"Mainstream media" article that extensively uses elasticity to describe a market. What a pleasant surprise!

A terrific article that explains the current market for corn using many micro and a few macroeconomic concepts.

Bumper crop is bummer for some (Edward Lotterman)

The main ones are  Elasticity of Demand and of Supply. Rare it is to find an article in mainstream media that uses correct terminology to describe economic events.  Warms my heart!

Check it out.  Offers MANY opportunities to practice drawing and analyzing basic supple and demand graphs.

Here is a quick "sketch" of what it looks like after all is said and done:

My explain-er on the the Monopolists Demand Curve, Total Revenue Curve, Elasticity and Marginal Revenue. Whew!!!

It any teacher or student of AP Microeconomics needs an explain-er on:

1. A Monopolists Demand Curve and the Total Revenue Curve
2. The Demand Curve and the Total Revenue Test for Elasticity
3. How Elasticity is represented along the Total Revenue Curve.
4. How the Marginal Revenue Curve is derived with emphasis on the importance of locating the REVENUE MAXIMIZING QUANTITY where MR = 0.

Probably some other stuff I forgot about. :)

If you review it PLEASE let me know of any errors.  I am my own worst proof reader. Also, any constructive criticism of the content is welcome as well.

Total Rev Test and MR equal 0

Uploaded by Gene on WizIQ Tutorials

The NFL is doubling ticket prices for some seats to Super Bowl 2014. Economists would say yes. Public Relations experts would say no. What do you think?

The National Football League (NFL) has announced the ticket prices for seats to the 2014 Super Bowl taking place in New Jersey:

Super Bowl fans can prepare to pay double for the best seats. The NFL expects the most expensive tickets for its championship game will be about $2,600 each for 9,000 premium seats for the Feb. 2 game at MetLife Stadium in East Rutherford, N.J.  

That's more than twice the $1,250 cost for similar tickets at last season's Super Bowl in New Orleans. 

According to the BLS the "Admission price to Sporting Events" increased by only 2.6% in the last year. The NFL is more than doubling the price to its marquee game for these premium seats. What is going on?

"We are looking to close the gap between the face value of the ticket and its true value as reflected on the secondary market," NFL spokesman Brian McCarthy said Tuesday.

Now it makes sense. The NFL is incensed that "secondary sellers" like StubHub or individuals on E-Bay are buying tickets AT THE PRICE the NFL offered for sale ("Face Value") to the public and then reselling them at a higher price to someone "willing and able" to purchase them at a higher price ("Secondary Market").

Using a basic Supply and Demand graphs, we can easily illustrate what is going on:

There are only 9,000 premium seats available in the stadium. This number is fixed regardless of the price of the ticket.  The market supply curve will be vertical ("Inelastic") at 9,000.

We can insert a market demand curve to establish an equilibrium price for the tickets and the price the NFL is expected to charge for the premium seats.

How did they arrive at this price?  They learned from last years Super Bowl in New Orleans.  The price of a premium ticket on the Secondary Market last year ended up around $2,600 (could have been less, or more).  The NFL representative suggests that THIS was should have been the actual price of the ticket.

The NFL offered those tickets for sale at a Face Value of $1,250.  In the graph below, you can see $1,250 is much less than the scalped price.  This suggests that at $1,250 the "Quantity Demanded" (12,000) for the tickets was greater than the "Quantity Supplied" (9,000).  I just made up the number (12,000) to use as a reference.

So, 9,000 people were able to get tickets for $1,250 and 3,000 fans were left without.  Because the market did not "clear" at 9,000 there will be some fans, not all, willing and able to purchase tickets at a higher price. This is where the Stub Hub's of the world take over.

Recognizing there is a shortage of tickets to meet demand an exchange is set up to entice at least 3,000 of the people that bought tickets at $1,250 to resell them.  Let the bidding begin.

The the scalped price, and ultimately the "true value as reflected in the secondary market", emerges from the scrum.

The NFL's pricing strategy is to side-swipe the secondary market and reap windfall from what they project will be the true price for a premium ticket to the Super Bowl.

When this becomes more widely publicized, the NFL will come under lots of criticism for charging such a high price.

According to Economics 101 they are doing the right thing. According to Public Relations 101 they are probably doing the wrong thing.

What do you think???

Airlines are currently NOT collecting Federal Taxes on tickets you purchase. The price of your ticket should decrease by the amount of the tax, RIGHT? HA! Let me 'splain' to you what is happening---My graphs included for no charge---or tax.

