Monday, June 30, 2008

Learning Economics Through Cartoons

Those are among the common economic problems shared by the US & UK economy. Probably President Bush & Mr. Gordon Brown both have no idea as to which problems to be tackled first as all of them come at the same time

In US, the big-3 automobile manufacturers namely Ford, General Motors and Daimler Chrysler have been on a consistent basis of losing their market share to Japanese rivals, Toyota & Honda. US made cars are well known for its bulky size since there are emphasis on safety features. Bulky means heavier & thus greater fuel consumption

US economy is suffering from the 'beating' of high oil price which had exceeded US $ 140 few days ago. This will definitely send US economy to a deeper level of recession

Sunday, June 29, 2008

Why Zimbabwe Is Collapsing? (Unit 5B)

Zimbabwe on the collapse:

1. Hyperinflation

Few years back, the Zimbabwe’s external debt mounted to more than 100% of its GDP. To overcome this, the Reserve Bank of Zimbabwe (RBZ) printed more money causing the supply of money to increase more than real GDP. This devalued the value of existing money causing price to rise. Second, serious shortage of basic goods. With too much money in circulation & yet few goods produced, prices of these goods have been ‘bid’ up to an unprecedented level. This is worsened by the imposition of price control, causing producers to be even more reluctant to produce due to escalating production costs. This means even worse shortage of basic goods (cycle repeat itself). This largely explains for its hyperinflation which is more than 100, 000%

2. Corrupt government

The Mugabe-led government is accused of highly corrupt & most of the aid given by IMF before 2004 has been siphoned for their own use, for political agenda etc. It could have benefited the whole Zimbabweans if the monies were used to construct more schools, increase number of hospitals, research centre & held campaign to rebuild its tarnish image on international stage

3. Food shortage

This stemmed from the land reform program in year 2000 where those lands owned by the Whites’ farmer were confiscated with the aim of benefiting landless Black Zimbabweans. With poor knowledge on modern farm management, usage of manpower rather than machineries, zero technology usage, poor international network & lack of innovation had contributed to serious fall in the productivity of agriculture sector. Supply of corn as their staple food has fallen drastically over these 7 years & tobacco production for the export market has suffered too

4. Refusal of IMF to help

Unsustainable foreign debt, failure to service the debt to IMF & misusage of aid given e.g. billions of dollars were wasted to finance the war in Congo rather than being used up to finance domestic development. These were the few main reasons why IMF has stopped providing aid to Zimbabwe

5. Serious drop in FDI

The chaotic land reform program, political instability, hyperinflation which will definitely increase the costs of operating in Zimbabwe, low productivity among its workers, low literacy, poor expenditure & management of infrastructures, difficulty even in getting telephone lines & erratic blackouts due to low availability of generators have caused foreign investors to stay away. What’s more with growing attractiveness of markets in Asia like China & India. The value of FDI has shrunk from USD 400 million (1998) to USD 30 million (2007) (www.allafrica.com)

6. Tarnishing tourism image

Despite Zimbabwe can no longer rely on its primary sector as a main source of income, it can still somehow concentrate on tourism. Places of attractions are like the Great Zimbabwe stone ruins, Victoria Falls, Lake Kariba & extensive wildlife (www.allafrica.com). However, its tourism sector has started to decline ever since 1999 due to various international bad publicities

7. Brain drain

Zimbabwe has low literacy rates. For those educated ones, most of them had migrated to South Africa. This is worsened by emigration by the Whites too whereby we know that Zimbabwean economy depends much on them. In the end, there will be no productive workforce to rejuvenate the economy which is on the collapse

8. Political instability

Mugabe’s regime, by threat has forced his main political rival, Morgan Tsvangirai to withdraw himself from the election. This caused Mugabe to be automatically enrolled as the President once again after a landslide win in a one-man-race election. According to BBC, during the election run-up, the supporters of Morgan were either beaten or jailed. For women they were raped & 90 deaths had been reported thus far

9. Unexploited resources
No doubt Zimbabwe is endowed with rich mineral resources. Exports of gold, asbestos, chrome, coal, platinum, nickel, and copper could lead to an economic recovery one day if they were to be fully exploited. However, in order to do so they first need to spend substantially on expensive drilling machineries, team of researchers that can lead to discovery of new mines, proper logistic network & international connection. In other word, inevitably the Zimbabwean economy must rely on FDI. Also the current government needs to foster & rebuild their ties with EU & US which conduct a sanction on its economies

10. AIDS

As much as 20% of its population is inflicted with AIDS & it is estimated by UN (United Nations) that on the average, 565 new cases are reported everyday. Life expectancy for males is 41 years & for females 39 years old. This is a disaster as that is the age where one working individual contributes to the economy the most. This spells a serious shortage of workforce in the very near future if nothing is done to tackle it

Thursday, June 26, 2008

Will Oil Price Go Down One Day?

