Wednesday, 28 September 2011


Using a supply and demand diagram, explain the trend we have seen in the rental market, thinking about the impact on demand, supply and hence on price. How does this explain why sealed bids have been used to combat the increased competition?
The rental market in Britain has changed dramatically during and after the recession. People, who were not able to afford buying a house or taking a mortgage, decided to rent a property instead and keep on saving. The demand curve shifted to the right causing prices to rise. With limited supply, rents increased by up to 35% in 2010

Which factors have affected (a) the demand for rental properties and (b) the supply of rental properties? How is the elasticity of demand and supply relevant here in terms of the impact on price?
a)      Factors, which affected the demand for rental properties:

Difficulties in getting mortgages
High house prices
Higher education fees (“However, rises in university fees will see student demand come down - though foreign student demand will remain strong, thanks to the pound's weakness. ”)

b)      Factors, which affected the supply of rental properties:

Lower demand for buying houses (people decided to let their properties)
 “The supply of buy-to-let mortgages is improving and new lenders have joined the market, but there have not been enough new entrants to replace those that were pushed out during the credit crunch.

To what extent is a sealed bid format fair on potential tenants? Who does such a strategy favour?

A sealed bid format is fair on potential tenants  because it is the price that matters. Landlord is more likely to make his decision according to your proposal. It is not so important if you are a student, have children or a pet. Moreover, a potential tenants will not end up in a situation, when a landlord suddenly changes his mind, because he has received a better offer.

Richard Davies, head of lettings of Chesterton Humberts, said that there was no mystery in the sealed bid process.
"If we do have more than one offer for a property, what we do is give a deadline for people to submit their best and final offers. All those offers go to the landlord who will decide who to go with"
This strategy favours property owners who become more likely to receive bigger profit, because of higher competition. Additionaly, "The only people who like sealed bids are vendors who have most probably achieved a figure way above their asking price," says Tim Le Blanc-Smith, Director of John D Wood & Co., South Kensington.

How could this sealed bid strategy be an example of price discrimination?
If a potential tenant offers a much higher price than the value of the property it a discrimination against average people who propose a reasonable price.

What is likely to happen to your consumer surplus if you have to submit a sealed bid?
After submitting a sealed bid in highly competitive market consumer surplus is likely to fall and reach 0.

That's what I think,


Tuesday, 27 September 2011

Oily oil

Explain why oil prices have been rising. Use a diagram to illustrate your answer.
The main reasons for oil price increase are:
-       Higher demand for oil caused by population growth and technological development, especially in the developing countries (e.g. China).
-       Weather conditions, such a heavy snow falls or low temperatures, not only increase demand, but also result in more difficult delivery conditions, which causes an increase in oil prices.
-       Increased fuel duties and the higher VAT rate
-       Declining dollar encourages people to buy oil as an alternative investment.
-       Political situation, mainly in the OPEC – 40% of oil production, because they can easily control the market and prices.
-       Natural disasters (e.g. earthquake and tsunami in Japan)

How can the concepts of price elasticity of demand, income elasticity of demand and price elasticity of supply help to explain the magnitude of oil price movements?
PED (Price elasticity of demand) – Demand for oil is inelastic because there is no common substitute of this resource. If the price of oil goes up, people will still buy it.
YED (Income elasticity of demand) – Higher oil prices would affect people on a low-income. If the income falls people are more likely to buy less oil or to choose public transport.
PES (Price elasticity of supply) – The oil resources are limited (peak oil theory) and the lower is supply, the bigger is the price. However, the current oil prices are not cause by the shortage of this resource, but by the reasons mentioned above and speculations.

Examine what is likely to happen to oil prices over the coming months. What are likely to be the most important factors in determining the direction and size of the price movements? Distinguish between demand-side and supply-side effects in your answer.
Demand-side: The oil prices will depend on weather conditions. Many people will pre-buy oil to ‘be prepared for the cold winter’ and, consequently that will increase oil prices. It also will depend on current situation in the Eurozone, because oil often becomes a ‘safe investment’ in bad times.
Supply-side: Oil prices depend on OPEC forecasts, i.e the situation in the Middle East.

