Rising costs of cloth and a rise in VAT could mean that clothes prices are set to rise. Does this spell the end of cheap fashion from the likes of Primark and H&M? Or can they absorb the cost increases?
The following articles look at the causes of the rise in costs of clothing and what the cheap fashion chains can do about it.
Articles
Primark follows fashion rivals as it warns of rising costs Guardian, David Teather and Zoe Wood (13/9/10)
Primark warns on costs as growth slows Telegraph, James Hall (14/9/10)
Is this the end of cheap clothes era? Price of cotton has rocketed because of floods, Primark warns Mail Online, Sean Poulter (14/9/10)
Fashion chains far from cheerful about future of cheap chic Observer, Zoe Wood, David Teather and Julia Finch (19/9/10)
Data
Commodity prices (including cotton) Index Mundi
Cotton futures BBC Business: Commodities
Questions
- Why have cotton prices been rising? Illustrate your arguments with a demand and supply diagram.
- Would you expect a rise in the price of cotton of 45% to lead to a rise in the price of cotton clothes of 45%, or of more than 45% or of less than 45%? Explain.
- For what other reasons are the prices of clothing rising?
- How did the process of globalisation keep the price of clothing down?
- Next’s chief executive, Lord (Simon) Wolfson said that if prices of Next’s clothes go up 8% then the number of units sold will fall by 10%. What is the value of the price elasticity of demand that he is assuming?
- Why is the ‘Fairtrade system so important’?
- “Some retailers have already increased prices but there is more to come. The products most under threat are T-shirts, underwear and socks. More complicated garments such as heavy jeans will be less affected.” Why are the prices of more complicated garments likely to rise by a smaller percentage than those of simple garments?
- What has been happening to the demand for cheap fashion clothing and why? Combine this effect with those of costs on a demand and supply diagram.
- What type of market structure is the market for fashion clothing? What are the implications of this for the profits of retailers?
There has been talk for some time about the possibility of standing room on flights, but it is hardly surprising that this has been rejected by the Civil Aviation Authority. Not the safest option, you might say, nor the comfiest – certainly not for a long haul flight to the other side of the world! However, this could be coming closer to reality, as we see The Skyrider, which is a new saddle-style airplane designed by Avioninteriors. It has yet to be snapped up, but Ryanair could be top of the list with their plans for a new style of flying.
It may not be quite what you imagine – you don’t literally stand up in the stalls at the front of the aircraft. Passengers will have seats, but these seats give a completely new meaning to ‘upright seats’. Seats would be 23 inches apart (some 10 inches closer than we’re used to), but they would only be available for flights up to 3 hours. Despite the publicity, the design is yet to be approved. Ryanair believe that such a design would increase passenger capacity by some 40%. However, passengers remain rather skeptical, as many struggled to fit in to the seats when it was unveiled in New York.
Technological development is vital in any dynamic industry, but is this one step too far? One day, it could be a game of sardines when packing passengers into a plane!
New airline seat for Ryanair resembles a saddle Irish Central, Molly Muldoon (18/9/10)
New plane ‘saddle’ would pack in passengers Edmonton Journal (19/9/10)
Ryanair one step closer to fulfilling dream of getting more people on each plane Travel News, Natalie Cooper (16/9/10)
Budget airlines love bad new stories about how cramped their planes are Telegraph, Harry Mount (15/9/10)
Behold! The world’s most cramped airline seat Reuters, Charlie Sorrel (13/9/10)
Questions
- Is it a rational decision for a passenger to travel in a new upright seat?
- Is it a cost-effective strategy for Ryanair or any other airline to adopt? Explain (a) why it is, but also explain (b) why it may not be cost-effective.
- Using a diagram, illustrate the opportunity cost to an airline of providing more upright seats.
- If successive airlines adopt the new saddle style seats, what is likely to happen to the price of such seats?
- As passengers become aware of these cheaper seats, what is likely to happen to the market price? Illustrate this on a diagram.
- If Ryanair were the only airline to offer such seats, does this mean it would have a monopoly? Explain your answer.
You may have heard that house prices are stalling. August’s house price numbers from the Nationwide Building Society revealed that the average UK house price fell by 0.9% which came on the back of a 0.5% fall in July. The Nationwide talks of an ‘unwinding of the demand-supply imbalance that drove up prices for much of the last year’. It seems that the house price rises last year have, over recent months, induced additional supply by encouraging home-owners to put their property on the market. Unfortunately, there are indications that housing demand has weakened during 2010 though, of course, this gives buyers a greater degree of bargaining power.
But, you might wonder how we can get a handle on the strength of housing demand. Well, one particularly useful piece of information in assessing housing demand is the number of mortgage approvals for purchasing property. After all, there are not many of us that can reach into our back-pocket to find the £166,507 that the Nationwide estimates is needed to buy the average UK property.
