Non-Price Determinants of Demand

This is not appropriate for use in high schools. However, those of you who teach at the college or university level may find this helpful.  Econgirl at EconomistsDoItWithModels has a great illustration of non-price determinants of demand with the help of "the most interesting man in the world."

For the Next Time You Teach Monopolies

Here’s a very good article from The Economist on substitutes and why monopolies don’t have absolute power in the marketplace. (Thanks to Carpe Diem for the pointer.)

I know I’m constantly dealing with the perception that monopolies have ultimate pricing power. I face it with my high school students, my undergraduate students, and occasionally even with graduate students. 

They seem to forget a factor in demand is the availability of substitutes.  And as prices rise, the search for substitutes often gets more intense. Once those substitutes are found and economies of scale can kick in, (this can be a significant period of time) the monopoly may suddenly find itself the victim of creative destruction.

There are other factors to pursue, of course. But this has the potential be a great discussion starter or an anecdote to toss into discussion.

Non-Price Determinants of Demand

I've been meaning to blog on an article for the past couple of weeks but just have not had the time.  I have a few moments while one of my summer classes are taking an exam so I will try to do it now.

The article in question is from The Wall Street Journal. It discusses how buying patterns have changed among the wealthy as a result of the recent recession. It offers a chance for you and your students to discuss some non-price determinants of demand.  How are non-price factors such as tastes, income, availability of substitutes/complements, expectations, and the number of buyers reflected in the article?  You can also use it to discuss the price elasticity of certain goods. What are your thoughts?

Complementary Goods and Marginal Utility

This recent Dilbert cartoon speaks to a lot of concepts.

But EconGirl at Economists Do It With Models does a much better job of talking about it than I ever could. I recommend you give a it few minutes.

Hypothetically, What Would It Cost?

Visualeconomics has an engaging visual on some of the costs we might associate with celebrating Independence Day in the U.S. Included is information on where various parts of the traditional mid-summer cookout come from. As I looked at the chart, I thought "what would our celebration cost if we imposed trade barriers between the states - depending totally on locally grown or produced items? Alternatively, how would we celebrate differently if it weren't for ideas like comparative advantage, productivity and specialization?"

It's just a thought as we pass the "mid-point" of summer and start thinking ahead (the local stores have their "back-to-school" displays up).

Put a Cork (or Plastic Stopper) in It

This article from The Wall Street Journal (still free at this writing) has been in my inbox for a couple months. But it's a good one. It's about how the corks in wine bottles have increasingly been replaced by plastic stoppers. It's a good example of how firms mature and evolve, how substitution drives competition, and potentially about efficiency and creative destruction. It also has an interesting slide show.

Substitutes and Inferior Goods?

Finally, here is a little levity to help ease you into the weekend.

Feel free to share your thoughts.

Peace and Trade

And second, here's an interesting piece on the Voxeu web site.

If you read The World Is Flat by Thomas Friedman, particularly the first edition, you are familiar with the idea that globalization reduces conflict. Friedman states that no two countries with McDonalds had ever gone to war. That no longer holds, I believe. But the idea is that trade promotes peace. The economic gains from trade outweigh the potential losses from warfare. Therefore it is in the interest of the countries to find a different channel to resolve conflicts.

While noting that political and historical benefits may be stronger motivators for trade agreements (bilateral and regional) than the economic benefits, the authors point out that they are not substitutes but can be viewed as complements. I'm not really doing the article justice, but I hope you will find it interesting.

Demand Curves Slope Downward, Apparently

In an article in today's edition of The Wall Street Journal titled "Theater Chains Pricing for Slow Growth", (subscription only, but plug the title into your browser and you may find an accessible version) we find out that demand curves slope downward. Yet, there are people running movie theater chains who don't seem to understand that idea. They seem to think the remedy for falling attendance is to raise ticket prices.

