Written by azhar.
For those of you taking Economics, this post may be an insightful one for you. It has been three months since I took up the job as a cashier in the oldest supermarket chain in Singapore, Cold Storage. I have gained a lot of knowledge there, up to the point that I wished I had known all that I learnt before taking up Economics two years ago. The hands on approach to learning Economics helps me to understand the concepts better. Most importantly, it provides me with an opportunity to witness first-hand, in real life, how huge companies utilize the strategies and policies taught in college to maximize their profits and stay competitive.
I have decided to make this post more interesting with real examples and hope it can aid your understanding in some Economic theories. The topic for this post will be on non-price competition.
Non-price competition
In college, I remembered how my tutor would explain the idea of non-price competition. Advertising, excellent service and sales promotions were the three things that she would usually touch on. Well, I am here to share with you how supermarket giants use non-price competition to compete with each other... out of the textbook!
The Self-Pack Rule
This is a relatively new rule introduced by NTUC Fairprice. Customers will have to pack the goods they bought themselves after making payment. My mother, who is a regular NTUC Fairprice customer, had tried it before and told me that the rule actually helped clean up the queue faster. I believe this innovative rule can help improve the quality of service of the supermarket giant.
Full Refund Given
This is what Cold Storage is known for. The supermarket chain emphasizes a lot on quality and freshness of its goods and items. As a cashier, I have witnessed how strict the conditions that the vegetables and fruits have to meet before being displayed on the shelves. Apples which are not yet rotten but are about to, are thrown away or sold to staff members at a discounted price. The company incurs extra costs of training its staff of the latest food safety techniques. Expiry checks are conducted occasionally. The expiry date of the items, especially for canned goods, must be at least two months ahead of the expiry check. We are human beings and sometimes slightly rotten fruits or expired products are overlooked. If customers happen to purchase and discover them after payment, a full refund will be given.
This is how Cold Storage compete with NTUC Fairprice. Although the items sold by the former hold more expensive price tags, there are customers who still buy them. The reason being is because of the quality ensured of the (mostly) imported products. Step inside a Cold Storage store and you should be able to view banners here and there guaranteeing customers of the finest quality in its items and showcasing the full refund policy.
Spend $30 And Receive One Stamp
This is a very popular non-price competition strategy used by supermarket giants such as NTUC Fairprice and Cold Storage. The idea is that for every $30 spent in a single transaction, customers will be given a stamp. They need to collect a minimum amount of stamps to redeem a free frying pan (or any other gifts). Cold Storage is currently holding this promotion whereby customers can redeem a free Wedgwood kitchenware.
Product Differentiation
As a cashier, I have scanned thousands of products from hundreds of brands every single day. It is really interesting how companies within the same industry are competing with each other to claim a bigger market share. A very good example is the toothpaste/toothbrush oligopoly industry, dominated by Darlie, Colgate and Kodomo Lion. Colgate designs toothbrushes with pictures of popular cartoon figures such as Spongebob Squarepants. Kodomo Lion, on the other hand, competes by mass producing toothpastes with fruity flavours!
Outlet Design
A few months, the Cold Storage outlet I was working for underwent a renovation. Guess what was the renovation all about? The management had decided to reserve a portion of the outlet for Singapore Pools despite the extra costs for hiring and training of new staff! This is their plan:
1) We all know how popular Singapore Pools is, right?
2) So why not obtain a license and open one in the store...
3) Customers can then drop by and purchase items from Cold Storage...
4) More sales!
Wa-la! It worked like a charm. And believe it or not, a NTUC Fairprice outlet located just opposite my house had just included a small Singapore Pools booth in its store recently.
That's about it for today. =)
Real Life, Hands On Economics
Is Our TPJC EconBlog08 Dead?
Most likely. TPJC's very own Economics blog, TPJC EconBlog08, which features news articles and posts by JC2 Alpha students has been inactive for more than three months. It was last updated in May. It seems the the commitment put in for the blog has drained, ceteris paribus.
It is not known what really happened to it. However, if you ask me what may cause its early death, then my finger points at the low interest shown by TPJCians. I think TPJCians are more interested to participate in our online forum than to read the blog. It may not be the student's fault though, as it is the owner's duty to update the blog with interesting articles that appeals to TPJCians in general.