If we look at Table A5.4 from August’s edition of Monetary and Financial Statistics, which is published by the Bank of England, we find that the number of mortgage approvals for house purchase in July was 48,722. Now, this was marginally up on the 48,562 in June, but, of more significance is the fact that July’s number was over 8% lower than in July 2009 when approval numbers stood at 53,126. Indeed, this number was to rise further through 2009, hitting 59,117 in November. This indicates a strengthening of housing demand at the time and helps us to appreciate why house prices rebounded last year.
But, the start of 2010 was to see mortgage approval numbers fall away and they have essentially flatlined over recent months at between 48,000 and 50,000. This time the numbers indicate a weakening of housing demand and so help to explain why house price growth has seemingly ceased and gone into reverse.
It remains to be seen how the balance between housing demand and supply will ‘play out’ over the remainder of the year. Will, for instance, some properties be taken off the market in response to this weaker demand? Could housing demand weaken further in response to economic conditions or to economic uncertainty? The answers to these questions will help to determine that all important balance between housing demand and supply. But, by monitoring the mortgage approval numbers we have a ready-made barometer on the strength of housing demand. Feel free to see which way the barometer needle swings in future!
Articles
UK mortgage approval rise but total lending weakest since March Telegraph (31/8/10)
House prices set to slump even further as home loans stay scarce Independent, Sean O’Grady (1/10/10)
Housing market ‘faces double dip’ Press Association (31/8/10)
UK mortgage approvals beat estimates as banks make more funds available Bloomberg, Scott Hamilton (31/8/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What variables do you think are important in affecting the level of housing demand?
- What variables do you think are important in affecting the level of housing supply?
- Using a demand-supply diagram illustrate how shifts in housing demand and/or supply may have affected house prices (i) during 2009 and (ii) during 2010.
- What would you expect to happen to the strength of housing demand in the coming months? How will this impact on house prices?
The prices of grains and other foodstuffs are rising rapidly. Wheat prices rose some 40 per cent in July and have continued to rise rapidly since. In June wheat futures were trading at around 450 US cents/bushel. By early September, they were trading at around 700 US cents/bushel. Global food prices generally rose by 5% over the two months July/August. And it’s not just food. Various other commodity prices, such as copper and oil, have also increased substantially.
At the beginning of September there were three days of food riots in Mozambique in protest against the 30% rise in the price of bread. Seven people were killed and 288 were injured. On 2 September Russia announced that it was extending a ban on wheat exports for another 12 months following a disastrous harvest. In Pakistan, the floods have destroyed a fifth of the country’s crops. Drought in Australia and floods in the Canadian prairies have reduced these countries’ grain production.
In response to the higher prices and fears of food riots spreading, the United Nations has called a special meeting on 24 September to bring food exporters and importers together to consider “appropriate reactions to the current market situation”. And yet, although global cereal production is down by some 5% on last year, it is still predicted to be the third largest harvest on record.
So what is causing the price rises? Is it simply a question of the balance of supply and demand and, if so, what has caused the relevant shifts in supply and/or demand? And what role does speculation play? The following articles look at the issues and at the outlook for commodity prices over the coming months.
Clearly changes in commodity prices affect the rate of inflation. The news item (Bank of England navigates choppy waters) amongst other issues looks at the outlook for inflation and the various factors influencing it.
Articles
Commodity prices soar as spectre of food inflation is back Guardian, Simon Bowers (6/8/10)
Food inflation is a rumble that won’t go away Telegraph, Garry White (8/8/10)
Global wheat supply forecast cut BBC News (12/8/10)
Commodity crisis sparks fear of food inflation on high street Independent, James Thompson and Sean O’Grady (10/8/10)
Should we be concerned about high wheat prices? BBC News, Will Smale (6/8/10)
Commodity prices: Wheat The Economist (12/8/10)
Interactive: What’s driving the wheat price spike? Financial Times, Akanksha Awal, Valentina Romei and Steven Bernard (20/8/10)
Wheat pushes world food prices up BBC News (1/9/10)
UN to hold crisis talks on food prices as riots hit Mozambique Guardian, David Smith (3/9/10)
Grain prices spark global supply fears CBC News, Kevin Sauvé (3/9/10)
GRAINS-US wheat firms after Russian ban extension Forex Yard (3/9/10)
Global food prices reach 20 year high BBC News, John Moylan (3/9/10)
Speculators ‘not to blame for higher food costs’ BBC Today Programme, David Hightower (4/9/10)
Q&A: Rising world food prices BBC News (3/9/10)
Don’t starve thy neighbour The Economist (9/9/10)
Data
Commodity prices Index Mundi
Commodity prices BBC market data
Energy prices U.S. Energy Information Administration
Questions
- Use a supply and demand diagram to illustrate (a) what has been happening to wheat prices (b) what is likely to happen to wheat prices over the coming months?
- How relevant is the price elasticity of demand and supply and the income elasticity of demand to your analysis?
- What factors have caused the shifts in demand and/or supply of wheat and copper?
