You’ll be familiar with these types of posts from me, which typically start with a comment like: ‘On my commute to work on …’. That’s one of the good things about a long drive – the interesting and informative discussions that you hear on the radio. This one is another interesting piece from BBC Radio 4, looking at a very topical issue, especially to those living in the South West and other rural areas in the UK.
We have recently seen pictures of farmers protesting about the price of milk and in places like Somerset, the protest took a rather odd method, where farmers from across the region entered supermarkets and simply bought all of the milk, before giving it away. The issue is that dairy farming is no longer profitable, as the price that dairy farmers receive for each pint of milk is now lower than the cost of providing it. Thus, for each pint they make a loss.
There are many reasons that have contributed to this situation, including pressures imposed by customers demanding cheaper prices; pressures from supermarkets using their monopsony power to 
force down the prices paid to farmers; and pressures from abroad. In the case of milk, we have a surplus and with a perishable product, i.e. one that cannot be stored, unlike wheat, this has contributed to falling prices. Data suggest that we are seeing approximately one farmer per day being forced to leave the indsutry.
This programme explores the current dairy farming crisis and draws some similarities with the wheat crisis that the UK experienced in the 1930s. The programme below is 30 minutes and provides some interesting insights on two important commodities and the economics behind the markets.
Today’s crisis in dairy farming and the wheat crisis of the 1930s BBC Radio 4; The Long View, Jonathan Freedland (29/9/15)
Questions
- Using demand and supply analysis, explain the situation in the milk market.
- Now consider the wheat industry and provide a similar analysis of how prices are set and what caused the problems seen in the 1930s.
- Although these two commodities have similarities they are also very different. Why can two different commodities experience such similar problems at such different times?
- What are the key demand and supply-side factors affecting the current low price of milk?
- Consider the market for (a) milk and (b) wheat. What are (if any) the market failures within each area?
- Agriculture is an area where we do see significant government intervention. Should the UK government be doing more to help the UK’s dairy farmers? If so, what should they do and would this intervention create further problems, e.g. unintended consequences?
With an election approaching in the UK, uncertainty is a term we will hear frequently over the next few weeks. Until we know which party or parties will be in power and hence which policies will be implemented, planning anything is difficult. This is just one of the factors that has caused the British pound sterling to fall last week by 2% to an almost five year low against the dollar.
In the last election, uncertainty also prevailed and continued even after the election before the Coalition was formed. Given how close this election appears to be at present, another Coalition may have to be formed and this is adding to the current election uncertainty. A currency strategist at Standard Bank said:
“A $1.40 level for sterling/dollar is certainly not out of reach if the election aftermath turns ugly”
With such uncertainty, investors are refraining from putting their money into the UK and this has contributed towards the deprecation of the British pound against the dollar.
Another factor adding to this downward pressure on the pound is the latest data on industrial output. Although economic growth figures for the UK in 2014 were very positive, there are some suggestions that 2015 will not be as good as expected, though still a strong performance. The first quarter data will not be available until just before the election, but data from the ONS on industrial output shows very minimal growth at just 0.1% from January to February. Chris Williams at Markit said:
“Clearly this all bodes ill for economic growth in the opening quarter of the year. It’s now looking like the economy slowed, and possibly quite markedly, compared to the 0.6% expansion seen in the closing quarter of 2014 … The trend should improve in March, however, according to survey data.”
These two factors have combined to push the pound down, with investors preferring to hold their money in dollars, despite the weak US unemployment data. However, it is not only against the dollar that we must consider sterling’s performance. Against the euro, it has performed better, rising by 1.5%. Whether this is positive for the UK or very negative for the Eurozone is another question. The following articles consider the performance of the British pound.
