Between January 2002 and July 2008 the world price of rice, a

Between January 2002 and July 2008 the world price of rice, a staple food for many people in developing countries, rose by slightly over 300%. As shown in Figure 4.26 the price of rice changed very significantly in the six months to July 2008 and was influenced by the actions of different governments.

The rise in the price of rice was typical of a wide range of commodities. These price rises caused food and fuel riots in developing countries. As a result some governments turned to protectionist trade measures. Vietnam limited rice exports while Cambodia and Egypt banned all rice exports. The Indian Government replaced the minimum export price that it enforced for non-basmati rice with a complete ban on rice exports. At the same time it placed restrictions on wheat imports for the purpose of disease control.

a. Calculate the approximate world price of rice in January 2002.

b. With reference to Figure 4.26, analyse the different causes of the price movements of rice from November 2007 to April 2008, and then after May 2008.

c. Explain two possible economic reasons for India’s introduction of export restrictions.

d. i. How might an effective minimum price for exports have helped India’s position? 

ii. Why might India have changed from the use of a minimum export price to an export ban?

e. Discuss the potentially harmful effects of India’s protectionist trade policy for both its own economy and that of the rest of the world.

A. Analyse the factors that might lead to contestability in a market.b.

a. Analyse the factors that might lead to contestability in a market.

b. Discuss the extent to which a rise in contestability in a market is beneficial for consumers as well as firms.

The supermarket business in the UK is dominated by the so-called ‘Big Four’. Their market shares in March 2014 are shown below:
Tesco ………………  28%
Asda  ………………. 19%
Sainsburys ……….  18%
Morrisons  ……….. 11%
Other established supermarkets, notably the Co-operative and Waitrose, are way behind with market shares of 5–6%. Over the year to March 2014, Tesco and Morrisons have lost out whilst the other two have hung on to retain or marginally increase their market share. UK supermarkets are in a fiercely competitive business. Since 2008, consumer spending on food has been cut mainly as a result of recession. At the same time, established supermarkets have faced a new challenge from German-owned discounters Aldi and Lidl. When they first entered the market a few years ago, they had a ‘no-frills’ image and often sold products that were unknown to UK consumers. That has now changed. Both have expanded their market shares in the last year, notably Aldi which has now around 4% of the market. They have also begun to stock new products that have appeal to a wider spectrum of customers. The response of the Big Four has been to embark on a vicious no holds barred price war. 

Recently:
■ Asda announced at the end of 2013 that it would spend £1bn cutting prices over the next five years.
■ Tesco then announced a £200m cut in its prices of core products, including fresh vegetables, and a scheme to reduce the price of petrol to its loyal customers.
■ Morrisons then followed a year of heavy losses by announcing that it was cutting its prices by £1bn over three years.
■ Sainsburys has remained committed to its ‘Brand Match’ policy of refunding to its customers any difference in its prices on selected items compared to competitors.

Tesco has until now been the price leader. Its profit margin is greater than its rivals although this has been shrinking. Whether it will be forced into taking further action on price is by no means clear. It could well be that the price-cutting campaigns that have been launched are a battle that none of the Big Four can win. Only time will tell.

A. What evidence is there to indicate that the UK supermarket business

a. What evidence is there to indicate that the UK supermarket business is an oligopoly? What further evidence might you need to be more certain that this is the case?

b. Comment on the suggestion that Tesco’s position as price leader is being undermined.

c. Other than price cutting, analyse the ways in which the Big Four might restrict the growth of new entrants such as Aldi and Lidl.

d. Discuss the extent to which the stores wars described above is in the best interests of the UK consumers. 

The supermarket business in the UK is dominated by the so-called ‘Big Four’. Their market shares in March 2014 are shown below:
Tesco ………………  28%
Asda  ………………. 19%
Sainsburys ……….  18%
Morrisons  ……….. 11%
Other established supermarkets, notably the Co-operative and Waitrose, are way behind with market shares of 5–6%. Over the year to March 2014, Tesco and Morrisons have lost out whilst the other two have hung on to retain or marginally increase their market share. UK supermarkets are in a fiercely competitive business. Since 2008, consumer spending on food has been cut mainly as a result of recession. At the same time, established supermarkets have faced a new challenge from German-owned discounters Aldi and Lidl. When they first entered the market a few years ago, they had a ‘no-frills’ image and often sold products that were unknown to UK consumers. That has now changed. Both have expanded their market shares in the last year, notably Aldi which has now around 4% of the market. They have also begun to stock new products that have appeal to a wider spectrum of customers. The response of the Big Four has been to embark on a vicious no holds barred price war. 

