Tag: value

Economics, but not as we know it. As the introduction to this programme on BBC radio 4 suggests, there has been criticism and concern about the way in which we think about economics. About, how it’s taught; the lessons we learn and whether we need to have a re-think. Tomas Sedlacek is a Czech economist and has a different way of thinking about this subject.

Humanomics is certainly a new way of thinking about economics and considering how it links and can be applied to a wide range of areas: the Bible; movies such as Fight Club and the Matrix. This 30 minute discussion between Evan Davies and Tomas Sedlacek provides some interesting insights and thoughts on some of the current challenges facing this subject and some novel insights into how we could change our thinking.

Tomas Sedlacek: The Economics of Good and Evil BBC Radio 4 (25/01/16)

Questions

  1. How do we define and measure value? Is this always possible? Can you think of some things where we cannot assign prices or numbers to values?
  2. How could economics be relevant Adam and Eve?
  3. Think about the marriage market. How would you apply the model of demand and supply to this most unusual of markets?
  4. What insights does Tomas Sedlacek provide about the ancient business cycle and this might affect our thinking about debt and assets?
  5. Do you think that refugees are of benefit to a country? If you don’t think they are of benefit, does this mean that countries should not accept them?
  6. If we did find out that corruption or crime and terrorism were of benefit to the GDP of a country, would you encourage it? Or would you place the morality issue above the actual figure of contribution?

The supermarket industry is a classic example of an oligopoly. A market dominated by a few large companies, which is highly competitive and requires the companies to think about the reactions of the other competitors whenever a decision is made. Throughout the credit crunch, price cutting was the order of the day, as the big four tried to maintain market share and not lose customers to the low cost Aldi and Lidl. Morrisons, however, has found itself in exactly that position and is now looking to restructure to return to profitability.

Morrisons is well known for its fresh food, but it seems that with incomes still being squeezed, even this is insufficient to keep its customers from looking for cheaper alternatives. Morrisons’ market share has been in decline and its profits or the last financial year have been non-existent. It’s been losing ground to its big competitor, Tesco and part of this is due to the fact that Morrisons was late to enter the ‘Tesco metro’ market. It remained dependent on its large supermarkets, whereas Tesco saw the opportunity to expand onto the highstreets, with smaller stores. It was also late arriving to the online shopping business and while it has now developed more sophisticated IT systems, it did lose significant ground to Tesco and its other key competitors.

Another problem is that Morrisons has found itself unable to compete with the low cost supermarkets. The prices on offer at Morrisons are certainly not low enough to compete with prices at Aldi and Lidl and Morrisons has seen many of its customers switch to these cheaper alternatives. But Morrisons is fighting back and has announced plans to cut prices on a huge range of products across its stores. The fresh food aspect of the business will still remain and the hope is that the fresh food combined with cheaper price tags will allow Morrisons to re-gain lost ground to Tesco and take back some of its lost customers from the low-cost alternatives. However, it’s not just Morrisons that has been losing customers to the budget retailers. Tesco, Sainsbury’s and Asda have all lost market share to Aldi and Lidl, but it is Morrisons that has fared the worst.

The latest news on Morrisons’ profits and overall performance, together with its promise of restructuring and price cuts worth £1 billion has caused uncertainty for shareholders and this has reduced the value of shares. However, Morrisons’ Directors have tried to restore confidence by purchasing shares themselves. With expectations of price wars breaking out, the other supermarkets have also seen significant declines in their share values, with a total of £2 billion being wiped off the value of their shares collectively. The consequences of Morrisons’ performance will certainly continue: customers are likely to benefit from lower prices in all of the big four supermarkets, but investors may lose out – at least in the short run. The impact on jobs is uncertain and will certainly depend on how investors and customers react in the coming weeks. The following articles consider this sector.

UK grocer Morrison warns on profit, threatens price war Reuters, James Davey (13/3/14)
Morrisons and the threat to mainstream supermarkets BBC News, Robert Peston (13/3/14)
Morrisons expected to sell property in response to profit drop The Guardian (9/3/14)
Morrisons restructuring sparks fears of new price war BBC News (13/3/14)
Morrisons’ dividend up while profit falls? It’s hard to believe The Guardian, Nils Pratley (13/3/14)
Morrisons boss talks tough as group slides into red The Scotsman, Scott Reid (13/3/14)
Morrisons plots price cuts after annual loss Sky News (13/3/14)
Morrisons’ declaration of £1bn price war with budget stores hammers Sainsbury and Tesco shares This is Money, Rupert Steiner (14/3/14)
Ocado on track for first profit in wake of Morrisons deal Independent, Simon Neville (14/4/14)