Sterling falls to five-year low Financial Times, Neil Dennis (10/4/15)
Sterling plummets to five year low as economic slowdown looms The Telegraph, Mehreen Khan (10/4/15)
Pound at five-year low against dollar on weak output BBC News (10/4/15)
Sterling falls after Bank of England’s Haldane says even chances of rate cut or rise Reuters (10/4/15)
Pound falls to five-year low as volatility jumps before election Bloomberg, Anooja Debnath and David Goodman (11/4/15)
Pound falls to a five-year low against the dollar as polls suggest election will create economic uncertainty Mail Online, Matt Chorley (10/4/15)
Questions
- Draw a diagram illustrating the way in which the $/£ exchange rate is determined.
- Explain why the election is causing economic uncertainty in the UK.
- How would uncertainty affect the demand and supply of sterling and hence the exchange rate?
- US job data is worse than expected. Shouldn’t this have caused the dollar to depreciate against the pound and not appreciate?
- Industrial output data for the UK economy is lower than expected. What has caused this?
- Why does slower growth in industrial output cause the exchange rate to depreciate?
- In order to keep the UK’s inflation rate on target, Haldane has said that we could expect a cut or rise in interest rates and policy should be prepared for both. How has this affected the exchange rate?
- Are there any advantages of having a lower pound?
House prices are always a good signal for the strength or direction of the economy. While there will always be certain areas that are more sought after than others and such differences will be reflected in relative house prices, the regional divide that we currently see in the UK is quite astonishing.
Prior to the financial crisis, house prices had been rising across the county, but in the year following the financial crisis, they declined by 19 per cent. It was only in 2013, when prices began to increase and, perhaps more importantly, when the variation in regional house prices began to increase significantly. In mid-2014, the UK’s annual house price inflation rate was 11.7 per cent, but the rates in London and the South East were 19.1 and 12.2 per cent, respectively. Elsewhere in the UK, the average rate was 7.9 per cent.
These regional differences have continued and figures show that the current differential between the cheapest and most expensive regional average house price is now over £350,000. In particular, data from the Land Registry shows that the average house price in London is £458,283, while in the North East, it is only £97,974.
Those people who own a house in London have benefited from such high house prices, in many cases finding that their equity in their house has grown significantly. Furthermore, any home-owners selling their house in London and moving elsewhere are benefiting from lower house prices outside London.
However, most first-time buyers looking for a house in London are being competed out of the market, finding themselves unable to gain a mortgage and deposit for the amount that they require. The opposite is, of course, happening in other parts of the country. First-time buyers are more able to enter the property market, but home-owners are finding that they have much less equity in their house.
This has also caused other problems, in particular in the labour market. Workers who are moving to jobs in London are finding the house price differentials problematic. Although wage rates are often higher in London than in other parts of the country, the house price differential is significantly bigger. This means that if someone is offered a job in London, they may find it impossible to find a house of similar size in London compared to where they had been. After all, an average family home in the North East can be purchased for under £100,000, whereas an average family home in London will cost almost £500,000.
The housing market is problematic because of particular characteristics.
Supply tends to be relatively fixed, as it can take a long time to build new houses and hence to boost supply. Furthermore, the UK has a relatively dense population, with limited available land, and so planning restrictions have to be kept quite tight, which is another reason why supply can be difficult to increase.
On the demand-side, we are seeing a change in demographics, with more single-person households; people living longer; second home purchases and many other factors. 
These things tend to push up demand and, with restricted supply, house prices rise. Furthermore, with certain areas being particularly sought after, perhaps due to greater job availability, ease of commuting, schools, etc., house price differentials can be significant.
The Conservatives, together with the other main parties, have promised to build more houses to help ease the problem, but this really is a long-run solution.
The Bank of England will undoubtedly have a role to play in the future of the housing market. The affordability of mortgages is very dependent on interest rate changes by the Bank’s Monetary Policy Committee.
Although house prices in London have recently fallen a little, the housing cost gap between living in London and other areas is unlikely to close by much as long as people continue to want to live in the capital. The following articles consider the housing market and its regional variations.