This is a question asked by one of my student in our MSN conversation

Student’s question: Sir, I have a question. Do you think oil price will go down again?

Thanks for asking or else I will be drained of topic so soon in my newly-started blog. Ok, as you can see in Economics there are always two sides of argument with one weighing more than the other. Before I jump into my personal conclusion, here are what I’m going to say

Yes,

1. If there is a swing in the mood of speculators. The whole world including Arab Saudi itself is now blaming speculation activities that take place in the oil market. Expectation that the oil price will increase even more in the near future to USD $ 200 per barrel, has caused more investors to jump to buy oil futures hoping to make quick bucks, causing demand to increase abnormally relative to supply. Once these investors feel that the oil price has peaked, then they will sell heavily causing the price to surge dramatically

2. If the rate of increase in the supply of oil outstrip demand, which I feel that it is very unlikely to happen.

3. Global recession. There is other demand-driven reason to explain the oil price phenomenon. Other than speculative demand, the US effort to build up its own oil reserve is also one of the main causal. Bear in mind, that US has the largest oil reserves in the world. Next, the strong industrialisation by China & India also mean an increase in fuel consumption. In a nutshell, for prices to fall US, China & India economy must fall at the same time

4. Discovery of substitutes for oil. There was once the talk on bio-fuel & bio-diesel. If the research conducted a great success, people will switch away from petrol to the more economical bio-fuel. Both have positive cross elasticity of demand. Increase in price of oil will cause the demand for bio-fuel to increase as well. Also if hydrogen cars are cheaper than petrol cars, the price of oil will go down as more people substitute towards the usage of hydrogen car

No,

1. Bear in mind, oil is still somehow a form of scarce economic resource. As such, over the time its price will definitely rise due to shortages or its demand outstrip supply. The only thing which is still possible is that, we can figure out a way to slow down its rate of increase (Just like drugs to slow down the spread of cancer cells)

2. Arab Saudi & other OPEC (Organisation of Petroleum Exporting Countries) members will not attempt to increase the supply of oil more than the rate of increase in demand (short run effort) to cool down the price. This is because the demand for oil is inelastic & as such a fall in the price means fall in total revenue for these main oil exporting countries

3. Even if there were global recession, soon after the cycle has gone & global economy is on their way recovery, prices of oil may return to its original level & perhaps hit another new high. History has proven this to us!

4. The development of bio-fuel is still in the infant stage. Meanwhile the economic effect from the usage of hydrogen cars is not widely known. If it is really effective in helping an average household to save more, why hasn’t all car companies or consumers itself install that kind of tank?

In a nutshell, I would conclude that the oil price will definitely increase & there is no way that its price will go down. The only thing I can say, is that its rate of increase may slow down depending on economic cycle

Tuesday, June 24, 2008

ZARA's Expansion Into The Chinese Market: Pros & Cons

Possible economic arguments for ZARA’s decision to expand in Chinese market:

1. Its business in home country has reached a saturated level. In other words, there is not much space for further growth as it has tapped most of the market. This is true given the fact that ZARA is the largest clothing retailer by sales across Europe

2. By expanding its business in Beijing, Hong Kong & coastal city of Shanghai, we say that they able to further exploit the existing economies of scale (EOS). It can be purchasing EOS, managerial EOS or even financial EOS. As such costs of production could fall even further & this may give them cost advantage over close rival such as H&M, Mango & etc

3. ZARA can be considered as a monopoly firm legally, owing that it controls more than 25% of the market share. As such this gives them more advantage of further reaping supernormal profit in the long run shall their expansion plan a great success. How this could be done? Through a proper price discrimination practices. Price discrimination is a practice of selling the same product to the different market at different prices. Higher price will be charged in a market where consumers ability & willingness to pay are higher & vice versa

4. Possibly to avoid heavy regulations by competition watchdog back in Europe such as the European Commission. In China & other Asian markets, the regulations could be much looser as part of the government’s effort to attract inflow of foreign capital. In other words, MNC (Multinational Company). This is crucial for many of the developing Asian economy as it could bring benefits such as drop in unemployment, technology & knowledge transfer & etc

