Exchange rates, and passing on the costs

An item on the BBC website neatly combines topics of global trade, exchange rates, business costs, price elasticity of demand and breakeven analysis. In 'Brexit, the pound and the cost of fish', the food wholesale markets of Manchester's New Smithfield market explain the links.

Since the Brexit vote in June, the pound has fallen in value by around 12%. This means that more pounds have to be used to buy imported goods, and around half of the food that we buy has been imported - the price being paid by the wholesalers has gone up by as much as 40%. So if, like Tony Howard who is a fruit and vegetable wholesaler at New Smithfield, you are working on a gross profit margin of only 10%, it is inevitable that the rising price of buying tomatoes from overseas will have to be passed on to your customers.

As he points out, Mr Howard is buying in bulk and will have relatively low overheads (or variable costs) to deduct from his gross profit. Compare this to his customers who are retailers or caterers - they will be buying raw ingredients in smaller quantities, and will have higher overhead (or fixed) costs of wages, rent, rates, heat and light for shops or restaurants, so their gross profit margin needs to be higher, in order to allow for those overheads to be deducted and still make an operating profit. If your cost of sales has gone up by 10%, as Darryl Laycock, from Sale Fish and Seafood in south Manchester, says is the case for the sea bass that he is buying, then your profit margins will be squeezed unless you also put up the price you charge the customer - your revenue.

But will the customer pay? That depends on the price elasticity of demand for the goods. Students could usefully discuss the factors that will determine whether that demand is likely to be price elastic or inelastic.

Some businesses benefit from the exchange rate. It is true that a weaker pound makes it easier to export goods, as less of the buyer's currency is needed to buy the pounds to pay for them. But, according to this report, even this has knock-on disadvantages for some UK businesses, Another of the fish wholesalers points out that, for those doing the fishing, it is easier and more profitable to sell their produce overseas than in the UK, so there is a shortage of fish available for sale in UK markets. Here is another opportunity for analysis - the supply curve on demand and supply graph for the industry will shift inwards, as less fish is available for sale, and that will push the price up again.

No wonder that Radio 5 Live is reporting this morning on the great Christmas Pudding price shock, as the cost of importing all that dried fruit and sugar goes up and up.