The ONS has just published two of its major annual publications on income and expenditure in the UK. The first is the Annual Survey of Hours and Earnings (ASHE) and looks at earnings from 1998 to 2013. The second is Family Spending and looks at the level and pattern of household spending each year from 2001 to 2012.
Figures from the two publications show that average real incomes have fallen each year since 2008. This is illustrated in the first chart (click here for a PowerPoint of the chart). They also show that household expenditure in real terms is falling and is at the lowest level since 2006.
Overall picture
In 2012, households’ average weekly disposable income was £597. In 2012 prices, this was down from £621 in 2010 (after the recession) and £659 in 2008 (before the recession).
Household expenditure is at its lowest level in real terms for over a decade. In 2012 households spent on average £489.00 per week. In 2012 prices, this compares with £521.90 in 2001/2 and £533.80 in 2006 (the peak year).
Picture for particular income groups and products
Although average real incomes have fallen, not everyone has been affected the same. For example, not all occupations have seen a fall in incomes (see the table at the end of the BBC article, Earnings rise slower than inflation for fifth year running). Also, as income distribution has become less equal, so those in lower income groups have seen their real incomes fall the fastest. This is partly the result of nominal wages rising less fast for low-paid workers and partly the result of price increases for various essentials, such as food and power being greater than the rate of inflation, and these products constituting a higher proportion of expenditure for poor people than rich people (see Squeezed Britain 2013).
Likewise expenditure hasn’t fallen on all categories of product. Since 2006, real expenditure on clothing and footwear and on housing, fuel and power has risen. The second chart illustrates expenditure on some of the different categories and how the balance has changed (click here for a PowerPoint). This partly reflects the changes in prices of products, with some items, such as electricity, gas and rent having risen faster than the average, and with the demand for such items being relatively price inelastic.
The changing pattern is also partly the result of different income elasticities of demand for different items. Thus, with falling real incomes, the proportion of income spent on products with a low income elasticity of demand is likely to rise.
Expenditure also varies by income group. People on higher incomes tend to spend a greater proportion of their income on things such as leisure activities (e.g. eating out and holidays), motoring, and clothing and footwear. Poorer people tend to spend proportionately more on food and drink, and on electricity, gas and rent (even net of housing benefit). These differences are illustrated in the third chart which looks at certain categories of expenditure of three different disposable income groups: the poorest 10% (decile), the richest 10% and the 6th decile (i.e. the 6th group up from the bottom – the group with average or just above average income) (click here for a PowerPoint for the chart). Detailed figures can be found here, which is Table 3.2 from Family Spending.
Just as the time-series data looking at changing income and expenditure over time can illustrate the different income elasticities of demand for different products, so can the cross-sectional data in Tables 3.1 and 3.2 of Family Spending.
Articles
Earnings rise slower than inflation for fifth year running BBC News (12/12/13)
Energy and rent are now the biggest family bills The Telegraph, Steve Hawkes (11/12/13)
Families spend £489 each week – on what? The Guardian, Mona Chalabi (11/12/13)
Cost of energy hits family budgets, says ONS BBC News (11/12/13)
Family spending interactive: how has it changed? The Guardian Datastore, Mona Chalabi (11/12/13)
Data
Annual Survey of Hours and Earnings, 2013 Provisional Results ONS (12/12/13)
Annual Survey of Hours and Earnings, 2013 Provisional Results: Statistical Bulletin ONS (12/12/13)
Family Spending, 2013 Edition ONS (11/12/13)
Family spending in 2012: Infographic ONS (11/12/13)
Video Summary: Are you an average spender? ONS (11/12/13)
Household expenditure based on COICOP classification, 2001-02 to 2012 at 2012 prices: Table 4.1 of Family Spending ONS (11/12/13)
Detailed household expenditure as a percentage of total expenditure by disposable income decile group, 2012: Table 3.2 of Family Spending ONS (11/12/13)
Questions
- What are the determinants of the price elasticity of demand for a product?
