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 over-aggressively 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: