UCAS: Economics 1 Manchester United 0 !!

You are the reserve player of the year at one of the world’s most famous clubs and your manager has just offered you another contract to stay. But your academic passions run deep too and a deferred place beckons to read Economics at Durham University, a seat of learning with it’s own rich sporting and academic heritage? What would you do?


It is fantastic to hear that Oliver Gill, son of David Gill, Manchester United’s chief executive has opted to commit himself to an Economics degree and starts in the wonderful location of Durham this autumn.

Manchester United’s loss is Durham’s gain. Will we see Oliver donning the famous palatinate shirts this season? Durham University is one of the top faculties in the country and I send loads of students there every year. It is a unique part of the North east with an environment and a history all of its own. He will have a superb time there.

Interested in reading Economics at university? Here is a link to Geoff Riley's updated UCAS Guide to making a strong application to read Economics or related disciplines.

Unit 3: Oligopsony - Dairy Losses Drive Farmers from the Fields

Hats off to the herd!

Milk production in the UK is expanding yet many dairy farmers have or are likely to leave the industry over the next five years unless raw milk production becomes more economically viable. Can the stakeholders in the sector reach fresh agreement on sustainable contracts for the near 40 million litres of milk produced every day?


Milk is just about the most regular purchase that we make in the shops and supermarkets. The nation consumes over 5 billion litres of milk every year, but few of us stop to check the price as our cartons drop straight into the basket. 53% of the milk that produce in the UK is sold as liquid milk. The other 47% goes into cheese, butter, yoghurts and a variety of other dairy products.

At the other end of the supply-chain, the price that dairy farmers get for their milk is absolutely crucial; indeed unless the return that milk producers receive improves in the near future many more farmers seem set to leave the industry unable to sustain mounting losses. According to this report in the Guardian/Observer “At least one dairy farmer has gone out of business in Britain every day for the past decade, as supermarkets have more than doubled their share of the price of a pint of milk”.

Those that remain will be unable to generate sufficient profit to finance re-investment in breeding stock, new buildings and farm machinery. Low levels of investment will hit productivity and may also affect animal welfare - healthy cows need good facilities and farmers need a profitable price.

The National Farmers Union (NFU) has estimated that dairy farmers in Britain are losing upwards of £300 million a year as supply costs increase and lag behind the farm-gate price paid to farmers by the major milk processing and distribution businesses such as Robert Wiseman, Arla Foods and Dairy Crest. These processors have oligopsony power in the market in other words; they have significant purchasing power when buying from producers at an earlier stage of the supply chain. The main alternative is either for farmers to join a cooperative - in the UK Milk Link and First Milk has roughly 10% to 11% of the market apiece - or to sell their milk direct to local and national supermarkets or direct to customers through farm shops.


Whilst it is vital for the dairies to establish and build strong supply relationships with dairy farmers, for many years there has been concern that the giant milk processors have used their buying power (economists call this a situation of monopsony) to keep farm gate prices lower than they might otherwise be. The NFU’s data finds that the average cost of milk production is currently 29.1 pence per litre (ppl). With an average British milk price of 25.94ppl, this result in a 3.16ppl gap between the cost of producing milk and the price the farmer receives.

Dairy producers have had to cope with a surge in their operating costs over the last few years. For example, average feed wheat prices are 66.7% higher than a year ago; the average price of fertiliser is 19.4% higher than at the same time last year and ammonia Nitrate bag prices are 34.2% higher than in May 2010. Feed wheat prices alone are said to contribute around 20% of the unit cost of each litre of milk supplied. Average income from dairy farms in 2009-10 was more than £24,000 before any income from EU farm support payments but for many that income is not enough to reap a profit.

Faced with persistent losses, many farmers have closed down and leave for pastures new. UK dairy cow numbers have declined by 10,000 in the last year alone, in the UK there are now 1.85 million dairy cows in the dairy herd and this has shrunk by seven per cent over the last five years.

Back in the supermarket aisles, Sainsbury’s, Waitrose and Tesco charged £1.49 for 4 pints in June 2011 with Asda charging £1.25 for 4 pints. 4 pints converts to 2.27 litres. A quick calculation tells us that farmers are getting an average of 59 pence for supplying 4 pints but the retail price in most supermarkets is 90 pence higher.


Many milk supply contracts require farmers based in Britain to sell all their milk to one of the major buyers for no less than 12 months and without any certainty of the base price they would receive. Milk processors then supply mainly to the supermarkets.

The Farmers’ Union is lobbying for a revised system of milk supply contracts what ensure milk supply deals bring greater fairness to relationships between milk producers and processors. This campaign has gathered momentum in the last two years partly because of steeply rising costs for many farmers (notably the soaring cost of livestock feed) and also because of the failure of Dairy Farmers of Britain, a milk producer cooperative which was responsible for 10% of UK milk production and which collapsed in 2009 leaving many farmers desperately searching for buyers of their produce.

Without a higher farm-gate (or wholesale) price the probability is that a growing number of farmers will opt to leave the sector. Some have attempted to diversify into higher value-added products such as yoghurts, ice-creams and cheese and there are some notable successes especially when niche brands that can sustain premium prices have emerged. Low profitability is also incentivising a longer term switch towards large-scale intensive milk production in mega-dairies which smaller-scale farmers giving way to huge complexes capable of supplying millions of litres every day.

Enlightened food retailers are also seeking to reach deeper agreements with farmers for example the ‘Milk Pledge Plus’ payment scheme set up by Marks and Spencer a milk payment scheme that adjusts for changing costs of supply and which also offers rewards for dairy farmers who meet high animal health and welfare standards. Show-casing local sourcing of milk which meets strict environmental standards is often a profitable marketing strategy for the supermarkets and provides greater certainty about revenue streams for the farmers themselves.

The vast bulk of milk produced in the UK will continue to flow through the processing industries to the supermarkets. In Britain we have not made enough progress in resolving the disputes between farmers, suppliers and supermarkets and a solution remains unlikely because of the imbalance in bargaining power between farmers and processors.

Put simply there remains a huge, structural price differential between what dairy farmers get at their gate and what the consumer pays at the supermarket. This monopsony power is a market failure that has cost many jobs, cut agricultural investment and made the UK more dependent on milk imports.

Unit 3: Cost & Revenue quiz in Zondle

A quick post to link to an A2 Microeconomics quiz in Zondle on the cost & revenue curves.


Go on pop the balloon and feed the fishy.

http://www.zondle.com/cdl.aspx?qp=6400&a=1147

Unit 1: Agrucluture - Cotton Prices and the price of clothing.

How does the world price of raw cotton affect the cost of buying new clothing on the high street and in the supermarkets? The answer is that the price of natural fibres is a key raw material into manufacturing garments and home furnishings. If prices rise, this increases the costs of production causing an inward shift of supply for clothing and furnishings at a given market price.


The world price of cotton has been rising steeply in recent times. As our chart below shows, raw cotton prices are well down from their peak in the spring of 2011, but the index is still more than twice the level of two years ago.

One of the key reasons for higher prices has been that demand for clothes from people in emerging fast-growing developing countries such as China, India and Brazil has been increasing rapidly. Between 2010 and 2025, it is forecast that world demand for raw cotton will rise by 20 million tonnes per year. Demand for cotton has increased faster than supply can respond and available supplies have also been hit by floods in countries such as Pakistan and Australia and bad growing weather in the United States which supplies about 40 per cent of the world’s trade in cotton.


Put the two forces of demand and supply together - cotton consumption worldwide is now exceeding production and prices go up as a result.

For clothes manufacturers and retailers, a crucial decision is whether to pass on the higher costs to their consumers in the form of higher prices.


For many years, prices of many mainstream high street fashion products have been falling and consumers may have become accustomed to this long period of price deflation. If their demand for new garments has a high price elasticity of demand, retailers may have to absorb increased costs and accept lower profit margins.

They might also try to increase efficiency and cut costs in other areas of their business or use their buying power in the garment industry by squeezing more value out of their suppliers.

Some of the biggest fashion retailers are experimenting with different fabric mixes moving away from 100% cotton products and increasing their use of man-made fibres. Others are shifting their clothing production away from countries such as China and Indonesia in favour of lower wage manufacturing in Bangladesh and southern India.

Is the era of ultra-cheap clothing for British consumers well and truly over? Possibly so and if his happens, cotton prices are only part of the explanation. Other costs have also increased including a surge in wages in many centres of manufacturing in the Far East, the effects of higher VAT and retail rent levels. But intensive competition at retail level means that the retailers themselves will shoulder much of the increase in their cost base.

Unit 1: Agriculture and the economics of Volatile Corn Prices

Corn is a soft commodity along with the likes of coffee, tea and rubber. Referred to as “yellow gold”, corn is used in products ranging from cereals, snack foods, salad dressings, soft drink sweeteners, chewing gum and peanut butter. Little wonder that shifts in the world price of corn can have a noticeable effect on the prices that we may for many popular foods and drinks.


