TDeluxe: How Luxury Lost Its Luster - Dana Thomas - Books - Review - New York Times

Unit 2 in IB and AP Economics begins by examining the interaction of supply and demand in product markets, and the importance of these factors in determining the equilibrium price in any particular product market.

In the above article from the NY times, the author reviews a book that exposes the diminished quality and attention to detail among manufacturers of luxury goods (think Prada, Gucci, etc…) The era of globalization and off-shoring of manufacturing has aided luxury firms in their quest for profits, as they’ve been able to significantly cut costs while maintaining exorbitant prices for their product.

The author takes issue with the alleged demise in the luxury market of attention to detail and craftsmanship, as competition and profit seeking behavior have led to an industry where the back alley workshops of Milan and Paris have been replaced by the factory floors of China and Vietnam. Free trade has allowed European luxury brands to produce more of their products at lower costs, which leads the author to her current question: “Why is this stuff still so expensive even as the cost of producing it goes down?”

Despite her accusations of poor quality and greedy, profit seeking managers in the luxury goods industry, the author seem unable to resist the luxury goods she claims to despise:

When, I asked myself, did it become commonplace to charge several thousand dollars for a mass-produced handbag? How could the flimsy designer sundress I bought on sale (a “steal”, the saleswoman assured me) still wind up costing a whole month’s salary? Why is my favorite brand of lipstick more expensive than a nice bottle of Italian wine? When did these products’ values grow so distorted, and what is the would-be customer to make of it all?

The author continues…

…the luxury industry is a sham because its offerings in no way merit the high price tags they command. Yet once upon a time, they most certainly did. In the 19th and early 20th centuries, when many of luxury’s founding fathers first set up shop, paying more money meant getting something truly exceptional. Dresses from Christian Dior, luggage from Louis Vuitton, jewelry from Cartier: in the golden period of luxury, these items carried prestige because of their superior craftsmanship and design. True, only the very privileged could afford them, but it was this exclusivity that gave them their cachet. Although they may have “cared about making a profit” the merchants who served this pampered class aimed chiefly to produce the finest products possible.

It appears that the author never took an introductory economics course. If she had, she would clearly understand that price is not determined by the level of craftsmanship, the attention to detail, nor the level of exclusivity represented by a particular purse, shoe or dress. Rather, price is determined by the interaction of Demand AND Supply in the market for all goods, EVEN luxury goods!

When she claims that “the merchents who served this pampered class aimed chiefly ‘to produce the finest products possible’”, the reviewer is forgetting some of the basic teachings of capitalism’s founding father. Adam Smith himself could have corrected the NYT reviewer when he said,

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer…

Smith knew as any economics student should know that exchanges in any market happen not because of a mutual appreciation for craftsmanship or artistry, rather because a producer (firm) wants to make a profit by charging as high a price possible to a consumer (household). In the case of luxury goods, Gucci and Prada never made high quality goods because they loved making high quality goods, rather they made them cause consumers demanded them and were willing to pay top dollar for them.

What the author is missing is a basic understanding of the determinants of Demand. The price a good commands in the market has little to do with how much it cost to produce or where it was produced, and everything to do with the level of demand relative to the level of supply.

Discussion questions:

1. Why do Prada, Gucci, Cartier and other luxury brands command such high prices relative to cheaper substitutes widely available to consumers?
2. As nothing else changes and the price of luxury goods goes up, how is demand affected? Explain.
3. What are some of the determinants of demand that have kept the price of luxury brand goods high even as the costs of production have been reduced due to cheap overseas manufacturing?

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FT.com / World - Air fares nosedive amid falling travel demand

Our IB and AP Econ classes here at Zurich International School have just begun our second unit of the year, where the concepts of Demand and Supply are introduced and the effect these have on prices is examined. The first assignment of the new unit was for each student to find an article discussing the demand for a particular good, service or resource, and post it to our Unit 2 wiki page.

If it’s ever unclear whether a change in demand for a good or a service can actually affect the price, the article linked here should make it perfectly clear that demand is a powerful market force. In an industry where it has seemed recently that prices only rise, a recent fall in market demand has driven prices downward, as firms have responded to consumer demand in order to sell their product, which in this case are seats on short and long-haul flights within and from Europe.

Falling demand for business and leisure travel is causing a marked decline in air fares, with UK fares to North America declining by nearly a half, according to American Express.

