Tuesday, February 7, 2012

Micro Economics of Movies

The New York Times has an interesting article on the movie industry and we can use this to examine three economic concepts that we face in Prin. of Microeconomics. One is the law of demand, that says if nothing else changes, people buy (demand) more goods/services when prices decrease and demand less when prices increase. The average price of a movie ticket increased 1 % in 2011 and movie attendance decreased by over 5%. Two, we can calculate the price elasticity of demand, which is the percentage change in demand due to a percentage change in price, and from the information given we see that for 2011 the price elasticity of demand for movies is elastic, meaning that consumers are very responsive to changes in (average) prices. Third, we can also infer the impact a change (in this case an increase) in prices will have on the change in revenues. The total revenue test states that if prices are elastic (as they are in this case) that an increase in price will lead to a decrease in total revenues, which is the headline from the NY Times article linked above.

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