The world’s appetite for corn is strong. In recent months there has been a surge in the global price of corn, indeed at the end of June 2011, corn prices were up 74 per cent on a year earlier. Super-high prices affect the price of feed for livestock farmers and eventually lead to more expensive foodstuffs for consumers, including millions of people in the world’s poorest countries exposed to persistent and life-shortening food poverty. Robert Zoellick, President of the World Bank has said that high and volatile food prices are “the single gravest threat” facing developing countries at the current time.

The main reason for the strong rise in corn prices has been fast-growing global demand set against restricted supply and falling international stockpiles.

The key to understanding the demand-side of the market for the corn is to focus on demand from three key industries - livestock, ethanol and food processing. World demand for corn has grown at rapid rates in recent years including farmers who use corn as feed in fattening livestock in developing countries. As per capita incomes rise, so does the demand for meat which has a high income elasticity of demand in poorer nations. Consider the example of China which, despite being the second largest producer of corn in the world, has moved from being a net exporter of grains to being a net importer as domestic demand for foodstuffs has soared. China is after the world’s corn and will be for years to come!

Another cause of rising demand has been purchases for corn-based ethanol in the United States and the European Union. Four years ago the United States Congress passed the Energy Independence and Security Act which acted as a green light for producers of alternative energy such as ethanol. The Act requires 15 billion gallons of ethanol be consumed in the United States per year by 2015, irrespective of what has happened to the global price of corn or crude oil. The result in the USA in 2011 is that over a quarter of scarce corn production must be given over to ethanol manufacturing.

Demand seems insensitive to market prices, i.e. there is a low price elasticity of demand. For 2012, despite high prices, world corn consumption is forecast by the US Department for Agriculture to climb to a record 872m tonnes, up 3 per cent from 2011 levels.

To some analysts there has been a permanent increase in global demand for corn not matched by a corresponding outward shift in supply potential in corn-producing nations. The result has been scrambling by buyers to purchase available stocks and an inevitable rise in prices.

The short-term situation has been exaggerated by a year-long ban on grain exports by Russia (only recently lifted) and by speculative buying in soft commodity markets, and there have also been supply problems outside of the USA - grain-producing regions in Russia, Ukraine, Kazakhstan, and South America were hit by drought in 2010.

One interesting aspect of the large rise in price focuses on the incentive effects this has on farmers. Standard economic theory predicts that high prices will eventually bring about an expansion of market supply helping to restore the supply-demand balance. This is known as the cob-web effect.


Consider the United States - a country that produces 40 percent of the world’s corn supplies and accounts for more than half of world corn exports. In the agricultural states of Iowa, Illinois, North Dakota, South Dakota, Minnesota and Montana, will farmers devote more acreage to planting more corn as high prices provide a strong profit-motive to expand production? There is some evidence that they will. In early July, the US Department for Agriculture (USDA) reported from a survey of over 80,000 farmers, evidence that America’s farmers planted 92.3 million acres of corn in 2011, the second-highest figure since 1944. Some farmers have switched away from soybean, the USDA estimated 2011 soybean acreage at 75.2m down from the 77.4m acres planted last year - this is the price mechanism in action.

Global corn prices have fallen back from their June 2011 highs partly because speculators have been selling their futures contracts in the wake of good news on corn harvests and signs that increased corn acreage in 2011 will boost corn stocks over the next year.

Lower prices will bring relief to livestock farmers whose feed costs will drop and they will reduce the input costs of food manufacturers. That said the problems created by high levels of price volatility in this key commodity market are unlikely to go away prompting several developing countries to consider moving themselves into the futures markets for corn to hedge against price uncertainty.

Unit 2 & 4: The Dangers of High Inflation

The annual rate of inflation in the UK has overshot its 2 per cent target in 51 of the past 60 months and this has led some economists to believe that the Bank of England has been adopting a tacit policy of allowing inflation to stay above target by keeping official monetary policy interest rates at 0.5% since the Spring of 2009. The Governor of the Bank of England Mervyn King has expressed his concern about “uncomfortably high rates of inflation” but the Bank’s Monetary Policy Committee has yet to reverse the steep falls in interest rates that came in the wake of the global financial crisis in 2008-09.


Although modest but persistently higher inflation might be helpful in reducing the real value of outstanding government debt there are also underlying dangers in allowing above-target inflation for a considerable length of time. This blog will look at these.

