Lecture 7 The Creative Industries Professor Julia Lowell lowell@econ.ucsb.edu Spring 2012 4/ 23/ 2012 Econ 191ac -- Lecture 7 1
Outline: Lecture 7 • Key points from Lecture 6: Firms, costs and markets in the live performing arts • Go over Homework 6 • Creative industries versus “standard” industries • Homework for Wednesday 4/ 25 4/ 23/ 2012 Econ 191ac -- Lecture 7 2
KEY POI NTS FROM LECTURE 5 : MI CROECONOMI CS OF THE PERFORMI NG ARTS FI RM 4/ 23/ 2012 Econ 191ac -- Lecture 7 3
Simple Case With Costless Production: Vertical Supply Curve, Price Predetermined ticket S 1 - determined by size of theater price Number of available seats is independent of price; since production is costless, maximize revenue by setting P1 to fill theater a P 1 D Available seats per Q S1 performance; quantity of seats demanded 4/ 23/ 2012 Econ 191ac -- Lecture 7 4
Output and Pricing in the Performing Arts: A Closer Look, With Costs Remember: • Theater rental, promotion etc. are measured per production • Wages of actors & stage crew, electricity for evening etc. are measured per performance • Some small cost associated with selling tickets, ushering measured per seat 4/ 23/ 2012 Econ 191ac -- Lecture 7 5
Marginal and Average Cost in the Performing Arts • Marginal cost is the increment to total cost from – Filling one more seat – Giving one more performance – Staging one more production • Marginal costs are determined by variable costs -- which vary with output measure – If variable costs associated with output measure (e.g., seats) are zero, marginal costs are zero • Average cost is total cost (fixed plus variable) per output measure – If variable costs associated with output measure are zero, average costs will monotonically decline 4/ 23/ 2012 Econ 191ac -- Lecture 7 6
Output and Pricing in the Performing Arts: Filled Seats As Measure of Quantity (1) • Let theater rental • What is fixed cost etc. be $16 associated with seating 1, 5, or 24 • Let actors’ wages, people? etc. be $8 • Let cost of seating • What is marginal cost of seating 1 person? one person be $1 • What is variable cost of seating 1, 5, or 24 Assume 24-seat people? theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 7
Output and Pricing in the Performing Arts: Filled Seats As Measure of Quantity (2) • Let theater rental • What is fixed cost etc. be $16 associated with seating 1, 5, or 24 • Let actors’ wages, people? etc. be $8 $16+ $8 = $24 • Let cost of seating one person be $1 • What is marginal cost of seating 1 person? Assume 24-seat • What is variable cost theater of seating 1, 5, or 24 people? 4/ 23/ 2012 Econ 191ac -- Lecture 7 8
Output and Pricing in the Performing Arts: Filled Seats As Measure of Quantity (3) • What is fixed cost • Let theater rental associated with etc. be $16 seating 1, 5, or 24 • Let actors’ wages, people? etc. be $8 • What is marginal • Let cost of seating cost of seating 1 one person be $1 person? • What is variable cost Assume 24-seat of seating 1, 5, or 24 theater people? 4/ 23/ 2012 Econ 191ac -- Lecture 7 9
Output and Pricing in the Performing Arts: Filled Seats As Measure of Quantity (4) • What is fixed cost • Let theater rental associated with etc. be $16 seating 1, 5, or 24 • Let actors’ wages, people? etc. be $8 • What is marginal • Let cost of seating cost of seating 1 one person be $1 person? $1 Assume 24-seat • What is variable cost theater of seating 1, 5, or 24 people? 4/ 23/ 2012 Econ 191ac -- Lecture 7 10
Output and Pricing in the Performing Arts: Filled Seats As Measure of Quantity (5) • What is fixed cost • Let theater rental associated with etc. be $16 seating 1, 5, or 24 • Let actors’ wages, people? etc. be $8 • What is marginal cost • Let cost of seating of seating 1 person? one person be $1 • What is variable cost of seating 1, 5, or 24 people? Assume 24-seat theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 11
Output and Pricing in the Performing Arts: Filled Seats As Measure of Quantity (6) • What is fixed cost • Let theater rental associated with etc. be $16 seating 1, 5, or 24 • Let actors’ wages, people? etc. be $8 • What is marginal cost • Let cost of seating of seating 1 person? one person be $1 • What is variable cost of seating 1, 5, or 24 people? Assume 24-seat $1* (1, 5, or 24) = theater $1, $5, or $24 4/ 23/ 2012 Econ 191ac -- Lecture 7 12