- What has been the role of speculation in the price rises? Is this role likely to change over the coming months?
- What is likely to happen to food prices in the shops over the coming months? Would you expect bread prices to rise by the same percentage as wheat? If so, why; if not, why not?
- If commodity prices generally rose by 5 per cent over the coming year, would you expect inflation to be 5 per cent? Again, if so, why; if not, why not?
Later this afternoon I’ll be going down to watch my beloved Leicester City. Our first home match drew a crowd of just over 21,500. This was perhaps a little disappointing for the first home match of the season. Normally, supporters’ spirits are high are the start of the season, we all go down to the ground with renewed optimism, and so ‘first match’ crowds are high. But, this year a number had not come along and the problem was not confined to my club. Just down the road in Coventry, their first match against fellow Midlanders Derby County drew a crowd of only a little over 13,000. While this match was televised by SKY, the attendance is likely to have disappointed many at this historic club. Up by the River Tees, Midllesbrough’s first home match drew a record low league crowd of 14,633 and led manager Gordon Strachan to blame poor crowds on the recession. But, while some clubs are struggling to get supporters through the turnstiles, others seemed rather more immune from the affects of the economic climate. Manchester United’s first home match drew a near-capacity 75,221, despite being a televised match on a Monday night, while Arsenal’s first home match against newly promoted Blackpool drew a capacity crowd of 60,032.
These contrasting experiences amongst football clubs raise some important questions about the nature of demand for attending football matches. Perhaps a good place to start for any chief executive thinking about the demand for their club’s matches is to actually step back and consider about how supporters derive satisfaction from attending matches. This satisfaction from consuming something is also known by economists as ‘utility’. In understanding how supporters derive utility clubs may gain some really useful information when pricing season tickets or match-day tickets.
Well, let’s start with me! I am a fox (a Leicester supporter) through and through and so it’s about an emotional attachment. I was first taken down to Filbert Street by Grandfather in the early 1980s. We were soundly beaten on the day by Notts County on the day. But, while I was gutted, I was supporting my team! I derive a lot of my satisfaction from supporting my home-town team. I guess that makes me what we might term a ‘core supporter’. It’s important for clubs to have a sense of their core support because these are likely to be supporters who are least sensitive to pricing. In other words, this group of supporters is more likely to exhibit a price inelastic demand.
So, a happy chief executive of a football club is likely to be one with a sizeable core support. Another way of looking at this, which is not always popular amongst football traditionalists, is to think of a football club as a brand. A popular, sought-after brand gives the supplier a greater degree of power over pricing. The greater the attachment to the brand the greater the power to set price. While for me the attachment comes from the geography of my birth, for others the attachment comes from being associated with success. This helps to explain the attachment of so many supporters to what we refer to as ‘the big clubs’. Therefore, success can help generate supporter-attachment which can therefore be ‘priced-in’ by clubs when determining the pricing structure for matches and season tickets.
But, not everybody is attached to a team out of loyalty to their town or city or because of its success. For others, the utility from attending matches could come from a variety of sources. A ‘floating supporter’ is therefore likely to be more choosey and pricing needs to try and take this into account. For these supporters it might be a question of who the two teams on show are on a particular day. This helps, in part, to understand why local derbies are generally well attended – but why they are also relatively expensive to attend. It might also be the case that particular matches allow supporters to see a ‘superstar’. If a certain player or club is in town then prices at the turnstiles are likely to reflect this.
What we have suggested here is that in beginning to understand the demand for attending football matches, clubs need to build up a profile of their supporters and their potential supporters. We have focused on how supporters derive satisfaction from watching football and how this affects what they are willing to pay. Yet they need to do more than this, including building up a profile of the economic, social and geographic demographics of supporters. As Gordon Strachan points out, supporters are not immune to economic conditions and football clubs can’t be either. Therefore, clubs will also need to have a sense of how income-sensitive is the demand for attending their matches. The economic climate means that many in football, especially those at clubs involved in setting prices, may need to give considerable thought to the demand function for attending live football matches. May be an economist really could help in the board rooms of many football clubs. While I may not make the board room at the Walkers Stadium later, I will be in the crowd!
Articles
Boro boss Strachan blames recession for poor crowds BBC News (22/8/10)
Premier League fun for all – at a cost BBC Sport, Matt Slater’s Blog (27/8/10)
Inside football with Rob Tanner: Where have all the fans gone Leicester Mercury, Rob Tanner (27/8/10)
Questions
- What do you understand by term ‘utility’? Think of any two products or services and draw up a list of how you derive utility from them?
- What do you understand by the terms ‘price elasticity of demand’ and ‘income elasticity of demand’? Try applying these concepts to the demand to attend matches at any two football clubs that you might be aware of.
- Are football clubs price-takers or price-makers when determining match prices? Is this true of all clubs?
- Imagine that a club is promoted to the top league in its country for the first ever time. How will this affect the position and slope of its demand curve for season tickets?