You can even use this article to discuss substitutes because cable, online and DVD sales are viewed as cheaper alternatives. And because the article points out that as much as 40% of a theater’s chain comes from the sale of concessions, you can discuss compliments (think popcorn). This Econtalk interview with Richard McKenzie touches on movie prices and compliments. Start about the 48 minute mark.

Please share your thoughts.

Competition Is a Great Thing...

provided it doesn't affect us. An excellent post on Carpe Diem shows how groups may react when competition induces change. (My family has used these clinics a couple of times. We have no complaints.)

As always, your comments are welcome.

Not That I'd Use This in Class...

But it did make me think of "substitutes" and "inferior goods."



What do you think?

Creative Destruction

 This short piece of video has some good possibilities for explaining "creative destruction" (HT to Mark Perry), but it also opens the door to discussions of division of labor, structural unemployment, complements and substitutes, and economic growth.



Give it a look. I think you might enjoy it. And please share your thoughts.

Substitution Principle and Revealed Preference

And here's a holiday-oriented comic strip that helps illustrate revealed preference (she'd rather leave trees in their natural state), substitution and inferior goods (I'm sorry, this is a normative statement but Grog just doesn't make it as a "tree"), and maybe a flair for innovation.

Market Skills: Technology vs. People

As economies change, the need for skills can change. This cartoon might be an example of a chicken-or-egg situation, but there's a clear message.



What do you think?

Supply, Demand, Price, Markets, Yadda-yadda

If you’re looking for some current issues to help illustrate your discussions about prices (how they are set, how they influence behavior, how they are influenced by behavior, how they act as a rationing mechanism, etc.) you could do worse than a couple of stories that have popped up over the past few weeks. You probably are already using them, but just in case they’ve slipped under your radar, here they are.

The first was in The New York Times about three weeks ago. The story is about how chicken wings, that finger-food favorite and former loss-leader for sports bars, have now become more expensive than boneless chicken breasts, the former gold standard of the poultry market. The story offers opportunities to move supply and demand curves, discuss cost/price issues, and even talk about substitutes, elasticity and inferior goods.

The second story was in The Wall Street Journal about a week ago. (I wish I could tell you with certainty that it’s free content. Sometimes it is. Sometimes it isn’t. If you run into a “subscriber content notice”, insert “Amid Price War, Three Retailers Begin Rationing Books” into your browser. You should be able to find the whole story. If that doesn’t work, the basic story has been covered by other news outlets like this segment from CBS News.)



It seems that traditional book-sellers are up in arms because Wal-Mart, Amazon and Target have started a price war, and newly released and soon-to-be-released popular books are the ammunition. That’s to be expected. However, the three sides in the war are discovering that “price acts as a rationing mechanism” and have had to decide how to distribute the goods when price is “below market.”

Let me know how these stories work. Or if you are already using them, please share your experience with other readers.

How Traffic Jams Help the Environment

There's a thought-provoking article (free at this writing) from the weekend edition of The Wall Street Journal. It makes a case that traffic jams actually help the environment.

Now, before you write the article off as the ravings of some anti-environmentalist, I suggest you take a look at it. The main idea is that more congested streets provide the proper incentive for people to move to public transportation, and other environment-friendly alternatives.

Specifically, the author states that ideas like congestion-pricing, where fees are paid to use highways and streets based on time of day and/or volume of traffic may actually cause more environmental problems, while "solving" congestion problems.

In the author's view, reduced (or better managed) traffic volume makes the commute more enjoyable, and may actually encourage people to stay in their cars - just shift times of travel where possible. Further, he does not say to get rid of congestion pricing, rather to find the right price. (For example, he finds it "absurd" that, in New York, "the East River bridges still don't charge tolls and that curbside parking in much of the city is free." On that last point, I'm not sure that much of that free parking is convenient to where people work, but there evidently are spots available.

You could use this as a discussion starter when talking about externalities or demand elasticity (the incentive of a substitute). It might be interesting to see where the discussion goes.

I look forward to your comments.

