Shifting consumer preferences

The sales of fish fingers (frozen processed fish in breadcrumbs) is on the rise, Fish fingers were a popular 1970's dish, but declined in popularity over time. This is a perfect example of changing conditions of demand.
                
We know that the relationship between the price of a product and the quantity demanded will obey the law of demand. However the quantity of a product will vary while the price remains the same due to changing conditions of demand which shift the demand curve.

As the 1980's and 1990s' progressed real incomes rose. Changing real income is a change in the conditions of demand and revealed that fish fingers are inferior goods. The demand curve for fish fingers shifted to the left, while demand for substitutes for fish fingers, normal goods, shifted to the right. This might have included the wonderful Chicken Kiev in the 1980's and pre-prepared meals such as curry's in the 1990's.

The demand curve for fish fingers now appears to be shifting right once again and it's not the law of demand that is causing it. Rather the concerns about the dangers of processed meant, such as bacon and sausages, is being credited with the change. As the demand for the substitute goods shifts left the demand for fish fingers shifts back to the right. The result is that more fish fingers are being bought at the market price, while fewer sausages and bacon rashers are purchased.

The diagram below shows the effect. The demand curve in each market shifts from D to D' as tastes and preferences, another condition of demand, changes for each good.
                                             Fish fingers                        Sausages

 

The article from the Daily Telegraph below explains some other factors and provides some numbers on the changes in quantities. If you are considering this for a microeconomics IA you should draw your own diagrams and incorporate the numbers.

Note that the rise in fish finger consumption could also be due to falling real incomes in the UK, particularly in lower income households. That is the income effect and shows fish fingers are still an inferior good. 

The Daily Telegraph article is here

 

Losing and gaining from inflation

Continuing the UK pound theme today I will look at a story on the effects of higher inflation in the UK.

Inflation has been subdued across the world in recent years despite very expansionary monetary policies being pursued by all central banks. In the UK inflation is well below the Bank of England target of 2% and in August was just 0.6% on the CPI measure. It has rocketed to 1% in September.

So far there is only anecdotal evidence that the fall in the value of the pound is responsible, but import prices will rise with the near 20% fall in the value of the pound since June. This would cause cost-push inflation and will compliment the demand-pull inflation that the Bank of England are encouraging by their recent reduction in interest rates to 0.25%.

The article, again from the BBC, looks at the effects higher inflation might have on households. It points out that when inflation reaches a rate higher than wages growth then real incomes start to fall, making people worse off. It also notes that those on benefits, many of which are frozen in value until 2020, also lose out.

One group that is protected are those who receive the old age pension (that is everybody in the UK who are old enough, it is not means tested). The old age pension goes up by at least 2.5% a year, or inflation on CPI or wages growth - whichever is higher. This protects the old against an important cost of inflation.

Note the link in the article to 'winners' from inflation.

The BBC article is here

The costs and benefits of inflation is relevant to everyone. This provides a very useful survey of the issue facing people today with low inflation and the impact of rising inflation. 

How is the Australian economy doing?

Yesterday the ABS presented a report on the state of the economy. The news was somewhat mixed.

The good news was that the economy is growing more strongly than expected. An annual rate of 3.1% after a strong first quarter. This is encouraging as it suggests that growth might continue to pick up over the next year or so.

However there was bad news on business investment, which contracted 2.2%. Investment is a component of Aggregate Demand and a driver of future growth on the supply side.

There was also bad news on real disposable income per capita which has been declining for two years according to the ABS. This means the purchasing power of households is declining and so lower material living standards will follow.

The picture is very mixed. The 'third phase' of the mining boom is driving output and exports. The third phase of the mining boom is the 'production phase', all those new and larger mines producing coal, iron ore and LNG. But the mining sector is located in remote Australia and provides few jobs, so most people will not see the benefit of this economic growth.

The ABC covers the report here (some nice graphs)

This article is most relevant to VCE students who must know how the Australian economy is performing and what the major demand and supply side influences are on the economy. IB students will be able to use it to understand how economic performance is measured and draw the inference that not all indicators point in the same direction.

The cost of economic growth may be falling

In economics there are costs and benefits associated with every decision and every change. In recent years when considering the desirability of economic growth the costs have become somewhat more important than they were.

For generations economic growth was seen as good. The benefits of higher real incomes and a higher material standard of living were seen as the primary long-run goal of economic activity. It was not until the 1960's when E.J. Mishan wrote 'The Cost of Economic Growth' that economists began to seriously consider that there was a serious downside to continuous growth.

Today we understand that non-material living standards can be seriously affected by growth (take for example China's atmospheric pollution) often through negative externalities. Also we know that material living standards are are threatened by some elements of growth, such as global warming.

Some economists supported continued economic growth following Mishan's criticism, such as W. Beckerman in his 'In Defence of Economic Growth'. He argued that technical progress would allow society to overcome many of the problems of growth and that the higher real incomes obtained through growth would allow us to devote the necessary resources to deal with the problem.

There had been little to support Beckerman's contention until recently. The article from the New York Times described how growth and CO2 emissions have become 'decoupled' in some advanced economies. This holds out the possibility of economic growth without greater environmental damage. There is a long way to go however, only 21 out of 191 countries have achieved growth without more CO2.

The New York Times article is here

This article is well suited to VCE students as they look at living standards and economic growth in Outcome 2 of Unit 3. It also provides IB students with the opportunity to look at the wider aspects of growth and to evaluate its impact. It provides all of us with the reminder that there are always costs and benefits to consider.

Measuring inflation and the standard of living

Australia has an odd way of measuring inflation compared to the rest of the world. The data is collected infrequently and only in the urban areas.

This makes the measure difficult to use when answering the question "Is the standard of living rising or falling for Australians?"

Of course the real cost of goods and services is only one way of measuring the standard of living, but it is an important one. And in the election campaign much has been made of 'skyrocketing prices" by the idiot Abbott and his cronies.

This article in the Guardian Australia shows that Australians are actually better off in real terms when considering their nominal incomes and the price level. This is very much in contrast to the rest of the developed world and you have to ask why Labor have not made much more of this. But that's another story.

What the article does show is how important it is to include the correct prices of goods in any calculation of inflation and how you have to compare it to incomes when considering real incomes. It also exposes the Liberals claims on the cost of living as a crude distortion of the facts. But we are used to that from Australian politicians aren't we?

The Guardian article is here

And another more scathing article is here