Microeconomics (DT398/1) - Project 1
This project accounts for 40% of total marks.
Listed below are seven News Items illustrating topics that are based on material
covered in the Course.
Four of the six Items must be answered. In each case, read the hyperlinked
reference material provided and then answer the questions asked. A full answer
should be at least 2 - 3 pages in length (though this may vary depending on context).
Where required, diagrams can be hand drawn - though as neatly as possible!
The Project is to be typed up and submitted by April 10, 2013.
(State clearly on the project your name and student number).
1. 1 spoonful of air, 1 pint of water = 1 litre of petrol
As resources become scarce, the price mechanism works to push up the price (see, for
example, Box 9.11 in Economics 8th ed). If you look at the price of petrol over the past
few decades, there has been a general upward trend – part of this is due to growth in
demand, but part is due to oil being a scarce resource. Many millions have been spent
on trying to find alternative fuels and perhaps things are now looking up!
Air Fuel Synthesis, a small British company, has allegedly managed to make ‘petrol from
air’. Following this, the company has unsurprisingly received finance and investment offers
from across the world. However, the entrepreneur Professor Marmont has said that he does
not want any company from the oil industry to get a stake in this firm. This doesn’t mean that
investment is not needed or on the cards, as in order to increase production of petrol from thin
air financing is needed. Professors Marmont said:
We’ve had calls offering us money from all over the world. We’ve never had that before.
We’ve made the first petrol with our demonstration plant but the next stage is to build a
bigger plant capable of producing 1 tonne of petrol a day, which means we need between
£5m and £6m
Whilst the process appears to be a reality, Air Fuel Synthesis is a long way from being able to
produce en masse. However, it does offer an exciting prospect for the future of petrol and
renewable energy resources in the UK. At the moment oil companies appear to be
uninterested, but if this breakthrough receives the financing it needs and progress continues to
be made, it will be interesting to see how the big oil companies respond. The following
articles consider this break-through.
Company that made ‘petrol from air’ breakthrough would refuse investment from big oil
Independent, Steve Connor (19/10/12)
British engineers create petrol from air and water Reuters, Alice Baghdijan (19/10/12)
Petrol from air: will it make a difference? BBC News, Jason Palmer (19/10/12)
British engineers produce amazing ‘petrol from air’ technology The Telegraph , Andrew
Hough (18/10/12)
Questions
1. Explain the way in which the price mechanism works as resources
become scarce. Use a diagram to help your explanation.
2. Why is investment from an oil company such a concern for
Professor Marmont?
3. Why is there unlikely to be any impact in the short run from this
new breakthrough?
4. If such a technology could be put into practice, what effect might
this have on the price of petrol?
5. How might oil companies react to the growth
2. Is consumer behaviour affected by the method of
payment used?
A recent article on this blog discussed the likelihood that we will soon move to a cashless
society. It is therefore interesting to consider the implications that this might have for
consumer behaviour. We might expect the form of payment to make no difference to a
rational consumer. However, there is considerable evidence to suggest that this is not
the case.
One reason why people appear to spend more freely on credit cards is payment decoupling –
you get utility from the item purchased before you pay the cost. However, more recent
evidence suggests that this is not the only relevant factor. It appears that the degree of
transparency of the payment method also has an effect. Psychologists quoted in the above
article conclude from their experimental evidence that:
Payment modes differ in the transparency with which individuals can feel the outflow of
money. ….with cash being the most transparent payment mode.
This effect also appears to make people spend cash less freely.
The author of the above article spent some time experimenting with trying to make all his
purchases using cash. He found that by doing so, he was able to reduce his spending by about
10%. However, this seems likely to become harder to do in the future and, as the article
concludes, it is already difficult to purchase some items with cash.
Why does foreign money seem like play money? Science Codex (04/06/07)
Questions
1. What type of products is it already difficult to purchase with cash?
2. How did the psychologists test the transparency of payment
methods?
3. Do you think the consumer behaviour described above is likely to
persist in the long-run?
4. Might firms be able to take advantage of the consumers behaviour
described above?
5. Do you think the transparency of foreign currencies is the main
reason why people spend more when they are abroad?