Economics of Video Rental

There's an interesting story (subscriber-only content) about Blockbuster Video in today's edition of The Wall Street Journal. Unfortunately it's subscriber-only content. (But browse around, you might find most of it.)

The summary is that Blockbuster, after having previously announced the closing of some 1,000 locations is raising the number to 1,560 - almost 40% of its total. What’s the reason? Things change.

Specifically, the market has changed. New competitors (specifically Netflix and Redbox) can deliver the same product cheaper. And substitutes (online viewing and on-demand films) are becoming more widespread.

There are a number of interesting concepts that can be teased out of the basic story: entrepreneurship, economic growth, and utility.

For entrepreneurship, I would direct you to Schumpeter's five entrepreneurial activities: new products, new production methods, new sources of resources, new markets, and new forms of organization. Ask your students how firms like Netflix and Redbox fit the definition and, by extension, become competitors to firms like Blockbuster.

For economic growth, I would again refer you to Schumpeter. His idea of 'creative destruction' was meant to be an explanation of economic growth. New products and services replace old ones. But you may also look at growth as providing new goods and services to consumers or existing goods and services at a lower cost (thus increasing real income).

Finally, the idea of utility is something we frequently skip or skim over. But it is the measure of usefulness that a product provides to the consumer: essentially how does something satisfy wants? I was taught that there were three types of utility: form, place and time. Form utility means the product has a form that the consumer finds satisfying; place utility means it's available where it can satisfy the consumer's wants; and time utility means it's available when the consumer wants it. First ask students "what forms of utility did Blockbuster provide to consumers?" Then ask them to identify the utility added by firms like Netflix and Redbox.

I'm sure there are more concepts you can link to this story.  Please share your ideas and your comments.

Beer & Anti-trust

This article may not be useful to your classrooms, on the other hand, it may. It was in this morning's Washington Post and examines the recent decision by two major brewers to raise the price of their products, despite the recession and falling sales. The tone seems to beg for anti-trust action, arguing market concentration. But a counter-argument would be that such a move makes microbrews and alternative beverages more competitive, thus encouraging substitution and the risk of a resulting permanent loss in market share. Perhaps you can use the information to set up a "hypothetical" without naming the product or the companies. Just a suggestion.

Disney + Marvel = New Levels of Fantasy?

Finally, as dad to three boys, I would be remiss if I didn't at least acknowledge yesterday's story in The Wall Street Journal (free content at this writing) about Disney's buyout of Marvel comics.

Again, it includes some neat graphics, slideshows and video that make for some interesting "cost-benefit" analysis exercise. And for those of you who have students playing any kind of stock market exercise, the big reaction has already passed, but look for bumps as the new owners begin to bring projects to the fore (this will likely happen over the next couple years - not the next semester). Now if only the Disney parent can arrange for Marvel superheroes to provide commentary on ESPN.

I can hear it now:
Spiderman: "Nothing but Net."
Incredible Hulk: Any reference to the Green Monster
X-Men: Hosting the X-Games?
Iron Man: References to the old Pittsburgh 'Steel curtain' defense.
Fantastic Four: Tennis doubles.

The possibilities are Marvelous. Any more you can think of?

Economics of Biofuels

This past Thursday (8/27/2009), The Wall Street Journal contained an interesting story (currently subscriber content) on the current downturn in the biofuel market. It was quite good and if you poke around using your browser, you might find most of the text in one or more sites.

What I found interesting were the various economic concepts that were illustrated in the story. I played with it a bit and came up with a PowerPoint® presentation that uses various quotes from the story and relates each one to basic ideas in economics - some with simple graphs to demonstrate them.

I'm interested in finding out whether this type of presentation would be helpful to classroom teachers. As a result, I will send a copy of the presentation to the first 25 high school teachers who reply to this post and request a copy. However, I will request three things: your name, the school you teach at and its location, and your analysis of the presentation. Let me know if it would be useful for your class or not. If not, why not. I'd be most grateful.