Price elasticity of oil

What is the implied price elasticity of demand for oil when the futures price of oil rises by 8.6% when OPEC announces an agreement that reduces production by 2%?

See http://qz.com/849133/oil-prices-are-up-8-6-after-opec-surprised-everyone-by-agreeing-to-a-deal/?utm_source=Quartz+Morning+Brief&utm_campaign=d7073aa20c-EMAIL_CAMPAIGN_2016_12_01&utm_medium=email&utm_term=0_1ff2527dbb-d7073aa20c-55459981.

Why did Saudi Arabia push for production cuts?

Economics Drove Saudi OPEC Move
by: Summer Said and Benoit Faucon
Sep 30, 2016
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 

TOPICS: Oil Markets

SUMMARY: Behind the kingdom's decision to agree to production cuts was a recognition of the consequences of low oil prices, according to people familiar with the matter.

CLASSROOM APPLICATION: Students can evaluate Saudi Arabia's decision to cut oil production, while exempting Iran from the cartel's production limits.

QUESTIONS: 
1. (Advanced) Why is OPEC cutting oil production? Are the production cuts motivated by government budget issues of member countries?

2. (Advanced) Why is the cartel exempting some member countries from production cuts?

3. (Introductory) What is a market-share policy, which is noted in the article?

Reviewed By: James Dearden, Lehigh University

Questions:

1. Estimate the price elasticity of oil using the data the article reports.
2. Will Saudi Arabia benefit from the cut if Iran maintains its current level of output?
3. Will Iran benefit from the cut if it maintains its current level of output?
4. When would Iran benefit more, when it maintains its current level of output or when it increases its output?

Prices, total revenue, and market power

Drugmakers' Pricing Power Remains Strong  by: Joseph Walker Jul 15, 2016 Click here to view the full article on WSJ.com TOPICS: Pricing SUMMARY: Firms' ability to raise drug prices is firmly intact despite pushback from health insurers and scrutiny by U.S. lawmakers. More than two-thirds of the 20 largest pharmaceutical companies said price increases boosted sales of their biggest products in the first quarter. CLASSROOM APPLICATION: The article informs students about the difference between list prices and prices consumers actually pay. With regard to pharmaceutical pricing, one point is that negotiated prices may not be increasing at the same rate as list prices. QUESTIONS:  1. (Advanced) Critically evaluate the statement, "More than two-thirds of the 20 largest pharmaceutical companies said price increases boosted sales of some or most of their biggest products." 2. (Advanced) What is the meaning of the following statement? "Drugmakers' pricing power in the U.S. isn't absolute." 3. (Introductory) Why have shares of many drugmakers slumped this year? 4. (Introductory) Why is it difficult to accurately track pharmaceutical prices? Reviewed By: James Dearden, Lehigh University

Taxes on sugary drinks

Big Soda Faces Test in Philadelphia

by: Mike Esterl
May 20, 2016
Click here to view the full article on WSJ.com

TOPICS: Taxation

SUMMARY: The U.S. soda industry faces its biggest threat yet in Philadelphia, which is weighing a tax that could raise the price of a can of Coke or Pepsi by more than half and sharply curb consumption of sugary drinks.

CLASSROOM APPLICATION: Students can learn about the rationale for Philadelphia's proposed tax on sugary drinks. They can also evaluate the effect of the tax on the price of sugary drinks in the city, consider whether the tax would be regressive, and also whether the tax would have positive health benefits.

QUESTIONS: 
1. (Advanced) How does the effect of the tax on the price of soda depend on the price elasticities of supply and demand for soda? Would the tax result in people substituting away from sugary drinks and toward other sugary products?

2. (Advanced) Would a city tax on sugary drinks create a black market for soda in Philadelphia?

3. (Introductory) What is Philadelphia Mayor Jim Kenney's rationale for proposing the tax on sugary drinks?

4. (Introductory) Would a Philadelphia tax on sugary drinks be regressive?

Here are some money quotes.

1. "Philadelphia ... is weighing a tax that could raise the price of a can of Coke or Pepsi by more than half ...The beverage industry estimates Philadelphia’s consumption would fall by 79% in the first year and the mayor’s office estimates a 55% drop, if fully passed on to consumers."
2. "'I sense Americans generally and I know Philadelphians don’t like the government telling them what they should and should not do'".

