How important are emotions when you go shopping? Many people go shopping when they ‘need’ to buy something, whether it be a new outfit, food/drink, a new DVD release, a gift, etc. Others, of course, simply go window shopping, often with no intention of buying. However, everyone at some point has made a so-called ‘impulse’ purchase.
There is only one article below, which is from the BBC and draws on data released from the National Employment Savings Trust’s survey. This report suggests that British people spend over £1 billion every year on impulse buys – purchases that are not needed, were not intended and are often regretted once the ‘high’ has worn off. Often, it is the way in which a product is advertised or positioned that leads to a spontaneous purchase – seeing chocolate bars/sweets at the tills; a product offered at a huge discount advertised in the window of a shop; 2 for 1 purchases; points for loyalty etc. All of these and more are simple techniques used by retailers to encourage the impulse buy. As consumer psychologist, Dr. James Intriligator says:
Retailers have clever ways of manipulating customers to spend more but if you stick to your plans you can avoid being affected by their tactics.
In other cases, it’s simply the frame of mind of the consumer that can lead to such purchases, such as being hungry when you’re food shopping or having an event to attend the next day and deciding to go window shopping, despite already having something to wear! Dr. Intriligator continues, saying:
Your ability to resist and make rational choices is diminished when your glucose levels are down … When you get irrational, you fall back on trusted brands, which often leads you to spend more money … Later in the shop, you’re more tired and less likely to resist [impulse buys]
But are such purchases irrational? One of the key assumptions made by economists (at least in traditional economics) is that consumers are rational. This implies that consumers weigh up marginal costs and benefits when making a decision, such as deciding whether or not to purchase a product. But, do impulse buys move away from this rational consumer approach? Is buying something because it makes you happy in the short term a rational decision? Behavioural economics is a relatively new ‘branch’ of economics that takes a closer look at the decisions of consumers and what’s behind their behaviour. The following article from the BBC considers the impulse buy and leaves you to consider the question of irrational consumers.
Article
How to stop buying on impulse BBC Consumer (30/5/13)
Questions
- If the marginal benefit of purchasing a television outweighs the marginal cost, what is the rational response?
- Using the concept of marginal cost and benefit, illustrate them on a diagram and explain how equilibrium should be reached.
- What is behavioural economics?
- What are the key factors that can be used to explain impulse buys?
- How can framing help to explain irrational purchases?
- If a product is advertised at a significant discount, what figure for elasticity is it likely to have to encourage further purchases in-store?
- Is bulk-buying always a bad thing?
The strength of the housing market is often a key indicator of the strength of the economy. But, the opposite is also true: a weak economy often filters through to create a weak housing market. With the current weak economy, a boost in confidence is needed and signs suggest that the housing market is beginning to recover.
While the picture of the housing market today is nothing like the pre-crisis view, things are beginning to look up. For a couple of years now, house price inflation in the UK has been very close, if not equal to zero. However, data from Nationwide Building Society suggests that in May, house prices rose by 0.4% and the once stagnant year-on-year change in house prices rose to 1.1% (see chart below: click here for a PowerPoint of the chart). This is the fastest it has grown since the end of 2011.
Commentators have suggested that this latest data is an indication that ‘the market is gaining momentum’. A further confirmation of this rejuvenated market came with the data that property sales were 5% up each month this year, than the average monthly level for 2012. Despite this improvement, they still remain well below the pre-crisis levels.
Which factors have contributed to this tentative recovery? Most households require a mortgage to purchase a house and, given the central role that the housing market played in the financial crisis with companies engaging in excessive lending as a means of expanding their mortgage books, the availability of mortgages fell. The number of mortgage approvals is likely to feed through to affect the number of house sales and these have improved in the first few months of 2013. Interest rates offered by lenders have also fallen, making mortgages more affordable, thus boosting demand. Furthermore, government assistance is available to help individuals put a deposit down on a house, by offering them an equity loan. Further measures are due to come into effect in January 2014, with the aim of providing a further boost to the housing market. The chief economist at Nationwide, Robert Gardner said:
Widespread expectations that the economy will continue to recover gradually in the quarters ahead, that interest rates will remain low, and the ongoing impact of policy measures aimed at supporting the availability and lowering the cost of credit all provide reasons for optimism that activity will continue to gain momentum in the quarters ahead.
Despite the optimism, the situation is different across the UK, with some areas benefiting more than others. London and the South-East are driving this 0.4% rise, whereas other areas may be in need of further assistance to keep pace (see The UK housing market: good in parts).
