Supreme and Economics

November 8, 2017 Leave a comment

SupremeStudents have long been talking about brands and none other than that of Supreme. Supreme was created in the 1980’s and was originally a brand which associated itself with the skateboard industry. There are currently 11 stores worldwide with three in the USA and six in Japan as well as store in Paris and London. In January this year Louis Vuitton held a fashion show featuring LV and Supreme as the two brands joined forces. Since then pop-up stores featuring the collaboration were opened on June 30, 2017 in Sydney, Seoul, Tokyo, Paris, London, Miami, and Los Angeles. It was the London pop-up that was recently the focus of an article in 1843 magazine of The Economist.

At 10am on Day One of the sale, a queue of about 600 people stretched down the Strand and along Surrey Street. Martin, Richard, Alex and Adita were all there. Running the queue for Louis Vuitton was security specialist Lex Showumni. “This is my first experience with Supreme. I was told it was going to be crazy, a lot of people pushing and shoving, but we haven’t experienced that so far.” The Supreme faithful have their own, slightly dubious, process of queue-management based on attendance and standing. It mostly works, but some people were unhappy: a trader had left the head of the queue to withdraw £12,000 from an ATM. He returned without the cash having lost his number 1 spot; eventually, after some animated discussion, he slipped back in near the front.

Each customer was admitted to the store for 15 minutes and allowed to buy six items. Successful trophy hunters included Ari Petrou, with a flipped T-shirt (around £400), that he was definitely keeping. Jeremy Wilson bagged a coveted red-logo baseball shirt (£730) that he planned to resell.

Within an hour, three main secondary exchanges had been set up outside the official store: one in the Pret A Manger, the other beneath a tree, and the third next to a municipal toilet. One dealer, who asked not to be named, explained that he had paid ten people a set fee to get early places in the queue and would give them a cut of the resale value of anything they could get their hands on. “It’s business!” he laughed. Wodges of cash were exchanged and stashed in newly acquired Louis Vuitton bags.

Invariably the hype that surrounds the pop-up store and the limited supply creates a situation where people get extremely anxious and are prepared to pay significant amounts of money for what could be classed as normal consumer goods.

There are certain economic concepts behind this.

Inelastic Demand – people who buy Supreme are are not price sensitive to purchasing items – a flipped T-shirt (around £400) seems quite excessive. A higher price has little impact on the quantity sold. In fact it maybe a Veblen Good – see below.

Limited supply – there is an artificially low supply of the product to maintain its uniqueness and ultimately it becomes very scarce. This creates excess demand which drives up the price

VeblenVeblen Goods – Conspicuous consumption was introduced by economist and sociologist Thorstein Veblen in his 1899 book The Theory of the Leisure Class. It is a term used to describe the lavish spending on goods and services acquired mainly for the purpose of displaying income or wealth. In the mind of a conspicuous consumer, such display serves as a means of attaining or maintaining social status. So-called Veblen goods (also as know as snob value goods) reverse the normal logic of economics in that the higher the price the more demand for the product – see graph.

 

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A2 Revision: Multiple-Choice question on shape of Total Cost curve

November 8, 2017 1 comment

WebBeen doing some A2 revision courses this holidays and this question came up. In the last two November A2 exams there have been multiple choice questions concerning the point on the Total Cost curve when MC, AVC, and ATC are at their lowest point. In the graph note the corresponding points on the Total Cost. They usually ask you where on the Total Cost line is the lowest point on the MC curve/AVC curve etc.

Remember:
MC cuts ATC and AVC at their lowest points. The firm will supply where the price is greater than or equal to MC. Thus the individual firm’s supply curve consists of the firm’s MC curve, but only the portion above AVC . The reason for this is that where P=AVC the firm will shut down operations because they are barely covering avoidable costs.

Categories: Exam revision Tags:

A2 Revision – Pareto Efficiency

November 6, 2017 Leave a comment

In the A2 exam there is usually one multiple-choice question on Pareto Efficiency and part of an essay.  The idea of Pareto Efficiency is named after the Italian Economist Vilfredo Pareto. For a given set of consumer tastes, resources, and technology, an allocation is Pareto-efficient, if there is no other feasible allocation that makes some people better off and nobody worse off. See also a previous post – Pareto Optimality and the perfect wave.

fig15-01

The figure above shows an economy with only two people, Susie and David. The initial allocation at A gives David QD goods and Susie QS goods. Provided people assess their own utility by the quantity of that they themselves receive, B is a better allocation than A which in turn is a better allocation than C. But a comparison of A with points such as F, D or E, requires us to adopt a value judgment about the relative importance to us of David’s and Susie’s utility. It is important to note from the figure the following:

  • If you move from A to B or A to G it is a Pareto gain – A to B both Karen and John are better off. A to G Susie is better off, David no worse off.
  • If point B or G is feasible then point A is Pareto-inefficient – more goods can be consumed
  • A move from A to D makes David better off and Susie worse off. However we need to make a judgment about the relative value of David’s and Susie’s utility before we can comprehensively state that David is better off. Therefore the Pareto principle is limited in comparing allocations on efficiency – it only allows us to evaluate moves to the north-east and south-west

fig15-02

Therefore, we need look at the economy as whole and how many goods it can produce. In the Figure above the frontier AB shows the maximum quantity of goods which the economy can produce for one person given the quantity of goods being produced for the other person. All points on the frontier are pareto-efficient. David can only be made better off by making Susie worse off and vice versa. The distribution of goods between David and Susie is much more equal at point C than at points A or B. Note that:

Anywhere inside the frontier is Pareto-inefficient – some can be made better off without making the other worse off.

The economy should never choose an inefficient allocation inside the frontier. Which of the efficient points on the frontier (A, B, C) is the most desirable will depend on the value judgment about the relative value of David and Susie utility.

