Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
You would think that larger catches would be good news for fishermen. But prices now are so low that they barely cover variable costs. Individual fishermen fish harder and longer to bring in even bigger catches to make up for the lower price. This, of course, compounds the problem and pushes the price even lower.
So what are the answers for the fishermen of Maine? One solution is to diversify their catch, but with lobster so plentiful and other fish stocks depleted, this is not easy.
Another solution is to cooperate. The Reuters article below quotes John Jordan, a lobsterman and president of Calendar Islands Maine Lobster Co.:
‘If you had an industry that actually cooperated, you wouldn’t be bringing in more product if you couldn’t sell what you already had, right?’
Restricting the catch would require lobster distributors to cooperate and set quotas for what the fishermen would be permitted to sell. But with over 5000 fishermen, this is not easy.
Another solution is to expand the market. One way is for the distributors or other agencies to market lobster and lobster products more aggressively. For example, 
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.
Jordan’s company and others are frantically seeking new ways to sneak lobster into unexpected corners of the food market, from gazpacho to puff pastries and quiche.
In the meantime, for consumers the question is whether the low prices paid to the fishermen of Maine will feed through into low prices in the fishmonger, supermarket and restaurant. So far that does not seem to be happening, as the final two articles below explain.
Webcasts
US lobster fishermen’s ‘problem of plenty’ BBC News, Jonny Dymond (5/10/13)
Maine lobstermen in a pinch over low prices, record catch: Part 1, Part 2, Part 3 Aljazeera America, Adam May (11/10/13)
Articles
Something fishy is going on in the nation’s lobster capital CNBC, Heesun Wee (1/9/13)
Booming lobster population pinches profits for Maine’s fishery Reuters, Dave Sherwood (25/8/13)
Lobster’s worth shelling out for The Observer,
Rachel Cooke (21/9/13)
Clawback The New Yorker, James Surowiecki (26/8/13)
Why The Glut Of Cheap Lobster Won’t Lower Price Of Lobster Rolls Gothamist, John Del Signore (20/7/12)
Questions
- Why have lobster prices paid to fishermen fallen? Illustrate your argument with a demand and supply diagram
- What has determined the size of the fall in prices? What is the relevance of price elasticity of demand and price elasticity of supply to your answer?
- How is the fallacy of composition relevant to the effects on profits of an increase in the catch by (a) just one fisherman and (b) all fishermen? What incentive does this create for individual fishermen in a competitive market?
- What can lobster fishermen do to restore profit margins through collaborative action?
- In what ways is there a conflict between economics and ecology in the lobster fishing industry?
- How does stored lobster affect (a) the price elasticity of supply and (b) the price volatility of lobster?
- How could cooperation between lobster fishermen and lobster processors and distributors benefit all those involved in the cooperation?
- Why may restaurants choose to maintain high prices for lobster dishes for ‘psychological reasons’? Are there any other reasons?
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
- Which is the better measure of an industry’s performance: the value or the volume of goods sold?
- Why would you expect volumes of Scotch sold to decline during an economic downturn?
- 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.
- What type of figure would you expect Scotch whisky to have for income elasticity of demand? Does it vary for different people?
- Why is forecasting demand for Scotch so difficult? What techniques might be used?
- Why does demand for Scotch whisky remain high and even rising in many emerging markets?
- Is the market for Scotch whisky exports a good indication of the interdependence of countries across the world?
The high street has changed significantly over the past 50 years and is likely to continue to do so over the next 50 years. Much of these changes have occurred as a result of technological developments. However, one thing that has remained largely unchanged is the telephone box. Although there are fewer of them, with the majority of people owning a mobile phone, city centre high streets still have their fair share of phone boxes.
With tastes constantly changing, products and services come in and out of fashion. But with technology constantly developing, products and services that were once needed have become obsolete, replaced by their more advanced substitutes. We’ve seen e-commerce develop, such that long-standing high street retailers have faced closure and the development of mobile phones and other communication devices have meant that the once essential phone box is now rather redundant. At least, in its traditional function. The Mayor of New York, Michael Bloomberg said:
New York is the most dynamic city in the world, and while technology has changed all around us, the city’s payphones have remained mostly the same for decades.
If we were to place the phone box on the product life cycle, it has certainly reached maturity and in many developed countries, even decline. But can extension strategies be used to create a new function for the phone box?
This is certainly happening in New York, where a reinvent challenge has been launched to help phone boxes adapt to technological innovation. Suggestions include using them as information sources, phone chargers, weather monitors and advertising boards. In the UK, phone boxes have even been fitted with defibrillators and are the first port of call for saving lives. But would this be enough to reinvent the phone box, whose numbers have fallen in New York from 35,000 to only 11,000?