Although these latest data may be a sign of things to come, it is also possible that things could go the opposite way. Incomes remain low; employment data are hardly encouraging; and the spectre of inflation is always there. Perhaps most importantly, consumer confidence remains fragile and until that gains momentum, uncertainty will continue to plague the UK marketplace. The following articles consider this issue.
Articles
UK house prices again up in May, says Nationwide The Guardian, Hilary Osborne (30/5/13)
Housing market could boost retail industry, Kingfisher says The Telegraph, Graham Ruddick (30/5/13)
UK house prices see modest rise, says Nationwide BBC News (30/5/13)
Hugh’s Review: House prices in spotlight BBC News, Hugh Pym with Yolande Barnes of Savills and Matthew Pointon of Capital Economics (31/5/13)
House prices are racing ahead as stimulus for the market kicks in Independent, Russell Lynch (31/5/13)
’Pick up’ in house prices recorded in sign of market confidence, says Nationwide Independent, Vicky Shaw (30/5/13)
House prices at highest level for nearly two years as confidence in UK economy grows and mortgages get cheaper This is Money, Matt West (30/5/13)
Stamp duty is ‘choking’ housing market as it rises seven times faster than inflation over last 15 years Mail Online, Tara Brady (28/5/13)
Nationwide launches Help to Buy mortgages The Telegraph, William Clarke (29/5/13)
UK home prices rise most in 18 months, Nationwide says Bloomberg, Jennifer Ryan (30/5/13)
House price data
Links to house price data The Economics Network
Statistical data set – Property transactions Department of Communities and Local Government
Nationwide house price index Nationwide Building Society
Halifax House Price Index Lloyds Banking Group
Lending to individuals – November 2012 Bank of England
Questions
- How is the equilibrium determined in the housing market? Using a demand and supply diagram, illustrate the equilibrium. Make sure you think about the shapes of the curves you’re drawing.
- Which factors affect the demand for and supply of housing?
- Why are there regional variations in house prices?
- Why is the housing market a good indicator of the strength of the economy?
- Why have house prices risen throughout 2013? Is the trend likely to continue?
- If the housing market does indeed gain momentum, how might this affect the rest of the economy? Which sectors in particular are likely to benefit?
- Explain why the government’s intervention in the housing market could be seen to have a multiplier effect?
- Concerns have been raised that the government’s schemes to help the housing market may create a house price bubble. Why might this be the case?
A simple model in economics is that of demand and supply. Through the price mechanism, signals are sent between consumers and producers and this interaction results in an equilibrium market price and quantity. However, what happens when the market for a good or service is in disequilibrium?
When a market is in equilibrium, demand equals supply. However, as we discussed in a previous blog concerning baby milk in China (see Milking the economy), markets are not always in equilibrium. If demand exceeds supply, a shortage will emerge and to eliminate this, the price must rise. If, on the other hand, supply exceeds demand, there will be an excess supply and thus the price must fall to restore equilibrium.
The market in question here is toilet paper in Venezuela! A severe shortage of this product has emerged in recent months, with shops running out of supplies. In a bid to relieve this shortage, the country’s Minister of Commerce has received approval for a $79 million credit, which can be used to import this basic product in short supply. Fifty million rolls will be imported to help fill the shortage that has emerged. The shortage is not just a problem for toilet paper, but also across a range of basic consumer goods. The article from Reuters comments that:
The government says the toilet paper shortages, like others, are the results of panicked buying and unscrupulous merchants hoarding the goods to artificially inflate prices.
Opposition critics say the problem is caused by the currency controls, created a decade ago by late socialist leader Hugo Chavez, and years of nationalizations that weakened private industry and left businesses unwilling to invest.
With shortages across a variety of products, the President has begun to work closely with business leaders to address this situation. The following articles consider this basic market, the intervention and consequences.
Venezuela hopes to wipe out toilet paper shortage by importing 50m rolls The Guardian (16/5/13)
Venezuela ends toilet paper shortage BBC News (22/5/13)
With even toilet paper scarce, Venezuelan president warms to business Reuters, Eyanir Chinea (22/5/13)
Toilet paper shortage in Venezuela to end after lawmakers back plans to import 39 million rolls Huffington Post, Sara Nelson (22/5/13)
Venezuela’s toilet paper shortage ended; 3 other basic goods that went scarce in the country International Business Times, Patricia Rey Mallen (22/5/13)
Questions
- Using a demand and supply diagram, explain how equilibrium is determined in a free market.
