Category Archives: Micro

The avocado market – prices up by 143%

The current avocado market has seen the wholesale price of a box of 48 avocados increase by 143%.

US$34.45 in September 2016
US$83.75 in September 2017

The reasons can be explained by simple Supply and Demand.

Supply

There have been droughts, storms, wildfires and strikes in various growing areas including California, Chile and Mexico

California – production down 44%
Mexico – production down by 20%

This has a huge impact on supply with the supply curve shifting to the left – S1 – S2 therefore increasing scarcity and putting up the price.

Demand

Annual consumption in the US has increase from about 0.5 kg in 1989 to 3.5 kg in 2016.

In 2016 total consumption was 1.15 billion kg. Demand curve shifts to the right – D1 – D2 therefore increasing the price.

A lot of demand has been driven by trends like avocado toast and the growth of fast-casual Mexican chains like Chipotle. There has also been higher avocado consumption in China and Europe as health-conscious consumers in the world’s most populous nations show an interest in the “heart-healthy” avocados.

Gourmet chocolate the economic lifeline to Venezuela

At the end of the 18th century Venezuela was the world’s leading cocoa producer. But the rise of the oil industry in the 20th century and the emergence of Hugo Chavez saw the decline of the cocoa industry. Chavez boosted state involvement in the economy and promised to create a society of equals. However since the crash in oil prices – up to 90% of government revenue came from oil – society has been divided. Doctors and engineers rarely make as much as US$50 a month whilst other with access to small amounts of hard currency can afford gourmet products.

Recently in Caracas there have been some 20 new businesses launched producing bars of Gourmet chocolate which retails for around US0.80 each in high end grocery stores — well out of the reach of most Venezuelans who earn less than that in a week but catering for the well-off in a two-tier system. Bars can fetch US$10 in a place like New York and Paris but bureaucracy makes this very difficult.

Although aware of these barriers one producer, Nancy Silva, is now focused on getting her chocolate to France, where she once sold a single kilo of her chocolate for the equivalent of 80 euros (US$96), which is today the equivalent of five years of minimum wage salary in Venezuela.

Venezuela cocoa beans

Venezuela produces 16,000 tonnes per year which is less than 1% of the global output and less than 10% of regional output when you take into consideration big producers like Brazil and Ecuador. However the use of Venezuela cocoa is seen as a marketing tool for shops as bars are produced with 100% local cocoa which is deemed high quality.

Many gourmet bars made in the United States now prominently advertise the use of Venezuelan cocoa but generally mix in other less-desirable cocoas. Bars made in Venezuela by contrast are made with 100 percent local cocoa.

This gives the new Venezuelan chocolatiers a leg up as they tap into the global ‘bean-to-bar’ movement, in which chocolate makers oversee the entire process of turning cocoa fruit into sellable treats.

On the second floor of an old mansion in Caracas, economist and chef Giovanni Conversi has been making specialty chocolate for two years under the name Mantuano. Sprinkled with sea salt or aromatic fruits from the Amazon, the chocolate bars are a hit in London, Miami and Panama City in specialty chocolate stores or shops that specialize in Latin American food.

Source: Reuters – Gourmet chocolate becomes economic lifeline in Venezuela crisis – 12th January

Airline price discrimination

Price discrimination involves charging different prices to different sets of consumers for the same good or service. So when you are on your next flight there are going to be different fares for the same class of seat whether it be in economy, business class or first class. What variables at work to bring about price discrimination in airline routes?

  • What day of the week you fly – Monday and Friday are usually peak times for business so you should find that fares are expensive. Also because it is usually for business purposes it is assumed that firms will be paying for the flights and therefore are prepared to pay more.
  • Times of the day – morning and evening tend to be more expensive as this is peak time.
  • How competitive the route is – if there is a lot of competition fares will be cheaper to the extent that there maybe predatory pricing. There is a good piece in the video showing the fares for flights from Montreal to St Johns Newfoundland. Once low cost carriers entered the market Air Canada dropped their price below cost.
  • Reputation of each airline – better reputation = higher fare

The video below is a very good especially the fare structure on the New York to Los Angeles route.