Recently:
■ Asda announced at the end of 2013 that it would spend £1bn cutting prices over the next five years.
■ Tesco then announced a £200m cut in its prices of core products, including fresh vegetables, and a scheme to reduce the price of petrol to its loyal customers.
■ Morrisons then followed a year of heavy losses by announcing that it was cutting its prices by £1bn over three years.
■ Sainsburys has remained committed to its ‘Brand Match’ policy of refunding to its customers any difference in its prices on selected items compared to competitors.

Tesco has until now been the price leader. Its profit margin is greater than its rivals although this has been shrinking. Whether it will be forced into taking further action on price is by no means clear. It could well be that the price-cutting campaigns that have been launched are a battle that none of the Big Four can win. Only time will tell.

A. Analyse the likely benefits that a car manufacturing firm might gain

a. Analyse the likely benefits that a car manufacturing firm might gain through expanding its scale of operations. 

b. Discuss whether gaining these benefits will mean that the firm is maximising its profits.

The supermarket business in the UK is dominated by the so-called ‘Big Four’. Their market shares in March 2014 are shown below:
Tesco ………………  28%
Asda  ………………. 19%
Sainsburys ……….  18%
Morrisons  ……….. 11%
Other established supermarkets, notably the Co-operative and Waitrose, are way behind with market shares of 5–6%. Over the year to March 2014, Tesco and Morrisons have lost out whilst the other two have hung on to retain or marginally increase their market share. UK supermarkets are in a fiercely competitive business. Since 2008, consumer spending on food has been cut mainly as a result of recession. At the same time, established supermarkets have faced a new challenge from German-owned discounters Aldi and Lidl. When they first entered the market a few years ago, they had a ‘no-frills’ image and often sold products that were unknown to UK consumers. That has now changed. Both have expanded their market shares in the last year, notably Aldi which has now around 4% of the market. They have also begun to stock new products that have appeal to a wider spectrum of customers. The response of the Big Four has been to embark on a vicious no holds barred price war. 

Recently:
■ Asda announced at the end of 2013 that it would spend £1bn cutting prices over the next five years.
■ Tesco then announced a £200m cut in its prices of core products, including fresh vegetables, and a scheme to reduce the price of petrol to its loyal customers.
■ Morrisons then followed a year of heavy losses by announcing that it was cutting its prices by £1bn over three years.
■ Sainsburys has remained committed to its ‘Brand Match’ policy of refunding to its customers any difference in its prices on selected items compared to competitors.

Tesco has until now been the price leader. Its profit margin is greater than its rivals although this has been shrinking. Whether it will be forced into taking further action on price is by no means clear. It could well be that the price-cutting campaigns that have been launched are a battle that none of the Big Four can win. Only time will tell.

Many central banks use ‘inflation targeting’. Their principal aim is to achieve

Many central banks use ‘inflation targeting’. Their principal aim is to achieve a particular annual rate of inflation within an acceptable range. For example, they might aim for a 2% rate of inflation but will accept a rate between 1% and 3%. Some economists claim that inflation targeting will help reduce the actual rate of inflation. The Central Bank of Turkey uses this approach and Table 5.1 shows how well it has worked.

In 2008 Turkey faced two particular difficulties. The New Turkish Lira (TRY) depreciated by 30% and food prices rose because of drought. Within the Turkish Consumer Price Index, food has a high weighting of 31%.How successful five countries were in controlling inflation in 2008 is shown in Figure 5.4.

a. (i) In which year was Turkey most successful in meeting its inflation target?
(ii) In which year was Turkey least successful in meeting its inflation target?

b. Explain the likely effect of the depreciation of the New Turkish Lira on Turkey’s rate of inflation.

c. With reference to Figure 5.4, how might differences between the inflation targets and actual inflation rates in Chile and Brazil in 2008 be explained?

d. How might having a target for inflation affect the causes of inflation?

e. Discuss the possible problems of constructing an accurate consumer price index.

