Week 2 - Textbook Discussion and Problems

Week 2 - Textbook Discussion and Problems

Discussion 1

Economists A and B are correct because these statements completely depend on the market, which is constantly changing (Leeds et al., 2018). This can be explained through an example: Suppose you own a restaurant, and you sell a certain sandwich for $10. You then raise the price to $12 and sell an equal amount of sandwiches. You then raise the price again to $15 and still sell an equal number of sandwiches. So far, you have made exactly $60 in profit from your three sandwich sales. Suppose you raise the prices all the way and finally to $100, but the quantity sold has gone down from 3 per week to 2 per week. Now you have made $80 in profit from your original price of $10.

Now you decide to lower the price to $10 and increase the quantity sold per week from 2 per week to 4 per week. This results in a greater profit than your highest margin, which was when the price was raised to $100. So, it is not uncommon for good to be elastic at one time and inelastic at another, dependent on market conditions and consumer tastes.

Thus economist B is correct when he says that if you raise prices, revenue increases, and if you lower prices, revenue decreases, whereas economist A is correct when he says that if you lower prices, revenue decreases.

Discussion 2

Question 1

Due to the popularity of many sports at the college level, there will always be a demand curve for basketball. Demand also depends on whether or not the school is located in large cities or small towns. If a school is located in a large city, then it has a higher demand for basketball than if it is located in a small town with no other sporting events available (Leeds et al., 2018). Another factor that could explain these choices is proximity to other schools playing basketball; if two college teams are close together, then demand increases because of increased competition and fans attending both games.

Of these factors, the school can most likely control the location of its demand curve. For example, the school could add new sports, such as volleyball, to accommodate more fans. The school can also try to make it convenient for students to attend the sporting event by putting out-of-town information in a brochure or on an e-newsletter detailing when and where tickets can be purchased so that students do not have to drive hours away to attend games.

Question 2

Sites such as StubHub charge a buyer and seller a fee, which is added to the item’s price. The more tickets are sold, the more the site makes. However, these sites make both buyers and sellers better off because they eliminate the middle man. A seller can sell an item without a profit, but they will be making money if they do sell it. This helps decrease rising prices by cutting out middlemen to get items to people faster and cheaper.

Though sites such as StubHub benefit buyers and sellers, they are made better off in the end because money is saved. For instance, if a seller sells an item for, say, $100 that costs $20 to make and sells it on StubHub for $110, then they will have a net profit of $80. However, selling through a site such as StubHub provides many advantages, including no need to pay income tax on one’s profits since sales are not cash sales; no need to pay any transportation cost since items can be delivered right to one’s door; no need to pay credit card fees because all transactions are done electronically.

Problems

2.4

The supply and demand model implies that the more popular a good is, the more people want to purchase it, which should increase prices. This will also be true for ticket prices when a team wins a championship because of the popularity of that team (Leeds et al., 2018). Because these teams are winning, they are also very popular, so more and more people want to see them play. If a specific team is not selling their tickets and they win a championship, then they can raise the price of their tickets because there is such high demand for them.

The equilibrium price shifts to the right because the demand curve shifts to the right since the team is more popular. In the graph below, 0 is the original equilibrium price. This price doesn’t change because it represents a balance between how many people want to buy and how many available tickets (Leeds et al., 2018). The new equilibrium price, 1, tells a story of a market that has shifted towards scarcity because of increased demand. If a team wins a championship this past season, then there will be many more people that want to buy their tickets next year (Leeds et al., 2018). The owners know this and can take advantage by raising their ticket prices when they go into the next season.

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2.8

The elasticity of demand tells us how much someone changes their behavior based on something else (Leeds et al., 2018). In this case, the WNBA’s Los Angeles Sparks raised their ticket prices from $50 to $60, which is a 10 percent increase. This would be a normal reaction to an increase in demand since the owners know that people will pay more to watch the team play. However, since a price change caused a smaller % change in ticket demand, the elasticity demand for tickets is inelastic. This is inelastic because the demand curve would shift by less than one unit for every one percent rise in quantity demanded (Leeds et al., 2018).

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2.9

In the graph above, the assumptions and information are as follows: The demand curve is a smooth, constant-elastic demand curve that rises with quantity demanded. The supply is a linear supply curve that slopes upward (Leeds et al., 2018). If a team moves to a stadium that holds more people than their previous stadium, the new stadium will increase in price since there are more people wanting to buy tickets. Since demand is constant and linear, any change in the size of the stadium has no effect on demand for tickets. In other words, an increase in ticket prices does not occur for stadiums with less seats. This demonstrates that stadiums become more valuable as they become larger because of an increase in fan interest (Leeds et al., 2018).

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Reference

Leeds, M., Allmen, P. von, & Matheson, V. A. (2018). The economics of sports. Routledge.