Air fares peaked earlier this year as a result of rising oil costs. But the slowing global economy has caused that to reverse.

The lowest economy class fares in Europe, the Middle East and Africa fell on average by 12.5 per cent in April to June compared with the first quarter, with long-haul fares down more than a quarter.

But UK fares suffered the sharpest falls, with the lowest economy fares down by an average of 20.2 per cent, including a 49 per cent fall in fares to North America and a 22 per cent decline in fares to Japan, Asia-Pacific and Australia.

Discussion questions:

1. What factors are driving demand for air travel down within, to and from Europe?
2. Why does the price of air travel fall as demand for air travel weakens?
3. Which other industries may have to lower their prices as fewer and fewer people travel between European countries and North America?

FT.com / Asia-Pacific / India - Camel demand soars in India

In a principles of economics course such as AP or IB Econ, we learn about the determinants of demand. I teach my students the acronym “TOEISS”, which stands for consumer tastes, other related goods’ prices, expectations, income, size of the market and special circumstances. A change in any of these determinants will shift the demand curve for a particular product.

“Other related goods” refers to the effect that a change in price for a substitute or a complement of one good will have on the demand for that good. An example might be the effect of an increase in the price of pork on demand for beef. Clearly, these two goods are substitutes in consumption, and if pork becomes pricey, consumers will demand more beef.

In an era of soaring gasoline prices, many consumers have made the switch from large, inefficient, gas-guzzling trucks and SUVs to smaller, more efficient hybrids and compact cars, a reasonable substitute for the average commuter. For some drivers, however, a hybrid just won’t meet their everyday needs.

In northern India, where farmers rely on tractors to till their arid fields, rising gas prices have made expensive tractors, dependent as they are on large inputs of fuel, less attractive to farmers. As gas prices have risen, demand patterns have shifted among farmers in the northern state of Rajasthan:

As the cost of running gas-guzzling tractors soars, even-toed ungulates are making a comeback, raising hopes that a fall in the population of the desert state’s signature animal can be reversed.

It’s excellent for the camel population if the price of oil continues to go up because demand for camels will also go up,” says Ilse Köhler-Rollefson of the League for Pastoral Peoples and Endogenous Livestock Development. “Two years ago, a camel cost little more than a goat, which is nothing. The price has since trebled…

”Market prices for these “ships of the desert”, which crashed with the growing affordability of motorised transport, are rising again as oil prices soar.

A sturdy male with a life expectancy of 60-80 years now fetches up to Rs40,000 ($973), compared to Rs5,000-Rs10,000 three years ago, according to Hanuwant Singh of the Lokhit Pashu-Palak Sansthan, a non-profit welfare organisation for livestock keepers. Entry-level tractors cost around $4,000.

Camels, the ultimate “alternative energy vehicle”. In fact, the only fuel these vehicles need is the occasional bite of grass and a weekly sip of water; talk about fuel economy!

While it may seem funny to those of us so used to the motor vehicle, animals represent a viable substitute for farm machinery in the developing world, and it is likely that as fuel costs continue to soar, more poor farmers will switch back to traditional means of tilling their soil. Water buffalo, cattle, camels, these are all substitutes for the gas powered tractor. Demand for these “alternative vehicles” will rise as fuel costs climb.

Clinton thinks suspending the gas tax for the summer is good for Americans. She says that any revenue lost can be made up for by taxing the profits of oil companies.

Obama thinks it will cause more harm than good to the economy. He says the $9 billion of government revenue foregone could have done more good for the economy through job creation and road maintenance than the $25 each American driver will save with a suspension of the gas tax.

They’re both using their positions on the gas tax to garner more support among Democratic voters in Indiana and North Carolina, where next week’s key primaries will be held.

Greg Mankiw, Harvard economist, has this to say about Hillary’s plan:

I don’t know any prominent economist who favors this McCain-Clinton proposal. More common is the reaction of a friend of mine (a veteran of the Clinton administration) who calls the idea “ludicrous.”

Sometimes a candidate’s position on one particular issue, even a relatively minor one like a federal gas tax that most Americans probably didn’t even know they were paying when they filled up their tanks, draws clear lines around a candidate’s values.