Some say that the phone box is no longer relevant and while the idea of a ‘community hub’ remains appealing, the cost of maintaining them can be rather high. For others, the phone box is still essential, especially for those on lower incomes, who perhaps cannot afford what some people see as a necessity: a mobile phone. Are phone boxes, therefore, a means of ensuring access to communication for all socioeconomic groups? Also, perhaps for all age groups? As technology and tastes continue to change over the coming decades, the phone box will go in one of two directions: a revival or obsolescence. The following articles consider this.
New York phone boxes get new lease of life BBC News, Michael Millar (22/3/13)
Phone box in Ashwell is fitted with defibrillator to help save lives Rutland and Stamford Mercury (23/3/13)
Red Rutland phone box becomes 2000th life-saving hub ITV News, Pete Bearn (20/3/13)
The trashing of the iconic red phone box is one bad call Telegraph, Cristina Odone (11/3/13)
Questions
- Draw out the product life cycle. What examples of products and services can you find that fit in each stage?
- What are extension strategies? How do they help products that are in decline?
- When deciding whether or not to keep a phone box, what factors will be considered?
- How can phone boxes help to tackle inequality, especially of access?
- Are there any other products or services that fit into the decline stage? Which ones have had extension strategies applied and which have not?
- Do all products and services eventually enter the decline stage of the product life cycle? Can you think of any that haven’t? What has enabled them to survive?
Adverts are increasingly diverse, ranging from families using various products and promoting their qualities, to a gorilla drumming, a horse dancing and a monkey drinking tea! But, how important is advertising to a product’s brand. Does it have a positive effect on sales and profitability?
The key role of advertising is to sell more products and many firms spend a huge amount on advertising campaigns. Indeed, over £16bn was spent on advertising in 2012. Given that the economy is still vulnerable and many firms have seen their sales and profits decline, this is a huge amount. Procter & Gamble spent over £200 million, British Sky Broadcasting spent £145 million and Tesco spent £114 million in 2011.
Advertising increases consumer awareness of the product and its features, but also actively aims to persuade people to purchase the product. By differentiating the product through adverts a company aims to shift the demand curve to the right and also make it more inelastic, by persuading customers that there are no (or few) close substitutes.
Since the start of the economic downturn in 2008, advertising expenditure has fallen, as companies have seen a decline in their budgets. From a high of £18.61 billion in 2004, the Advertising Association found that it fell to £14.20 billion in 2009 at constant 2008 prices. In the last few years, advertising expenditure has remained at around £14.5 billion. But, is cutting back on advertising a sensible strategy during a recession? Of course budgets are tight for both firms and consumers, but many suggest that media-savvy firms would actually benefit from maintaining their advertising. By doing so firms could take advantage of weaker competitors by increasing their market share and establishing their brand image in the long run.
It’s also important to consider another link between economic growth and advertising. Research suggests that advertising can be an important factor for economic growth. A three-year study undertaken by the Advertising Association and Deloitte, commencing in January 2013 suggests that for every £1 spent on advertising in the UK, £6 is generated for the wider economy. Based on these predictions, the estimated £16bn that was spent on ad campaigns in 2011 added over £100 billion to the UK’s GDP.
So, perhaps encouraging more advertising is the answer to the UK’s economic dilemma. This is certainly the opinion of Matt Barwell, the consumer marketing and innovation director of Diageo Western Europe, who said:
People fundamentally believe in advertising but a lot of the conversation focuses on negative elements. People rarely get the opportunity to talk about the positive role advertising plays in terms of wealth creation, exports and the social benefits that it provides. These are all things that many of us take for granted.
If private firms can therefore be encouraged to boost their marketing campaigns, jobs may be created, demand for products will rise and with the help of the multiplier, the economy may strengthen. Advertising has both pros and cons and opinions differ on what makes a good advert. But, whatever your opinion of the role of advertising, it is certainly an important aspect of any economy. The following articles take a view of advertising.
Articles
Could we advertise ourselves out of recession? Marketing Week, Lucy Tesseras (31/1/13)
Advertising in times of recession: A question of value The Open University, Tom Farrell (13/3/09)
Recession spending on advertising and R&D Penn State, Smeal College of Business
Nothing to shout about The Economist (30/7/09)
UK’s payday lenders face restrictions on advertising Reuters (6/3/13)
Value claims improve advertising effectiveness in recessionary times Com Score, Diane Wilson (17/9/13)
Advertising in a bad economy About Advertising, Apryl Duncan
Advertising worth £100bn to UK economy The Telegraph, Graham Ruddick (31/1/13)
Can advertising be the motor that gets the struggling UK economy out of first gear? More about advertising (26/2/13)
Adverts ‘worth £100bn to UK’ Independent, Giddeon Spanier (30/1/13)
Report
Advertising Pays – How advertising fuels the UK economy Advertising Association & Deloitte (30/1/13)
Advertising Pays – How advertising fuels the UK economy: Accompanying video presentation Advertising Association & Deloitte: on YouTube (30/1/13)
Questions
- What is the role of advertising?