Income redistribution: One important risk of higher inflation is that it has a regressive effect on lower-income families and older people in society. According to figures produced by Alliance Trust in June 2011, rising inflation in Britain is hitting the elderly hardest because prices for food and domestic utilities such as water and heating have been increasing at more than 5 per cent a year. This was before the announcement of another 15-18 per cent hike in electricity and gas prices announced by the major utility businesses in the summer of 2011.

Many households are effectively on fixed incomes, and when prices rise, they can afford to buy less and less. Soaring energy costs has driven hundreds of thousands of vulnerable people into fuel poverty - a situation where more than 10 per cent of family income drains away in meeting fuel bills.

Further evidence for the impact of high inflation on poor people in Britain has come from new research from the Institute of Fiscal Studies (IFS). They found that between the years 2008-10, the poorest fifth of households (the 1st quintile) faced a rate of inflation of 4.3% pa in contrast to annual price rises of 2.7% for the richest fifth of households. The inflation rate for pensioner households dependent on state benefits was 4.6% pa whereas richer families have benefitted from lower mortgage costs and continued deflation in the prices of many leisure goods such as televisions, mobile phones and computers.

Falling real incomes: With millions of people facing either a cut in their wages or at best a pay freeze, rising inflation leads to a steep fall in real incomes and is a key factor behind a squeeze in consumer spending on goods and services. With consumption accounting for over 60 per cent of aggregate demand, a fall in household spending risks dragging the UK closer to a double-dip recession and this will eventually hit government tax revenues from VAT, excise duties and corporation tax on business profits.


Negative real interest rates: If interest rates on many types of savings accounts are lower than inflation - and with many savings accounts today, they are - then they too fall behind rising prices, and people who rely on interest from their savings will also feel poorer. Real interest rates for millions of savers have been negative for at least three years and the situation shows little sign of improving in the near-term. This hits the incentive to save and may mean that UK banks have less deposits flowing into their accounts as a basis for lending out to those who need to borrow.

The cost of borrowing: High inflation may also lead to higher interest rates for businesses and people needing loans and mortgages as financial markets seek to protect themselves against rising prices and increase the cost of borrowing on short and longer-term debt. The government also faces having to pay more interest on their existing borrowing since many bonds were issued as “index-linked” securities where the rate of interest tracks the annual rate of inflation. There is also pressure on the government to increase the value of the state pension and unemployment benefits and other welfare payments as the cost of living climbs higher.

Risks of wage inflation: Much of the recent increase in consumer prices in Britain has been due to the soaring cost of commodities in international markets - foodstuffs, oil and gas and many globally-traded minerals have all seen sizeable price rises hitting the pockets of hard-pressed consumers and raising input costs for businesses across many industries.

Because the economy has barely come out of a deep recession in 2009, there has been little appetite for workers to bid for inflation-protecting pay rises especially when unemployment is high and job insecurity is rife - but this might change if inflation stays high through 2011.

Inflation expectations have been rising and the hit on real incomes is something that millions of people are experiencing at the moment. It may turn out that inflation of 4-5% (well above the 2% target) might actually be quite damaging for prospects of a sustainable economic recovery.

Here is a super video from Declan Curry on the winners and losers from a period of higher inflation

Unit 1: Opportunity Cost - New Zealand Article

Click here to access a link which looks at smarter consumer spending and using opportunity cost as a concept to put some of our many choice in context. Some great examples here that will help explain one of the first concepts you will learn at AS Micro.

Unit 2: Supply Side Policies in action in Brazil

Look at this for a great supply side policy from Brazil. One of the biggest slums in Rio is now home to a 3.5 km cable car system. It aims to transport residents quickly into the city, saving them hours of journey time as they avoid steep and narrow roads. Hopefully this will improve the productivity of the workers shifting the countries PPF outwards.

Click here for video clip

Unit 4: 75th anniversary of Keynesian Theory.....enjoy

Here is a must for students of Keynesian economics - a video stream of a lecture given at Cambridge University by Professor Paul Krugman on the occasion of the 75th anniversary of the publication of Keynes’ General Theory of Interest Employment and Money...click here for video clips!

Unit 1: Opportunity Cost - The Broken Window Fallacy!

Remember in class we spoke about the Japanese earthquake possibly being good for their economy...well perhaps not!

The French economist Frederic Bastiat wrote a thesis explaining that destroying stuff does not actually create jobs. It was called 'What is seen and what is not seen'.

It's quite dry stuff but I really like this explanation below of his theory (see you tube clip)...it became known as 'The Broken Window Fallacy' 

For extra reading click on this link to read the origonal text from the economist, Bastiat. A fine way to help explain lots of concepts in economics in particular opportunity cost.