In 2009, there was an economic recession in many countries. One aspect

In 2009, there was an economic recession in many countries. One aspect of the recession was that unemployment rose. Governments paid large subsidies to a number of industries to try to stop the rise in unemployment. This increased the government’s debt and affected its other expenditure. In an attempt to recover part of the extra expenditure, some governments increased income tax rates on people who had high salaries. However, critics of this policy argue that higher tax rates do not work. They say that the proportion of revenue received from top taxpayers falls and does not rise as taxes increase and the higher taxes cause damaging effects on the economy. It is better, they say, to decrease taxes. The decrease in taxes brings the government more revenue, not less revenue. Their opinion is supported by evidence from the past, as is seen in the effect on tax receipts of changing tax rates in the US as shown in Figure 9.31.

It is suggested that this opposite policy of reducing tax rates is better. Lower tax rates actually boost both the economy and tax revenues. For example, Russia, Latvia and Estonia reduced their highest tax rate and replaced a complicated system of taxes with a single income tax rate of 10%. They enjoyed a huge economic boost as a result. Another aspect of the recession was that businesses found it difficult to borrow money from the commercial banks. In order to try and make borrowing easier and help businesses, some central banks lowered their interest rates. The central banks also bought government bonds in an attempt to increase the supply of money in the economy. 

a. Explain what is meant by a recession.

b. The article states that ‘higher tax rates do not work’.
i. What does the article mean by this statement?
ii. Is there enough evidence in the article to justify this statement?

c. Discuss why the actions of the central banks mentioned in the article might have been expected to ease the recession.

Using a diagram, explain the effects on the market of an indirect

Using a diagram, explain the effects on the market of an indirect tax on the use of plastic bags.

India leads with bans on plastic bags. On June 20 2014, the Times of India reported that Agra was the latest city to ban the use of most types of plastic bags. The reasons here as elsewhere are to curb pollution. The issue with plastic bags is that their irresponsible disposal causes many problems. Plastic bags block drains and the sewage system; they litter streets and public facilities such as parks and cause a health risk to cows and bulls that roam the streets, foraging for food in waste dumps. When disposed of in rivers, the inks used to promote retailers often contain toxic lead which can work its way into drinking water supplies. Their manufacture also poses environmental issues due to the release of toxic fumes into the atmosphere. Six years earlier, the authorities in the capital, Delhi, had led the way by passing a regulation banning plastic bags. For various reasons, this regulation was never properly implemented. So, amidst growing fears over problems of their disposal, any retailer giving out plastic bags could be fined up to 100,000 rupees or five years in jail. Interestingly, a recent survey carried out in Pune showed that around 80% of respondents favoured a complete ban on plastic bags, blaming their production and disposal as a contributor to climate change. This view though is not shared by the many manufacturers of plastic bags. There are over 400 such businesses in Delhi alone and they claim that many thousands of jobs will be lost if the ban is properly enforced. They also argue that using recyclable products like paper, cotton and jute to make bags is not always as environmentally acceptable as it might appear to be. Furthermore, they claim that there is a desperate need for Indian consumers to be made more aware of the damage caused by plastic bags. This, rather than a ban or an indirect tax, should become the focus of how the community wants to control the use of plastic bags in the future. India appears to be taking the lead on bans on plastic bags. Other cities including Mumbai, Karwar, Tirumala, Vasco and Rajasthan all have a ban in place. The problem, as typified by Delhi, is that any ban will only reduce pollution if it is effectively applied.

Comment on the case for introducing an indirect tax on plastic bags

Comment on the case for introducing an indirect tax on plastic bags compared with that of banning their use in many Indian cities.

