Category: Essentials of Economics: Ch 02

Up until a year ago, milk and cheese prices were soaring woldwide (see Cheddar – the king of cheeses at £2000 per tonne). A surging world economy and rapidly growing demand from China and India were driving up commodity prices, including milk and milk-based producs. In the UK, average farmgate prices for milk had risen from 19 pence per litre (ppl) in 2006 to 27.4ppl by October 2008 (see here for data). Since then, however, as the global economy has plunged into recession, milk prices have fallen. By September 2009, the farmgate price had fallen by over 18 per cent to around 22.4ppl. With rising costs for fuel and cattle feed, many dairy farmers are now making a loss and are either quitting, or considering quitting, the industry.

It’s a similar story in Europe, North America and other dairy producing regions of the world. In Europe “the mood is turning sour. Last week 300 tractors dragged milk containers over fields in southern Belgium, dumping a day’s worth of production (see video). Similar protests were made in Germany, France, the Netherlands and Luxembourg. The crisis has driven many EU farmers into a ‘milk strike’, with thousands refusing to deliver to the industrial dairy conglomerates that produce everything from skimmed milk to processed cheese.”

So is this just market forces in action and will prices rise again as the world economy recovers? Or is it a reflection, in part, of the monopsony power of the supermarkets and the milk processing industry? The following articles look at the issues, both in the UK and the rest of Europe and in the USA.

Milk ‘strikes’ and shortages hit Europe as UK dairy industry reels from crisis Observer (20/9/09)
German agriculture ministers meet as European milk crisis escalates Deutsche Welle (17/9/09)
EU Milk Strike Joined by More Than 60,000 Farmers, Group Says Bloomberg (18/9/09)
EU to boost aid for dairy farms BBC News (17/9/09)
Milk: Commission proposes further measures to help dairy sector in short, medium and long term European Commission Press Release (17/9/09)
Milk output fell in August as dairies cut herds Chicago Daily Herald (19/9/09)
New England tries to save dairies The News Journal (Delaware) (20/9/09)

Questions

  1. For what reasons are many dairy farmers now making a loss?
  2. For what reasons has the power balance in the wholesale milk market shifted towards milk purchasers (such as supermarkets) and away from farmers?
  3. How would a phased liberalisation of EU milk production help the UK’s dairy farmers?
  4. Discuss the likely effectiveness of the European Commission’ proposed measures to help dairy sector in short, medium and long term.
  5. What is likely to happen to milk prices over the next two years and what will be the likely effect on supply? Explain your answer and consider the relevance of price elasticity of supply.
  6. “Agriculture officials and farmers in Vermont, New Hampshire and Massachusetts have launched a program called Keep Local Farms. … Organizers say they hope to appeal to consumers’ growing taste for local foods” (see final linked article above). What determines the likely effectiveness of such ‘buy local’ movements? What incentives are there for people to buy local? If countries in general encourage people to buy local, is this a zero sum game? Explain.

Economic growth is normally seen as the most important long-term macroeconomic objective. Without economic growth, so it is argued, people will be unable to achieve rising living standards. But, according to Nicholas Stern, Professor of Economics and Government at the London School of Economics, former head of the Government Economic Service, former World Bank chief economist and author of the 2006 Stern Review on the Economics of Climate Change, countries will need to reconsider making growth the goal of their societies.

Speaking to students at the People’s University of Beijing, Lord Stern warned that unless substantial cuts were made in carbon emissions, the effects of global warming would have devastating effects on people’s lives. As the Stern report stated, “Climate change will affect the basic elements of life for people around the world – access to water, food production, health, and the environment. Hundreds of millions of people could suffer hunger, water shortages and coastal flooding as the world warms.” The implications are that countries must making cutting carbon emissions a priority and must reconsider their growth strategies. In his speech he said that “Beijing should shift the economy away from heavy industry, manufacturing for exports and other high-emission activities. Instead, it should focus more on domestic consumption, service industries and low-carbon technology.”

So should countries rethink their economic objectives? Is economic growth either a necessary or sufficient condition for an increase in human welfare? Read the articles and then consider the questions below.

World must help China shift to clean growth-Stern Reuters (11/9/09)
Stern Truths: Some Parts of China Have Western-Style Emissions Wall Street Journal (11/9/09)
Stern: Rich nations will have to forget about growth to stop climate change Guardian (11/9/09)
Stern words in Beijing Hot Topic (New Zealand) (13/9/09)

Questions

  1. Are the objectives of economic growth and tackling gobal warming necessarily incompatible?
  2. What would a low carbon growth strategy look like?
  3. What would you include in the opportunity costs of maintaining a high growth strategy compared with switching to a lower carbon, lower growth one?
  4. Consider whether economic growth is (a) a necessary condition; (b) a sufficient condition for a growth in the wellbeing of the human race.