Source
The contributors should also take the blame for the blog's failure to stay alive. Perhaps, the passion to further develop or expand the blog is not there (most probably due to low readership). It could also be due to the contributors' busy schedule. The latter, to me, is a weak excuse as they could have attempted to update it at least once or twice per month.
The Economics blog is not the only birth child of the college Economics Department - Coffee Shop Econs Talk is another initiative introduced by them to make learning Economics fun. Coffee Shop Econs Talk is a free newsletter produced by the JC2 Alpha students. So far, they have only managed to produce one issue of the newsletter.
Are TPJCians less interested in such innovative study resources?
The ERP Spike
Written by azhar.
[Updated on 18/7/08]
Singaporean motorists thought they have heard the worst news this year when oil prices surged to a record high. However, the situation has just turned more complicated as the Land Transport Authority (LTA) had just announced its plans to raise the Electronic Road Pricing (ERP) charges this year. The changes will take effect starting from July 7.
According to the LTA, the changes include a rise in ERP charges for up to $2 more and the introduction of five new gantries along the Singapore River which will go live from 6pm to 8pm on weekdays. The introduction of the five new gantries will bring the total number of gantries islandwide to 65. Another change announced affects the actual ERP charges. All new gantries will begin with $2 deductions and as speed continues to decline, each jump will be $1.
The new measures have been introduced to help control traffic congestion on the roads in the Singapore business district. The LTA calculates the congestion level by referring to the 'average' speeds of taxis passing through the ERP gantries. If the figure plummets, this will indicate that there is a congestion as motorists are unable to enjoy a smooth ride. 6,000 taxis are equipped with the LTA devices that measure the distance driven and the trip time. From July 7, motorists will be able to travel at speeds above 20kmh on arterial roads and at least 45kmh on expressways, at least 85 per cent of the time, up from just half the time now. Furthermore, the LTA also hopes that the new changes announced will help encourage more citizens to switch to public transportation.
The changes in the ERP system turned out to be a real can of worms for some motorists, especially the taxi drivers. The escalating petrol prices has already burnt a huge hole in their pockets. The high ERP charges will further leave them in a lurch. The operating costs for the taxi drivers has significantly increased this year. Taxi companies are responding to the problem by introduing schemes which will help alleviate the financial burden. Taxi opearators such as TransCab and Smart Taxis are providing monthly cash rebates worth $90 to each driver to help them deal with the higher ERP charges. A rise in ERP charges will eventually lead to higher taxi fares as taxi drivers transfer the extra costs to consumers. This can result in a decline in the number taxi bookings as taxi rides become more expensive and the business will be less profitable as the quantity demanded falls. The taxi drivers are the worst group of people affected by the new changes which will take effect from July 7.
Besides the taxi drivers, another group of people who will be adversely affected by the changes in the ERP system are the motorists who work in companies located in the charging zone. Crossing all the gantries can cost road tolls for up to $3 or more each day. This illustrates a higher cost of living for the workers who will have to pass through the gantries to get home. Some workers interviewed commented that they will just have to stay in their workplace until after 8pm, when the gantries stop operating. Delivery workers may also be affected by the changes. They will have to incur higher road tolls every time they need to deliver any goods or services to a customer located in the charging zone. However, in the long run, the delivery companies can benefit from the changes when traffic congestion is reduced. They will be able to provide better service to their potential customers.
Nonetheless, some people suggest that the new measures implemented are beneficial to the companies along the roads of the business districts which welcomes motorists with the ERP gantries. The higher ERP rates will discourage motorists from using the roads, and hence reducing traffic congestion. Economists define traffic congestions as a negative externality. While an automobile company has to pay for electricity and other costs of production, the individuals living in the country will have to pay for the traffic congestion since it will cause them to have higher road tolls. When there is minimal congestion along the roads of the companies, customers will find it easier to patronize the businesses there. This is especially true for food and beverage entreprises as the fall in traffic congestion allows greater convenience for their loyal customers. In fact, the Straits Times reported that hotels, restaurants and retail enterprises in the charging zone have since profits go up for the case of London which started levying road tolls downtown in 2005.
It looks like public transportation is the best method to travel for Singaporeans in the future. The Singapore government had introduced initiatives to further improve the quality of our public transportation system such as increasing the train and bus frequencies. While the rich is still able to afford a car despite the high road tolls and surging petrol prices, it seems like taking a bus or a train will be an everyday lifestyle for the middle-class workers in the future. Time to top up your EZ-link!