What are ‘crude futures’? Explain how actions in the futures market are likely affect spot prices.
Spot price - the current price at which a particular commodity can be bought or sold at a specified time and place (
Futures contracts are financial instruments and carry with them legally binding obligations. Buyer and seller have the obligation to take or make delivery of an underlying instrument at a specified settlement date in the future. 
Excessive speculations have a significant impact on oil prices.

WATCH: Playing the oil prices money game

To what extent can OPEC control oil prices?
OPEC controls production levels (i.e. has a possibility to increase production to avoid a surge in oil prices or the other way around). Moreover it prepares demand forecasts, which are also very influential.

If crude oil prices go up by x%, would you expect petrol station prices to go up by approximately x%, or by more than or less than x%? Explain.
If crude oil prices go up by x%, I would expect petrol station prices to go up more than x%. Crude is the primary raw material used to produce gasoline and other petroleum products. If its price would go up the petrol station would rise more due to transportation costs and the cost of refining the oil into gasoline.

Why have central heating oil prices risen by around 70% of over the past three months? What are the implications of your answer for the type of market structure in which central heating oil companies are operating?
In the last months of 2010 oil prices have risen by around 70%, which was caused by the profiteering from the cold weather. Central heating oil companies increased their prices in the consequence of higher demand due to cold winter. They knew that people would still buy it to heat their homes. People with oil heating suffered from the lack of close substitutes and the oligopolistic oil market.

That's what I think, 


Monday, 26 September 2011

Peak oil theory

The main economic problem is scarcity - fulfilling people’s want and needs with limited resources. Peak oil theory states that, at one point, this resource will reach the maximum level of production effecting the continuous decline afterwards.

M. King Hubbert, who created and first used the models behind peak oil, initially predicted in 1974 that peak oil would occur in 1995 "if current trends continue." 

However, in the late 1970s and early 1980s, global oil consumption actually dropped (due to energy-efficient cars, electricity and natural gas for heating). This clearly shows that the only way to identify the timing of peak oil will be in retrospect.


That's what I think, 


What are you driving?

What type of tax is VAT? Illustrate the effect of such a tax on a diagram and explain why the higher the price of the good, the bigger the impact of the VAT rise. How might this impact inflation?
VAT (Value Added Tax) is a type of a consumption and regressive tax. It is a tax on spending on goods and services and its value, as a percentage of households’ budget, increases inversely with the income rate.
Let’s take a 2,5% VAT rise in the UK. If you buy a cheap good (e.g. a pencil) the increase in price will not be so significant as if you decide to buy an expensive product (e.g. a car). Therefore, VAT has a larger effect on expensive items.
Increasing VAT rates could cause cost-pushed inflation, but on the other hand it could provide an incentive for people to spend less or import and, consequently, lower the inflation.
"Coupled with a 5% monthly rise in petrol prices, gas and electricity price hikes and another solid rise in food prices, this [the VAT rise] could lift the headline inflation rate up to about 4.2%," said Vicky Redwood, senior UK economist at Capital Economics.

Why are car sales expected to fall in the UK over the coming year? Given this expected trend, what might we expect to see in terms of car prices?
Car sales are expected to rise mainly because of VAT rise (from 17.5% to 20%) and forecasted public sector job losses. In order to change this situation car prices are likely to fall to encourage people to buy more.

What impact might rising petrol prices have on new car purchases? What figure would you expect to see for cross elasticity of demand?
Higher oil prices are likely to increase fuel-efficient (or electric) new cars. The cross elasticity of demand would be a positive number, because these products are subsidies. For example a 10% rise of oil prices would cause the demand for new cars to increase by 20% and figure of the cross elasticity of demand would be 2.

How might the expected decline in car sales affect the UK economy over the next 12 months?
Further decline in car sales could cause higher unemployment and lower confidence among investors. Paul Everitt, the boss of Britain's automaking association SMMT, said that he expected demand to strengthen in the second half of 2011.