- Illustrate the shortage described in the aticles on your above demand and supply diagram. How should the price mechanism adjust?
- What types of government intervention have led to the shortages of such basic consumer goods?
- How have currency controls created a problem for Venezuela?
- With an increase in imported products, what impact might there be on Venezuela’s exchange rate and on its balance of payments?
Imagine that the team you support has made the final of a major competition or a your favourite band is playing a live concert this summer. You desperately want a ticket and are willing to pay the advertised price. They go on sale at 9.00am in the morning and you go on-line at 8.59am but unfortunately the webpage will not load. You keep pressing the refresh button but with no success. Eventually, annoyed and frustrated, you give up at 10.00am!
Tickets for sporting, musical or other live shows are initially sold by people who organise the events in two ways. They may choose to sell some or all of the tickets directly to the customer. For example you can buy tickets for a West End show from the box office in the theatre. With some football games it is still possible to buy tickets on the day at the stadium. Another approach is to sell some or all of the tickets via an authorised ticket agent. These businesses are usually members of STAR (The Society of Ticket Agents and Retailers) and the organisers of the sporting, musical or live show provide them with tickets to sell on their behalf. Some of the larger and well known agents such as Ticketmaster, Ticketline and Seetickets usually sell the tickets at face value although some booking fees are often added to the price. This initial sale of tickets by either the event organiser themselves or an agent acting on their behalf is referred to as the primary market.
For example, British Athletics sold all of its 130,000 tickets for its two day Anniversary Games on the 26th and 27th July via its authorised ticket agent in 75 minutes!! However an internet search for this event will quickly reveal that tickets are still available!! Unfortunately in most cases the advertised price will be far greater than the face value of the ticket. How is this possible? The answer is that the internet has helped a thriving secondary market for tickets to develop. The secondary market refers to situations where people who have already purchased tickets through the primary market re-sell them to other members of the public. Prior to the internet the main way of buying a ticket in the secondary market was to visit the venue on the day of the event and hunt for some-one willing to sell. However technology has dramatically reduced these transaction costs and made it much easier for potential buyers and sellers to make an exchange. For example companies such as Viagogo, Seatwave, GetMeIn and Stubhub have created websites that allow members of the public to buy and sell tickets. As Viagogo publish on their webpage:
You are buying tickets from a third party, Viagogo is not the ticket seller. Ticket prices are set by the seller and may be above or below face value.
Why does this secondary market exist? An economist would argue that it can only happen if the quantity of tickets demanded is greater than the quantity of tickets for sale at the price set by the event organiser. If this was not the case then customers would be able to buy tickets through the primary market on the day of the match, concert or show. The puzzle is to explain why prices do not rise in the primary market. If the quantity demanded of any product is greater than the quantity supplied then market forces should put upward pressure on prices. However it would appear that many of the event organisers appear to resist this incentive and consistently set prices below the level that would limit demand to the number of tickets available. This leaves an opportunity for sellers in the secondary market to sell tickets much closer to their market clearing rate. Navin Kekane, the business operations director of Stubhub, stated that
What we do is all about supply and demand, and you can sometimes find tickets at below face value.
Some of these companies in the secondary market have recently established formal partnerships with a number of English Premier League (EPL) football clubs and other major sporting bodies. For example Viagogo have signed deals with 10 EPL clubs while Stubhub have deals with 3 EPL clubs as well as Leicester Tigers and the Lawn Tennis Association.
However some observers have expressed grave reservations about the growth of the secondary market. For example Malcolm Clarke, chairman of the Football Supporters Federation, stated that
At the moment if you are fan trying to sell a spare ticket and are not authorised to do so then you face a criminal conviction, even if you sell at the face value.
But secondary ticketing exchanges, because they are authorised, are allowed to do so. Many clubs grant these agencies the right to allow the re-sale of tickets for their matches at above face value. I don’t think that can be right.
Joe Cohen, the founder of Seatwave counters that
Touts is an emotional, dehumanising word. The reality is that they are just speculators. No one likes speculators until you need something from them.
Some have called for more regulation of the secondary market. For example Sharon Hodgson, Labour MP for Washington and Sunderland West, unsuccessfully tried to get a Private Members Bill through Parliament which would have made it illegal to re-sell tickets for more than 10% above their face value.