However,

1. Though by operating in huge market like China, ZARA may not be able to earn the extreme super normal profit as one think. This is because the business still face stiff competition from rivals such as Spain’s Mango, Germany’s C& A & Swedish H&M which has started to gain their strong foothold in the Chinese market. Of course, not to mention strong local brand such as Esprit (US & Hong Kong)

2. ZARA faces cost disadvantage in China since rivals such H&M & Mango already source a greater proportion of their merchandise from the region. Example, H&M the Europe’s second largest fashion retailer sources more than 60% of its products in Asia, more than half of that from China compared to 34% for ZARA

Sunday, June 22, 2008

Loom Future For US Car Manufacturers?

Signs of loom future for US manufactured cars (Ford, General Motors and Chrysler)


1. US economy is one of the worst hit with sharp slowdown in overall economic activity & rising prices (called stagflation) mainly caused by soaring fuel prices. Many consumers are pessimistic about future of US economy & thus cut their expenditure on big items such as cars

2. Second, US car manufacturers are losing out to Japanese auto-makers. It seems that the Japan has a comparative advantage in this field. Recent evidence showed that demand for Ford has fallen 15.8%, General Motors fallen 27.5% & Chrysler fallen 25.4%. Meanwhile demand has surged for brands like Nissan that increased by 8.4% & Honda up 15.6% (figures from BBC, 20th June 2008). It is well known across US & the Europe, that US cars are ‘big & bulky’ which makes it not being fuel efficient. Much attention has been paid on security feature of the car while the Japanese oversee the future direction of oil price hence coming up with more fuel efficient models

3. Third, it has decided to postpone its new models of pick-up trucks by 2 months & latest statistic estimated that Ford itself will produce lesser 90, 000 vehicles by second half of 2008 (figures from BBC, 20th June 2008)

4. Fourth, as for General Motors, its official has decided to shut down by large scale plants for SUV (Sports Utility Vehicle) & truck factories in US, Canada & Mexico. This may not be good news as they may no longer be able to produce at minimal cost due to failure to fully exploit technical EOS. Cost of raw materials such as steel is on the rise & yet it is spread over a smaller range of output

5. Fifth, Ford motor has suddenly decided to sell of luxurious brands such as Jaguar & Land Rover to Indian firm, Tata

Evaluation


1. Future for US car manufacturers will be even worse with direct competition from Chery Automobile, from China. Bear in mind, while Japanese-made cars are relatively cheaper in the long term thanks to its fuel efficiency, Chinese-made cars are not to be belittled too as they can be cheap due to its high ability in exploiting EOS. Thus the cheaper costs of production will be passed on to the end consumers. To some extent some may argue that, Chinese cars are of low quality & safety standards. Furthermore Chery is not a dominant brand. Much concerted effort is needed to build its reputation in US & across Europe. Hence this means not much of threat to US auto-makers

2. Fall in the demand for home made cars are temporary. Its officials said that they have already planned for the production of smaller & more fuel efficient cars in respond to consumers’ demand. This is in line with the spirit of free market economy (Remember what we learn in Unit 1? Consumers are the king)

3. Possibly, the US auto-makers are facing great diseconomies of scale (DEOS) resulting from overly large operation scale. As such rather than facing declining costs as quantity of cars increase, they face an escalating one. Measures to reduce work shifts, shut down production plants which are not that profitable such as trucks in the face of slowing economy & disposing non-profitable subsidiaries are a great head start to clean up their balance sheet

Saturday, June 21, 2008

Why Women Have More Purchasing Power Than Men?

Reasons:

  1. Number of women participating into the labour market is increasing over the years. Some are climbing the corporate ladder faster than men & thus have greater earning capacity. Some conventional profession once hold by men such as Engineering & IT are starting to be filled by more female workers

  2. Most women buy things on impulse unlike men. As such, effective branding & advertisement is crucial to attract women buyers

  3. Women are key decision makers in household

  4. The market for goods & services for women is much larger than men. Things that the women desire can range from as sophisticated such as luxury handbags, ear rings, shoes, clothing & other accessories to expensive haircuts, cars & mortgages. There is no statistical evidence for this claim, but I believe that in a period of a year, frequency of changing handbags will be much greater than wallets. Applicable onto shoe too

Evidence of how much have women contribute to the economy (US data, 2007)

  1. Women accounted for 85% of consumer purchases including everything from auto to healthcare: new home (91%), new PC (66%), vacations (92%), healthcare (80%), new cars (65%), food (93%)

  2. American women spend about $5 trillion annually, & that is more than half of US GDP

  3. Women represent majority of online market

  4. As much as 70% of new businesses are started by women

  5. Women are willing to pay up to 28% or more for a product, if she believes & trusts the salesperson

Thursday, June 19, 2008

My Economic Predictions For The Second Half of 2008

What do we expect to see in the next few months?