- What are the limitations of using time-series data of prices and expenditure to estimate the price elasticity of demand for particular products?
- What are the determinants of the income elasticity of demand for a product?
- What are the limitations of using time-series data of incomes and expenditure to estimate the income elasticity of demand for particular products?
- What are the limitations of using cross-sectional data of expenditure of different income groups to estimate the income elasticity of demand for particular products?
- How do your answers to the above questions demonstrate the significance of the ceteris paribus (other things being equal) assumption?
- If real earnings are falling, why are people able to spend more in real terms?
- What are the macroeconomic implications of increased consumer spending at a time of falling real incomes?
- How could increased consumer spending help to reverse the fall in real incomes (a) in the short run (b) over a period of a few years? Distinguish between the effects on aggregate demand and aggregate supply.
The price of road fuel is falling. Petrol and diesel prices in the UK are now at their lowest level since February 2011. The average pump price for a litre of unleaded petrol has fallen to 130.44p in November – down nearly 8p per litre since September.
According to the AA, the reduction in price equates to a fall in the average monthly expenditure on petrol of a two-car family of £14.49 – down from £252.54 to £238.05. This saving can be used for spending on other things and can thus help to boost real aggregate demand. The fall in price has also helped to reduce inflation.
But will lower fuel prices lead to a rise in fuel consumption? In other words, will some of the savings people make when filling up be used for extra journeys? If so, how much extra will people consume? This, of course depends on the price elasticity of demand.
The following articles explain why the price of road fuel has fallen and look at its consequences.
Webcast
Good news for motorists as fuel prices fall in the East ITN (22/11/13)
Articles
November fuel price update Automobile Association (22/11/13)
Finally there is good news for motorists as petrol prices hit lowest level since 2011 The Telegraph, Steve Hawkes (22/11/13)
Petrol prices fall to lowest level for almost three years as strong pound gives motorists relief on the forecourt This is Money, Lee Boyce (22/11/13)
Falling petrol prices boost motorists The Guardian (22/11/13)
Data
Weekly road fuel prices Department of Energy & Climate Change
Europe Brent Spot Price US Energy Information Administration
Spot exchange rate, US $ into Sterling Bank of England
Questions
- Why have the prices of petrol and diesel fallen?
- Illustrate the fall in price of road fuel on a demand and supply diagram.
- How does the size of the fall in price depend on the price elasticity of demand for road fuel?
- If a fall in price results in a fall in expenditure on road fuel, what does this tell us about the price elasticity of demand?
- Why may the price elasticity of demand for road fuel be more elastic in the long run than in the short run?
- If a motorist decides to spend a fixed amount of money each week on petrol, irrespective of the price, what is that person’s price elasticity of demand?
- Using the links to data above, find out what happened to the dollar price of sterling and the Brent crude oil price between September and November 2013.
- How do changes in the exchange rate of the dollar to the pound influence the price of road fuel?
- If the price of oil fell by x per cent, would you expect the price of road fuel to fall by more or less than x per cent? Explain.
- Why do petrol prices vary significantly from one location to another?
UK Supermarkets: a prime example of an oligopoly. This industry is highly competitive and over the past decade, but particularly since the onset of the credit crunch, price wars have been a constant feature of this market. You could barely watch a full programme on commercial TV without seeing one of the big supermarkets advertising that their prices were lower than everyone else’s! So, despite oligopoly being towards the ‘least competitive’ end of the market structure spectrum, this is an example of just how competitive the market can actually be.
