Category: Essential Economics for Business: Ch 03
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
- Define the terms (i) “normal good” and (ii) “inferior good”.
- What will be the value of the income elasticity of demand for (i) a normal good and (ii) an inferior good?
- Discuss strategies that firms can adopt to minimise the impact of an economic downturn on (a) their total revenue and (b) their profitability.
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
- Given the recession in France, as what types of good would you classify (a) offal and (b) beef?
- What values would you expect for the income elasticity of demand for (a) offal and (b) beef?
- What are the principal determinants of the demand for offal?
- Using diagrams as appropriate, explain the changes that have taken place in the market for offal in recent months.
- 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.
The financial crisis has, according to research from the Institute of Grocery Distribution (IGD), begun to lead to a fundamental change in shopping habits. People are now more ready to take packed lunches to work, walk rather than drive and even grow their own food to a greater extent than for many years.
Cash-strapped shoppers in search of Good Life Times Online (14/10/08)
Questions
| 1. |
With reference to the article, suggest products for which demand is likely to increase during an economic downturn. |
| 2. |
Are all the products you identified in question 1 inferior products? |
| 3. |
With reference to the article, suggest products for which demand is likely to decrease significantly during an economic downturn. |
| 4. |
Comment on the likely value of the income elasticity of demand for each of the products you have identified in questions 1 and 2. |
Times of economic uncertainty often lead to people seeking what they consider as ‘safe havens’ for their money. Traditionally gold has been one of these safe havens. This financial crisis has been no exception and the price of gold has risen, but there has also been a rapid growth in demand for gold bullion and gold coins and dealers have found themselves besieged by people looking to protect their savings. ATS Bullion, a London gold bullion dealer, has even seen queues: something quite unprecedented for them.
There’s gold in them thar’ shops: the rush is on Guardian (2/10/08)
Austria witnesses new gold rush BBC News Online (12/10/08)
Gold rush as investors pile into bars Financial Times (3/10/08)
Market turmoil sparks gold rush to specialist funds Times Online (13/10/08)
Questions
| 1. |
What the main determinants of demand for gold coins and gold bullion? |
| 2. |
Using diagrams as appropriate, show the changes that have taken place in the market for gold coins in recent months. |
| 3. |
Discuss the extent to which the supply of gold bullion is likely to keep up with the rapid growth in demand. |
The economist Joseph Stiglitz won the Nobel Prize for Economics in 2001. Along with George Akerlof and Michael Spence, he worked out a theory of information asymmetry: a situation where both parties in a transaction have different levels of information. Could this theory have some relevance as an explanation of the current financial crisis?
In praise of …..Joseph Stiglitz Guardian (8/10/08)
Stiglitz lecture on financial crisis available online University of Manchester (13/10/08)
Questions
| 1. |
Explain what is meant by information asymmetry. |
| 2. |
Explain how information asymmetry can lead to markets working imperfectly. |
| 3. |
Discuss the extent to which the theory of information asymmetry may be relevant as a partial determinant of the current financial crisis. |