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    Movie Tickets

    Jan 5 • Behavioral Economics, Businesses, Demand, Supply, and Markets, Households, Thinking Economically • 3671 Views

    Should you pay more to see a blockbuster film during the Christmas holidays when movie going peaks? Less for an obscure foreign film? More on Saturday and at 7 pm? Less on Tuesday and 11 am?

    The issue is variable pricing. In this paper, several researchers suggest that “one price fits all” no longer makes sense for movie tickets. Their ideas are discussed here in an Atlantic article with several fascinating graphs about our movie going habits.

    And, here (Israeli congestion pricing), here (baseball games and airlines), here (a Chicago restaurant) and here (Broadway tickets), econlife.com looks at variable pricing elsewhere.

    Our bottom line: Now that we have the technological capability to variably price, should we?

    The Economic Lesson
    Variable or dynamic pricing is all about price elasticity of demand. If price changes a lot and the quantity we buy remains almost the same, as with medication, then our demand is inelastic. By contrast, if price swings have a big impact on buying, then our response is elastic.

    With movie tickets, certain consumers have an elastic response to lower prices; when price descends they see many more films. Meanwhile, others whose demand is inelastic respond minimally to price changes. Awareness of price elasticity of demand could generate more revenue for movie theaters and savings for consumers.

    An Economic Question: Depending on the movie, the time, the day and the season, how would higher and lower prices affect people with elastic demand? Inelastic demand?

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    Questions about Capitalism

    Jan 4 • Demand, Supply, and Markets, Developing Economies, Economic Debates, Economic History, Economic Thinkers, Innovation • 693 Views

    Can capitalism survive?

    In a Project Syndicate article, Harvard professor Ken Rogoff said, probably. But the “Anglo American paradigm” might evolve into another kind of capitalism.

    What threatens Anglo-American capitalism? Dr. Rogoff lists 5 challenges.

    • pollution
    • rising health care costs
    • inequality
    • financial upheaval
    • the welfare of future populations

    What might replace today’s dominant form of capitalism? Good Capitalism Bad Capitalism names 4 categories (pp. 60-61) of capitalism:

    1. “state-guided” where government dominates
    2. “oligarchic” where small groups have power and affluence
    3. “big-firm capitalism” dominated by giant enterprise
    4. “entrepreneurial capitalism” with innovation from small firms the dominant force

    And finally, sort of like cars, discussing the best vehicles for growth, financial journalist David Wessel says there are the U.S., European, Japanese export-driven, Chinese, and Latin American models of capitalism.

    The Economic Lesson

    This takes us to the three basic economic questions that every country needs to answer:

    1. What will be produced?
    2. How will goods and services be produced?
    3. Who will receive income?

    The different forms of capitalism (and combinations of these forms) provide different answers to the 3 economic questions. Good Capitalism Bad Capitalism considers combinations that lead to beneficial economic growth and those mixtures that are “bad.”

    An Economic Question: How does the U.S. capitalism model answer the three basic economic questions?

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    The (GDP) Gap

    Jan 3 • Developing Economies, Economic History, Macroeconomic Measurement • 642 Views

    With the U.S. #1 and China #2, people are starting to wonder when the U.S./China GDP gap will disappear. Here, at the Economist, you can create your own prediction. Just input assumptions about GDP growth rates, inflation and the yuan’s relationship with the dollar and then watch where the 2 nations’ GDP lines cross.

    For more of an historical perspective, here, you can look at a new Peterson Institute book, “Eclipse: Living in the Shadow of China’s Economic Dominance.” Graphs on pp. 46 and 47 tell the whole story. In 1870, the top 3 economically dominant countries were the U.K., France and Germany. By 1929 though, the U.S. bar on the graph starts to soar. Russia makes a brief appearance after WWII but within several decades, the U.S., Japan and China remain.

    For further insight, you might listen to the Teaching Company’s “Why Economies Rise or Fall.”

    The Economic Lesson

    It can be tough to compare economies. Even if GDP comparisons use the same components (consumer spending, business investment, government spending, and exports minus imports), still we have to remember that purchasing power differs. Also, we can use per capita (per person) comparisons and other individual standard of living yardsticks.

    But, here are some comparisons:

    Ranked by 2010 GDP, the U.S is #1 (close to $15 trillion), China is #2 (close to $6 trillion), and Japan is #3 (close to $5.5 trillion). Completing a list of the top 11, then we have Germany, France, the U.K., Brazil, Italy, India, Canada, and Russia.

    An Economic Question: Using the Economist calculator, when do you predict that the Chinese GDP will surpass the U.S.?

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    Presidential Futures

    Jan 2 • Behavioral Economics, Demand, Supply, and Markets, Thinking Economically • 554 Views

    The prices of buy and sell contracts for the Republican presidential candidates in Iowa provide a good history of the beginning of the primary race.

    Romney contracts (max of $1) on the first and last day of each month since September 1 were:

    This is how the market works:

    The Iowa Electronic Market (IEM) indicates the probability that a candidate will finish in the top 2 in the Iowa caucuses. So, a 22-cent contract displays a 22% probability. Like any market, the price representing a Romney victory fluctuates because of supply and demand.

    Explained on the IEM website, “Contracts for the correct outcome pay off at $1; all other contracts pay off at zero. As a result, the price of the contract at any given time is the probability that the traders believe that event will happen.” The maximum investment is $500.

    Polls or Markets? This study says the markets were more accurate than polls 3/4 of the time between 1988 and 2004.

    The Economic Lesson

    Former Secretary of the Treasury Lawrence Summers said that the most important idea to learn about the U.S. economy is “the power of the market.” As a process that creates prices and quantities for goods and services, markets are a source of information and incentives for businesses and consumers.

    Through their price making mechanism, prediction markets might also be a forecasting tool.

    An Economic Question: Here, the Iowa futures are shown for the 2012 presidential election. What do the numbers display?

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    New Year’s Resolutions

    Jan 1 • Thinking Economically • 454 Views

    If one of your New Year’s resolutions is to “think economically,” please remember this top ten list:

    10. Whatever the question, always answer, “There’s no such thing as a free lunch.”

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