What type of market structure is the car industry?
Car industry is a monopolistic competition with many independent buyers and many independent sellers.  Main characteristics of monopolistic competition are:
1. All firms produce similar yet not perfectly substitutable products.

2. All firms are able to enter the industry if the profits are attractive.

3. All firms are profit maximizers.

4. All firms have some market power, which means none are price takers.

Read more:

How did the car scrappage scheme help car sales?
The car scrappage scheme was introduced to help the motor industry cope with falling sales after the recession. The government estimates that 4,000 jobs with manufacturers and suppliers were supported. Under the car scrappage scheme owners of cars at least 10 years old could get £2,000 off the price of a new vehicle. This encouraged people to buy new cars (with positive effect on the economy, as well as, on environment).

What might explain the different trend seen in the German car industry?
Germany is the Europe’s largest car market and produces most luxurious and expensive cars in the world. The demand for luxury goods is inelastic and, consequently, German car industry did not suffer as much as in the UK. What is more, the German government has provided much more efficient and quicker help for the industry by implementing the scrappage scheme. 

That's what I think,


Wednesday, 21 September 2011

Full of energy

In the last January BP, one of the world’s leading energy company, has presented its new report on the Energy Outlook 2030.  This amazingly interesting (!) document about long-term energy trends is a great source of information, even though the predictions themselves are not very likely to become true.

What are the most powerful driving forces behind the demand for energy?
The factors behind the demand for energy are:
1.       Population growth:
(Since 1990 world population has more than quadrupled!)
2.       Income growth (predicted to grow at factor of 25%)
The world’s real income is likely to rise by 100% over the next 20 years.
 Higher personal income gives people the opportunity to spend more and improve their level of life by, for example, buying new cars and other types of energy-consuming equipment.
3.       Global integration and globalisation
(higher trade, travel and transport rates)
What is interesting, according to the report, the energy consumption for transport is going to decline in the OECD countries. 
4.       Industrialisation, urbanisation and motorisation, causing further technology improvements and innovations.

Polish coal resources and production

5.       Energy policies (the promotion of energy efficiency or different kinds of regulations fighting the climate change)

What assumptions are made about growth rates in OECD and non-OECD countries?
The global primary energy consumption is predicted to grow by 39% with an average annual growth of 1,7% (in the two previous decades it was 1,9%)., but according to the report, developed countries this rate would be ONLY 6%. Non-OECD energy consumption would account for 93% of global energy growth (now it is 50%). That means that emerging economies are seen driving energy demand.

Why does the report forecast virtually no increase in energy demand in developed countries?
It is mainly due to the fact, that in developed countries there is a much slower population growth accompanied with strict environmental policies. Moreover, the process of industrialisation in these countries is over, so there is no big need for more energy.

What factors would lead to a substitution of sustainable energy sources for fossil fuels? What would determine the size of such substitution?
1.       Innovations and technology development
2.       Implementing further environmental policies and possibly international agreements
3.       Higher costs of fossil fuels
4.       A shortage of any of fossil fuels

The size of such substitution would be determined by the amount of time of these changes (processes) and the prices of these substitutions.

Oil is expected to be the slowest-growing fuel over the next 20 years, while natural gas is likely to become the fastest-growing fossil fuel.

What is the role of the price elasticity of demand for and supply of oil and the income elasticity of demand for oil in determining oil consumption in different parts of the world?
Often the demand for energy is price-inelastic, because there is no direct substitution (f.g, most of the produced cars need oil and even if the price goes up, people will still buy it). The biggest problem with oil is, that it is supplied mainly by OPEC countries, who can easily control prices and the volume supplied. If  the income goes up there is bigger demand for energy, because people can buy more and want to increase their level of life (easy to see in the emerging countries of Asia)

Why may high energy prices not necessarily mean ‘doom’?
They could work as an incentive to innovation, finding and investing in new sources of energy (shale gas) and, most obviously, would cause people to use and buy less energy with a positive effect on environment.
(The recently made available US Department of Energy report revealed that the largest reserves of shale gas in Europe are in Poland!)

