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Continuing a series on world leaders, Miles Deverson takes a look at Angela Merkel
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In the first of a series on world leaders, Miles Deverson takes a look at Nicholas Sarkozy
The Yorker’s politics team recognises that economics is not the easiest topic to get your teeth into. Yet we also feel an understanding of economics can benefit everyone. This column aims to demonstrate why. Cutting through the jargon, we hope to provide economic solutions to everyday student problems.
Why does one beer have a different price depending on which bar you are in?
Whilst we have come to accept this as a fact of life, does it not seem odd that the same drink that you can get for £1.50 in one club can cost you up to three times that in a different establishment? You are buying the same product, yet the price can be wildly different.
To understand why this happens, we must first consider how prices are determined. Generally, the price we see on the shelves comes as a result of the level of supply and demand for that product. Generally, economics tells us that all things being equal, the lower the price, the higher the demand from consumers. This makes intuitive sense: as something gets cheaper more people will be willing to buy it. Conversely, the higher the price, the higher supply will be from producers. Once again, this also makes intuitive sense: as something gets more expensive more people will be willing to sell it.
If you set the price too low, you get the problem of under-supply, where there is less of a product available to purchase than people who want to purchase it. If you set the price too high, you get the problem of over-supply, where there is more of the product produced than people want to buy.
Adam Smith, the economist who sits on the back of every 20 pound note, argued that under perfect market conditions the price will tend towards the “equilibrium price”. That occurs where the price of the product results in the total demand being the same as the total supply. In our problem, it’s where the brewery produces exactly as much beer as people want to drink.
So why does the price of beer fluctuate? If we listen to Adam Smith, surely we should expect all bars to sell at the equilibrium price? The problem is that we don’t have the perfect market conditions that Adam Smith talks about. This means that bars are able to set their own price, a price which might not be the equilibrium price. The price they set it at is likely to depend on two things.
First, they must consider their costs. In particular, they think about their fixed costs, such as the electricity of the building, rent, wages etc which stay the same regardless of how many pints they sell. Generally, these will be larger than the cost associated with making the beer. To offset these costs, some bars will charge an entry fee. This covers these fixed costs, and allows them to sell the beer at a price a lot closer to the variable costs, the cost of beer production (or buying it from the producer).
Second, they must consider the “elasticity of demand”. This reflects the extent to which changes in price affect the demand. For example, in a club in York at midnight on a Wednesday night, the price of beer can be said to be very “elastic”. This means that if a club lowers its price of beer, poor (and drunk) students are likely to buy a lot more of it – perhaps halving the price will result in a trebling of demand? This will result in higher profit for the firm. This means that the company will rapidly decrease its price (think 80p shots) to get a lot more sales.
Alternatively, in the theatre bar before a show, price can be said to be relatively “inelastic”. The customers aren’t aiming to get drunk, and will probably buy just one drink, regardless of the price. Therefore they will increase the price significantly, as they know their clients, who are likely fairly wealthy, will not change their consumption habits. Therefore if the beer doubles in price, it is unlikely to see any change in demand. Once again, the company has made more money and explains why a pre-show glass of wine is so dear!
This week, economics seems to have just confirmed what we already know. Go to student nights for cheap drinks (although expect to pay an entry fee) and stay away from more upscale bars who make their profit not from the number of drinks they sell, but the price of those few drinks!
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