What are the highest paid sports leagues?

NBA basketball has the highest average salary of any sports league followed by IPL cricket with baseball coming in third. Over half of the highest paid leagues were football with the EPL and the Bundesliga being above US$2 million. It is interesting that La Liga is third within the Football category even though a Spanish team has won the Champions League 5 times in the last 7 years.

In cricket the Twenty20 format has proved to be very popular with television viewers and gets very good attendances most notably in the IPL (India), Big Bash (Australia) and T20 Blast (England). In September this year IPL signed a five year contract worth US$2.55bn (US$510m per year) for broadcast and digital rights with Star India – a TV network owned by 21st Century Fox. The IPL competition involves just 60 matches which equates to US$8.5m per game which is 400% higher than the NBA per game and 66% greater per game than that of the EPL.

Cricket in the USA
Although cricket is globally very popular it has very limited uptake in the USA – both players and spectators. Sport in the USA has a high income elasticity of demand which means a change in income results in a greater percentage increase in demand. An Indian Media firm – Times of India Group – are hoping to tap into the American market and put on high profile cricket matches with the leading players in the game. The games generally take place in baseball stadiums but the firm is considering building cricket stadiums.

Highest paid sports leagues 2014-2015 season.

Top paid sports leagues.png

Source: CIE AS & A Level Revision Guide by Susan Grant

A2 Revision – Pareto Efficiency

In the A2 exam there is usually one multiple-choice question on Pareto Efficiency and part of an essay.  The idea of Pareto Efficiency is named after the Italian Economist Vilfredo Pareto. For a given set of consumer tastes, resources, and technology, an allocation is Pareto-efficient, if there is no other feasible allocation that makes some people better off and nobody worse off. See also a previous post – Pareto Optimality and the perfect wave.

fig15-01

The figure above shows an economy with only two people, Susie and David. The initial allocation at A gives David QD goods and Susie QS goods. Provided people assess their own utility by the quantity of that they themselves receive, B is a better allocation than A which in turn is a better allocation than C. But a comparison of A with points such as F, D or E, requires us to adopt a value judgment about the relative importance to us of David’s and Susie’s utility. It is important to note from the figure the following:

  • If you move from A to B or A to G it is a Pareto gain – A to B both Karen and John are better off. A to G Susie is better off, David no worse off.
  • If point B or G is feasible then point A is Pareto-inefficient – more goods can be consumed
  • A move from A to D makes David better off and Susie worse off. However we need to make a judgment about the relative value of David’s and Susie’s utility before we can comprehensively state that David is better off. Therefore the Pareto principle is limited in comparing allocations on efficiency – it only allows us to evaluate moves to the north-east and south-west

fig15-02

Therefore, we need look at the economy as whole and how many goods it can produce. In the Figure above the frontier AB shows the maximum quantity of goods which the economy can produce for one person given the quantity of goods being produced for the other person. All points on the frontier are pareto-efficient. David can only be made better off by making Susie worse off and vice versa. The distribution of goods between David and Susie is much more equal at point C than at points A or B. Note that:

Anywhere inside the frontier is Pareto-inefficient – some can be made better off without making the other worse off.

The economy should never choose an inefficient allocation inside the frontier. Which of the efficient points on the frontier (A, B, C) is the most desirable will depend on the value judgment about the relative value of David and Susie utility.

Source: Economics by Begg

Indifference Curves – Mindmap

With a bit more time on my hands I was able to produce a mindmap on Indifference Curves – a topic that students find quite difficult. The mindmap covers all the main features – what is meant by the Income Effect, Substitution Effect and most importantly how they are characterised in Normal, inferior and Giffen goods. Particularly useful for a theoretical essay on utility and consumer choice. You can download a full size copy by clicking here.