Discuss Whether You Consider A Fall In Exchange Rate To Be The Most Effective Way To Achieve Full Employment.
Written by azhar.
Spot an error? Inform us!
(I am practising my essay skills. You can read and help correct some points if you wish.)
[Updated on 18/7/08]
A fall in exchange rate can help raise the level of employment in a particular country. When the country devalues its currency, the price of exports of the country will be cheaper in terms of the foreign currency. This will mean that the country’s exports will be more competitive and attractive in the global market. At the same time, when the currency is devalued, the price of the country’s imports will be more expensive in terms of its currency. This is assuming that the Marshall-Lerner condition holds, which states that for a currency devaluation to have a positive impact in trade balance, the sum of price elasticity of exports and imports (in absolute value) must be greater than 1. Assuming that both exports and imports are price elastic, a devaluation of the exchange rate means a reduction on price of exports, demand for these will increase more than proportionately. At the same time, price of imports will rise and their demand diminished more than proportionately. Thus, the net exports will increase.
An increase in exports means that the aggregate demand (AD) will also increase. This can be seen in the rightward shift from AD(1) to AD(2). This also causes an increase in the real national income from Y(1) to Y(2) and the rise in the general price level from P(1) to P(2). When this happens, the firms will step up its production of goods to meet the rising demand and enjoy more profits. And in order to do so, the producer will need to hire more workers to produce more goods.
However, there may be adverse effects due to the currency devaluation. Firstly, it would be loss in investors’ confidence. Investors will view the currency devaluation as the beginning of a series of devaluation. They will lose confidence and will pull out their funds from the country, also known as capital flight. Referring to the formula AD=C+I+G+(X-M), a fall in investments (I) will lead to a fall in AD. Therefore, firms will have to cut down on the number of workers to cut costs. Hence, unemployment rises.
Next, the currency devaluation can only bring a positive result if the Marshall-Lerner condition is met. In the short run, the demand tends to be price inelastic. This is because tastes and preferences do not change quickly and time is needed to source for substitutes. Therefore, the price increase will only result in a less than proportionate decrease in the quantity demanded for imports as they still prefer the imported goods and there are no close substitutes available. At the same time, the demand for exports will also increase less than proportionately with respect to fall in price. This can result in a worsening of the Balance Of Trade (BOT) as expenditure from imports exceeds revenue from exports. Investments will decrease in the short run as it is less profitable as both the quantity demand (brought about by a change in price) and price is low. This in turn causes a lot of workers to be jobless, resulting in a rise in the unemployment rate. However, the BOT and unemployment will improve in the long run when demand becomes elastic. [J-curve effect-- states that the BOT deficit would worsen in the short-run and improve in the long-run due to elasticity. Learn more HERE.]
Besides that, currency devaluation may also cause inflation and make the cost of living rise. When the country devalues its currency, the price of imports will be more expensive. This means that the price of imported inputs and the cost of production will increase. Producers will transfer the rise in cost of production to the consumers in terms of higher prices. Hence, inflation will set in. This will cancel out the advantage that a falling exchange rate might have on export prices. Furthermore, it will also push up the cost of living as prices of imported goods and services are more expensive.
The fall in exchange rate is only one way to achieve full employment. There are other ways such as Demand management policies. Currency evaluation is more effective in countries with open economies and less effective in countries where the domestic demand dominates. For such instances, expansionary fiscal and monetary policies are often employed. For example, expansionary fiscal policy means an increase in government expenditure and a reduction in taxes. An increase in development expenditure such as spending on ports and schools will immediately raise aggregate demand and so reduce unemployment. This is because when the government spends on such projects, more people will be able to obtain the jobs and income. From there, since more people now earn their own income, they will be able to demand for the domestically produced goods, hence increasing AD. Firms will hire more workers to step up their production. Thus, employment rate will improve.
As for the reduction in taxes, when the government cut corporate taxes, more foreign companies will find it more attractive and profitable to invest and set up factories in the country. Since investments are a component of AD (AD=C+I+G+(X-M)), AD will also increase. Hence there will be more factories set up, which will employ more workers, increasing the employment rate of the country. Furthermore, when the government reduced the personal income tax rate, the workers will have more disposable income. They will be able to demand more domestically produced goods. With a rising AD, firms will also start to increase their number of workers to meet the rising demand. Hence, employment will increase.