The Math • Total Cost (TC) = Fixed Costs (FC) + Variable Costs (VC) VC at Q = the sum of Marginal Costs from 1 to Q or Σ (1 to Q) MC • and • Average Total Cost (ATC or AC) = (FC + VC)/ Q, where Q = number of seats filled So for Q = 12 seats in our example, FC = $24; VC = $12; and AC = ($36/ 12) = $3 Note that, because MC is constant in this example (unlike typical assumption where MC increases due to diminishing returns to labor), we have the interesting case that VC = Σ (1 to Q) MC = Q* MC, so that ATC = (FC + VC)/ Q = FC/ Q + Q* MC/ Q = FC/ Q + MC. As Q gets bigger, ATC will approach (but never quite reach) MC— always a teensy bit of fixed cost still to spread. 4/ 23/ 2012 Econ 191ac -- Lecture 7 13
Per Seat Theater Cost Example: What It Looks Like 3 0 2 5 2 0 Cost capacity constraint per 1 5 Seat 1 0 AC 5 MC 0 1 3 5 7 9 1 1 1 3 1 5 1 7 1 9 2 1 2 3 Available Seats 4/ 23/ 2012 Econ 191ac -- Lecture 7 14
What If the Quantity Measure Is the Number of Performances? • Let theater rental • What is the fixed etc. be $16 cost of 1 vs 5 performances? • Let actors’ wages, etc. be $8 • What is the marginal cost of 1 more • Let cost of seating performance? one person be $1 • What is the variable cost of 1 vs 5 Assume 24-seat performances? theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 15
Output and Pricing in the Performing Arts: Performances As Measure of Quantity (1) • Let theater rental • What is the fixed etc. be $16 cost of 1 vs 5 performances? • Let actors’ wages, etc. be $8 • Let cost of seating one person be $1 Assume 24-seat theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 16
Output and Pricing in the Performing Arts: Performances As Measure of Quantity (2) • Let theater rental • What is the fixed etc. be $16 cost of 1 vs 5 performances? • Let actors’ wages, etc. be $8 Fixed cost is $16 regardless of number of • Let cost of seating performances one person be $1 Assume 24-seat theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 17
Output and Pricing in the Performing Arts: Performances As Measure of Quantity (3) • What is the fixed cost of • Let theater rental 1 vs 5 performances? etc. be $16 • What is the marginal • Let actors’ wages, cost of 1 more etc. be $8 performance? • Let cost of seating one person be $1 Assume 24-seat theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 18
Output and Pricing in the Performing Arts: Performances As Measure of Quantity (4) • What is the fixed cost of • Let theater rental 1 vs 5 performances? etc. be $16 • What is the marginal • Let actors’ wages, cost of 1 more etc. be $8 performance? • Let cost of seating one person be $1 $8 for wages etc., plus $24 (if theater is full), for a total of $32 Assume 24-seat (need to know how many seats theater are filled at each performance) 4/ 23/ 2012 Econ 191ac -- Lecture 7 19
Output and Pricing in the Performing Arts: Performances As Measure of Quantity (5) • What is the fixed cost of • Let theater rental 1 vs 5 performances? etc. be $16 • What is the marginal • Let actors’ wages, cost of 1 more etc. be $8 performance? • Let cost of seating • What is the variable one person be $1 cost of 1 vs 5 performances? Assume 24-seat theater 4/ 23/ 2012 Econ 191ac -- Lecture 7 20
Output and Pricing in the Performing Arts: Performances As Measure of Quantity (6) • What is the fixed cost of • Let theater rental 1 vs 5 performances? etc. be $16 • What is the marginal cost • Let actors’ wages, of 1 more performance? etc. be $8 • What is the variable • Let cost of seating cost of 1 vs 5 one person be $1 performances? 1 performance (with full Assume 24-seat house): $32 theater 5 performances (with full house: $160 4/ 23/ 2012 Econ 191ac -- Lecture 7 21
Per Performance Theater Cost Example: What It Looks Like Full- House Cost per Perform ance 6 0 5 0 4 0 ATC 3 0 MC 2 0 1 0 0 1 2 3 4 5 6 7 8 9 1 0 1 1 1 2 Num ber of Perform ances 4/ 23/ 2012 Econ 191ac -- Lecture 7 22
Regardless of the Output Measure You Choose… Price and cost measures must be consistent with output measures • Price per ticket goes with cost per seat • Revenue from performance goes with cost per performance (on revenue side, need to know how many seats are filled; on cost side not so important, since marginal costs of filling seats are very small) 4/ 23/ 2012 Econ 191ac -- Lecture 7 23
HOMEW ORK 6 REVI EW 4/ 23/ 2012 Econ 191ac -- Lecture 7 24
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