3. Anyone want to take a bite out of Apple?
The technology sector is highly complex and is led by Apple. However, as the tablet
market is continuing to grow, it is becoming increasingly competitive with other firms
such as Samsung gaining market share. Although both firms sell many products, it is
the growing tablet market which is one of the keys to their continued growth.
Tablet PCs have seen a growth in the final quarter of 2012 to a high of 52.5 million units,
according to IDC. Although Apple, leading the market, has seen a growth in its sales, its
market share has declined to 43.6%. Over the same period, Samsung has increased its market
share from 7.3% to 15.1%. While it is still a huge margin behind Apple in the tablet PC
market, Samsung’s increase in sales from 2.2 million to 7.9 million is impressive and if such
a trend were to continue, it would certainly cause Apple to take note.
It’s not just these two firms trying to take advantage of this growing industry. Microsoft has
recently launched a new tablet PC and although its reception was less than spectacular, it is
expected that Microsoft will become a key competitor in the long run. There are many factors
driving the growth in this market and the war over market share is surely only just beginning.
The chart shows the 75.3% growth in sales in just one year. (Click here for a PowerPoint of
the chart.)
A Research Director at IDC said:
We expected a very strong fourth quarter, and the market didn’t disappoint…New product
launches from the category’s top vendors, as well as new entrant Microsoft, led to a surge in
consumer interest and very robust shipments totals during the holiday season’
Apple has been so dominant in this sector that other companies until recently have had little
success in gaining market share. However, with companies such as Samsung and ASUS now
making in-roads, competition is likely to become fierce. There are already concerns that
Apple’s best days are behind it and its share price reflects this. People are now less willing to
pay a premium price for an Apple product, as the innovations of its competitors have now
caught up with those of the leading brand name. The following articles consider this growing
market.
Samsung gain tablet market share as Apple lead narrows BBC News (1/2/13)
Apple snatches US lead from Samsung Financial Times, Tim Bradshaw (1/2/13)
Apple revenues miss expectations despite high sales figures BBC News (24/1/13)
Samsung eats into Apple sales in the tablet market Mirror, Ruki Sayid (1/2/13)
MacWorld’s Apple celebration opens amid fears of tech giant’s decline Guardian, Rory
Carroll (31/1/13)
Samsung’s tablet sales soar as Apple’s grip on market loosens Daily News and Analysis,
Richard Blagden (2/2/13)
Samsung takes a nibble out of Apple’s tablet lead InfoWorld, Ted Samson(31/1/13)
Tablet Sales up 75% as Samsung and Asus Gain on Apple Interational Business Times,
Edward Smith (31/1/13)
Questions
1. Which factors are behind this exceptional growth in the tablet PC
market?
2. Using the Boston matrix, where do you think tablet PCs fit in
terms of market size and market growth?
3. Why have Apple’s shares fallen recently? Do you think this will
be the new trend?
4. Microsoft’s new tablet didn’t attract huge sales. What explanation
was given for this? Use a diagram to help answer this question.
5. Tablet PCs are relatively expensive, yet sales of them have
increased significantly over the past few years. What explanation
is there for this, given that we have been (and still are) in tough
financial times?
4. The new cooler UK housing market?
The housing market is an incredibly fascinating market to monitor and to research. The
market was at the centre of the financial crisis with some lenders accused of overaggressively expanding their mortgage books and relaxing their lending criteria. The
UK housing market of today looks very different to the market before the financial
crisis. Nationally, house prices are stagnant while transaction numbers are less than
half their pre-crisis level. The UK housing market appears almost as ‘cold’ as the recent
weather!
As the first chart shows, the annual rate of house price inflation across the UK has been
consistently close to or even below zero over the past couple of years. The latest figures from
the Nationwide Building Society point to the average UK house price in the final quarter of
2012 being 1.1 per cent lower than in the final quarter of 2011. The figures from the Halifax
concur with their estimate showing UK house prices 0.3 per cent lower year-on-year in the
final quarter of 2012. This is a very different picture from that during the 2000s. As recently
as 2007, the annual rate of house price inflation was in excess of 10 per cent.