  1. In the very near future, very likely Mervyn King as the Governor for Bank of England will have to write a letter to Chancellor Alistair Darling to explain why the inflationary target of CPI 2% ± 1% not being met. It was reported in BBC two days ago, that the inflation target is very likely to breach 4%

  2. People worldwide will be inevitably forced to change their lifestyle. Examples, drive lesser & use more of public transport (provided if the public transport system is reliable), eat lesser at exclusive outlet & more at home, possibly an attempt to increase personal saving due to unforeseen circumstance e.g. recession, demand for smaller & fuel efficient vehicles & etc

  3. Car manufacturers may possibly suffer a quarterly lost due to large number of buyers who choose to postpone their purchasing of cars due to several reasons. First uncertainty in world oil price. Second, shopping around to look for the most fuel-efficient cars

  4. Those people who install NGV (Natural Gas Vehicle) tanks for cars are one of the greatest beneficiaries from oil price hike. Absurd price increase had forced more & more people to look for ways to reduce their burden of fuel consumption, & among things they do is installing NGV tank

  5. Tesco, ASDA, Sainsburys & Morrisons which continue to enjoy great EOS will further benefit from the soaring inflation as more & more consumers will be shopping for their cheap goods

  6. Oil firms like British Petroleum, Exxon Mobil, Petronas & etc will continue to record billions of profits although to certain extent they may argue that they do not make much as high costs of reinvestment must be factored into their profits too

  7. Competitive firms who find great difficulty to pass on the increase in the costs of production to consumers will have to absorb it or reduce it elsewhere. Those which fail to do so, will be out of business very soon

  8. There will be an increase in strike & protests worldwide e.g. recently in India, there was a strike due the decision by federal government to increase fuel price by 10%, also possible strike to bargain for higher wages etc
  9. Share market & prices of property worldwide will continue to fall. Both of these are related to households' wealth. Losses from paper assets & drop in value of houses will dampen consumers expenditure. Bear in mind that fall in C means a fall in aggregate demand (AD). This will result in various negative multiplier effect & thus possibly a further slowdown of economic growth

  10. For those students who are just about to learn Macroeconomics, will have a better understanding of INFLATION as now they are ‘experiencing’ it & hearing it everyday on the news

Wednesday, June 18, 2008

Economics of Global Warming

Economics Of Global Warming

Causes of global warming:


  1. Increase in population. The number of population has now reached a threatening stage where the planet is no longer able to support. Third World countries are responsible for this. More people mean more cars on the road, thus increase of the emission of carbon into the atmosphere. Also increase in population leads to an increase in consumption of goods which eventually leads to more garbage. Other than landfill, some choose to dispose by incineration

  2. Rapid industrialisation. This has led to more factories being set up to fulfill unlimited human wants. As a result air pollution is worsen along with the emission of carbon monoxide from cars. Don’t forget that more forests & trees have to be sacrificed along the way

Economic consequences of global warming:

1. Agriculture. Global warming will result in severe draught & the worst hit countries will be Africa as most of the population relies on rain-fed agriculture for their livelihoods. This will directly lead to famine. Other agriculture activity such as tea planting will also be affected in countries like Ceylon & Malaysia


2. Death of livestock. It can happen via 2 ways. First, death due to unbearable heat. Second, shortage of food & water even for farm animals. This too may lead to famine


3. Spread of disease. Acute shortages of water will inevitably force some people to drink from contaminated source & this will lead to various water-related disease such as cholera

4. Greater increase in demand for clean water for consumption due to dehydration

5. Firms may need to incur opportunity cost in their capital expenditure. More firms are required to invest in clean technology such as wind power farm & solar energy which may cause them billions of pounds

6. Crippled the economy of a country. Again many Third World countries will be affected as their core economic activity is agriculture. This will further push them into the vicious cycle of poverty besides starvation