With household incomes being squeezed, in particular by another oligopolistic industry (energy) and with the ‘middle market’ being pinched by higher-end retailers and budget retailers, the supermarket sector is facing uncertain times. Asda’s sales growth has continued to slow and in response, the giant supermarket chain will be launching a £1 billion price-cutting campaign. Tesco is the market leader, but Sainsbury’s and Asda have been battling over the second spot. One of Asda’s selling points is its low prices. Perhaps not as low as Aldi and Lidl, but this new pricing strategy will aim to bring its prices further below Tesco, Sainsbury’s and Morrisons and
close the gap with the two big discount supermarkets. As Andy Clarke, Asda’s Chief Executive, said:
We regard ourselves as the UK’s leading value retailer and it is against this backdrop that I have today set out our strategic priorities which will improve, extend and expand the business over the next five years.
So, what will be the impact of lower prices? It appears as though Asda is marketing itself towards the budget end of the pricing spectrum, perhaps aiming to become fiercer competitors with Aldi and Lidl and let Tesco and Sainsbury’s do battle with the higher-end retailers, such as Waitrose and Marks and Spencer. Lower prices should cause a substitution effects towards Asda’s products, as many of them will have relatively price elastic demand. If the other supermarkets don’t respond, this should lead to sales growth. However, the key to an oligopoly is interdependence: the actions of one firm will affect all other firms in the market. The implications then, are that Tesco may react to this pricing strategy by engaging in its own price cuts, especially as the Christmas period approaches. The characteristic of interdependence was evident in the aftermath of Asda’s announcement when shares in Tesco and Morrisons both fell, showing how the markets were responding.
Of course, there are many other factors that affect a consumer’s decision as to whether to shop at Asda, Tesco or any other big supermarket. In the area where I live, we have a Tesco and a Morrisons (a few years ago, we had neither!). I don’t shop at Asda, as the nearest branch is over 30 miles away – even if prices were significantly lower, it would be more expensive to get there and back and a lot less convenient. For others, it may be loyalty and not just of the ‘I’ve shopped there all my life’ kind! For some, clubcard vouchers from Tesco may be preferred to Asda’s offerings and thus tiny price differences between the supermarkets may have little effect on a consumer’s decision as to where to shop. Many products at supermarkets are relatively cheap and thus as the proportion of our income that we spend on these goods is pretty low, any change in price doesn’t cause much of an effect on our demand.
It’s not just a pricing strategy where money is being invested by Asda. More investment will be going into their online services and more stores will be created, kin particular in London and the South East where their presence is low, but demand appears to be high. Improving ‘product quality, style and design’ will also be on the agenda, all with the aim of boosting sales growth and securing its position as the second largest retailer in the sector, perhaps with a long term aim of one day overtaking Tesco. The following articles consider the supermarket battleground.
Supermarket battle heats up as Asda announces £1bn price-cutting plan The Telegraph, Graham Ruddick (14/11/13)
Sainsbury’s profits make it second biggest supermarket BBC News (13/11/13)
Asda to launch £1bn price-cut plan AOL, Press Association (15/11/13)
Asda takes fight to rivals with £1bn investment plan The Guardian, Angela Monaghan (14/11/13)
UK’s Asda promises £1 billion investment in price cuts Reuters (14/11/13)
Asda makes bid to woo shoppers with vow of five-year £1billion price war after it was overtaken in market share by Sainsbury’s Mail Online, Sean Poulter (15/11/13)
Sainsbury’s overtakes Asda on demand for its premium lines Independent, Simon Neville (14/11/13)
Asda to put £1bn into lowering prices over five years The Grocer, Thomas Hobbs (14/11/13)
Wal-Mart posts $3.7bn quarterly income BBC News (14/11/13)
Questions
- What are the key characteristics of an oligopoly?
- What is meant by a price war? Who benefits?
- How important is the concept of price elasticity of demand when deciding whether or not to cut the price of a range of products?
- Why is the proportion of income spent on a good a key determinant of the elasticity of demand of a product?
- How can market share be calculated?
- Many suggest that the ‘middle market’ of the supermarket sector is slowly disappearing. Why is this?
- How effective will Asda’s price cutting strategy be? Which factors will determine its effectiveness?