People can (and always will) argue about the reliability of these kind of reports. In my opinion, the most important thing is that it is a good possibility for a wider debate on energy issues. But…

Are we able to predict the future in any way?

“In 1894, a columnist in The Times estimated that such was the growth in horse-drawn carriages that in 50 years every street in London would be buried under nine feet of manure. Some of today's extrapolations for energy use look equally ridiculous. We do not have to rely on a technological breakthrough as significant as the internal combustion engine to save us from being buried in manure.

That’s what I think.


Monday, 19 September 2011

income TAXES

Why may relative income tax rates between countries give only a partial picture of the international competitiveness of these countries? What else would need to be taken into account?
Compering income tax rates in different countries may give a general clue about their international competitiveness, but there are many other factors worth taking into consideration. Firstly, the rates of expenditure taxes could differ dramatically (for example the VAT rate). Secondly, there cooperate taxes and tariffs are also important issues to take into account. Thirdly, the current political and economic situation can influence country’s competiveness. It is more beneficial for an investor to put money into a country with a stable growth than into one with a risky public debt.  Others factors are: the quality of labour force and infrastructure, costs of living (education fees, rent) and social insurance.

Does making taxes more steeply progressive necessarily act as a disincentive to output? Explain.
Of course it depends. Generally, more steeply progressive taxes could act as a disincentive to output, because many rich people could flee to other countries or simply work less. On the other hand, they could gain more from government’s spending and investments.

How progressive are income taxes in the UK compared with other countries? Give examples.

In the UK individual income taxes are highly progressive at the rate of 0-50%. In Norway it is 28-49%, in Ireland 20-41% and in the USA 15-45%.

What externalities (positive and negative) might result from steeply progressive income tax rates?
Countries have to find a compromise between efficiency, fairness and simplicity. Steeply progressive income taxes could cause a disincentive for wealthy people to work more and also encourage them to leave the country, in order to pay lower taxes. On the other hand, steeply progressive tax rates could help in reducing the gap between the rich and the poor in the society. Another advantage of it is a bigger tax revenue for the government and the possibility of higher spending and investment, which would benefit the whole nation.

That's what I think.


Au & Ag

Why have the prices of gold and silver risen so much recently? 

Gold and silver were always described as a safe and stable investment. It is caused by its historical status, esthetical appearance and no other cheap subsidies. Their high reputation has started when people begun using gold coins and jewellery and its popularity has never stopped. Traditionally, investors turn to these precious metals at times of uncertainty and rising prices. Recently, weaker dollar, inflation and conflicts in the Middle East and North Africa caused their prices to rise high. As gold is priced in dollars, any fall in this currency means it becomes cheaper for investors using other currencies to buy it. The prospect of low interest rates in the US is driving investors seeking higher returns towards gold. Another factor of the rise of gold is its use in jewelry, particularly in India. According the World Gold Council, Asian consumers accounted for a full 51% of total jewellery and investment demand in 2010. Silver, on the other hand, is often used in industry, particularly in electronics. Higher demand of these limited goods causes their prices to raise. 

Why has silver risen more than gold? 

The main reason of silver prices increasing more than gold is its wide use in industry. After the financial crisis and during the global recovery demand for silver in industry rose by 21% last year. 

Why may higher rates of world inflation make investors turn to precious metals for investment? 

Gold is considered as an ‘inflation hedge’, because if inflation goes up the gold prices usually also increase. On the other hand, as soon as interest rates rise, the cost of betting on gold will rise and speculators will probably pull their money out of the market and gold prices will fall. 

How are future decisions by the Fed likely to affect the price of gold? 

As the Fed keeps inflation down, the price of gold will continue to rise. As soon as the economy recovers, the price of gold will start to go down as investors will start to move from the safe-haven to more risky investments such as stocks.

That's what I think.


Thursday, 15 September 2011

oh, EUROzone!... What have you done?