Articles
London’s homeowners have made £144,000 on average since 2009 International Business Times, Sean Martin (20/2/15)
Wide gap in regional house prices, Land Registry figures show BBC News, Kevin Peachey (27/2/15)
Mapped: 10 years of Britain’s house price boom (and bust) The Telegraph, Anna White (27/2/15)
Oxford houses less affordable than London Financial Times, Kate Allen (26/2/15)
January’s UK house prices show unexpected climb The Guardian (5/2/15)
House prices since 2008: best and worst regions The Telegraph, Tom Brooks-Pollock (22/8/14)
House prices hit new record high of £274k with six regions now past pre-crisis peak – but the North lags behind This is Money, Lee Boyce (14/10/14)
Data
House price indices: Data Tables ONS
Links to sites with data on UK house prices Economic Data freely available online, The Economics Network
Regional House Prices Q4 2014 Lloyds Banking Group
Questions
- What are the main factors that determine the demand for housing? In each case, explain what change would shift the demand curve for housing to the right or the left.
- Which factors determine supply? Which way will they shift the supply curve?
- Put the demand and supply for housing together and use that to explain the recent trends we have seen in house prices.
- Use your answers to question 1 – 3 to explain why house prices in London are so much higher than those in the North East of England.
- Why are interest rates such an important factor in the housing market?
- Explain the link between house prices and the labour market.
- Do you think government policy should focus on reducing regional variations in house prices? What types of policies could be used?
In the UK, we take it for granted that if you need to see a doctor, you go and give little, if any thought, to the cost. It may be petrol costs, time off work or the cost of a prescription, but beyond that, receiving treatment is free at the point of use. Funded through a progressive tax system, the NHS is seen as being one of the more equitable health care systems.
When a mother gives birth, the main thing she will have to worry about is the labour – and not whether to have certain painkillers or stay an extra night, because of the cost.
The International Federation of Health Plans (IFHP) looked at data on the cost of giving birth, based on insurance company payments. For someone living in the UK, the figures make for quite astonishing reading. In the USA, a normal delivery will cost $10,000, while a caesarean totals $15,000, meaning that giving birth in the USA is the most expensive place in the world. The article linked below takes the case of Mari Roberts, whose total delivery bill came to over $100,000. The insurance did cover it, but that’s not always the case. Medical bills in the United States are one of the leading reasons for bankruptcy and with these types of figures, perhaps it’s hardly surprising.
Other countries also see high costs for delivery, where expectant mothers really do need to give consideration to the length of their stay in hospital and perhaps even whether they are willing to forgo a pain-relieving drug and save some money. There is often said to be an efficiency–equity trade-off in the area of healthcare, with countries offering a free at the point of use service delivering an equitable system, but with a lack of responsiveness to the demands of the patients. In the UK, you don’t pay to see a doctor but, with a ‘free’ service, demand is understandably very high, thus creating a shortage and waiting lists. In countries, such as the USA, a higher price for treatment does limit demand, creating more inequity but a responsive system.
There are certainly lessons that can be learned from all health care systems and living in a developed country, we should certainly consider ourselves lucky. There are many countries where access to even the most basic health care is a luxury that most cannot afford. So, where does have the best health care system? I’ll leave that to you.
Video and article
How much do women around the world pay to give birth? BBC News, Mariko Oi (13/2/15)
Report
Research for Universal Health Coverage, World Health Report 2013 World Health Organisation August 2013
Health Systems Financing: The Path to Universal Coverage, World Health Report 2010 World Health Organisation August 2010
Questions
- Using a demand and supply diagram, explain why there may be a trade-off between efficiency and equity.
- If there is over-consumption of a service such as health care, does this suggest that the market fails?
- What are the main market failures that exist in health care?
- Is the concept of opportunity cost relevant to mothers in labour? Think about the country in question.
- How would you go about ranking health care systems if you worked for an organisation such as the OECD or WHO?