Another indicator of the changing face of the UK housing market is the level of activity. The
second chart shows the number of transactions per quarter across England and Wales since
1996. The figures from the Department of Communities and Local Government show that
since the start of 2010 England and Wales has seen an average of 159,000 transactions per
quarter. This compares with an average of 294,000 transactions over the period from 1996 to
the end of 2007. Hence, the number of purchases today is roughly half the level prior to the
financial crisis.
A further indicator of today’s very different housing market is the numbers of approvals by
lenders for mortgages for house purchases. The latest Bank of England figures show that
across the UK, the number of approvals each month in the first eleven months of 2012
averaged 51,000. Since 2010, the average monthly number of approvals has been 49,000.
However, over the period from 1996 to the end of 2007 there were over 102,000 mortgages
being approved each month.
A trawl through some of the key indicators of the UK housing market helps to paint a picture
of a market that is markedly different to that before the financial crisis. It would be a big
surprise in today’s financial and economic climate if there were to be any significant change
in the path of these indicators for some time.
Data
Statistical data set – Property transactions Department of Communities and Local
Government
Nationwide house price index Nationwide Building Society
Halifax House Price Index Lloyds Banking Group
Lending to individuals – November 2012 Bank of England
Articles
UK house prices drop 1% Guardian, Hilary Osborne (3/1/13)
House prices on course to pass pre-crisis peak levels Telegraph, Roland Gribben (21/1/13)
House prices rise at highest rate in seven months Independent, Vicky Shaw (15/1/13)
UK mortgage market ‘now more robust’ BBC News, (21/1/13)
Bank of England report flags improving mortgage market Telegraph, Emma Rowley
(21/1/13)
Questions
1. Draw up a list factors that are likely to have affected each of our 3
indicators of the UK housing market (house price inflation,
transactions and mortgage approvals) since the late 2000s.
2. Using a demand-supply diagram, illustrate the forces that have
affected house prices in the late 2000s and early 2010s.
3. Draw up a list of issues surrounding the housing market that
would be of interest to a microeconomist. Now repeat the exercise
for a macroeconomist.
4. Why are house prices so notoriously volatile? Can you think of
any other markets where prices are similarly volatile? Do these
markets share any common traits?
5. If you were a commentator on the UK housing market what would
you be forecasting for prices and activity in 2013?
5. His Master’s Voice is fading
Comet, Peacocks, Woolworths, JJB, Jessops and now HMV – they all have one thing in
common. The recession has hit them so hard that they entered administration. HMV is
the latest high street retailer to bring in the administrators, despite insisting that it does
have a future on the UK’s high streets. With debts of £176m and huge competition from
online retailers, the future of HMV is very uncertain.
Over the past decades, companies such as Amazon, ebay, LoveFilm, Netflix and apple have
emerged providing very stiff competition to the last remaining high street seller of music and
DVDs. People have been turning more and more to the internet to do their shopping, with
cheaper prices and greater choice. The speed of delivery, which in the past may have been a
disadvantage of buying from somewhere like Amazon, is now barely an obstacle and these
substitute companies have created a difficult environment for high street retailers to compete
in. Despite going into administration, it’s not necessarily the end of the much-loved HMV. Its
Chief Executive said:
We remain convinced we can find a successful business outcomes. We want to make sure it
remains on the high street … We know our customers fell the same way.
While the recession has undoubtedly affected sales at HMV, is this the main reason for its
demise or are other factors more relevant? As discussed, online retailers have taken over the
DVD and music industry and with downloading increasing in popularity and CD/DVDs on
sale in numerous locations, including supermarket chains, HMV has felt the competitive
pressure and its place on the high street has come into question. As Neil Saunders, the
Managing Director of Conlumino said:
By our own figures, we forecast that by the end of 2015 some 90.4 per cent of music and film
sales will be online. The bottom line is that there is no real future for physical retail in the
music sector.
Further to this, prices have been forced downwards and HMV, having to pay high fixed costs
to retain their place on the high streets, have been unable to compete and remain profitable.
Another contributing factor could be an outdated management structure, which has not
responded to the changing times. Whatever the cause, thousands of jobs have been put at risk.
