Principles of Economics

Answer All Questions

 Section A

Milk Prices and Supermarkets

The past few years have seen a desperate fight for market share among Britain’s supermarkets, sharpened by the relentless rise of Aldi and Lidl, two successful German-owned discounters. Tesco, the biggest, Asda, Morrisons and others have reported some of their largest-ever losses. They might have been hoping for a period of relative calm to restructure their businesses and repair their balance-sheets. No such luck.

 

Thanks to a string of changes affecting the world dairy industry, most significantly the end of European Union quotas on milk production, falling demand in China and Russian sanctions against EU dairy producers, there is a glut of milk. That has led to falling prices everywhere. Britain’s dairy farmers, says Phil Bicknell, head of food and farming at the National Farmers’ Union, have experienced brief price drops before, but nothing on this scale. Except for a brief respite in February, prices have been falling every month for well over a year. And it could get worse.

 

Milk producers have been venting their anger and frustration on the supermarkets, where most of the stuff is sold. Angry farmers have been herding cattle down supermarket aisles and activists have been buying up shelves of milk only to pour it down the drain, in protest against low prices. They claim that, unless the supermarkets pay more, many dairy farmers will go out of business.

 

Yet for retailers, milk has become a prime weapon in the battle for profits, or even survival. As Julian Bailey, head of marketing at Morrisons, puts it, “if we are not competitive on milk prices, then some of our customers, particularly the more budget-conscious ones, will just shop elsewhere.” Indeed, this price war has resulted in supermarkets cutting spending on liquid milk relentlessly, especially this year. Since 2007, according to Kantar Worldpanel, a research outfit, the amount of milk sold in Britain has risen by 11% to a projected 5.5 billion litres this year, but the value of sales has fallen from £3.5 billion ($5.5 billion) in 2009 to an estimated £3.2 billion this year, the lowest figure since 2007.

 

Confronted by bovine protesters followed by television cameras wandering down their aisles, the supermarkets have been forced to respond, and prices are edging up. On August 17th Aldi, Lidl and Asda started to pay a minimum price of 28p per litre, well above the average price paid directly to a farmer for milk of 23.64p (the so-called “farmgate” price). Even so, that is still below the cost of production, which farmers claim is about 30p per litre. Tesco, Sainsbury’s and a few others already pay a bit more than the cost of production.

 

Morrisons, the fourth-largest supermarket, has pledged 26p a litre later this month. It is also introducing a new brand, “Milk for Farmers”, which will cost 10p more per litre, money that it promises to pass straight to farmers. This gives shoppers the opportunity to put their money where their mouths are if they want to support British farmers. Morrisons’ own research suggests that, at least in theory, 41% of its customers are happy to do this.

 

Yet the dairy industry could do more itself. There has been much rationalisation in the sector in recent years, but the farmgate price of British milk is, at the moment, the fifth most expensive among the 15 older EU members. This is partly due to short-term currency movements, but it also suggests that Britain’s dairy farmers could become more efficient.

 

(Article adapted from The Economist – 22/8/2015)  

 

 

Section A Questions

 

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In total there are 50 marks available for this section. The marks for each section are given for each part. It is important to answer as fully as possible. Marks will also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.

 

 

  1. According to the article what has caused the price of milk to fall in recent times?          (6 marks)

 

  1. Using demand and supply diagrams explain how the price of milk has been affected by the factors mentioned in question (1) above.             (10 marks)

 

 

  1. The article suggests that farmers are blaming the supermarkets for the fall in milk prices. Giving your reasons, to what extent do you agree with this argument? Does the evidence suggest that the demand for milk is relatively elastic or inelastic?

(10 marks)

 

  1. Giving reasons for your answer explain what type of market structure the dairy industry is operating in. In your answer you should consider the role of the supermarkets as buyers as well as sellers of the product.                  (12 marks)

 

 

  1. If the UK government decided to intervene in the industry what measures could it employ to help UK dairy farmers and what effects would such measures have on the industry? Diagrams are expected for this question.

(12 marks)

 

Section B

 

Labour Market Indicators

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Figures for employment and unemployment give an incomplete picture of the state of the labour market. Just because a person is employed, that does not mean that they are working the number of hours they would like.

Some people would like to work more hours, either by working more hours in their current job, or by switching to an alternative job with more hours or by taking on an additional part-time job. Such people are classed as ‘underemployed’. On average, underemployed workers wanted to work an additional 11.3 hours per week in 2014. Underemployment is a measure of slack in the labour market, but it is not picked up in the unemployment statistics.

Other people would like to work fewer hours (at the same hourly rate), but feel they have no choice – usually because their employer demands that they work long hours. Some, however, would like to change to another job with fewer hours even if it involved less pay. People willing to sacrifice pay in order to work fewer hours are classed as ‘overemployed’.

Zero-hours and short-hours contracts have become more prevalent in the UK labour market. Zero-hours are contracts offering no assurance of minimum working hours per week and have increased by 114,000 since 2013 to 700,000 in 2014. Furthermore the Trade Unions Congress estimated that in 2014 there were 820,000 workers in the UK employed on short-hours contracts, which guarantee as little as 1 working hour per week. These contracts have gained popularity amongst employers as a means of avoiding paying national insurance contributions for individuals if working less than 18 hours per week.

Statistics released by the Office for National Statistics show that 9.9%, or 3.0 million, workers in the UK were underemployed in 2014; and 9.7%, or 2.9 million, were overemployed. The figures for underemployment vary between different groups:

11.0% of female workers 8.9% of male workers
19.6% of 16-24 year olds 9.9% of all workers
21.1% of people in elementary occupations (e.g. cleaners, shop assistants and security guards) 5.4% of people in professional occupations (e.g. doctors, teachers and accountants)
11.5% of people in the North East of England (in 2013) 9.2% of people in the East of England (in 2013)
22.1% of part-time workers 5.4% of full-time workers

 

Meanwhile, doctors, dentists, psychologists, chief executives and senior police officers are the most likely to want shorter hours. They are also older: the proportion of over-50s who are overemployed has risen since 2008 while overemployment rates have fallen for all younger age groups. However, the number of workers seeking to cut their hours has been increasing since the middle of last year across all sectors, the ONS said.

The fact that there is still significant underemployment suggests that there is still considerable slack in the labour market and that this may be acting as a brake on wage increases. On the other hand, the large numbers of people who consider themselves overemployed, especially among the professions and older workers, suggests that many people feel that they have not got the right work–life balance and many may be suffering consequent high levels of stress.

 

Section B Questions

 

In total there are 50 marks available for this section. The marks for each question are given at the end. It is important to answer as fully as possible. Marks will also be awarded for clarity and for the use of correctly labelled diagrams where appropriate.

 

  1. Explain the terms ‘unemployment’, ‘underemployment’ and ‘overemployment’.                                                                                                    (6 marks)

 

  1. With reference to the table on the previous page, what explanations are there for the differences in the underemployment rate across the five groups?                                                                                                                  (15 marks)

 

  1. Why would overemployment be primarily a problem for professional people and older people?                                                                           (8 marks)

 

  1. How may the rise in zero hours contracts have affected underemployment?                                                                                                     (6 marks)
  1. Suppose that you are working as an economic advisor to the Government. How might you suggest the problem of underemployment be tackled?         (15 marks)

 

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