• Dynamic Pricing for Tickets Displays the Power of Prices

    Broadway and Airlines

    Nov 26 • Businesses, Demand, Supply, and Markets, Economic History, Innovation • 771 Views

    Have you ever hesitated to book an airline reservation and, within moments, the price changed? Or, could you have known that delaying your purchase of a ticket to God of Carnage in LA last summer would have saved you almost $70?

    The reason is “dynamic pricing.” Airlines do it, hotels also, and now theater owners.

    According to the NY Times, Broadway theater owners are using dynamic pricing to cater to the “haves” and “have-lesses.” For airlines, that has meant vacationers paying much less than business travelers. Even for certain restaurants, you could pay more for Saturday evening at 8:00 than Tuesday at 9:30. With the LA example, early ticket purchasers spent $120 but when demand plunged, the price did also.

    With dynamic pricing a seat is not just a seat. It becomes a commodity that has to be used when available because you cannot store it. Its customers have different needs, its future demand is uncertain, and its providers have pricing power. Implemented appropriately, dynamic pricing maximizes revenue.

    The Economic Lesson

    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 Broadway shows and airline seats, certain consumers have an elastic response to higher prices; when price ascends they say, “No.” Others, the inelastic group, will buy no matter what.

    An Economic Question: Thinking of “dynamic pricing,” we could say that we have 2 demand curves among Broadway theater ticket buyers. Explain and draw.

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  • Hoping to stimulate the economy, in 1939, FDR moved the date of Thanksgiving back a week.

    A Thanksgiving Mystery

    Nov 25 • Demand, Supply, and Markets, Economic History, Households, Innovation, Thinking Economically • 899 Views

    Thanksgiving means more demand for turkeys. And yet supermarkets discount the price. Why?

    First some turkey facts. This year, the American Farm Bureau says that the price of a typical turkey is up 22% from last year. According to Slate, the price of the typical supermarket frozen turkey has been increasing since the 2007 recession began.

    One culprit is corn. As this turkey farmer said, “Any time corn prices jump, our costs go up a lot.” Revenue may be record setting but not profits.

    But still, knowing the once a year turkey buyer is price-sensitive, your local supermarket will probably charge 10% less than its October price. Similarly, during Lent, food stores discount tuna. And people pay less for beer during the 4th of July weekend.

    Finally, priced from $75 to $100 and more, here is a turkey for which buyers are not price sensitive.

    The Economic Lesson

    Knowing that the Thanksgiving turkey customer is price sensitive, food stores charge less. But, they make their money on relatively expensive complementary goods like sweet potatoes and cranberries and cream of mushroom soup.

    Looking at a graph, you would see the demand for turkeys rise. As a result, the demand curve for a complement would also shift to the right.

    An Economic Question: On a supply and demand graph, how would you illustrate the increase in typical Thanksgiving supermarket turkey prices?

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  • Equality or Efficiency, the Size of the Pie and Each Slice

    A Plymouth Plantation Reprise

    Nov 24 • Behavioral Economics, Economic Debates, Economic History, Households, Labor, Macroeconomic Measurement, Thinking Economically • 491 Views

    Perhaps even more relevant today, this was our blog for last Thanksgiving:

    In 1623, two years after the first Thanksgiving, Governor William Bradford was worried about Plymouth’s food supply. The problem, he concluded, was that people shared whatever they produced. Because “able and fit” young men were expected to work harder and then give their food to others, all worked less.

    As Bradford explained it in Of Plymouth Plantation,”So they began to think how they…could…obtain a better crop than they had done…At length…the Governor…so assigned to every family a parcel of land…This had very good results for it made all hands very industrious…”

    You can see what happened. When people could keep what they produced, they became more industrious.

    The Economic Lesson

    Equality or efficiency was a dilemma in 1623 and remains a dilemma today. The basic question involves how much of what we produce should we keep?

    Maybe, especially on Thanksgiving, we can say it all takes us back to the size of the pie.

    An Economic Question: At what level, from 10% to 60% of your income, do you believe that taxation would affect your ambition and incentive to innovate?

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  • The ROI From College

    College Matters

    Nov 23 • Demand, Supply, and Markets, Economic Debates, Households, Labor, Macroeconomic Measurement, Thinking Economically • 609 Views

    Assume you are an 18 year-old high school graduate with $102,000 to use for a lifelong investment.

    These are your choices:

    • triple-A rated bonds
    • housing
    • common stock
    • Bachelor’s Degree (4 year college)
    • Associate’s Degree
    • gold
    • long term treasuries

    The results? The Associate’s Degree gives the largest return and housing the smallest. Specifically, Brookings hypothesizes that the average annual return for 60 years would be: Associate’s Degree: 20%; Bachelor’s Degree: 15.2%; stock market: 6.8%; AAA corporate bonds: 2.9%; gold: 2.3%; long-term treasuries: 2.2%; housing: .4%.

    However, the WSJ reminds us that there might be other differences between college grads and those who did not continue with higher education. At the high school level, college grads had higher grades, were more affluent, and fared better on standardized tests. Asked for a number, though, researchers estimate the lifelong income boost from college at $300,000-$600,000.

    The Economic Lesson

    Defined as sacrifice, the cost of every investment is more than the dollars it directly required. Cost includes alternative uses of the money as well as less tangible benefits.

    An Economic Question: We could say that the benefit of college has a “spill over effect” as a positive externality. That is, individuals benefit but society gets even more. How would you assess the broader impact?

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  • Medicare Payments

    Nov 23 • Demand, Supply, and Markets, Economic Debates, Government, Households, Macroeconomic Measurement, Regulation, Thinking Economically • 455 Views

    http://economix.blogs.nytimes.com/2011/11/11/equalizing-payments-for-medical-care/

    For each procedure, you have a provider and a recipient. Same procedure. Different “reimbursement” D

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