Because Congress did not fully fund the Federal Aviation Administration (FAA) in a bill last week, the FAA is NOT collecting some taxes that are levied on your purchase of a plane ticket. WOW! I guess that means the ticket price SHOULD decrease, right? Not so fast:

U.S. airlines raise fares as taxes lapse

Many U.S. airlines have raised fares in recent days to take advantage of a lapse in U.S. ticket tax collection after Congress failed last week to fully fund the Federal Aviation Administration budget, but passengers are not likely to notice any price difference.


The expiration of the FAA reauthorization on Friday means some aviation taxes are no longer being collected. These include a 7.5 percent sales tax on U.S. air transportation and a 7.5 percent sales tax on the purchase of air miles, said fare watcher FareCompare.com. Additionally, taxes on jet fuel are also reduced.


"Friday evening we adjusted prices so the bottom line price of a ticket remains the same as it was before prior to the expiration of federal excise taxes, etc.," American Airlines (AMR.N) spokesman Tim Smith said by email.

Let's look at this graphically. Assumptions: We look at one plane only with 200 seats. No matter what the price, there are only 200 seats REGARDLESS of what the price of the ticket is. Supply of tickets is Perfectly INELASTIC. The price of the ticket for the customer is $100 (see 1st graph) which includes the taxes levied BEFORE the latest event happened. 

Assume the taxes submitted to the govt totals $20 of the $100 final ticket price.  So, the price the airline actually receives for the flight is $80 ("Point B". This is illustrated in the graph below.

Without the $20 in taxes included in the ticket, the market price of the ticket SHOULD drop to $80 (Point "C"). Because the price of the ticket DECREASED ("ceterus paribus")  we move ALONG the existing demand curve, downward and to the right to Point "C". According to our market demand curve ("Demand*") at $80 the QUANTITY DEMANDED is 240 seats.  We can see that the QUANTITY SUPPLIED of seats is still 200. Our market is in dis-equilibrium where Quantity Demanded is GREATER than Quantity Supplied---we have a SHORTAGE of seats

It is clear that the market clearing price is $100 (Ceterus Paribus--assuming DEMAND does not increase or decrease).  The quantity demanded will decrease as the price increases to clear the market and ration the 200 seats.

Yes, theoretically 40 people will be rationed off the plane as we move back to the previous market equilibrium price of $100 and 200 seats:



The key difference is that the airline is the beneficiary of this lapse in policy. In the short term, they reap an additional $20 per ticket.  In economic terms, they are earning some "economic profits", profits over and above "normal profits"--Total Revenues - Total Costs (fixed costs + variable costs + opportunity costs).

We SHOULD expect competition to take care of these economic profits. The presence of economic profits sends a signal to the market that more seats are needed. An additional plane will be called into service and the SUPPLY of Airline Seats will INCREASE. The supply curve will shift to the right and the market price will decease to $80--the price of assumed "normal profits"...

Again, I made lots of simplifying assumptions, but overall this how the process works. I hope this helps you understand microeconomics a little better. :)

Netflix raises prices...This has to kill their revenues, doesn't it? Look at the numbers and see if they can STRETCH revenues like an elastic

Netflix recently announced a new pricing plan for its online streaming and DVD service.  People understandably are upset about this. Is this going to hurt their revenues as people follow through on their threats to discontinue the service?  Let's perform a total revenue test to see if this is going to hurt their revenues.

 I am going to use some easy numbers to illustrated what might happen to Netflix revenue as a result of this change in pricing policy.

I currently subscribe to the $9.99 plan (round to $10 so the math is easy) where I can stream online and get 1 DVD at a time through the mail. This plan will increase in price to $15.98 (round to $16 so the math is easy).  This is a 60% increase in the monthly price. Right now, Netflix has approx 23.6 million subscribers. Assume that because of the negative publicity 10% of their customers drop the service completely. I don't think that many will, but lets see what happens.  This means monthly subscriptions will be 21.2 million now (a loss of  2.2 million subscribers).  That can't be good for the bottom line, can it?

Revenue before the change in plan: $10 X 23.6 million = $236 million.  Revenue is actually higher because they do have more expensive rental plans, but we will leave that aside for now.

Of the remaining 21.2 million customers, assume only 40% decide to maintain the streaming and 1 DVD at a time plan for the higher price of $16---8.48 million X $16 = $136 million.  Assume the rest are split 50/50 between online only and DVD only plans---12.72 million X $8 (either plan costs $8) = $102 million. Total revenues now are $238 million---$2 million MORE than before the change.

Performing the Total Revenue Test for Elasticity of Demand, we found that the increase in price and corresponding decrease in quantity demanded actually increased their total revenues. This means overall not enough people were sensitive to the change in price to discontinue the service and cause Netflix total revenues to decrease.