Even if buyers are found, some store closures by the administrators, Deloitte, seem
inevitable. Customer gift vouchers have already become worthless and further losses to both
workers and customers seem likely. It is thought that there will be many interested buyers and
huge support from suppliers, but the former is likely to remain a relatively secretive area for
some time.
This latest high street disaster will undoubtedly raise many questions. One theory about
recovery from a recession looks at the need for many businesses to go under until the fittest
are left and there is sufficient scope for new businesses to emerge.
Could it be that the collapse of companies such as Woolworths, HMV, Comet, Jessops and
Blockbuster is an essential requirement for economic recovery? Or was the recession
irrelevant for HMV? Was its collapse an inevitable consequence of the changing face of
Britain’s high streets and if so, what does the future hold for the high street retailers? The
following articles consider the demise of HMV.
HMV: a visual history BBC News (15/1/13)
Chief executive says ‘HMV still has a place on the high street’, as customers are told their
gift vouchers are worthless Independent, James Thompson (15/1/13)
Potential buyers circle stricken HMV Financial Times, Andrea Felsted (15/1/13)
HMV and independents to urged to work together to save in-store music market BBC News,
Clive Lindsay (15/1/13)
HMV record chain was besest by digital downloads and cheap DVDs The Guardian
(15/1/13)
The death of traditional retailers like HMV started when we caught on to one-click and the
joy of owning DVDs wore thin Independent, Grace Dent (15/1/13)
HMV shoppers: ‘I’m disappointed, but it’s understandable why they went bust The Guardian,
James Brilliant (15/1/13)
HMV: Record labels could take HMV back to its 1920 roots The Telegraph, Graham
Ruddick (15/1/13)
HMV’s future seen as handful of stores and website Reuters, Neil Maidment and James
Davey (15/1/13)
HMV leaves social gap in high street BBC News, Robert Plummer (15/1/13)
Is there good news in HMV’s collapse? BBC News, Robert Peston (15/1/13)
Is it game over for UK retail? The Guardian, Larry Elliott (18/1/13)
High Street retailers: Who has been hit hardest? BBC News (16/1/13)
Questions
1. What are the main reasons behind the collapse of HMV?
2. Use a diagram to illustrate the impact the companies such as
Amazon and Tesco have had on costs and prices in the
entertainment industry.
3. To what extent do you think HMV’s collapse is due to its failure
to adapt to changing social circumstances?
4. Briefly outline the wider economic implications of the collapse of
a company such as HMV. Think about managers, employees,
suppliers, customers and other competitors, as well as other high
street retailers.
5. In which market structure would you place the entertainment
industry? Explain your answer. Has this contributed to the demise
of HMV?
6. Taxing fatty products
The problem of obesity and healthy eating is a growing problem in many countries and governments have
long been looking into designing policy to tackle this issue.
Some have gone for healthy eating campaigns and policies to encourage pregnant women to eat better, but one
government took it a step further and introduced a Fat Tax. In October 2011, the Danish government introduced
a tax on foods that are high in saturated fat in a bid to reduce consumption of these goods. However, this policy
is now to be abolished.
The Fat Tax introduced by the government imposed a surcharge on foods that contained more than 2.3%
saturated fat. Numerous products were affected, including meats, dairy and as expected – processed foods. The
policy was criticised by scientists who said that saturated fat was the wrong target and perhaps they were proved
right, but the government’s u-turn, which will now see the tax being abolished. The tax had gradually increased
food prices throughout the country and authorities said that it had even put Danish jobs at risk.
With food prices much higher in Denmark with the tax, consumers switched from buying domestically produced
goods to crossing the border into Germany and purchasing their cheaper food. This undoubtedly had an adverse
effect on the Danish economy, as it represented a cut in consumer expenditure. Perhaps it also helps to explain
Germany’s strong economy – it was feeding 2 nations! The Danish tax ministry said:
‘The fat tax and the extension of the chocolate tax — the so-called sugar tax — has been criticised for
increasing prices for consumers, increasing companies’ administrative costs and putting Danish jobs at risk …
At the same time it is believed that the fat tax has, to a lesser extent, contributed to Danes travelling across the
border to make purchases … Against this background, the government and the (far-left) Red Green Party have
agreed to abolish the fat tax and cancel the planned sugar tax’
Once the tax is abolished, other policies will need implementing to tackle the problem of obesity and encourage
healthy eating, as it continues to be a big problem in this and many other countries. The following articles
consider this problem.
