay in advance, travel light, book online and check-in online in a seat of the airline’s choice, you can still find very cheap flights. But the extras amount to a premium on choice and flexibility - I guess this is an example of the hurdle model of price discrimination - BA has launched a second-bag check-in fee on some of its flights and a reservation fee for passengers wanting to book particular seats more than 24 hours in advance of flight time. Day by day it is starting to resemble a budget airline in tactic as well as consumer goodwill. I booked a return flight to Hong Kong today with Cathay Pacific - no tedious optional extras - what a refreshing change!
This BBC video is good on the new a la carter revenue policies of airlines.
The UK Economy - a Long Run Perspective
We tend to focus on short run changes in output, jobs, prices and profits and risk missing the long term picture of where an economy is. A year ago I produced this chartroom presentation as the UK economy entered recession - this has now been updated and might be useful for colleagues helping students develop an appreciation of the long-run trends in key UK economic data. It is available for download in pdf and scorn-compliant VLE format.
Launch streamed revision presentation on the Long Run Perspective
Download SCORM-compliant VLE ZIP version
Download printable pdf handout version
Managing a global business in turbulent times
Over ten years at my current school I have been hugely fortunate to hear some tremendous speakers on a tremendously wide range of issues. Few have impressed me as much as Simon Henry, CFO of Shell plc in his talk to our Keynes (Economics) and the newly-formed Management Society last night. His talk was beautifully paced and considered; the responses to questions were candid and rooted in a deep understanding of energy industries where volatility has become the norm. Future shareholder value will depend largely on successfully breaking the cycle of volatility.
Olive Oil Producers Suffer from Falling Prices
For the olive oil growers of Spain falling prices are threatening their very existence. They claim that the supermarkets - who sell 9 out of every 10 bottles - have used their market muscle to drive down the retail price and the growers are barely able to justify continuing production. This is a good short video on the workings of the price mechanism.
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
Second-hand car market – law of unintended consequences
Drive a new car off the forecourt and you it immediately loses a sizeable slice of its value. And, under normal market conditions, second-hand cars lose value by about 15 per cent a year, but this year they are increasing in value – by an average of £600 so far this year – mainly due to a shortage of supply caused by the government’s scrappage scheme.
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