7. Change in ecosystems. As global warming causes sea levels to rise & weather to change, some species may be forced out of their habitats & possibly to extinction due to inability to adapt to change in conditions

Monday, June 16, 2008

Macroeconomic Impact From More Expensive Manufactured Goods In UK

“Two surveys have found UK manufacturers are continuing to increase their prices as they seek to counter rising costs”

--BBC News, 2nd June 2008—


Possible macroeconomic implications from more expensive UK manufactured goods:

  1. Worsening of Balance of Payments. UK’s manufacturing sector has been lacking behind all this while compared to its main rival such as Germany & France. By further increasing the prices of final output, it may cause a fall in the demand for UK goods & further deteriorate its competitiveness in global market. What’s more with the growing attractiveness of Chinese & Indian market that can consistently price their goods low even at turbulent times due to significant EOS

  2. Unemployment may rise in the coming months. Demand for the manufactured goods may fall & this shows possible fall in the profitability. 3 reasons account for this. First, pricey goods as mentioned above. Second, significant slowdown in global economy, which also translates to lower appetite for imported goods. Finally, people in UK may cut their consumption spending on these goods

  3. UK economy will further register slower growth or even fall into a recession. 2 reasons accounted for this. Consumer spending (C) & investment spending by firms (I) may register a smaller increase or even fall. C falls due to more people being unemployed while I falls due to fall in profitability. The downside effect of C could be greater given that the prices of property are declining in many areas in UK now. Traditionally, people in the UK hold their wealth in property

Arguments

1. Bear in mind that now, the pound is depreciating against many other currencies. From another angle, it means cheaper to import from UK. As such an increase in the price of output, could be offset by the fall in the value of sterling


2. Also demand for UK’s exported goods may not be affected at all as most countries in the world now are experiencing rising inflation due to rise in the price of energy. Some countries are recording at all time high inflation such as Vietnam 25%, Singapore, Thailand & Vietnam at around 7.5%-11%, India 8.75% etc. As such it could make no difference whether to import from UK or Vietnam

3. Balance of payments may not worsen as much as one thinks. Severe trade deficit in current account could be soften by an increase in capital account


4. The impact of slower growth or fall in the C & I due to higher unemployment & fall in capital expenditure may not be that bad. This is because most people in UK are still employed in the service sector & that is the strength of UK economy

Tuesday, June 10, 2008

Jokes: What Happen When Oil Price Hit $200 per barrel

video

Sometimes, learning Economics could be highly taxing. Let's unwind. I just found about this video, & it's about how we have to 'UBAH GAYA HIDUP'. Enjoy the video!!

Should Wages Go Up During This Tough Time?

Should our wages go up in this tough time?

Yes,

  1. Inflation means a fall in purchasing power. The same £1 no longer carries the same value as before the oil price hike. To make it simple, now you buy lesser good with the same £1. Hence with an increase at least can compensate for the decreasing purchasing power
  2. To maintain economic momentum. GDP is largely associated with consumer spending (C). In most cases, C is the largest component of AD (aggregate demand). With an increase in wages, people are able to continue their consumption pattern as before. This could have a knock on effect onto other areas in the economy e.g. firms are able to remain profitable. As such, they may have more money for reinvestment (I) into their business & this could in turn affect AD & thus further economic growth
  3. To certain extent, it may increase productivity of employee. People seeing an increase in their paycheck will be more motivated to work. As a result, output will increase & this will help to lower down the costs of production due to a larger spread of costs over a greater number of outputs
  4. Lower down unemployment in the economy. How? As the gap between unemployment benefits (UK) & wages by working increase, people will soon realise that the opportunity costs of staying unemployed gets larger. Hence this will push more of those unemployed people into the labour market

    No,

1. It may not even compensate for the fall in purchasing power, if the increment is not justified or insignificant. Example if costs of living overall increase by 15%, but the hike in salary is just 4%, then it may not help to ease the burden of those low-paid employees by much although one could argue that it is better than nothing

2. An increase in paycheck means an increase in the costs of production to firms. As a result the final goods being sold will be priced higher so as to maintain the company’s profitability. Seeing this, employees will soon realised that they are being priced out & they will demand another round of increase in pay. So, again the final goods being produced will be even more expensive. This cycle will repeat itself & it’s called WAGE-SPIRAL inflation. Situation could be worse if we factor in possible increase of oil price to USD$ 200 per barrel this year

3. Workers will still be worse off! How? Under the progressive tax system, an increase in paycheck means falling into higher income bracket. Say if inflation increase by 4% & a person’s nominal income increase by 4%, his real income remain unchanged. But as his nominal income is higher, he will be subjected to higher tax. So overall the employee is worse off. Furthermore it is unlikely, that our paycheck increase at the rate of inflation. Likely, it could be lower!