A remarkable event took place in Venezuela on Friday 8th November. Soldiers, on the orders of the president, temporarily occupied a chain of shops run by a leading electrical retailer called Dakar. The shops were forced to cut the prices of their electrical appliances and five managers were arrested and accused of ‘hiking up’ prices.
Unsurprisingly, news of these lower prices spread very quickly and long queues rapidly appeared outside the stores as people hoped to buy plasma televisions, fridges and washing machines at bargain prices. On Sunday 9th November, the president, Nicolas Maduro, gave a televised address in which he condemned the owners of the stores and announced that he was going to ask the National Assembly to grant him extra powers so that he could extend price controls to all consumer goods. He stated that he would next turn his attention to stores selling toys, cars, textiles and shoes.
The use of price controls in Venezuela is not new and dates back to 2003 when they were first introduced by the then president Hugo Chavez. Initially the regulations were imposed on various foods and basic goods. For example, by 2009 maximum prices had been set for cooking oil, white rice, sugar, coffee, flour, margarine, pasta and cheese. Businesses often complained that the maximum prices set by the government were below the costs of production. For example after a maximum price of 2.15 Bolivares was placed on a kilo of rice, producers argued that the cost of producing a kilo of rice was 4.41 Bolivares.
The impact of the maximum prices in Venezuela appears to have been exactly what the theories in the economics textbooks would have predicted – shortages, long queues of people waiting outside shops and a flourishing black market. An article on the shortage of toilet rolls has been discussed in a previous article on this news site: Shortages in Venezuela- what’s the solution? However this has not stopped the Venezuelan government extending the scheme and increasing the number of products that have maximum prices imposed on them. In 2011 Hugo Chavez argued that the policy was required because:
The market has…become a perverse mechanism where big monopolies, the big trans-nationals and the bourgeoise dominate and ransack the people.
Economics textbooks often include some analysis of the impact of price ceilings on a competitive market. The effects on consumer surplus, producer surplus and deadweight welfare are usually discussed. However the potential administrative costs are rarely considered. The Venezuelan case helps to illustrate how in practise these costs could be quite significant.
For example, in April 2012 price controls in Venezuela were extended to a range of 19 products including fruit juice, toilet paper, nappies, soap, detergent, deodorant, toothpaste, baby food, floor polish, mineral water and razor blades. This caused a reduction in prices of between 4% and 25%. However this did not simply mean setting 19 different maximum prices because the goods were all sold in different quantities or different package sizes. For example a tube of toothpaste could be purchased in 4 different sizes – 50ml, 75ml, 100ml and 150 ml. Therefore officials had to set 4 different figures. Nappies were sold in 12 different package sizes ranging from10 nappies/packet to78 nappies/packet. Once again this meant that the administrators had to set 10 different maximum prices just for nappies. In total across the 19 products government officials had to set prices for 616 different individual items!! Companies were given just one month to adjust to the new legislation.
Whenever maximum prices are imposed on a competitive market both frustrated buyers and sellers have an incentive to evade them and trade illegally. Therefore the government established a number of organisations in an attempt to make sure the prices were enforced. One agency is called The National Superintendency of Fair Costs and Prices or Sundecop. Officials from this agency were sent out to 82 retail outlets in April 2012 to try to make sure that firms were sticking to the new regulated prices. They also printed and handed out leaflets to the public informing them of the changes. Another agency is called ‘The Institute for the Defense of People’s Access to Goods and Services’ or ‘Indepabis’. This organisation launched a new strategy in June 2012 in order to monitor compliance. This included the creation of a network called the Friends of Indepabis which would act as an information point for members of the public to report illegal pricing. A new complaints phone line was also introduced.
If president Maduro is granted the power to extend maximum prices to all consumer products, then one can only begin to imagine the extra administrative costs involved with implementing the policy.
