Lecture 4 Artists and Performing Arts Organizations Professor - PowerPoint PPT Presentation

Lecture 4 Artists and Performing Arts Organizations Professor Julia Lowell lowell@econ.ucsb.edu Spring 2012 4/ 11/ 2012 Econ 191ac -- Lecture 4 1

Outline: Lecture 4 • Key points from Lecture 3 • Go over Homework 3 (due today) • More on the elasticity of demand for the arts • Artists • Organizations in the arts: nonprofits versus for-profits • Homework for Monday 4/ 16 4/ 11/ 2012 Econ 191ac -- Lecture 4 2

Review of Lecture 3 Characteristics of Live Performing Arts Markets • Fixed supply per performance – implication? • Ticket price is set before demand is known – implication? • Consumers care about ticket price – implication? 4/ 11/ 2012 Econ 191ac -- Lecture 4 3

Review of Lecture 3 Characteristics of Live Performing Arts Markets • Fixed supply per performance – vertical supply curve • Ticket price is set before demand is known – Can’t easily adjust to demand fluctuations • Consumers care about ticket price – Usual downward-sloping demand curve 4/ 11/ 2012 Econ 191ac -- Lecture 4 4

Review of Lecture 3 Price Discrimination Helps Ameliorate High Variance in Demand… • Tickets to performances priced according to – quality of seat – type of consumer (students, e.g.) – date of purchase • But why not simply adjust ticket price in response to demand fluctuations (like airlines do)? – How do airlines prevent after-market ticket exchanges? – Why don’t airlines worry about people with similar seats paying different prices? 4/ 11/ 2012 Econ 191ac -- Lecture 4 5

Review of Lecture 3 Price Effects of Hits and Flops • When a show is a hit – Ticket prices go up – But the price premium typically goes to brokers and scalpers – Not to promoters, venues, or acts • When a show flops – Ticket prices don’t fall by much – Because brokers/ scalpers can’t sell cheap tickets – Lots of tickets show up at the TCKTS booth – But show must close down if it can’t cover its variable costs 4/ 11/ 2012 Econ 191ac -- Lecture 4 6

Review of Lecture 3 And Finally… What Determines A Hit or A Flop? • We Don’t Know • But the usual suspects for influencing the quantity demanded of any good are – “Tastes” – Price – Income – Prices of rival goods – Prices of complementary goods 4/ 11/ 2012 Econ 191ac -- Lecture 4 7

In-Class Exercise: Factors Affecting Demand for Seats at the LA Phil Trace out the likely effect on the demand ticket price, LA curve of an increase in Philharmonic • the ticket price • the median income of Angelenos • the price of tickets to the LA Opera • the price of tickets to the SF Symphony • the price of parking in downtown LA • a feature article on Gustavo Dudamel in the Sunday LA Times D seats per performance 4/ 11/ 2012 Econ 191ac -- Lecture 4 8

Slope vs. Elasticity The slope of the demand curve measures the effect of a change in the quantity demanded of good ‘i’ on the price of good ‘i’ Slope = Δ P/ Δ Q Elasticity is the percent change in quantity demanded of good ‘i’ in response to a percent change in some other variable. When that variable is the price of good ‘i’, then we are talking about the elasticity of the demand curve. ε p = Δ Q/ Q Δ P/ P 4/ 11/ 2012 Econ 191ac -- Lecture 4 9

Elasticities To Get To Know Δ Q/ Q = ε p • Own-price (P) elasticity: Δ P/ P Δ Q/ Q = ε y • Income (Y) elasticity: Δ Y/ Y Δ Q i / Q i = ε pj • Cross-price (P j ) elasticity: Δ P j / P j 4/ 11/ 2012 Econ 191ac -- Lecture 4 10

Own-Price Elasticity: Some Terms • ε p < 1, demand is inelastic When the price rises by 1 percent, the quantity demanded falls by less than 1 percent • ε p = 1, demand is unitary • ε p > 1, demand is elastic When the price rises by 1 percent, the quantity demanded falls by more than 1 percent 4/ 11/ 2012 Econ 191ac -- Lecture 4 11

Income Elasticity: Some Terms • ε Y < 0, the good is an inferior good When income rises, the quantity demanded of the good falls • 0 < ε Y ≤ 1, the good is a normal good • ε Y > 1, the good is a luxury good When income rises by 1 percent, the quantity demanded increases by more than 1 percent Cultural goods are typically assum ed to be luxury goods—is this necessarily the case? 4/ 11/ 2012 Econ 191ac -- Lecture 4 12

