Tuesday, November 23, 2010

Disney raises admission prices to DisneyWorld...How do they know what my elasticity is?? Oh, I forgot, Disney knows everything!!

The economists on staff at Disney have been busy. The debates about the Elasticity of Demand for DisneyWorld Tickets must have been very heated!

Disney parks hike admission fees

Admission at Disney's theme parks is going up effective Thursday.
Walt Disney World has hiked its admission price to a whopping $82 for adults, up from $79. And since childhood ends at age 10 in the Magic Kingdom, the increase could be significant for families. Children's prices will jump to $74, up $6 at the Orlando park.

     Adult ticket prices increased by 3.8% ($3.00 divided by $79.00 times 100) and children's prices increased by 8.82% ($6.00 divided by $68.00 times 100). For the example I use below, let's round these percentages to 4% and 9%, respectively, for simplicity  The Law of Demand states that at a higher price the quantity demanded of a good or service will decrease.  To find out how this impacts them, Disney must determine how sensitive customers will be to this price change.  They need to estimate what their Elasticity of Demand is for their admissions tickets.  Elasticity of Demand measures changes in quantity demanded relative to changes in prices.  Let's do a simple example with simple math.
    Assume the quantity demanded for park tickets BEFORE the price change was 1,000 adult tickets purchased and each adult brought 3 kids with them, so the number of kids tickets purchased was 3,000. Before the change in price, the total revenue in ticket sales was $283,000 (1,000  adults X $79 = $79,000 PLUS 3,000 kids X $68 = $204,000)
    Let's assume Disney believes that the quantity demanded for adult tickets will decrease by 6% (now only 940 adults buy tickets) as a result of the 4% price increase. Now the total revenue from adult ticket sales with 6% fewer adults will be $77,080. Yikes, they lost money on the adult ticket sales! This can't be good...
    We cannot forget the kids.  If 60 fewer parents go then a total of 180 fewer kids will not go as well.  Now instead of 3,000 tickets sold, there will be 2,820 sold, a percentage decrease of 2%  Total revenue from the sale of kids tickets will now be $208,680. With fewer tickets sold to kids, Disney INCREASED total revenue from selling kids tickets.
     What is the overall effect on revenues from the increase in ticket prices for both adults and children?  Disney went from revenues of $283,000 to 285,760, or an increase of $2,760 in revenues.
     What we have just illustrated is the Total Revenue Test for Elasticity of Demand. For adults there was a larger decrease in quantity demanded for tickets relative to the change in price so total revenues decreased. For kids there was a smaller decrease in quantity demanded for tickets relative to the change in price so total revenues increased.  When taken together, we find the combined elasticity of demand for Disney admissions tickets is relatively INELASTIC. In other words, in terms of change in quantity demanded, families are not sufficiently sensitive to the price increase to the detriment of Disney's total revenues.
     What is the "magic" here (sorry, could not resist) from raising the admissions price?  Disney calculates that the decrease in quantity demanded by adults will not be MORE than 4% and the decrease in quantity demanded for kids tickets will not be MORE than 9%.  Who am I to judge? I don't even ask how much it costs when I go there...
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