Denmark to scrap world’s first fat tax Associated Press (10/11/12)
Denmark to abolish tax on high-fat foods BBC News (10/11/12)
Fat tax repealed The Copenhagen Post (10/11/12)
Businesses call fat tax a failure on all fronts The Copenhagen Post, Ray Weaver (10/11/12)
Questions
1. Illustrate the effect of a tax being imposed on a diagram. What happens to
equilibrium price and quantity?
2. According to Danish authorities, consumers didn’t change their consumption
habits with the tax. What does this suggest about the PED of these products?
3. How does the amount of tax revenue generated vary with the price elasticity of
demand and supply?
4. What other policies could be implemented to encourage healthy eating?
5. Why did this fat tax lead to higher food prices?
7. A glass half empty or half full?
European wine producers have seen one of the worst grape harvests for decades. With exceptionally wet
weather in the northern European growing areas and exceptionally hot and dry weather in the southern
ones, yields are well down in most countries.
In France, the world’s largest wine producer, wine production is forecast to be 19% down on the previous year.
In Italy and Spain, Europe’s second and third largest producers, production is forecast to be 3% and 6% down
respectively. Production in the EU as a whole, which produces some 57% of world output, is expected to be 9%
down and at a historically low level. What is more, the past five years in the EU have all seen modest harvests.
And the poor harvests are not confined to Europe. Argentina’s production is some 24% down on 2011, with
New Zealand’s 17% down. And despite a few countries expecting an increase, including the USA and Chile,
overall world production is expected to be 6% down on 2011 and more than 7% down on the average for 2008–
11.
So is this good news or bad? At first sight it would seem to be bad, especially for the countries with large falls in
output. It would also seem to be bad news for the consumer, with prices set to rise.
But for some it’s good news. If prices rise, then producers experiencing an increase in output will have a double
gain. And a fall in output is only part of the story. For some producers, the smaller yield has been accompanied
by an increase in quality. And then there’s the question of stocks. For several years, global production of wine
has exceeded consumption. Indeed the gap widened after the financial crisis and recession of 2007–9 as
consumption of wine fell. This year’s poor global harvest should help to slow down the increase in stocks or
may even lead to a reduction in stocks, depending on the extent to which demand recovers.
Articles
World Wine Output to Fall to 37-Year Low, Depleting Stocks BloombergBusinessweek, Rudy Ruitenberg
(30/10/12)
World wine drought after weather ruins harvests The Telegraph, John-Paul Ford Rojas (31/10/12)
Wine Experts: Drought, Cold Bring Worst Harvest in 50 Years Skye (30/10/12)
Wine experts: worst grape harvest in half century Washington Examiner (17/10/12)
Small 2012 harvest sparks supply fears thedrinksbusiness.com, Gabriel Savage (30/10/12)
Wine shortage to follow poor 2012 grape harvest BBC News (31/10/12)
Hot summer cools business prospects for Madrid vintners BBC News, Jaime Gonzales (24/9/12)
World awash in wine, so Europe’s poor grape harvest won’t hit Edmonton goblets just yet Edmonton Journal,
Dan Barnes (17/10/12)
Data
Wine in figures Wines from Spain
2012 global economic vitiviniculture data Wines from Spain (Note that the countries in Table 1 have been
entered in the wrong order.)
Questions
1. Illustrate the effect of the global wine harvest on a demand and supply diagram.
2. Will a fall in grape production of x per cent lead to a rise in the price of wine of
more or less than x percent? How is the price elasticity of demand relevant to
your answer?
3. What elements are there in the supply chain from planting vines to consuming
wine?
4. How does the holding of stocks affect (a) the profitability of wine production;
(b) the price volatility of wine?
5. The Greek grape harvest is predicted to be higher in 2012 than in 2011. How
will this affect the prices of Greek wines in (a) Greece; (b) outside Greece?