If unemployment is structural in nature, falling exchange rate will be useless to address the mismatch of skills. Supply-side policies will more useful for structural unemployment. The government can provide subsidies for firms to train their workers and upgrade their skills. This can also increase productivity, which will attract investments, as it is a lower cost per unit output. Employment will rise. Moreover, the government can also nurture the service sector such as the health care and tourism industry as it is both labour-intensive and caters to workers with little formal education. Hence, there will be more job opportunities for the less-skilled workers. Employment will increase.
In conclusion, fall in exchange rate is usually seen as a short run solution to the problem of unemployment because of the various problems it creates. The government needs to investigate the root cause of unemployment before deciding on the most appropriate solution. If the unemployment is the result of the loss of competitiveness, long-term solutions should be focused on restoring the competitiveness through productivity improvements and economic restructuring.
If the unemployment is the result of slow down in worldwide economic growth, the country might have to seek an alternative engine of growth in the meanwhile to cushion the effect of a fall in external demand. Even in a country like Singapore with a small multiplier size, off-budget measures are still introduced in periods of falling AD to minimize the impact and hardships as we wait for the world economy to pick up again.
Explain The Factors That Influence The Competitiveness Of A Developed Country's Economy.
Written by azhar.
Points courtesy of Ms Charmaine Liu Meifeng.
Spot an error? Inform us!
Competitiveness refers to both export competitiveness and the country’s ability to attract Foreign Direct Investments (FDIs) and talents. Export competitiveness measures the ability of a country to sell its exports in the global market. This will depend on both the price and non-price factors. The country’s ability to attract FDIs and talents will depend on factors such as a pro-business environment, a stable exchange rate and the direct tax rates.
Exchange rate is an example of how a price factor can influence a developed country’s competitiveness. A weak exchange rate keeps the foreign price of the country’s exports low. Hence, it is cheaper to buy the exports in terms of the foreign currency. This will eventually make the exports more attractive and competitive in the global market. However, this is not applicable for countries which rely heavily on imported raw materials such as Singapore. With a weak exchange, the price of the imported goods will be more expensive in terms of the Singapore currency. A higher price of imported raw materials or inputs will mean higher costs of production. Producers will then transfer the higher costs to the consumers in terms of a higher price for the finished goods. Since Singapore has a small domestic demand and largely exports its finished goods, its exports will appear unattractive, as it is more expensive. Thus, this will reduce Singapore’s export competitiveness.
Another price factor which influences a developed country’s competitiveness is its productivity. Developed countries do not compete in terms of labour costs. This is because the emerging economies like those of China and India have very cheap labour costs as compared to the developed countries, as they have still abundant labour force and land. Therefore, developed countries will tend to raise their productivity so that the cost per unit of output produced can be lowered. The government will spend on education and training to improve the workers’ productivity level. A well-educated workforce also helps to attract FDIs in the economy. The government can also provide grants for firms to engage in R&D to further increase its productivity. Since higher productivity will lead to lower cost per unit output produced, the price of the finished goods will thus be lower. The developed country’s exports will be relatively cheaper and more attractive. Hence, its exports competitiveness will rise.
The final influencing price factor is the hidden costs. Since developing countries have yet established a reliable government, corruption and red tape may be present. All these add on to costs in terms of the transactions. This will in turn cause the developing countries to lose its competitiveness to the developed countries. Since developed countries have a relatively more pro-business environment, it will thus be more attractive to investments. This is because it is cheaper, with no costs incurred from corruption, to do business in a developed country and hence, raising its competitiveness.
Non-price factors can also play a part to influence a developed country’s competitiveness. Quality is a very good example of a non-price factor. The firms in the country can make sure the product design and reliability is of high standard. All these can help increase the competitiveness of the country, as customers will be more pleased and attracted with the workmanship and quality of the good. This can also grab customer loyalty and brand reputation. Besides this, the producers in the country can also decide to take on product differentiation. Successful product differentiation can create a competitive advantage for the producer, as customers view the products as unique. The producers can also engage in creative advertising campaigns gain more competitiveness. Thus, product quality helps raise the competitiveness of a developed country’s economy.