Airline consolidation, prices, and elasticity of demand

Airline Consolidation Hits Smaller Cities Hardest 
by: Jack Nicas
Sep 11, 2015
Click here to view the full article on WSJ.com

TOPICS: Oligopoly

SUMMARY: Airline mergers over the past seven years have had an uneven effect on travelers. While airline service has changed little at the nation's major gateways, carriers have cut flights and raised fares at smaller airports. "From 2007 to 2014, domestic airfares at the nation's 10 busiest airports, including Atlanta, Dallas and Denver, increased less than 1% on average, while the combined number of domestic seats fell 1.6%. But at the 90 next-biggest airports-including Detroit, Honolulu and Birmingham, Ala.-airlines cut their total domestic seats by 14.5% and raised fares by 6.4%. All airfare figures are adjusted for inflation."

CLASSROOM APPLICATION: Students can evaluate the effect of a change in airline strategy toward larger aircraft and increased service at major airports and decreased service at smaller airports on seat prices.

QUESTIONS: 
1. (Introductory) From 2007 to 2014, during the most recent wave of airline consolidation, the average round-trip domestic flight, including fees, increased nearly 16% and airlines cut domestic seats by 10%. Assume that the cut in domestic seats is due to a decrease in supply. What is the price elasticity of demand?

2. (Advanced) Why have Cleveland airfares risen while Cincinnati and Memphis, Tenn. airfares remained flat or fallen slightly?

3. (Advanced) What will be the effect of shift toward larger jets and a pilot shortage on flights to and from regional airports?

Reviewed By: James Dearden, Lehigh University

Minimum Price for Alcohol in GB

http://www.bbc.co.uk/news/health-20515918 describes a proposal to put a minimum price on the retail price of a unit of alcohol in Great Britain. A study estimates that setting the minimum @ 45 p would reduce consumption by 4.3%. Also see http://www.huffingtonpost.co.uk/2012/11/28/theresa-may-to-announce-m_n_2202231.htmland http://www.marketplace.org/topics/world/british-government-wants-booze-price-hike.

A colleague wonders why GB is thinking about setting a minimum price instead of imposing or increasing a tax. Using higher taxes will also reduce the quantity demanded and would have the additional benefit of generating tax revenue. Using a minimum price has the advantage of targeting cheap alcohol, the consumption of which imposes more externalities than sipping brandy. 

elasticity, externalities, price controls

Rationing water in CA

This article from CNN reports that Gov. Brown calls for 'voluntary "20% conservation of our water use"'. It might be a good way to introduce rationing in courses. It could also spur discussion about why we typically rely on governments instead of free markets to supply water in most localities. Finally, it might be the basis for a good question: "What percentage price increase reduces water usage by 20%?"

label = elasticity

Amazon increases the price for Prime

This article from the WSJ reports that Amazon is increasing the price of its Prime service from $79/year to $99/year. It is a good introduction to pricing, elasticity, and behavioral economics.

If the does not work, conduct a Google search on the title.

SUMMARY: Amazon plans to raise the rate for Prime membership to $99 a year from $79, the first price increase for the shipping and video-streaming service. The Seattle retailer said the 25% increase was needed to offset rising delivery and content-acquisition costs. As a result of the 25% price increase, "analysts said they expect fewer than 10% of the more than 20 million Prime members to drop their accounts."

CLASSROOM APPLICATION: Instructors can use the article to present the price elasticity of demand for Amazon Prime services, and also present the reason Amazon is increasing the price of the service.

QUESTIONS: 
1. (Advanced) According to the data presented in the article, what is the possible range of the price elasticity of demand for Amazon Prime?

2. (Introductory) Why is Amazon raising the price of its Prime service? Is it an increase in cost of providing the service or an increase in demand?

3. (Advanced) Under what condition would it be profitable for Amazon to price Prime at below the marginal cost of providing the service?

labels= elasticity, pricing, behavioral economics

Price elasticity and ebooks

This article in the New Yorker reports that Amazon wants Hachette to reduce the prices for most ebooks it offers through Amazon and to increase the percentage of the price paid to authors from 25% to 35%. It is a great introduction to elasticity and pricing.

1. What is the arc-price elasticity if Amazon is correct when it wrote, "for every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99." 
2. Would revenue rise if Hachette cuts price from $14.99 to $9.99?
3. Who gains and who loses if price decreases from $14.99 to $9.99, the percentage retained by the author increases from 25% to 35%, Hachette's share falls from 45% to 35%, and Amazon's share remains constant at 30%? Assume that the marginal cost of an additional download of an ebook is $0.
4. Are the interests of Hachette, the authors, and Amazon aligned over what price to charge?
5. Are the interests of Hachett, the authors, and Amazon aligned over how to share revenues and (fixed) costs?
6. Why does Amazon advocate that some books be sold at prices in excess of $9.99? 