From October 2007 to March 2009, stock markets around the world fell massively. In the UK, the FTSE 100 fell from a peak of 6752 on 15 October 2007 to a trough of 3461 on 9 March 2009 (a fall of 49 per cent). By the end of August 2009 it had reached 4944 (a rise since March of 43 per cent). Does this mean that the March value represented an over-correction downwards? Did the subsequent rise represent an over-correction upwards? Are stock markets about to plummet? The following two articles reflect on the past and look into the future!

World Wide Stock Market Crash on Pause The Market Oracle (3/9/09)
Are shares about to fall off a cliff? BBC News (4/9/09)

Questions

  1. What is meant by the ‘efficient (capital) market hypothesis’?
  2. If stock markets are overvalued, does this mean that they are inefficient?
  3. Why might (a) stock markets plummet in the near future; (b) carry on rising? Why don’t the ‘experts’ know which will happen?
  4. Explain why markets may over-shoot their long-term equilibrium value?

This podcast is from BBC Radio 4’s Today Programme. It consists of an interview with James Berresford, chief executive of VisitEngland, and Tracy Corrigan, of the Daily Telegraph on the topic of ‘staycations’ – a term used to refer to people holidaying at home rather than going abroad. Staycations are up, but why is this the case; how much have people switched; and is it really a cheaper option?

More people holidaying in England BBC Today Programme (27/8/09)

See also the following articles:
Unemployment Up In Seaside Resorts Despite Era Of The ‘Staycation’ Fresh Business Thinking (22/8/09)
Unemployment up in seaside resorts despite era of the ‘staycation’ TUC (21/8/09)
Haven Holidays sees rise in caravan sales Times Online (26/8/09)
‘Staycation’ Britons reconsider their holiday plans The National (Abu Dhabi) (28/8/09)
Recession-hit Britons abandon foreign holidays in favour of ‘staycations’ Guardian (13/8/09)
Bad weather puts paid to the Great British Staycation Independent on Sunday (22/8/09)

The following are useful sources of evidence:
Visits to the UK up 4 per cent Office for National Statistics News Release (13/8/09)
1.2 Million More Holidays Taken In England As Brits Take Breaks Closer To Home enjoyEngland (7/8/09)
11.9 million Brits to take U.K break this Bank Holiday enjoyEngland (26/8/09)

Questions

  1. What are the determinants of demand for staycations? How have these impacted on the demand for staycations in the UK in summer 2009?
  2. How are the (a) price; (b) income and (c) cross-price elasticities of demand for staycations relevant in determining the demand for staycations?
  3. Why is imperfect information an important problem in making a decision about where to take a holiday and how do risk attitudes affect the decision?
  4. Why has unemployment risen more than the UK national average in many seaside towns?

Tea prices have soared in recent months. Explanations can be found on both the demand and supply side. But while this might be bad news for tea drinkers, the news is more mixed for tea growers. So just what are the causes and consequences of the price rises? The following linked articles look at the issues.

Tea prices hit record high as supplies tighten Financial Times (19/8/09)
No break for Britons as tea price set to soar Scotsman (19/5/09)
Tea prices hit record high (video) BBC News (21/8/09)
Price of cup of tea goes up (video) BBC news (17/8/09)
Africa Tea Prices Climb to a Record on Dry Weather Bloomberg (20/8/09)
Kenya Tea Prices Hit Record High Before Ramadan FlexNews (19/8/09)
African tea prices ‘to extend gains’ China People’s Daily Online (18/8/09)
Sri Lanka to revive all closed tea factories ColomboPage (24/8/09)
Land usage should be flexible: Tea panel The Economic Times of India (24/8/09)

For tea price data see:
Tea Monthly Price Index Mundi

Questions

  1. Identify the factors on the demand and supply sides that have led to the rise in tea prices. Draw a diagram to illustrate your answer.
  2. Under what circumstances will farmers benefit from a rise in tea prices? What is the relevance of the market price elasticity of demand to your explanation?
  3. If the price of tea in the shops rises, will this necessarily mean a rise in the price to tea growers and in the wages of workers on tea plantations? Explain using concepts of competition and market power.
  4. What will be the effect of using more land for growing tea on (a) the price of tea and (b) the incomes of tea growers?