What is the relationship between interest rates and inflation. Why have the ECB and the Bank of England reacted differently to rising inflation?

There are two types of inflation: cost-push (caused by higher production costs – oil, labour or import prices) and demand-pull (caused by higher demand for goods). There are two ways for the government to control it (fiscal and monetary policy). The fiscal policy is about taxes and government spending and monetary is about interest rates. If interest rates are low it enables people to spend more and that causes demand-pull inflation. On the other hand, if the economy grows too fast, the central bank of a country can decide to increase interest rates in order to reduce people’s demand and lower inflation.

In the UK interest rates have remained at the same, historically low level of 0.5% since March 2009, while in the Eurozone they were increased from 1% to 1.25% and there is a pressure for further rise due to the increasing economic growth in most of countries. Why are there two different reactions to rising inflation?

Raising interest rates increase the cost of borrowing, and there are concerns this may cause the UK to fall back into recession.

"Premature rate increases will have negative effects on growth and jobs. With wage increases remaining subdued, we strongly urge the MPC to hold its nerve and avoid taking any action that may risk derailing the recovery." said David Kern, the BCC's chief economist.

The ECB decided to increase interest rates to lower the inflation by decreasing demand.

""Monetary data continue to point to a modest recovery in euro area money and loan growth," While the data in itself do not indicate upside risks to price stability that require further monetary tightening, they are further proof that the economic situation has changed substantially since 2009 -- which is why the ECB thinks that extremely low interest rates are no longer appropriate.” said Christoph Balz, economist at Commerzbank.

Is the inflation currently being experienced in the Eurozone cost-push or demand-pull? Illustrate your answer with the help of a diagram.

The inflation in the Eurozone is cost-push due to, for example, higher oil prices. If prices of production and transport go up it causes prices of the product to raise. 

"The combination of high oil prices, a strong euro, and fiscal and monetary tightening has started to dent the economic mood in the euro zone," said Martin van Vliet, economist at ING. 

What is the relationship between interest rates and the exchange rate?

An increase in interest rates will raise the exchange rate, and vice versa. Higher interest rates attract inflows of funds from overseas and this rise in demand for pounds can push up the price of sterling.

Why is there some concern about the ‘economic sentiment’ indicator in the Eurozone?

The Economic Sentiment Indicator can be used as a measurement method of European Union’s economic strength. The five indicators are: Industrial Confidence Indicator; Services Confidence Indicator; Consumer Confidence Indicator; Construction Confidence Indicator and Retail Trade Confidence Indicator. The concern about it is that, the ESI shows the economic health of the EU more as a whole, than individually. Most EU members reported an increase in sentiment in 2010, it was mainly caused by the 4 points increase in Germany. Other countries that recorded a major increase were Poland (!), France and Italy. In contrast, the ESI remained weak in Spain, Portugal and Greece.

What is the relationship between interest rates and economic growth? Explain the process by which a change in interest rates could affect AD and then economic growth and employment.

An economic growth is an increase of value of output of goods and services in an economy over a period of time. It is measured mainly by GDP (or GNP). A raise in interest rates would cause people to spend less (lower demand) and, consequently, prices to fall. It would probably lead to lower economic growth (or a recession – two consecutive quarters of negative economic growth) and higher unemployment. On the other hand, reducing interest rates would cause just the opposite result. People would be able to spend more (assuming that their low confidence would not lead them to saving their money) and cause the economic growth, and lower unemployment.

Why is this interest rate rise (and possible further rises) likely to hurt countries, such as Ireland and Greece more than other countries within the Eurozone?

"The hike is unwelcome for peripheral countries, but arguably the core member states were in need of this move already some time ago," said ECB president Jean-Claude Trichet

Higher interest rates in these countries would cause lower consumer spending even more and increase unemployment. It would also hurt small businesses and individuals who are already have problems with repaying their loans. The economies of Greece, the Republic of Ireland and Portugal would remain trapped by large debts, high unemployment, weak consumer spending and uncompetitiveness.

That's what I think.