Below is a very good video from the Wall Street Journal on price elasticity of demand (PED). PED is key to understanding how companies price their products. Consumer spending has held up relatively well so far despite inflation, but experts say we’re approaching an inflection point. The WSJ explains the role ‘elasticity’ plays in a company’s decision on whether to raise prices. After the video I’ve included some notes about calculating PED and a mindmap. Price Elasticity of Demand (PED) This measures the relative amount by which the quantity demanded will change in response to change in the p ..read more

Climbing Ladder on a Container Ship With the downturn in global trade the international transport industry has been very much affected. Those that have been associated with the distribution of goods get an early indication of the slowdown in global growth. The obvious indicators are: idle cranes, queues of merchant ships dwindle etc. But what about the speed of cargo ships and the length of ladders to climb aboard? When the world economy was “steaming” ahead the captain of a merchant ship said that they cruised at 20 knots but in a recession we slowed to 16 knots. A harbour pilot summed up th ..read more

The recent David McWilliams podcast entitled Humanomics discusses how economists have struggled to make accurate decisions as Ben Bernanke’s recent report on the Bank of England’s failures show. He states that economists need to get out more and uses the example of when he worked as an economist for the Irish Government. Whilst calculating the GDP forecast for the Irish economy using all sorts of formulae a senior economist told him to look out the window at the number of cranes in the skyline as that will give you an idea of what is going on in the economy. He compares the beauty of the exac ..read more

With exams approaching in the northern hemisphere thought this post might be useful. There are concerns about essay writing in that students tend to either write sentences that are too long, or they do not know how to write different types of sentences. Better essay writers vary the style of sentence they use to keep the reader interested. Sentences of 20 words or less will make it easier for the marker to grasp the point you are trying to get across. Below are some ideas that may be useful to add some spice to student essays. Source: Dr Ian Hunter – ‘Write That Essay! A Practical Guide to Wri ..read more

With the exam season approaching in the northern hemisphere here is something on the kinked demand curve. In 1939 Paul Sweezy of Harvard University wrote his paper ‘Demand Under Conditions of Oligopoly’ in which he explained conditions around the kinked demand curve. He suggest that rivals in a market react differently according to whether a price change is upward or downward. If producer A raises his price, his rival producer B will acquire new customers. However if producer A lowers his price, his rival producer B will lose new customers. From the point of view of any particular producer thi ..read more

Post COVID-19 has seen the rapid rise in prices globally which in turn has led central banks implementing a tight monetary policy (higher interest rates) to counter this rise in inflation. The impact on consumers of higher interests depends in their current financial situation. In most economies a mortgage is the largest liability that consumers have and the property market is a large part of the economy. Mortgages can be fixed or floating and research from the IMF show that fixed-rate mortgages have become more common globally – see image. Fixed-rate mortgages vary – close to zero in South Af ..read more

John Mauldin’s book “End Game: The End of the Debt Supercycle and How it Changes Everything” and his weekly publication ‘Thoughts from the Frontline’ address the topic of debt and in particular when debt-fuelled asset price explosions seem to be to good to be true, they probably are. Debt is useful if you can pay back the borrowed money and from it are able to generate value in an economy. This ultimately raises living standards and economic growth. However throughout history debt has been misused by both the private sector and government. This area has also been studied by Ken Rogoff and Carm ..read more

Higher incomes may make life easier with an ability to afford certain items whether it be a new car or household appliance but this is only one variable in predicting happiness. Other variables, such as social support, life expectancy, freedom, generosity, and the absence of corruption, also help explain varying levels of happiness between countries. The Easterlin Paradox In the mid 1970s Richard Easterlin drew attention to studies that showed that, although successive generations are usually more affluent that their parents or grandparents, people seemed to be no happier with their lives. It ..read more

With the northern hemisphere getting ready for the external exams in May/June here is a revision post on how the elasticity of demand varies along a demand curve. Notice in Case A that the fall in price from Pa to Pb causes the the total revenue to increase therefore it is elastic – the blue area (-) is less than the orange area (+). In Case B the opposite applies – as the price decreases from Pa to Pb the total revenue decreases therefore it is inelastic – the blue area (-) is greater than the orange area (+). In Case C the drop in price causes the same proportionate change in quantity demand ..read more

It is the job of the Reserve Bank of New Zealand to keep the consumer price index (CPI) between 1 – 3% aiming for 2%. However, to many people the CPI is foreign to them and price stability is impossible to define unless you specify which prices you mean. How we perceive inflation is quite different from those that calculate the CPI. Consumers don’t keep records of how much they pay for everything they buy but have a general sense of what their living costs are. The average consumer doesn’t look at the CPI but perceive inflation when it starts having a visible effect on their lives. This is why ..read more