Source: Economics by Begg

Categories: Micro Tags:

Recession Recovery or He-cession She-covery?

November 2, 2017 Leave a comment

Radio NZLast Sunday there was a very good interview with Canadian economist Armine Yalnizyan on Radio New Zealand’s ‘Sunday’ Programme (with Wallace Chapman). She mentions that the neoliberal policies of the last 30 years have seen income inequality grow and the collapse of consumer spending (C) the main driver of any domestic economy. There has been an increase in the proportion of income accruing to assets which worsens inequality in many countries. China would be an economy that has relied a lot on its export sector (X) for growth but is now trying to drive domestic demand (C) to generate growth. Remember that Aggregate Demand = C+I+G+(X-M). She makes the point that corporates favour the return for shareholders rather than for example
the wages of employees.

“We have this very unusual situation here where corporations are gaining in strength for a host of reasons, similar to the type of corporate power 100 years ago, in key sectors of the economy with less ability to either tax a proportion of the profits they make or regulate their activities.”

Boosting the minimum wage is stimulatory

She also mentions an increase in the minimum wage being stimulatory with lower income groups spending a much higher proportion of their income and thereby increasing consumption. And the vast majority of this spending happens in the domestic economy – C↑. Some have talked of wage inflation by increasing the minimum wage but with the fall in trade union membership and bargaining power this has been significantly reduced. In fact we have seen wage compression.

He-cession and She-covery

However later on in the interview I was interested to her explanation of He-cession and She-covery during the interview.

Recession = “he-cession” – more men tend to become unemployed as areas that are initially impacted by the downturn are manufacturing, mining, construction etc which are likely to be male dominated.

Recovery = “she-covery”: men who lose $30 an hour jobs wince at accepting $15 an hour offers, but women grab them to make sure the bills get paid.

Indifference Curves – Mindmap

October 30, 2017 Leave a comment

With a bit more time on my hands I was able to produce a mindmap on Indifference Curves – a topic that students find quite difficult. The mindmap covers all the main features – what is meant by the Income Effect, Substitution Effect and most importantly how they are characterised in Normal, inferior and Giffen goods. Particularly useful for a theoretical essay on utility and consumer choice. You can download a full size copy by clicking here.

Mind Map 13 indifference curves.jpg

Categories: Micro Tags:

Have Central Bankers’ got it wrong?

October 30, 2017 Leave a comment

Below is very good video from the FT – here are the main points:

  • Central Banks – by lowering interest rates they could make savings less attractive and spending more attractive
  • After GFC low interest rate and asset purchases increased lending and avoided a global depression.
  • Now the world economy is not behaving as the central bankers’ said it would
  • Their theory was that with lose credit (lower interest rates) the economy would grow and inflation would rise.
  • Inflation is stagnant (unlike the 1960’s – see graph below) and this is worrying as a little inflation is required to lubricate the economy. It allows prices to fall in real terms.
  • The missing inflation may mean that the bankers’ theories are wrong.
  • Cheap money may have encouraged high asset prices and debt levels but it may undermine the economy without doing much for growth.

Inflation Unemployment.png

A2 Revision – New Classical to Extreme Keynesian

October 27, 2017 Leave a comment

The main competing views of macroeconomics (Keynesian vs Monetarist) is part of Unit 5 in the A2 syllabus and is a popular topic in the essay and multiple-choice papers. Begg covers this area very well in his textbook. In looking at different schools of thought it is important to remember the following:

Aggregate Demand – the demand for domestic output. The sum of consumer spending, investment spending, government purchases, and net exports
Demand Management – Using monetary and fiscal policy to try to stabilise aggregate demand near potential output.
Potential Output – The output firms wish to supply at full employment after all markets clear
Full Employment – The level of employment when all markets, particularly the labour market, are in equilibrium. All unemployment is then voluntary.
Supply-side policies – Policies to raise potential output. These include investment and work incentives, union reform and retraining grants to raise effective labour supply at any real wage; and some deregulation to stimulate effort and enterprise. Lower inflation is also a kind of supply-side policy if high inflation has real economic costs.
Hysteresis – The view that temporary shocks have permanent effects on long-run equilibrium.

There are 4 most prominent schools of macroeconomics thought today.

New Classical – assumes market clearing is almost instant and there is a close to continuous level of full employment. Also they believe in rational expectations which implies predetermined variables reflect the best guess at the time about their required equilibrium value. With the economy constantly near potential output demand management is pointless. Policy should pursue price stability and supply-side policies to raise potential output.

Gradualist Monetarists – believe that restoring potential output will not happen over night but only after a few years. A big rise in interest rates could induce a deep albeit temporary recession and should be avoided. Demand management is not appropriate if the economy is already recovering by the time a recession is diagnosed. The government should not fine-tune aggregate demand but concentrate on long-run policies to keep inflation down and promote supply-side policies to raise potential output.

Moderate Keynesians – believe full employment can take many years but will happen eventually. Although demand management cannot raise output without limit, active stabilisation policy is worth undertaking to prevent booms and slumps that could last several years and therefore are diagnosed relatively easily. In the long run, supply-side policies are still important, but eliminating big slumps is important if hysteresis has permanent effects on long-run equilibrium. New Keynesians provide microeconomics foundations for Keynesian macroeconomics. Menu costs may explain nominal rigidities in the labour market.

Extreme Keynesians – believe that departures from full employment can be long-lasting. Keynesian unemployment does not make real wage fall, and may not even reduce nominal wages and prices. The first responsibility of government is not supply-side policies to raise potential output that is not attained anyway, but restoration of the economy to potential output by expansionary fiscal and monetary policy, especially the former.

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