Unit 1: Merit goods, information failure, and an ironic death!

When the government thinks that consumers do not have enough information to make good decisions, it often steps in and encourages consumption in some way. But not everyone appreciates this government intervention, for example some parents don’t want to get their children vaccinated and some motorcyclists would prefer to take the risk of not wearing their helmet.


In the United States, helmet laws are done on a state by state basis and as the graphic below shows, range from 100% personal choice eg Iowa, to mandatory helmets for everyone eg New York. Most have something in between, usually that under 21’s must wear a helmet.

It was in New York that Philip Cantos was participating in a protest against the state’s mandatory law with 550 other riders. Unfortunately, while riding he came off his bike and his head hit the pavement and he was pronounced dead at the local hospital. According to the medical experts, he would have survived had he been wearing a helmet.

A link to the article can be found by clicking here. It gives opposing two points of view - firstly that wearing a helmet reduces the risk of a fatality by 40%. Secondly, helmets do prevent accidents and that “The decision on when to wear a helmet while operating a motorcycle should remain with each responsible adult rider.” The resulting discussion should add interest to any lesson on merit goods.

And related to this, the “top 10 craziest ironic deaths of all time” is an amusing, if a little macabre read!

Summer Reading list 2011

As promised, better late than never, here is a selection of books for economics students keen to demonstrate a commitment to independent thought and active learning. Please reflect and comment on what you have read in your UCAS statement!


There are several books on the inter-play between Economics, Geography, Biology, Mathematics and History – which I hope you will find interesting! No author appears more than once! I am bound to have made some terrible omissions and I am happy to amend the list based on the recommendations of blog readers.

Please do leave a comment below. I have added in some links to relevant book reviews.

Anyway - here is my current selection!
1. 23 Things They Don’t Tell You About Capitalism (Ha-Joon Chang), ISBN: 1846143284

2. Adapt: Why Success Always Starts with Failure (Tim Harford) ISBN: 1408701529

3. An Optimist’s Tour of the Future (Mark Stevenson) ISBN: 1846683564

4. Animal Spirits (Akerlof and Shiller) ISBN: 978-0-691-14233-3

5. Art of Strategy (Dixit and Nalebuff) ISBN: 978-0-393-06243-4

6. Civilization: The West and the Rest (Niall Ferguson) ISBN: 1846142733

7. Crisis Economics (Nouriel Roubini) ISBN: 978-1-846-14287-1

8. Development as Freedom: (Amartya Sen): ISBN: 0192893300

9. Drunkard’s Walk (Leonard Mlodinow) ISBN: 0713999225

10. Exorbitant Privilege: The Rise and Fall of the Dollar (Barry Eichengreen) ISBN: 9780199596713

11. How Markets Fail: The Logic of Economic Calamities (John Cassidy) ISBN: 1846143004

12. How we Decide: (Jonah Lehrer) ISBN 978-0-618-62011-1

13. Keynes – the Return of the Master (Skidelsky) ISBN: 184614258X

14. Meltdown – the end of the age of greed, second edition (Paul Mason) ISBN: 1844676536

15. Origins of Virtue (Matt Ridley) ISBN: 0140244042

16. Prophet of Innovation: Joseph Schumpeter & Creative Destruction (TK McCraw) ISBN: 0674025237

17. Red Plenty: Industry! Progress! Abundance! Inside the Fifties’ Soviet Dream. (Francis Spufford) ISBN: 0571225233

18. Super Co-operators, Supercooperators: Evolution, Altruism and Human Behaviour (Nowak and Highfield) ISBN: 9781847673367

19. The Big Questions: Tackling the Problems of Philosophy with Ideas from Mathematics, Economics and Physics (Stephen Landsburg) ISBN: 143914821X

20. The Big Short: Inside the Doomsday Machine (Michael Lewis) ISBN: 1846142571

21. The Economics of Enough: (Diane Coyle) ISBN: 0691145180

22. The Master Switch – the rise and fall of information empires (Tim Wu) ISBN: 1848879849

23. The Plundered Planet: How to Reconcile Prosperity with Nature (Paul Collier) ISBN: 1846142237

24. The Upside of Irrationality (Dan Ariely) ISBN: 978-0-00-735476-4

25. Triumph of the City (Edward Glaeser) ISBN: 0230709389

26. Where Good Ideas Come From: Natural History of Innovation (Steven Johnson), ISBN: 184614051X

27. Worldly Philosophers (Robert Heilbroner) ISBN: 0140290060