Mind Map 13 indifference curves.jpg

A2 Revision – Marginal Utility Theory

With the A2 exam not far away I thought it appropriate to post something on Marginal Utility. This is usually a multiple-choice question and part of an essay.

Consumers buy goods to derive satisfaction, or utility. Each unit purchased gives satisfaction (utility) and Marginal Utility is the satisfaction derived from the consumption of 1 more unit. Under normal circumstances the amount of satisfaction from each unit consumed will fall as more units are consumed e.g. when you finish a run your first drink will give you more satisfaction than your second and your second drink will give you more satisfaction than your third etc. – hence we get diminishing marginal utility see Table below. This is the basis of the normal demand curve, which slopes left to right – downwards.

The theory assumes that the RATIONAL CONSUMER aims to MAXIMISE SATISFACTION (or utility) by equating the MARGINAL UTILITIES yielded by the expenditure of a last money unit (cent or dollar) on each commodity purchased. The consumer is this is EQUILIBRIUM when the following formula is achieved:

  • MU of A   =     MU of B    =     MU of C       Etc.
  • Price of A       Price of B        Price of C

This means that the LAST unit of money spent provides the consumer with the same SATISFACTION (or UTILITY) irrespective of the good on which it is spent.

Examples

A consumer has $35 to spend. Price of X = $10 and Price Y = $5. What combination of X and Y maximize total satisfaction?

Quantity Bought Marginal Utility X Marginal Utility Y
1 30 15
2 20 12
3 15 10
4 9 8

 

  • MU of X   =     MU of Y
  • Price of X       Price of Y
  • 20   =   10
  • 10         5

Here the consumer buys 2X and 3Y

TOTAL UTILITY in this example = 30+20+15+12+10 = 87. (Note that TOTAL UTILITY is otherwise irrelevant to the calculation).

When the PRICE of a good falls, more will be bought (since the M.U. ÷ price formula is disturbed – and a LOWER M.U. {i.e. MORE BOUGHT} will restore equilibrium). Similarly, when the price of a good RISES less will be bought. This emerges from the LAW OF DIMINISHING MARGINAL UTILITY which states that as successful and equal quantities of a good are consumed, total utility increases but at a DIMINISHING RATE (i.e. MARGINAL UTILITY is FALLING – and can eventually become NEGATIVE.

Limitations of marginal utility theory 

  1. Unit of measurement – difficult to find an appropriate unit of measurement of utility.
  2. Habit and impulse – consumer spending on a particular product maybe habit forming or on impulse and therefore does not consider the marginal utility
  3. Enjoyment may increase as consumption increases – in some case utility may increase from further purchases of an item. A collector of memorabilia may obtain greater satisfaction from consuming an additional item – collecting a set of stamps etc
  4. Quality and consistency of successive units of a good – there is the assumption that all goods are homogenous but if successive can of soft drink are not the same then the marginal utility may change and be more or less than the previous one
  5. Other things remain constant – assumes that all factors affecting individuals’ satisfaction remain the same. However over time there maybe changes in income and the quality of other products as well as development of new products.

IGCSE Economics – Co-operatives

Showed this video on co-operatives to my IGCSE Economics (Unit 4 of CIE syllabus) class today and found it most useful in demonstrating the characteristics and examples. Remember the following characteristics about co-operatives:

  • share responsibility for the success or failure of the enterprise
  • work together
  • take decisions together
  • share profits (and losses).
  • The three most commonly found cooperatives are farming, production and retail.

Advantages

  • Limited liability
  • Workers in worker co-operatives take business decisions and share profits.
  • Members of consumer co-operatives enjoy profit dividends or lower prices

Disadvantages

  • Many consumer co-operatives have been forced out of business by larger companies.
  • Worker co-operatives may be badly run.

A2 Revision – Marginal Utility Theory

With the A2 exam not far away I thought it appropriate to post something on Marginal Utility. This is usually a multiple-choice question and part of an essay.

