Investigating Price Changes Portfolio Project

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Economics Unit 2: How Markets Work Investigating Price Changes Portfolio Project Part 1: Chapter 6 Wall Street Journal Questions

1) Why are sports teams considering switching to a variable–pricing strategy for tickets? Sports teams are switching to a variable-pricing strategy for tickets so that they can get a higher profit on games with record attendance numbers. They feel the need to do so because the marginal costs, such as construction payment and players’ salaries, did not equal to the marginal revenue, since attendance was severely dropping. To pay for the marginal cost, the sports team needed to capitalize on things that they were sure of, like increasing attendances to games between major sporting rivals.

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2) What would happen if airlines and baseball stadiums priced all seats the same instead of using variable pricing? What would happen to the number of tickets sold? What would happen to the total revenue from ticket sales? Assume stadiums are using variable pricing and aren’t completely sold out or completely empty. What would change if seats were sold at the lowest prices? Highest prices? Variable prices? When tickets are placed at the lowest prices, the law of demand states there would be an increase in ticket sales to the game. The revenue would therefore be higher. If the prices were placed at the highest prices, the demand would be elastic and very few people would be willing to pay for the tickets. They may not be as willing to pay for them because of their budget limitations and their discernments for what is necessity or luxury. The revenue would then be lower. If the market used variable prices, the ticket sales and revenue would increase, assuming that the ticket discrepancies were not pushed very far.

3) Stephen says he skipped the game with rival Toronto because of the price increases. “I do not agree that I have to pay extra to see certain teams,” he says, “I don’t pay less for teams that usually don’t draw.” What do you know about Mr. Duford’s demand to tickets to see the Senators play Toronto? Mr. Duford’s demand to tickets to see the Senators play Toronto is elastic. His demand is sensitive to price changes, so his demand would decrease as price increases. His demand is elastic for many reasons. It could be because he sees the tickets as a luxury rather than a necessity. The tickets do not help his life in any manner other than offering it entertainment.

4) For each article describe causes of changed price and the effects of the changed price. Increase in price: The recent deflation in Japan’s economy has brought paper used for commercial products and home offices to skyrocketing prices. In just the past five months, paper has totaled an increase of 25% of its original price value. Paper producing companies are setting high prices because the value of the yen has dropped and the import costs have risen. Since there are few substitutions for paper and many people need them for daily uses, the demand would be inelastic to the price increase. Companies could therefore produce more paper and gain a higher profit than before. Although demand would theoretically be higher, the economy would not improve much if the companies are not willing to raise their employee’s wages. Income plays a huge role in demand, for few people, if any, would buy products that they could not afford. In addition, as time passes, people would find or develop a substitute for paper, and the demand and quantity supplied would decrease. Price decrease:

U.S. gasoline prices have fallen to their lowest level in nearly 33 months, as Wall Street Journal reported. As a result, the demand has increased significantly to reflect the law of demand. Suppliers are stocking up extra gasoline to meet the consumers’ demands and make a higher profit. In addition, the marginal cost of food delivering companies has decreased, and the costs of these goods have also decreased to equate the marginal costs. If the gasoline prices continue to be low, there would be many new gas companies opening because businessmen would see this as a prime time to get in on the market. The consumers are benefiting from the fall of gas prices in many ways. The income effect makes them feel richer, and they therefore have spare money to spend on other goods. Furthermore, they could use this time to stock up on gas, so that they would not have to pay for it when prices increase in the future.

5) How will the change in prices affect the demand for each product? Because it is an inelastic product, paper would remain at a high demand despite increases in prices. However, there is a possibility that someone discovers a substitution for paper over time. The demand for paper would then be lowered. A decrease in anything, especially something as commonly used as gas, would yield a higher demand because the opportunity costs are little in goods that are affordable. The consumers might even have a bit of extra cash saved to spend on other goods.

6) How will the change in prices affect the producers of each product? An increase in prices would yield a higher profit for the producers of paper, since paper is a rather inelastic good. They would produce more paper to more profit. A decrease in gas prices would also yield an increase in market revenue for producers. Some producers who use gas, such as food delivery services, would have lower marginal costs and would lower costs for consumers. When the markets for any good look profitable, there would be an increase in businesses that sell this product.

7) For each product, has the market equilibrium been reached? Why or why not? Market equilibrium is when the quantity demanded is equal to the quantity supplied. Although, in the case of paper, there is no definite number of quantity demanded and supplied, one could assume that market equilibrium has been reached because the product is inelastic and the demand would remain the same despite changes in price. In the case of gas, the market equilibrium has also been reached. Consumers are constantly demanding gas, and gas companies are constantly stocking up on gas to meet their specific number of demands.

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