- Using a demand and supply diagram, illustrate and explain the role of advertising.
- During a recession, why would you expect advertising expenditure to fall? What impact would you expect this to have in your diagram from question 1?
- How might firms that sustain their advertising expenditure during a downturn benefit?
- Explain the link between advertising and the economy.
- Why could a higher level of advertising boost economic growth?
- Are there any negative externalities from advertising?
Australia is a rich country. It is one of the few to have avoided a recession. This has been the result partly of successful macroeconomic policies, but largely of the huge mining boom, with Australia exporting minerals to China and other fast growing Asian economies.
But has this growth brought happiness? Are Australians having to work harder and harder to pay for their high standard of living? Indeed, do higher incomes generally result in greater happiness? The following articles explore this issue, both in an Australian context and more broadly. They look at some recent evidence.
For example, in one study, Canadian, Chinese, Indian, and Japanese university students were asked what they held to be most important for assessing the worth of their lives. The crucial finding was that although higher incomes may be a contributing factor to increased happiness and well-being, especially for poorer people, other factors are more important. These include developing fulfilling personal relationships, whether with partners, family members or friends; gaining knowledge and wisdom; having enjoyable hobbies; having financial security (as opposed to higher incomes); having a worthwhile career; living a moral life; helping other people.
The question then arises whether our economic systems and incentives are geared towards achieving these outcomes. Or are we encouraged to consume more and more and to seek higher and higher incomes to feed our addiction to consumption?
Is there an information problem here? Do many individuals perceive that money will buy them happiness, whereas, in reality, money can’t buy them love?
Articles
Australia: Where the good life comes at a price BBC News Magazine, Madeleine Morris (24/2/13)
Australia has the know-how to boost wellbeing Sydney Morning Herald, Matt Wade (8/9/12)
Money can’t buy you the good life Independent, Roger Dobson (24/2/13)
The 10 Things Economics Can Tell Us About Happiness The Atlantic, Derek Thompson (31/5/12)
Yes, Money Does Buy Happiness: 6 Lessons from the Newest Research on Income and Well-Being The Atlantic, Derek Thompson (10/1/13)
The fact is, the richer you are, the happier you are The Telegraph, Allister Heath (5/2/13)
Money buys happiness? I wouldn’t bank on it The Telegraph, Christopher Howse (6/2/13)
Who Says Wealth Doesn’t Buy Happiness? The Wealthy Do CNBC, Robert Frank (4/2/13)
More Proof That Money Can’t Buy Happiness Business Insider, Aimee Groth (28/1/13)
Money Changes Everything The New York Times, Adam Davidson (5/2/13)
Why are the Chinese so sad? Maclean’s (Canada), Mitch Moxley (4/2/13)
Reports
First World Happiness Report Launched at the United Nations The Earth Institute, Columbia University (2/4/12)
World Happiness Report The Earth Institute, Columbia University, John Helliwell, Richard Layard and Jeffrey Sachs (eds.) (2/4/12)
Well-being evidence for policy: A review New Economics Foundation, Laura Stoll, Juliet Michaelson and Charles Seaford (3/4/12)
Questions
- Distinguish between necessary and sufficient conditions. Is higher income a necessary or sufficient condition (or both or neither) for an increase in happiness? Does a person’s circumstances affect the answer to this question?
- Explain what is meant by ‘rational behaviour’ at the margin in the traditional economic sense?
- If a person always behaved rationally, would they be happier than if they did not? Explain.
- Explain how information asymmetry between the two or more parties involved in a transaction may make people worse off, rather than better off, even though they were behaving rationally.
- Explain what is meant by diminishing returns to income.Do richer countries get happier as they get richer?
- How would you set about measuring happiness?
- What do you understand by the term ‘hedonic elevation and decline’? Does this provide an accurate description of you own purchasing behaviour? If so, explain whether or not you would like to change this behaviour.
- When people make economic decisions, these are normally made with bounded rationality. How may this affect the desirability of the outcomes of the decisions?
- In explaining bankers’ behaviour, Christopher Howse (author of the second Telegraph article above) states: ‘It’s the power game that keeps them happy, not the money itself. When I say “keeps them happy” I mean “feeds their addiction”. It is a negative kind of satisfaction. A morning spent without the distraction of making big bucks is a morning left exposed to the empty horror of being a little rational animal on the bare surface of the Earth lost in space.’ Do you agree? Explain why or why not.
- When people are addicted to something, would doing more of it be classed as irrational? Explain.
- Why are the Chinese so sad?
Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.