4. Higher pay could also mean greater extent of unemployment in the economy! Firms will attempt to cut their costs of production & the normal measure being undertaken is retrenchment although one could argue that they can cut their costs elsewhere

How Much Oil Companies Really Make When Oil Price Increase?

Viewers question: Hi Sir, say if oil price increase by 40% within few months time, does it mean that profitability of oil companies increase by that amount as well or more?

Ok, interesting question!! As oil price increase, definitely those oil producing companies will chunk in more profit but not as much as people would have anticipated.

Of course, by looking at the raw figures of $16 or even $20 billion will certainly raise our eyebrow. But don’t forget, these are few of the industries that reinvested high proportion of their profits into the business & their reinvestment cost billions too. It would be better if we look at their profit margin as in how much they make of each dollar sold.

I don’t have the latest statistics. But according to 2006 data, British Petroleum is making 6.8% while Exxon Mobil 10.7% as a profit margin & I would say that it looks healthy. I believe any Ramly Burger seller could have easily earned more than 20% as a profit margin.

Monday, June 9, 2008

Economic Effects of Euro 2008 (in Malaysia)

Economic effects from Euro 2008


  1. Fall in productivity. Overall productivity of workers may be affected through two channels. First, late arrival means lesser work being done on the same day. Even those who are punctual, may not be able to perform their task as efficient as before due to tiredness
  2. Increase in the costs of production for firms. From economic viewpoint, lesser work done means a possible increase in operating costs for the month of June. Why? Simple. Costs are being spread over a smaller range of output
  3. Negative externalities to colleagues & road users. If there are urgent tasks that must be completed within the same day, the affected worker may sought help from his colleagues. Another angle to look at this will be, tiredness that may contribute to accident statistics while driving
  4. Surge in profits for Mamak operators. Definitely there will be larger audience & customers this month. Some may come as early as 1 or 2 hours before the game started just to ‘fight’ for a comfortable spot
  5. Some businesses may take this opportunity to market their new products. I could recall that Proton advertise its Satria Neo aggressively during 2006 World Cup. The scenario differs in country like UK. Brewery firms like Carlsberg will see a rainfall of profit due to an extraordinary demand. In Western, alcohol drinks & football matches are complement goods
  6. Bookies will be better off. Illegal betting means there will be some minority that make a fortune in this month at the expense of those majority unfortunate ones
  7. For students who are sitting for major examination e.g. A Levels in the month of June, this will be a great month of distraction. Results of the exam will not be that favourable at the end of day if there is no proper time allocation

    However,

1. One could argue that fall in productivity will be less significant, if one has enough sleep before staying up late at night. Example if the match starts at 2:45am, one could have taken a rest in between 8:30pm to 2:30am & that is 6 hours sleep. Also it could be argued that if someone stays back late in the office after official hours, wouldn’t it compensate for the lost of output initially due to lateness?

2. Working adults with commitments will actually will be more likely to concentrate on their jobs & careers. Few could have chosen to stay up till that late

3. Although there will be an increase in profit for Mamak operators, somehow it may not be as high as being anticipated. 3 reasons accounted for this. First, customers at most will order a meal & sit there the whole night. Even if there is, it will be nothing more than a second glass of drink. Second, it happens in the middle of inflation shock. Prices of flour, rice & sugar has gone up several times & they yet to increase the price of food. Third, many people would rather choose to stay at home & watch. Therefore the overall profit churned could be mild.

4. Businesses may not make that much at the end of the day if there are rivals of similar nature advertise aggressively at the same time. Example if Carlsberg & Heineken do advertise aggressively, which will prevail at the end of the day? Which will enjoy a surge in demand? Again this lies in preference & the elasticity of demand

Sunday, June 8, 2008

Indonesia no longer OPEC member

Possible reasons for Indonesia withdrawal from its OPEC membership:
  1. Indonesia is dissatisfied with OPEC’s reluctance to increase the world oil supply despite the current oil price surge. This hurt Indonesia even more as it is already a net oil importer (Indonesia is the only net oil importing OPEC member)
  2. The country’s oil sector is flagging. No discovery of new oil rigs has been made lately. The exploration is merely heavily concentrated in Northern Sumatera

Possibilities of less oil exploration activities:

  1. Lack of technology & local expertise
  2. High level of bureaucracies, weak legal control over corruption etc. It is still possible to expedite the documentation & legal process so as to avoid excessive red tapes. How? Through corruption!!

