Airlines fees testing elasticity of passenger demand

    In the article “Airlines fees testing elasticity of passenger demand” by Charlie Leocha the testing of elasticity of demand was described. It was very interesting for me to find out that it is better to look for lower additional fees rather than lower airfare. According to the article, every airline has a different structure for charging prices, such as charging the first-checked-bag fee. I do not believe that it is very smart to test the pricing intelligence of the US passengers as well as their price elasticity, because people can always figure that out and do more driving then flying.

     On the other hand, it is quite obvious that different customers pay different prices. For instance, I think that business travelers have an inelastic demand for tickets, because their time is pressed and slow transportation is not a good substitute for their need.

     However, if I look into the category of leisure travelers, I can state that they have an elastic demand. As a leisure traveler, I pay for my flight out of my family budget not business expenses, and that is why I am more sensitive to price.

     Finally, I would like to mention children’s discount. Children have more elastic demands than adults because parents are paying for children and that is considered low budget.

    Airlines understand the difference between the categories that I have described above, in terms of price elasticity of demand, and charge business travelers more for a ticket. Checking business airfares, I saw different restrictions that airlines placed on the lower-priced tickets, such as non-refundable tickets, unless you have made a 2-week advance purchase.

    In conclusion, I would like to ask everybody to be more aware of airline policies, because as customers we have to make right judgments in this travel world where airlines are engaged in price discrimination and are trying to raise the prices in order to see how much we are willing to pay to fly.
http://www.consumertraveler.com/today/airlines-fees-testing-elasticity-of-passenger-demand/ 

Is the Supply and Demand of Football Decreasing?

By now I’m sure everyone has heard of the controversy brewing around football in the past few years. Head injuries and concussions are in the news more than ever because of the newly discovered lingering effects of the injuries. 

Chronic traumatic encephalopathy (CTE) is the result of excessive head trauma and has been discussed in the news frequently. CTE is a progressive degenerative disease resulting from multiple concussions and/or head injuries. CTE is diagnosed post-mortem and has resulted in former players committing suicide and giving their bodies for CTE research. 

The news about CTE and concussions is adversely affecting the sport of football. The supply and demand of football could be affected in a few ways:

Many former NFL players are filing class action lawsuits against the NFL. If the NFL starts losing judgments it could be facing bankruptcy. Lawsuits may be filed against colleges, the NCAA, and even high school football organizations. If these lawsuits resulted in winning judgments, insurance companies might stop covering colleges and high-schools against football-related injuries. Liability suits could greatly reduce the supply of football.

Another factor that would affect both the supply and demand of football is the risk. Many former players have made statements that they will not let their kids play football. Parents will not allow their children to play a sport with such risks and teenagers and young adults may choose not to play because they realize that risk.

A factor that may affect demand is the implementation of more rules. Football organizations are trying to make the game safer by implementing new rules and regulations to limit some of the contact in football. If rules become too excessive, football could lose the hard-nosed style that made it as popular as it is today.

The supply and demand of football could be experiencing a decline in the near future. 

Florida's 150 acre launch complex

Our text book, written by Ivan Png and Dale Lehman, describes managerial economics as "...the science of directing scarce resources in management of a business..." and highlights the efforts  of Boeing vs. Airbus as an example. Well, another fascinating display of managerial economics in the aerospace industry is being played out in Florida.

With the retirement of NASA's Space Shuttles, demand did not go away. If anything, demand has risen due to NASA's role in the ever expanding ISS (International Space Station). Over the past year, the only source of "space travel supply" has been furnished through Russia's space program at, true to economic form, a steep cost. However, with the successful flight of the Falcon rocket, SpaceX has pioneered a new market in private supply missions to the ISS. And as is consistent with any new or successfully emerging markets, new entrants are not far behind (affecting long run supply curves).

Florida has a long standing relationship with NASA and is not interested in being passed over in a new space race by Texas. Instead, Florida is battling for SpaceX's attention (and other potential entrants such as Virgin Galactic and Spaceship Company) by purchasing 150 acres of land (located at the Kennedy Space Center) from NASA. Although Florida officials have not empirically stated that this land purchase is specifically for SpaceX's use, they nevertheless have plainly spoken about their desire to build a commercial launch complex. It will be very interesting to observe whether Texas responds to this move and how this will affect the efforts of other commercial startups.   

Rising gold prices, a supply and demand issue?

Are the ever increasing gold prices a function of reduced supply, increasing demand, or both?