Questions

  1. What are the key characteristics of an oligopoly?
  2. To what extent do you think the supermarket sector is a good example of an oligopoly?
  3. Why is the characteristic of interdependence a key cause of the potential price war between the supermarkets?
  4. Why has Morrisons been affected so badly with the emergence of the budget retailers?
  5. By using the income an substitution effect, explain how the big four supermarkets have been affected by retailers, such as Aldi and Lidl.
  6. Using a demand and supply diagram, explain how the share prices of companies like Morrisons are determined. Which factors affect (a) the demand for and (b) the supply of shares?
  7. What do you think will happen to the number of jobs in Morrisons given the performance of the company and its future plans?

In the blog No accounting for trade, the rise in the UK’s balance of trade deficit was discussed. Many factors have contributed to this weakening position and no one market is to blame. But, by analysing one product and thinking about the factors that have caused its export volumes to decline, we can begin to create a picture not just of the UK economy (or more particularly Scotland!), but of the wider global economy.

Scotch whisky may not have been the drink of choice for many British adults, but look outside Great Britain and the volume consumed is quite staggering. For example, French consumers drink more Scotch whisky in one month than they drink cognac in one year. The volume of Scotch whisky exported from our shores was £4.23 billion for 2011, accounting for 90% of all sales and making its way into 200 markets. However, one problem with this product is that it is highly susceptible to the business cycle. Add to this the time required to produce the perfect Scotch (in particular the fact that it must be left to mature) and we have a market where forecasting is a nightmare.

Producers typically look to forecast demand some 10 years ahead and so getting it right is not always easy, especially when the global economy declines following a financial crisis! So what has been the impact on exports of this luxurious drink? In the past few years, it has been as key growth market for UK exports rising by 190% in value over the past decade. But in 2012 the volume of Scotch whisky exports fell by 5% to 1.19 billion bottles. What explains the decline in sales?

The biggest importer of Scotch whisky is France and its volumes were down by 25%. Part of this decline is undoubtedly the economic situation. When incomes decline, demand for normal goods also falls. Many would suggest Scotch whisky is a luxury and thus we would expect to see a relatively large decline following any given fall in income. However, another factor adding to this decline in 2012 is the increased whisky tax imposed by the French government. Rising by 15% in 2012, commentators suggest that this caused imports of Scotch whisky to rise in 2011 to avoid this tax, thus imports in 2012 took a dive. Spain is another key export market and its economic troubles are clearly a crucial factor in explaining their 20% drop in volume of Scotch whisky imported.

But, it’s not all bad news: sales to Western Europe may be down, but Eastern Europe and other growth countries/continents, such as the BRICs and Africa have developed a taste for this iconic product. Latvia and Estonia’s value of Scotch whisky imports were up by 48% and 28% respectively, as Russian demand rises and China, still growing, is another key market. Gavin Hewitt, chief executive of the Scotch Whisky Association said:

A combination of successful trade negotations, excellent marketing by producers, growing demand from mature markets, particularly the USA, and the growing middle class in emerging economies helped exports hit a record £4.3bn last year.

Furthermore, while the volume of exports worldwide did fall, the value of these exports rose to £4.27 billion, a growth of 1%. This suggests that although we are exporting fewer bottles, the bottles that we are exporting are more expensive ones. Clearly some people have not felt the impact of the recession. For Scotland and the wider UK, these declining figures are concerning, but given the cyclical nature of the demand, as the world economy slowly begins to recover, sales are likely to follow suit. Gavin Hewitt continued his comments above, saying:

We are contributing massively to the Government’s wish for an export-led recovery. There is confidence in the future of the industry, illustrated by the £2bn capital investment that Scotch whisky producers have committed over the next three to four years.

The following articles consider the rise and fall of this drink and its role as a key export market across the world.