The percentage change in price for Netflix (+60%) was greater than the percentage decrease in quantity demanded for their service.  If this remains the case, then we can say the demand for Netflix is relatively INELASTIC.

Netflix will weather the storm of negative publicity. Eventually the DVD part of the business will disappear and so will the postage and all the other costs associated with running a mail order business. A broader offering of content will be available for online streaming in the near future and everyone will forget the day Netflix raised prices.

Gas prices are too low and need to be higher! Our kids, grand-kids and great-grand kids will THANK US!

I am convinced the only way get off our dependence on oil (domestic and foreign) is to ensure the price of gasoline stays elevated.  A gas tax or a tax on a barrel of oil seems to be the preference of many/most economists.  $4.00 per gallon seems to be the generally accepted price that moves Americans to change their consumption behavior. It is a short term pain we must go through to obtain the long-term benefits.  Please read this short piece below.  I added emphasis on the parts I think are important.  You will see when the prices are high people start to make alternative choices in the types of vehicles they purchase.  The process works, it just has to be allowed to work itself through to the end.  The current policy to use the Strategic Oil Reserve only serves to slow down the process and sends mixed signals to the people. I am not insensitive to the hardships the high price of gas puts on people. I am MORE sensitive, however, to the hardships the will be visited upon the next generation if we don't take REAL action today. Is that so wrong? 

This is also a great read for AP Microeconomic teachers and students. Data is provided to calculate various elasticities...
Via Mark Thoma

From MIT Sloan Experts: My latest research* looks at how consumers adjust to high gas prices by changing the kinds of car they buy, and the prices they pay. What launched this research was the debate around the effectiveness of a gas tax to reduce climate change; the goal was to determine whether consumers undervalue fuel economy. If consumers do undervalue fuel economy, then such a tax would not shift enough consumers to buy smaller, more fuel-efficient automobiles.

I try to do my research with an eye toward showing policymakers what will happen if they adopt Policy X over Policy Y. I am not a granola environmentalist, but I do see a lot of inefficient policies out there, and as an economist that’s frustrating.

And here’s the thing…

At the moment, the US relies on a variety of subsidies and “performance standards” to reduce greenhouse gas emissions from the transportation sector. On the fuel side, we have ethanol subsidies and the Renewable Fuel Standard, which is an implicit subsidy program. On the vehicle side, we have Corporate Average Fuel Economy Standards, or CAFE standards, which dictate the average fuel economy of an automaker’s annual fleet. The current standard for passenger cars is 30.2 mpg. The standard for light-trucks — a classification that also includes SUVs under 8,500 pounds — is 24.1.

On the electricity side, lawmakers also use the Energy Star program, which was created in the early 1990s, to force appliance makers to create more efficient products. Policymakers seem to believe that consumers are not going to buy the correct dishwasher, or the correct air-conditioner. So instead, they regulate the manufacturer of these appliances to comply with certain efficiency requirements, rather than let the price of electricity reflect the social cost of that dishwasher or air-conditioner.

My research shows that performance standards – such as CAFE standards – may be more inefficient than previously thought, and that pricing instruments, such as a gas tax, would likely have a bigger impact on reducing greenhouse gas emissions.

My colleagues and I found that a jump in the price of gas causes a significant change in the kinds of cars that consumers buy and the price they pay for them. A $1 increase in the gasoline price changes the market shares of the most and least fuel-efficient new cars by +20% and -24%, respectively. Changes in gasoline prices also change the relative prices of the most fuel-efficient cars and the least fuel-efficient cars. For new cars, the relative price increase for fuel-efficient cars is $363 for a $1 increase in gas prices; for used cars it is $2839. (For comparison: a $1 increase in gas prices alters the budget of the average household by about $50 a month.)

I am not naïve, and I realize that no politician has ever been elected on a platform of: ‘I’m going to raise your gas prices,’ but by advocating alternatives, they’re promoting inefficient policies that simply hide these inflated costs. There’s a lot of resistance from consumers about the prospect of a gas or carbon tax, but I believe this is mainly because consumers are misled to believe that performance standards are cheaper.

The run-up in the price of gas in recent years has been substantial enough to make top auto executives give up their historic opposition to gasoline price taxes: some have even suggested that Congress should consider a variable gasoline tax that would create a $4 floor for retail gasoline prices.

Mike Jackson, CEO of AutoNation, the largest U.S. dealership chain, told the Wall Street Journal: “We need more expensive gasoline to change consumer behavior. Otherwise, Americans will continue to favor big vehicles, no matter what kind of fuel-economy standards the government imposes on automakers.”

Four dollars a gallon, he added, ‘is a good start.’ Hear, hear.