Fuel prices 'keep cars off road'

It is generally assumed that the demand for petrol is relatively price inelastic, hence the increasing duty that has been imposed over the years. But we may now have reached a price that is startring to encourage some motorists to reconsider their transport options if a report by the AA is to be believed. High prices of petrol and diesel are making UK drivers think twice about travelling by car, a survey suggests. The AA polled 17,500 members, and found 27% had cut back on other areas of spending, 16% had decided to travel less by car, and 21% had done both. Petrol prices have risen sharply this year, although government figures have only shown car traffic falling 2%. The Petrol Retailers Association says that average prices could go up as much as 5 pence a litre by the weekend. Link to BBC News.

Why do you think 27% had 'cut back on other areas of spending' to maintain their perol or diesel consumption?

A view from France

Greater competition, lower prices, must be welcomed by consumers. Not necessarily so, if the example of France is anything to go by. Many French consumers, unhappy at rising prices, inflation at a 17 year high and lower prices elsewhere in Europe, have reacted unfavourably to a proposed new law enabling more hypermarkets to be built to challenge local monopoplies and greater freedom for them to negotiate prices with suppliers. A poll showed that less than half favoured more competition as a solution to their concerns but rather a reduction in sales tax and a rise in the minimum wage.

Unlike the UK, hypermarkets are not allowed sell pharaceutical products, despite their claims that they could do so more cheaply. Despite a legal challenge, ' the pharmacists' monopoly remains—with Mr Sarkozy himself ruling out any change on the ground that pharmacies are not a business but a “public service”. ' Read the full article here.

How do firms set prices?

For economics students, obsessed with demand and supply diagrams, setting prices is child's play. But how do firms set their prices? What information do thay need to set a price that will hopefully clear the market. An interesting article in the FT, offering advice to firms about what to consider when setting prices in an economic slowdown. A key factor is to 'understand how price-sensitive customers will behave - and act on that knowledge more quickly than competitors'. Price sensitivity, a concept that should be familiar to students. Read the FT article here.

A reflection on falling prices

An interesting article by John Kay in today's FT. He considers the effect of falling prices in the light of fears of lower prices in the asset and housing markets. Should we welcome this situation rather than react in the way we have seen recently?

http://www.ft.com/cms/s/0/fff6244a-d406-11dc-a8c6-0000779fd2ac.html