However, the officials in Indonesia do not reject the possibility of re-joining OPEC shall there is new oil rigs discovery.

Mergers: United Airlines & US Airways

US carriers on merger talk

“United Airlines and US Airways have shelved plans to merge, the two carriers' parent companies have said”
-BBC, 30th May 2008-
Possible reasons to merge?
  1. Oil price has surged to a new high of USD $135 & will continue to increase given that oil is a scarce commodity. In any airline firms, oil alone consists averagely as much as 35% of their operating costs & that's a lot.
  2. Drastic drop in the number of passengers given that now many countries experience slow economic growth & economies are in grea uncertainty. Air travel is perceived as a form of luxury good still. Meaning to say, as income fall, the demand for it will fall by more than proportionate. Those airline operators are severely affected & as such by merging is a good way for them to consolidate financially
  3. To achieve EOS on various areas e.g. financial, managerial & purchasing
  4. To strengthen its position in the market to avoid being a target of takeover
  5. To leverage on each others strength e.g. market share vs. management

Disadvantages of mergers

  1. Possibility of diseconomies of scale that arise from the difficulty to monitor overly large business, communication failure etc
  2. Consumers may have to pay higher price
  3. Airline firms may not reinvest its super normal profit into R&D to discover ways to provide better quality of services to passengers
  4. May result in cost inefficiency as there is lack of elements of competition in the economy

Recent oil shock: Benefits, costs & why?

Benefits of oil increase?

  1. The slowing down of global warming due to lesser carbon emission from cars
  2. Lesser congestion on the road which may lead to lesser accident statistics. People living in large city have lesser health problems associated with air condition. Fall in the extent of air pollution
  3. The poorest people in the economy will benefit as in the form of greater provision of public transports
  4. May cause or ‘force’ some people to choose healthier lifestyle by walking more
  5. Expedite the discovery of new form of energy source e.g. biofuel
  6. Firms will be automatically forced to be more cost efficient either with or without competition

Problems of oil price increase?

  1. Causing stagflation to an economy (increasing price with falling output)
  2. Worsening inflation. Average consumers which form the majority of people will become poorer with declining purchasing power
  3. Will erode profitability of many firms. As such they may start to think of ways to cut costs. Among measures can be taken e.g. cut employment especially in the manufacturing sector & other labour intensive industry like hotelling
  4. Prices of other goods will increase
  5. May prompt the government to introduce measure such as minimum wage to protect those low paid. This will worsen unemployment
  6. Some countries may lose its international competitiveness when it comes to trade as goods produced are more expensive. This lead to fall in the demand for exported goods

Why oil price increase?

  1. Reluctance of OPEC to increase oil supply to meet rising demand
  2. Rise of China & India economically means greater demand for oil
  3. Strong consumption by US & given the fact that they are the major cause of price hike as US has the world’s largest oil reserve
  4. Speculative activities in the economy. Given the rumours that oil price will likely reach $200 by the end of year 2008, has led to an ‘abnormal’ demand in the market

As such oil price will definitely increase given that the growth in demand outstrip the growth in supply e.g. demand increase 20% per annum, while supply increase by 8% or worst still remain stagnant

Your portal to the world

Hi there,

This blog is created as a medium to disseminate as much information as possible to all those students who are currently taking the A-Level Economics out there with special emphasis on DEVELOPING the EVALUATION skills. These skills are so scarce & uncommon among students & yet they are to utmost important in the real A-Level examination.

Issues that I touch will cover a huge spectrum including Economics, Social & Politics. Bear in mind that all those three are actually inter-related. I will bring you all to venture into the economics around the globe with special reference on Europe, Sub-Saharan Africa & Asia (including Malaysia). I will try to keep it brief, comprehensive & of course as interesting as possible.

Issues that I will cover are such as:
  1. Shopping & the economy
  2. Is inflation really that bad?
  3. Oil price shock to Malaysians & many oil related issues
  4. Purchasing power: Men vs Women
  5. Worry about China or India?
  6. Weak country administration. Who benefits & who don't?
  7. Economic effects of Euro 2008