Consumers buy goods to derive satisfaction, or utility. Each unit purchased gives satisfaction (utility) and Marginal Utility is the satisfaction derived from the consumption of 1 more unit. Under normal circumstances the amount of satisfaction from each unit consumed will fall as more units are consumed e.g. when you finish a run your first drink will give you more satisfaction than your second and your second drink will give you more satisfaction than your third etc. – hence we get diminishing marginal utility see Table below. This is the basis of the normal demand curve, which slopes left to right – downwards.

The theory assumes that the RATIONAL CONSUMER aims to MAXIMISE SATISFACTION (or utility) by equating the MARGINAL UTILITIES yielded by the expenditure of a last money unit (cent or dollar) on each commodity purchased. The consumer is this is EQUILIBRIUM when the following formula is achieved:

  • MU of A   =     MU of B    =     MU of C       Etc.
  • Price of A       Price of B        Price of C

This means that the LAST unit of money spent provides the consumer with the same SATISFACTION (or UTILITY) irrespective of the good on which it is spent.

Examples

A consumer has $35 to spend. Price of X = $10 and Price Y = $5. What combination of X and Y maximize total satisfaction?

Quantity Bought Marginal Utility X Marginal Utility Y
1 30 15
2 20 12
3 15 10
4 9 8

 

  • MU of X   =     MU of Y
  • Price of X       Price of Y
  • 20   =   10
  • 10         5

Here the consumer buys 2X and 3Y

TOTAL UTILITY in this example = 30+20+15+12+10 = 87. (Note that TOTAL UTILITY is otherwise irrelevant to the calculation).

When the PRICE of a good falls, more will be bought (since the M.U. ÷ price formula is disturbed – and a LOWER M.U. {i.e. MORE BOUGHT} will restore equilibrium). Similarly, when the price of a good RISES less will be bought. This emerges from the LAW OF DIMINISHING MARGINAL UTILITY which states that as successful and equal quantities of a good are consumed, total utility increases but at a DIMINISHING RATE (i.e. MARGINAL UTILITY is FALLING – and can eventually become NEGATIVE.

Limitations of marginal utility theory 

  1. Unit of measurement – difficult to find an appropriate unit of measurement of utility.
  2. Habit and impulse – consumer spending on a particular product maybe habit forming or on impulse and therefore does not consider the marginal utility
  3. Enjoyment may increase as consumption increases – in some case utility may increase from further purchases of an item. A collector of memorabilia may obtain greater satisfaction from consuming an additional item – collecting a set of stamps etc
  4. Quality and consistency of successive units of a good – there is the assumption that all goods are homogenous but if successive can of soft drink are not the same then the marginal utility may change and be more or less than the previous one
  5. Other things remain constant – assumes that all factors affecting individuals’ satisfaction remain the same. However over time there maybe changes in income and the quality of other products as well as development of new products.

Indifference Curves and Giffen Goods

New to the A2 CIE syllabus is indifference curves and my A2 class recently had a multiple-choice question concerning indifference curves and giffen goods. A giffen good occurs when a rise in price causes higher demand because the income effect outweighs the substitution effect.

Suppose you have a very low income and eat two basic food stuffs rice and meat. Meat is a luxury and is much more expensive than rice. If rice increased in price, your disposable income is effectively reduced significantly therefore, you buy less meat, to compensate for less meat you buy more rice to gain enough calories. Source: www.economicshelp.org

Griffen good and indifference curves

indiff-giffen

  • Good B falls in price – hence budget line moves from: 50 A – 30 B to: 50 A – 60 B.
  • The move from point J to point K is the substitution effect which = +16
  • The move from point K to point L is the income effect which = -20
  • These make up an overall move from point J to point L is the price effect (substitution effect + income effect) = -4

As income effect is negative, substitution effect positive and overall price effect negative Good B is a giffen good.

Summary of income and substitution effects of price changes

sub-income-effect

Go to eLearn Economics for more notes on Indifference Curves.