India leads with bans on plastic bags. On June 20 2014, the Times of India reported that Agra was the latest city to ban the use of most types of plastic bags. The reasons here as elsewhere are to curb pollution. The issue with plastic bags is that their irresponsible disposal causes many problems. Plastic bags block drains and the sewage system; they litter streets and public facilities such as parks and cause a health risk to cows and bulls that roam the streets, foraging for food in waste dumps. When disposed of in rivers, the inks used to promote retailers often contain toxic lead which can work its way into drinking water supplies. Their manufacture also poses environmental issues due to the release of toxic fumes into the atmosphere. Six years earlier, the authorities in the capital, Delhi, had led the way by passing a regulation banning plastic bags. For various reasons, this regulation was never properly implemented. So, amidst growing fears over problems of their disposal, any retailer giving out plastic bags could be fined up to 100,000 rupees or five years in jail. Interestingly, a recent survey carried out in Pune showed that around 80% of respondents favoured a complete ban on plastic bags, blaming their production and disposal as a contributor to climate change. This view though is not shared by the many manufacturers of plastic bags. There are over 400 such businesses in Delhi alone and they claim that many thousands of jobs will be lost if the ban is properly enforced. They also argue that using recyclable products like paper, cotton and jute to make bags is not always as environmentally acceptable as it might appear to be. Furthermore, they claim that there is a desperate need for Indian consumers to be made more aware of the damage caused by plastic bags. This, rather than a ban or an indirect tax, should become the focus of how the community wants to control the use of plastic bags in the future. India appears to be taking the lead on bans on plastic bags. Other cities including Mumbai, Karwar, Tirumala, Vasco and Rajasthan all have a ban in place. The problem, as typified by Delhi, is that any ban will only reduce pollution if it is effectively applied.

Explain why a plastic bag in many Indian cities is seen as

Explain why a plastic bag in many Indian cities is seen as a demerit good.

India leads with bans on plastic bags. On June 20 2014, the Times of India reported that Agra was the latest city to ban the use of most types of plastic bags. The reasons here as elsewhere are to curb pollution. The issue with plastic bags is that their irresponsible disposal causes many problems. Plastic bags block drains and the sewage system; they litter streets and public facilities such as parks and cause a health risk to cows and bulls that roam the streets, foraging for food in waste dumps. When disposed of in rivers, the inks used to promote retailers often contain toxic lead which can work its way into drinking water supplies. Their manufacture also poses environmental issues due to the release of toxic fumes into the atmosphere. Six years earlier, the authorities in the capital, Delhi, had led the way by passing a regulation banning plastic bags. For various reasons, this regulation was never properly implemented. So, amidst growing fears over problems of their disposal, any retailer giving out plastic bags could be fined up to 100,000 rupees or five years in jail. Interestingly, a recent survey carried out in Pune showed that around 80% of respondents favoured a complete ban on plastic bags, blaming their production and disposal as a contributor to climate change. This view though is not shared by the many manufacturers of plastic bags. There are over 400 such businesses in Delhi alone and they claim that many thousands of jobs will be lost if the ban is properly enforced. They also argue that using recyclable products like paper, cotton and jute to make bags is not always as environmentally acceptable as it might appear to be. Furthermore, they claim that there is a desperate need for Indian consumers to be made more aware of the damage caused by plastic bags. This, rather than a ban or an indirect tax, should become the focus of how the community wants to control the use of plastic bags in the future. India appears to be taking the lead on bans on plastic bags. Other cities including Mumbai, Karwar, Tirumala, Vasco and Rajasthan all have a ban in place. The problem, as typified by Delhi, is that any ban will only reduce pollution if it is effectively applied.

Air Passenger Duty (APD) is a flat rate indirect tax on passengers

Air Passenger Duty (APD) is a flat rate indirect tax on passengers who fly from UK airports. It is collected by the airlines who add the tax onto ticket prices. In 2009, the tax was £5 for economy class passengers travelling on flights within the European Union.
The table below summarises the likely effects of increases in APD on a typical flight.

a. Calculate the price elasticity of demand for each of the new tax rates.

b. Explain the meaning of each of the figures you have calculated.

c. Suppose the UK government wishes to reduce the demand for air travel for environmental reasons. Comment on how it might use the price elasticity of demand estimates to achieve this objective.