Cross-Price Elasticity: Some Terms ε ij < 0, goods i and j are complements When the price of good j rises, the quantity of good i demanded falls ε ij > 0, goods i and j are substitutes When the price of good j rises, the quantity of good i demanded rises Com plem ents to live cultural events include parking, babysitting, restaurant m eals, and m odes of transportation Substitutes for live cultural events include other live cultural events, other cultural activities, and other leisure activities 4/ 11/ 2012 Econ 191ac -- Lecture 4 13

Factors That Influence Own-Price Elasticity (1) What factors might make consumers more responsive to changes in the price of a product? 4/ 11/ 2012 Econ 191ac -- Lecture 4 14

Factors That Influence Own-Price Elasticity (2) What factors might make consumers more responsive to changes in the price of a product? • Availability of alternatives (rival products) • Need for the product • Others? 4/ 11/ 2012 Econ 191ac -- Lecture 4 15

HW3 - for Weds 4/ 11 (1) You are the producer of a hit Broadway show with excess demand at the current ticket price. You want to maximize revenue. You have the option of either raising the ticket price or moving to a larger theater. There are no transaction costs associated with the move, and many Broadway shows that compete with yours. What should you do? Explain your answer in terms of the own-price elasticity of demand. Use graphs. 4/ 11/ 2012 Econ 191ac -- Lecture 4 16

HW3 – A Good Answer Justin: “Both increasing the ticket price and moving to a larger theater could increase profits. But with so many substitutes available, demand to see Broadway shows is relatively elastic and a price increase might scare away some of those people willing to pay at the current ticket price. Because of this, and especially because there are no transaction costs associated with moving to a larger theater, moving would be the smarter option. Those people that purchased tickets at the previous price would still be willing to purchase at that price, and due to the increased seating, those willing but previously unable to pay at that price would now be able to.” 4/ 11/ 2012 Econ 191ac -- Lecture 4 17

HW3: Comparing Revenue in the Case of Inelastic Demand b a c 4/ 11/ 2012 Econ 191ac -- Lecture 4 18

HW3: Comparing Revenue in the Case of Elastic Demand b a c 4/ 11/ 2012 Econ 191ac -- Lecture 4 19

What We Know About Own-Price Elasticity in the Live Arts For arts firms in the nonprofit sector, – demand appears to be xxxxxxxxx 4/ 11/ 2012 Econ 191ac -- Lecture 4 20

What We Know About Own-Price Elasticity in the Live Arts Research suggests tht, for arts firms in the nonprofit sector, – demand appears to be price-inelastic , – which could imply they are producing in the low price- high quantity range of their demand curves – which does imply that revenue could be increased – by raising ticket prices But, – nonprofits don’t want to discourage donations – most studies have looked at demand for the performing arts industry, not individual firms (why does this matter?) 4/ 11/ 2012 Econ 191ac -- Lecture 4 21

What We Know About Income Elasticity in the Live Arts For the cultural products of nonprofit arts firms, – Might expect income elasticity to be high -- culture as luxury product (What does this imply about the expected magnitude of ε y ?) 4/ 11/ 2012 Econ 191ac -- Lecture 4 22

What We Know About Income Elasticity in the Live Arts For the cultural products of nonprofit arts firms, – Might expect income elasticity to be high (culture as a luxury product) (What does this imply about the expected magnitude of ε y ?) But, – Most studies find that ε y hovers close to 1 4/ 11/ 2012 Econ 191ac -- Lecture 4 23

What We Know About Income Elasticity in the Live Arts For the cultural products of nonprofit arts firms, – Might expect income elasticity to be high (culture as a luxury product) (What does this imply about the expected magnitude of ε y ?) But, – Most studies find that ε y hovers close to 1 Why? 4/ 11/ 2012 Econ 191ac -- Lecture 4 24

What We Know About Income Elasticity in the Live Arts For the cultural products of nonprofit art firms, – Might expect income elasticity to be high (culture as a luxury product) (What does this imply about the expected magnitude of ε y ?) But, – Most studies find that ε y hovers close to 1 Why? – Bad studies – Opportunity cost of leisure time (as income rises, value of time does too) 4/ 11/ 2012 Econ 191ac -- Lecture 4 25

ARTI STS 4/ 11/ 2012 Econ 191ac -- Lecture 4 26

Who Is an Artist? (from NEA report, Artists in the Workforce 1990-2005) 4/ 11/ 2012 Econ 191ac -- Lecture 4 27

Nationally, The Largest Category of Artists Is “Designers” Source: 2003-2005 American Community Survey 4/ 11/ 2012 Econ 191ac -- Lecture 4 28