Articles
Secondary ticketing: Inflating sport prices or useful service? BBC News Bill Wilson (13/5/13)
Sold out: Are Rihanna, Rolling Stones and Justin Bieber fans being ripped off by so-called secondary ticket websites? The Daily Mail Adam Luck (19/1/2013)
Olympic anniversary athletics event sells out in 75 minutes The Guardian Owen Gibson (19/2/2013)
Is this a new golden age for ticket touts? The Observer Laura Barnett (14/4/2013)
5 live Investigates: ‘legalised ticket touting’ by Premier League clubs BBC Sport Andrew Fletcher (2/12/2012)
StubHub UK expands into Premier League Ticket News, Jean Henegan (4/9/12)
Football fans lose out on £64m of tickets due to absent season ticket holders Daily Telegraph, (16/8/12)
Questions
- Give some potential advantages for a football club or sporting body of using an authorised ticket agent to sell tickets in the primary market.
- Using a demand and supply diagram explain what happens in a market if the price is continually set below its market clearing rate. Illustrate and explain how mutually beneficial trade can take place in the secondary market at prices above those in the primary market.
- Can you explain why it is less likely for a secondary market to exist for cinema tickets than a popular West End show?
- Can you think of any reasons why it might be in the interests of a profit maximising organiser of a sporting or music event to sell tickets below the market clearing rate.
- What non-price methods could be used to allocate tickets for popular events? Consider some of the advantages/disadvantages of using these non-price methods.
- Do you think it is in the interests of society to allow people to re-sell tickets at a price above their face value?
The market for any good or service is affected by countless factors. On the demand-side, things such as incomes, relative prices, expectations of price changes and tastes determine the shape and position of the demand curve. For the supply curve, it’s factors including costs of production, the profitability of alternative goods and in some cases, the weather or natural disasters. It is this last factor, which has presented Weetabix with problems.
An established breakfast cereal and brand, Weetabix is well-known for producing a range of high quality products. However, production of some of its most popular products has been stopped, as the quality of the British wheat used to make the various cereals was called into question. Last year, we had little summer to speak of and this led to the ‘worst harvest we have seen in decades’, so much so that the quality of the wheat was not sufficient to be used in making the breakfast cereal. This has caused production to cease on certain products and shortages have already begun to emerge, with some shops completely selling out and facing no prospect of being re-stocked.
Weetabix is now owned by a Chinese state-owned company, but still prides itself on using locally sourced wheat. However, with the weather affecting the harvest, wheat from abroad has had to be used, aiming to reduce the gap between demand and supply. The UK is typically an exporter of wheat, but with the poor harvest has come a drop in the amount of wheat produced and thus exported by some 2m tonnes – this is back to a similar level as was seen in the 1980s. A spokesman for Weetabix said:
Normally they’re proud to claim Weetabix is not just British wheat but from within 50 miles of Burton Latimer … They have had to source a bit from outside the UK, but Weetabix is still proud to say it sources its wheat within the UK … weather permitting.
Supply will be increased once wheat from abroad is used, but it is expected that this will take a couple of weeks. In the meantime, if you’re a consumer of the traditional Weetabix, you don’t need to worry, as it’s the less-known cereals that have been affected. The following articles consider this external factor and how it affects the supply of a product.
Weetabix products hit by poor wheat harvest BBC News (22/4/13)
Weetabix supplies hit by dismal harvest The Guardian, Rupert Neate (22/4/13)
Weetabix move to scale back production and re-engineer process is a commendable one The Grocer (20/4/13)
Britain’s disastrous wheat harvest halts production of Weatbix Minis and Oatibix Mail Online, Leon Watson (22/4/13)
Bad weather threatens wheat harvest Channel 4 News, Tom Clarke (3/4/13)
Weetabix halts production of Minis after poor harvest Farmers Weekly, Philip Case (22/4/13)
Questions
- With a poor harvest, which way would you expect the supply curve to shift? Illustrate this on a diagram.
- How should this shift in supply affect the market price and quantity of wheat, assuming all else remains the same?
- How can this example can be used to explain the interdependence between markets?
- With shortages possibly emerging, what might happen to demand today? Illustrate your answer on a demand and supply diagram.
- Does sourcing wheat from local areas give Weetabix a competitive advantage? If so, how might it be affected if it does choose to import wheat?
How important are emotions when you go shopping? Many people go shopping when they ‘need’ to buy something, whether it be a new outfit, food/drink, a new DVD release, a gift, etc. Others, of course, simply go window shopping, often with no intention of buying. However, everyone at some point has made a so-called ‘impulse’ purchase.