Venezuelan president Maduro ‘to expand price controls’ BBC News (11/11/13)
Venezuela sends in troops to force electronics chain to charge ‘fair’ prices NBC News (13/11/13)
Venezuela appliances crackdown spurs uncertainty ABC news (13/11/13)
Venezuela’s government seizes electronic goods shops BBC News (9/11/13)
Venezuelan government sends TROOPS into electronics chain to force them to sell goods at a “fair price” DailyMirror (10/11/13)
Shocher: Price Controls Lead to Shortages in Venezuela Free Advice, Robert Murphy (2/10/13)
Venezuelan Government Action against Overpricing Welcomed by Citizens, Manipulated by Media venezuelanalysis (12/11/13).
Questions
- Explain why a maximum price imposed on a competitive market might generate a shortage. Draw a diagram to illustrate and explain your answer.
- Are there any circumstances when a maximum price would not cause a shortage in a competitive market?
- Analyse the impact of a maximum price on consumer surplus, producer surplus and deadweight welfare loss. Assume the market is competitive and clearly state any other assumptions you have made in your analysis. Comment on the impact of the price ceiling on economic efficiency.
- Illustrate and explain what would happen to consumer surplus and deadweight welfare loss if the available goods for sale were only purchased by the consumers with the lowest willingness to pay.
- Why might a maximum price lead to a flourishing black market?
- The former president, Hugo Chavez, argued that the price regulations were required because “big monopolies… ransack the people”. Using economic theory discuss this statement. Examine the impact of a maximum price on a pure monopoly.
A bumper harvest should be good news for farmers – but not if it drives down prices. This is the position facing many Australian farmers. After a relatively wet summer a year ago and a mild winter this year, crop yields have soared. But the prices farmers can get in wholesale markets have been so low that many have resorted to setting up their own farm shops or selling in farmers’ markets or from the backs of ‘utes’ (utility vehicles, i.e. pickup trucks) or at roadside stalls.
And the supply problem is not just one of increased domestic supply: cheap food imports, often of inferior quality, have been flooding into Australia. Increasing food exports, 
especially to Asia, would help Australian farmers, but here again there is competition in these markets from other countries.
The problem of increased Australian supply is even more serious for Australian farmers in areas where harvests have not been so good. Australia is a huge country and conditions, although generally favourable this year, have been poor in some areas. Here farmers face the double disaster of low output and low prices.
Australian dairy farmers too are facing problems of falling prices. Price deregulation and the monopsony power of supermarkets have driven down 
the price of milk and other dairy products. Since deregulation in 2000, the number of dairy farms has halved, as many smaller family farms go out of business and larger ‘industrial-scale’ farms grow.
So are there any solutions? The BBC article looks at things being done in Tasmania to help small farmers, but questions whether small farmers have much of a future more generally in Australia?
Articles
Australia’s small farmers struggling with low prices BBC News, Phil Mercer (31/10/13)
Commodity prices edge lower in October Sky News Australia (1/11/13)
Low prices spoil perfect season for Australian farmers ABC News, Eric Tlozek and Courtney Wilson (18/9/13)
Agri-businesses taking over the farm The Guardian (Australia) (6/11/13)
Data
Commodity prices Index Mundi
Agriculture in Australia Wikipedia
Farm inputs & costs Dairy Australia
Questions
- How does the fallacy of composition relate to the ‘problem’ of good harvests?
- How price elastic is the demand for specific crops likely to be? Why may individual farmers face an elasticity of demand close to infinity?
- Illustrate the problem for small farmers in Australia with a demand and supply diagram.
- Is there any way in which farmers, either individually or collectively, can make their demand less elastic?
- Comment on the following statement by a sugar cane farmer: “We’ve got that much money tied up (in the business) we just can’t walk away”. Under what circumstances would it make sense to ‘walk away’?
- How does the monopsony power of supermarkets influence the prices farmers receive?
- Discuss ways in which the federal government in Australia could support farmers.