See this post to learn what happened.

labels= elasticity, pricing

Competition, strategies, and UPS's profit margin

This article from the WSJ reports that UPS has seen its profit margin decrease as e-business deliveries quadrupled. Some juicy quotes follow.

"Because of the ubiquity of free shipping, fierce competition from other delivery services and Amazon's power to drive down shipping costs as it gets even more enormous, UPS's average revenue on each Internet-related package it handles is dropping.

"UPS is under more pressure than FedEx Corp. and the U.S. Postal Service because UPS is the biggest e-commerce carrier and its two rivals dived into the business later with narrower strategies.

labels = elasticity, pricing, strategy

Another great article

"This article in FiveThirtyEightEconomics covers supply and demand, elasticity, and several other fascinating ideas on the secondary Nike Shoe market".       

Label = supply and demand, elasticity

Pricing, elasticity, and sunk costs in the wireless industry

Google, Cablevision Challenge Wireless Industry's Business Model

by: Ryan Knutson, Alistair Barr, and Shalini Ramachandran
Jan 27, 2015
Click here to view the full article on WSJ.com
Click here to view the video on WSJ.com 
TOPICS: Innovation
SUMMARY: Google and Cablevision Systems are preparing new cellphone services that would turn the wireless industry's business model on its head, increasing pressure on companies already dealing with a price war. Related article: Cablevision's service, dubbed "Freewheel," will take advantage of the 1.1 million Wi-Fi hot spots the company has deployed in its greater New York service area since 2007.
CLASSROOM APPLICATION: Students can conjecture about the effect of the introduction of wireless service using Wi-Fi hot spots and cellular connections on the price of wireless service.
QUESTIONS: 
1. (Advanced) Distinguish the types of consumers who use 'Wi-Fi only,' 'Wi-Fi first,' and cellular wireless service. Conjecture on the price elasticities of demand for these different types. How would the consumer price elasticities of demand affect the equilibrium prices of these services?

2. (Introductory) How would the increasing popularity of 'Wi-Fi only' service affect the equilibrium prices of cellular service?

3. (Advanced) What are "sunk costs"? Are the costs of constructing cellular networks fixed and sunk? How do large fixed and sunk costs required to offer a service affect entry into an industry? How does limited entry affect equilibrium prices?

4. (Advanced) What is "normal economic profit"? Does the limited entry resulting from large fixed costs of entry imply that the firms operating in an industry earn above normal economic profit? Are cellular companies earning above normal economic profit?

Reviewed By: James Dearden, Lehigh University

labels = elasticity, pricing

Who benefits from subsidies to college students?

This article in the WSJ reports that the primary beneficiaries of subsidies to college tuition are the colleges. It might be a good example to illustrate the incidence of a subsidy for a good with an very inelastic demand.

Review & Outlook. College Aid Means Higher Tuition

by: Editorial Staff
Jul 20, 2015
Click here to view the full article on WSJ.com

TOPICS: Education

SUMMARY: A new Fed study shows that colleges pocket most student subsidies. The New York Fed staff paper is available at http://www.newyorkfed.org/research/staff_reports/sr733.pdf.

CLASSROOM APPLICATION: Students can evaluate the effect of grants for higher education on the tuition by using supply and demand, students can evaluate the effect of subsidy on the demand for higher education and ultimately the equilibrium price. Investigating the issue in greater detail, students can examine the relationship between the price elasticities of supply and demand and the effect of federal student aid on equilibrium tuition rates.

QUESTIONS: 
1. (Advanced) In a perfectly competitive market, what is the effect of a subsidy for purchasing a good on the price of the good? How does the magnitude of the price change depend on the price elasticities of supply and demand?

2. (Advanced) What is the effect of federal subsidies to higher education on tuition?

3. (Introductory) Should the federal government subsidize higher education? Should it cap tuition increases set by colleges and universities?

Reviewed By: James Dearden, Lehigh University

Elasticity and the Super Bowl

here is a cool article involving demand, elasticity, and the super bowl! 

http://www.forbes.com/sites/prishe/2013/09/19/super-bowl-xlviii-pricing-a-lesson-in-demand-elasticity/

The article discusses ticket prices on the rise, mark ups, and also evaluates consumer surplus.The conclusion is that there will be higher 
face prices for marquee seating at this year's Super Bowl.