Clinton’s ‘Trouble’ ad

Obama Takes On Clinton and McCain on Gas Tax Holiday

It should be noted that while Obama is probably right that a gas tax suspension will only save drivers a pittance, his economics is slightly flawed. Here’s Tim Haab of Environmental Economics blog responding to Obama’s claim that a gas tax holiday could actually increase demand for gas thus raise gas prices:

Wrong, wrong, wrong: A lower gas price causes quantity demanded to increase as consumers move down the demand curve. The only things that cause gas demand to change are changes in income, prices of substitutes and complements, tastes and preferences and expectations… I demand a retraction.

Who are these “some economists” that Obama is talking about? Did they get their degrees from an SEC school or something? Name names so that we can have an econoblogosphere beatdown! Out these blasphemers!

Note: I think Obama got the $25 to $30 number correct.

Mr. Haab is technically correct when it comes to basic economic theory. Repealing the gas tax should shift supply out, not demand, as taxes are a determinant of supply. Rather than demand changing, quantity demanded by drivers will increase, in response to the increased supply and lower prices.

What I do think could happen, however, is that expectations of future price increases might incentivize drivers to increase their demand for gas over the summer. This Mr. Haab seems to oversee. When August roles around and drivers know that come Labor day the gas tax will kick in again, they may chose to take a family road trip that they otherwise would have postponed, shifting overall demand for gas out, driving prices up.

In the case of a temporary suspension of an excise tax on any good, there is always the expectation that the price will increase again in the future. This could lead to hoarding or stockpiling of the good, increasing overall demand and driving the price up before the tax has even returned.

Holiday weekend retail sees big crowds, but no splurging - Nov. 25, 2007

Black Friday; a most interesting phenomenon of American culture. A day when consumer demand in retail product markets is at its strongest, the day after Thanksgiving when, still lightheaded from excess tryptophan and mashed potato intakes and an NFL overdose from the previous day, millions of Americans stumble full-bellied from their beds and flock to the malls and big box retail outlets of suburban America to give thanks to the gods of consumerism: Wal-mart, Target, JCPenny, Nordstroms, Macey’s… all the holy temples of our sacred religion open their golden gates to the hoards of consumption-crazed pilgrims, all hoping to pay tribute to their beloved deities with their almighty dollars.

Although deep discounts brought out much bigger crowds of holiday bargain hunters, a major retail trade group said Sunday that shoppers actually spent less money this year over the crucial Thanksgiving weekend.

The National Retail Foundation’s (NRF’s) 2007 Black Friday Weekend Survey said more than 147 million shoppers hit the stores over the Black Friday weekend, up 4.8 percent from last year.

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by Annie Sung and Kristie Chung

Which do you prefer, the Wii? the XBox 360? the PS3? How about other video game consoles? Can you even think of any other video games consoles? Hmm… let’s see… how about the Sega? Wait, no, haven’t seen any of those in a while… what about the Atari? Oh, shoot, nope! Oh yeah, don’t forget the Caleco Vision (for the record, Mr. Welker’s earliest video game memory was of playing Smurfs on a Caleco Vision).

The fact is, today, the market for video game consoles has shrunk to three dominant firms: Nintendo, Microsoft and Sony. This podcast will investigate the video game console market, examine its characteristics, including the elasticity of demand for the different consoles, and conclude whether it exhibits the features of an oligopoly.

By Claire Moon and So Yeon Yoon

For our second installment of the SAS Economists Podcast, Claire and So Yeon survey 55 students to discover what determines where they prefer to get their coffee fix in the Shanghai neighborhood of Gubei. They discover through their research that consumers base their decisions on a variety of reasons, and that price, while important, is not the only factor that determines which particular products consumers will purchase. Location, tastes, size of the market, and various other factors all play a role in consumer’s decisions between two alternatives in a competitive market like that for coffee in Gubei, a trendy neighborhood with no shortage of coffee outlets.

Click below to hear this excellent and enlightening investigation into consumer behavior and the determinants of demand for coffee in modern Shanghai!

 

 Determinants of demand for Starbucks vs. The Coffee Bean [5:24m]: Play Now | Play in Popup | Download

By Emily Yeh and David Xu:

Introduction: So today on SAS Economists podcast we come to examine the economic practices of our beloved catering service, Eurest. For the last several years Eurest has held our stomachs and their breaths, as they poured out food for the school community’s enjoyment. But how much does the community really enjoy the services provided by Eurest? Too often complaints about the variety of food or taste and appeal are expressed by students and teachers when the name “Eurest” is mentioned.

