Category: Economics for Business: Ch 05

Posted on

Recession – bring it on!

Whilst a recession has a devastating impact on many industries – not least construction and related sectors – there are some firms who will fare much better during a recession. Firms who have products whose demand is income inelastic, or which are even inferior, will feel the impact of the recession much less than those whose goods have a more income elastic demand. The two articles below consider jobs and businesses that are less likely to suffer in recessionary times.

Slump busters: jobs that beat the downturn BBC News Online (27/11/08)
Riding the recession: how some businesses are doing well in the downturn Times Online (23/11/08)

Questions

  1. Define the terms (i) “normal good” and (ii) “inferior good”.
  2. What will be the value of the income elasticity of demand for (i) a normal good and (ii) an inferior good?
  3. Discuss strategies that firms can adopt to minimise the impact of an economic downturn on (a) their total revenue and (b) their profitability.
Posted on

Let them eat offal

According to the article linked to below, the demand for offal has risen by 15% in France since the investment bank Lehman Brothers went out of business. Over the same time period French butchers have faced a 2.6% fall in the demand for beef. So is the global financial crisis set to make offal merchants rich?

Recipes for the recession bring offal back into fashion in France Times Online (20/11/08)
Let them eat offal Guardian (20/11/08)

Questions

  1. Given the recession in France, as what types of good would you classify (a) offal and (b) beef?
  2. What values would you expect for the income elasticity of demand for (a) offal and (b) beef?
  3. What are the principal determinants of the demand for offal?
  4. Using diagrams as appropriate, explain the changes that have taken place in the market for offal in recent months.
  5. Discuss the extent to which the increase in demand for offal has been caused by the promotional strategies adopted by The National Federation of French Offal Merchants.
Posted on

More expensive cigarettes = happier smokers

In the article below Tim Harford (the Undercover Economist) looks at rationality in the purchase of cigarettes. He consider whether healthy and happy smokers are the same thing and the extent to which smokers would be happier if cigarettes were more expensive.

Why smokers are happier when cigarettes cost more MSN Slate (17/5/08)

Questions

1. Identify the principal factors that determine the level of demand for cigarettes.
2. Given the factors identified in part (a), discuss the likely value of the price elasticity of demand for cigarettes.
3. Discuss the extent to which higher cigarette prices would make smokers happier.
Posted on

Japan – releasing rice to the market

The market for rice has been in turmoil recently with shortages and rapid price rises. This crisis has led to Japan and the USA negotiating a deal to release the surplus rice held by Japan in silos. It is estimated that this deal would lead to around 1.5 million tonnes of rice being made available and this could help reduce the price of rice on global markets.

Japan’s silos key to relieving rice shortage Times Online (17/5/08)
Tokyo stockpiles rice while others go short Times Online (17/5/08)
Thai cartel idea outrages consumers Times Online (3/5/08)
Controlling crops goes against the grain Times Online (3/5/08)

Questions

1. Explain why Japan is holding surplus rice in silos.
2. Assess the impact of this ‘distortion’ on the global rice market.
3. With reference to the last two articles linked above, assess the likely impact of the cartel proposed by the Thai prime minister on the global market for rice.
Posted on

Milking it in the EU

Increased demand for milk and milk-based products has led to the EU agreeing to increase milk quotas by 2% from April. The move was backed by most countries but Germany and Austria opposed the move on the basis that increased quotas would push milk prices down and therefore hit many farmers.

EU farmers to produce more milk BBC News Online (17/3/08)

Questions

1. Using diagrams as appropriate, show how EU milk quotas affect the equilibrium price and level of output in the market for milk.
2. Analyse the likely impact of a 2% increase in quotas on the equilibrium price and level of output in the market for milk. (n.b. as part of your answer you may like to consider the likely value of the price elasticity of demand for milk and the impact this is likely to have on the market price.)
3. Discuss the effectiveness of using milk quotas in maintaining income levels for dairy farmers.