Scottish whisky industry puts export hope in new market BBC News (2/4/13)
Scotch whisky sales on the slide The Guardian, Simon Neville (2/4/13)
Growth stalls for Scotch whisky exports BBC News (2/4/13)
Scotch whisky accounts for 25pc of UK’s food and drink exports The Telegraph, Auslan Cramb (2/4/13)
Whisky sales fall but value of exports hits new high Herald Scotland (3/4/13)
Scotch whisky exports rise to record value The Telegraph, Auslan Cramb (2/4/13)
Scotch whisky exports hit by falling demand in France The Grocer, Vince Bamford (2/4/13)
New markets save Scotch from impact of austerity Independent, Tom Bawden (2/4/13)
Scotch exports hit by falling demand Financial Times, Hannah Kichler (2/4/13)

Questions

  1. Which is the better measure of an industry’s performance: the value or the volume of goods sold?
  2. Why would you expect volumes of Scotch sold to decline during an economic downturn?
  3. When a higher tax was imposed on Scotch whisky in France, why did volumes fall? Use a demand and supply diagram to illustrate the impact of the tax.
  4. What type of figure would you expect Scotch whisky to have for income elasticity of demand? Does it vary for different people?
  5. Why is forecasting demand for Scotch so difficult? What techniques might be used?
  6. Why does demand for Scotch whisky remain high and even rising in many emerging markets?
  7. Is the market for Scotch whisky exports a good indication of the interdependence of countries across the world?

Here’s an interesting example of oligopoly – one you probably haven’t considered before. It’s the art market. And it’s not just one market, but a whole pyramid of markets. At the bottom are the ‘yearning masses’ of penny-poor artists, from students to those struggling to make a living from their art, with studios in their attic, garden shed or kitchen table. At the top of the pyramid are those very few artists that can earn fantastic sums of money by selling to collectors or top galleries. Then there are all the layers of markets in between, where artists can earn everything from a modest to a reasonable income.

The pyramid is itself depicted as a work of art, which you can see in the linked article below. It’s worth studying this piece of art carefully as well as reading the article.

A guide to the market oligopoly system Reuters, Felix Salmon (28/12/10)

Questions

  1. Identify the increasing barriers to entry as you work up the art market pyramid.
  2. Are there any other market imperfections in the art market that you can identify from the diagram?
  3. What are the key differences between the ‘primary market, tier 1’, the ‘primary market, tier 2’ and ‘the secondary market’?
  4. Are artists ‘rational maximisers’? If so, what is it they are trying to maximise? If not, why not?
  5. How would you set about determining the ‘worth’ of a piece of art? How do possible future value of a piece of art determine its present value?

Whilst the internet and technological developments provide massive opportunities, they also create problems. For some time now, newspapers have seen declining sales, as more and more information becomes available online. Type something into Google or any other search engine and you will typically find thousands of relevant articles, even if the story has only just broken. As revenue from newspaper sales falls, revenue has to be made somewhere else to continue investment in ‘frontline journalism’. The question is: where will this come from?

The Financial Times and News Corp’s Wall Street Journal charge readers for online access and we can expect this to become more common from May, when the Times and the Sunday Times launch their new websites, where users will be charged for access. Subscription to these online news articles will be £1 per day or £2 for weekly access. Whilst the Executives of the Times admit that they will lose many online readers, they hope that the relatively low price, combined with a differentiated product will be enough of an incentive to keep readers reading.

Critics of this strategy argue that this a high risk strategy, as there is so much information available online. Whilst the BBC does plan to curtail the scope of its website, the Times and Sunday Times will still face competition from them, as well as the Guardian, the Independent, Reuters, etc., all of whom currently do not charge for online access. However, if you value journalism, then surely it’s right that a price should be charged to read it. Only time will tell how successful a strategy this is likely to be and whether we can expect other online news sites to follow their example.

Times and Sunday Times websites to charge from June (including video) BBC News (26/3/10)
Murdoch to launch UK web paywall in June Financial Times, Tim Bradshaw (26/3/10)
Times and Sunday Times websites to start charging from June Guardian, Mercedes Bunz (26/3/09)
News Corp to charge for UK Times Online from June Reuters (26/3/10)
Murdoch-owned newspaper charges for content BBC News (14/1/10)

Questions

  1. Why have newspaper sales declined?
  2. How might estimates of elasticity have been used to make the decision to charge to view online articles?
  3. ’If people value journalism, they should pay for it.’ What key economic concepts are being considered within that statement?
  4. Why is charging for access to the Times Online viewed as a high-risk strategy?
  5. What are the advantages and disadvantages of this strategy? To what extent do you think it is likely that other newspapers will soon follow suit?
  6. Which consumers do you think will be most affected by this strategy?
  7. In what ways might non-pay sites gain from theTimes’ charging policy?
  8. Would you continue to read articles from the Times linked from this site if you had to pay to access them? If so, why? If not, why not? (We want to know!!)