Today, we will examine the alleged gap between price and quality for Eurest’s food. We’ll try to find out whether the prices charged for cafeteria food truly reflect the costs to Eurest, or whether it is monopoly power that result in the prices many students consider to be unreasonable. Does a lack of competition result in x-inefficiency on behalf of Eurest? If students had the benefit of greater variety and the freedom to eat off campus, how would Eurest match up against greater competition? What can the company do to achiever a higher level of customer satisfaction? These questions and more in the first EVER SAS Economists podcast!

To play, click on the viewer below and wait a couple of minutes for the video to load. It will play automatically once it has buffered.

 

 A mealtime monopoly - Demand for SAS's cafeteria food [5:28m]: Play Now | Play in Popup | Download

Mali’s Farmers Discover a Weed’s Potential Power - Sept 6, New York Times

Can it be possible that a new use for an old weed could change the economic health of a nation and at the same time defy the law of opportunity costs? In Mali, farmers are choosing to plant more of weed called jatropha becuase it can now be turned into biofuel. It is a unique plant in that it needs marginal soil and requires little fertilizer. In class we have talked about how discovering a new resource can cause economic growth, how this can shift the PPC curve. But, can a country actually get the benefits of using this new resource with out any opportunity cost? Is what is happening in Mali an example of economic development or economic growth in the first place? Is this a supply or a demand issue?

But now that a plant called jatropha is being hailed by scientists and policy makers as a potentially ideal source of biofuel, a plant that can grow in marginal soil or beside food crops, that does not require a lot of fertilizer and yields many times as much biofuel per acre planted as corn and many other potential biofuels. By planting a row of jatropha for every seven rows of regular crops, Mr. Banani could double his income on the field in the first year and lose none of his usual yield from his field.

You be the judge of why Mali is making the decision to produce more jatropha. Is this a case for demand or supply? Which curve would shift? Which determinant is causing this shift?

But here in Mali, one of the poorest nations on earth, a number of small-scale projects aimed at solving local problems — the lack of electricity and rural poverty — are blossoming across the country to use the existing supply of jatropha to fuel specially modified generators in villages far off the electrical grid.

“We are focused on solving our own energy problems and reducing poverty,” said Aboubacar Samaké, director of a government project aimed at promoting renewable energy. “If it helps the world, that is good, too.”

This is very interesting information for you to consider as you are wondering about environmental sustainability, a real life economic issue.

Jatropha’s proponents say it avoids the major pitfalls of other biofuels, which pose significant environmental and social risks. Places that struggle to feed their populations, like Mali and the rest of the arid Sahel region, can scarcely afford to give up cultivable land for growing biofuel crops. Other potential biofuels, like palm oil, have encountered resistance by environmentalists because plantations have encroached on rain forests and other natural habitats.

But jatropha can grow on virtually barren land with relatively little rainfall, so it can be planted in places where food does not grow well. It can also be planted beside other crops farmers grow here, like millet, peanuts and beans, without substantially reducing the yield of the fields; it may even help improve output of food crops by, among other things, preventing erosion and keeping animals out.

So try to apply what you have learned about opportunity costs, economic growth and development, as well as supply and demand and analyze these economic events in Mali. I look forward to your comments

Vindy.com - Ethanol affects price of pork, China’s staple

What does the biofuel we put in our cars have to do with the meat we eat with our noodles and rice? Economics has an answer to this question! This week in AP Economics we learned that market supply of a product is determined not only by the price of the product but also by several “non-price determinants of supply”. To help remember these we learned an acronym:

    S- subsidies and taxes
    T- technology
    O- other related goods prices
    R- resource costs
    E- expected future prices
    S- size of the market (# of firms)

The article above talks about the relationship between the demand for ethanol, which is a corn-based biofuel being manufactured in record quantities all over the world, and the price of China’s staple protein source, pork.

Read the article, and discuss which determinants of supply are being affected, and describe the impact on the pork market (think of the supply and demand curves and equilibrium price).

As the price of pork goes up, what do you think is happening in the market for substitutes in consumption, such as chicken? How will the rising pork prices affect demand for chicken? Assuming that pork and chicken are also substitutes in production, how will the changes in the pork market affect the supply of chicken? What can we expect to happen to the price of other related goods as pork prices continue to rise?

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