- Pick a country whose health care system you are familiar with. What changes have occurred to the way in which health care is organised and financed in this country? How has it affected the key objectives that formed part of your answer to question 5?
McDonalds is one of the most recognised names in the world and its iconic product, the Big Mac, is an obsession for many people – though I have to confess that I have never had one. McDonalds is taking advantage of this fact by auctioning off a bottle of its secret Big Mac sauce. The proceeds will go to charity.
McDonalds has around 36 000 stores around the world, located in over 100 countries. The Big Mac is sold in all of these stores and the famous sauce is available there for a pretty small price. However, on eBay, this bottle of sauce has already reached a bid of AU$23 100 (£11 800)! The 500m bottle is only being auctioned in Australia and with a few days before the auction finishes, the price may get still higher.
So, why are people prepared to pay such a high price for a bottle of sauce that is readily available on a Big Mac and which, in Australia, will be sold in small tubs throughout this month?
The advert on eBay suggests that the bottle is being set free and is ‘rarer than a spot on Bondi beach on New Years Day’. As we know, when products become scarce their price tends to rise. This auction will be the first time that this sauce is available, as normally the sauce is dispensed straight onto the burger. The ingredients of this famous sauce are known, but the recipe for making it is not. Perhaps it represents an opportunity for someone to try to re-create it!
An auction is an interesting mechanism to receive the highest price for any product. Most people have a maximum willingness to pay for something and if they pay less than that, they will receive some consumer surplus. However, with an auction, it can be a good way for the seller to force consumers to bid their maximum price and hence this can reduce the consumer surplus.
Of course, in this auction only the highest bidder will actually pay and so it will only be their consumer surplus that is affected. However, other auction designs, such as an ‘All-pay’ auction can extract the full consumer surplus from bidders. Mr Lollback, the Chief Marketing Officer said:
‘We’re excited to be auctioning off the first-ever bottle of Big Mac sauce for a cause we are passionate about… It’s going to be interesting to see just how much people are prepared to pay for such a sought after commodity.’
The final price will certainly be interesting and, with other bottles of this sauce available, we will have to wait and see whether or not further auctions take place or if other mechanisms of delivering the sauce to the public appear. The following articles consider the Big Mac sauce auction.
McDonald’s Big Mac sauce auction attracts $18,000 bid BBC News (3/2/15)
Liquid Gold! Macca’s auction off the only bottle of its trademark Big Mac special sauce in Australia … and bids have already reached $23,000 Mail Online, Leesa Smith (3/2/15)
Bottle of McDonald’s secret Big Mac sauce up for auction USA Today, Jessica Durando (3/2/15)
McDonald’s Big Mac special sauce yours to own from today The Telegraph, Richard Noone (29/1/15)
Questions
- Why does the price of a product rise when it is scarce? Use a diagram to explain this.
- What is consumer surplus and how can a firm aim to extract as much of this as possible? Why would a firm want to do this? Use a diagram to illustrate the concept of consumer surplus and how it can change.
- Why can an auction push up the market price of a product?/li>
- Given that the Big Mac sauce is available on all Big Macs, which can be purchased for a very low price, what explanation can be given for people being prepared to pay over £10,000?
- When are auctions a good mechanism to sell a product?
- What are the different types of auctions that can occur? How do they vary in terms of the price that can be achieved?
You’ll be familiar with these types of posts from me, which typically start with a comment like: ‘On my commute to work on …’. That’s one of the good things about a long drive – the interesting and informative discussions that you hear on the radio. This one is another interesting piece from BBC Radio 4, looking at a very topical issue, especially to those living in the South West and other rural areas in the UK.
force down the prices paid to farmers; and pressures from abroad. In the case of milk, we have a surplus and with a perishable product, i.e. one that cannot be stored, unlike wheat, this has contributed to falling prices. Data suggest that we are seeing approximately one farmer per day being forced to leave the indsutry.