Increasing fears of inflation due to global stimulus, and the emergence of the middle class in countries like China and India has shifted the demand curve for gold to the right. As gold prices continue to rise, gold miners seek to increase their supply to meet the current market demand. Gold miners are attempting to shift the supply curve to the right, while keeping prices high and extraction cost low.
As stated in the article, gold supply isn't keeping pace with demand. This ultimately led to a spike in the price of gold. So how high will gold prices go? Is gold still a viable long-term investment? Will prices come crashing down as global recession fears ease?

In my opinion, an investment in gold represents the ultimate "fool's trade." In the investment industry this means that the price of gold can only go higher if the next buyer is willing to pay more than the prior buyer. Gold pays no income and has very little industrial uses. The current price of gold isn't indicative of its true value. The metal is definitely overbought, and I suspect that this bubble will eventually pop leaving many to wonder what happened to their so called safe investment.

Increase in Demand for Energy

According to research done by Chevron, global energy consumption is expected to increase by 36% by 2035. They attribute this growth to the general population increase as well as increased energy consumption. The majority of this growth is expected to take place in countries with emerging economies such as China and India. The demand for energy in China alone is expected to increase by a staggering 75%.

In essence, Chevron is expecting the demand curve to shift to the right as consumption increases. With supply remaining the same this will drive energy prices up. Chevron also has a plan to shift the supply curve to the right in order to keep up with demand. They are "finding and developing conventional and new sources of oil and gas, using energy more efficiently, and investing in renewables and the next generation of energy sources." As they shift the supply curve to the right this will keep prices lower and provide more economic profit for Chevron.

http://www.chevron.com/globalissues/energysupplydemand/

Sunk Costs in NBA

According to the article “Sunk Costs in the NBA” by Staw B, managers will invest money and time in a project when they feel like the project is almost done. From my understanding of the article, sunk costs are losses that manager will take in consideration if they lead towards decision of getting rid of the certain product. Also, I would like to underline that managers do not want to suffer an embarrassment or show their expenditures in publicity, therefore, they will do their best to take personal responsibility in order to avoid sunk costs being a non-potent factor in making decision. It is common sense that managers will use only that resource for what they have paid the most. The author used three analyses to check the theory of sunk costs: role of costs in the decision to use players on the court, prediction of the number of seasons players survive in NBA, analysis of being trade. Results have proved that coaches gave more playing time to their best drafted team players and thus, kept them longer in spite of their injures and trade status.

 

 

Staw B, & Hoang, H. (1995). Sunk costs in the NBA: Why draft order affects playing time and survival in professional basketball. administrative science quarterly, 40, 474-494.

Selling off the federal reserve - of Helium

The government evidently has a huge reserve of helium in some underground location in Texas. Like gasoline, helium is another resource that is widely used in a number of industries from cellphones to computers. Yet the real point of interest in this NPR story on Helium Reserve is that although the government is opening up the reserve to sell on the market, ostensibly to lower the price of such a important commodity, it is having the opposite effect.

Normally we would expect as the supply increases given static demand, the quantity demanded would increase while at the same time the equilibrium price would decrease. However what is happening is that the additional supply has just enough downward pressure on price to keep a number of private suppliers from entering into the market. By keeping the price 'low', there is no incentive for private companies to produce helium because there is not enough margin. If the price of helium were allowed to rise, then potential firms would take this as a signal there is profit to be made and enter the industry. Existing firms would feel  more secure to invest in additional capital equipment that would increase their efficiency through economies of scale and in the end, lower the price for consumers.

Until then, we will just have to do without squeaky voices at parties.

Amazon to Collect CA Sales Tax

In an effort to relieve the financial stress faced by its state and local governments, California recently decided that Amazon.com, Inc. will have to collect California sales taxes just like everybody else.  Amazon deals mostly  in items that are relatively  price elastic in terms of demand.  The sales tax can be as high as 9.75% in California.  This price increase will drive demand for the majority of Amazon's products downward.

 

The higher costs will most certainly be passed on to the consumers, driving customers to other retailers.  Amazon will take the biggest hit on big-ticket items. The sales tax represents a significant cost to California consumers.   People who were content to purchase an item without actually being able to see it in person will now have less incentive to take that risk.  This will drive demand up for big-box retailers, who can provide a sandbox environment for people to experiment with a product before buying it.  This may explain the rumors that Amazon may soon open a brick and mortar store front.

One of Amazon's greatest advantages has been its ability to undercut the competition.  As more states turn to the enforcement of sales taxes for online sales, it is doubtful that Amazon will be able to manage its prices in a way that maintains its competitive advantage as an online retailer.  In order to remain viable, Amazon will need to reinvent itself as a virtual company with a more physical presence.

Newspapers, from inelastic to bankrupt

Newspapers are one of the most common items in our lives.  We read them, we use them for packing boxes, some people wrap their presents with them, and we train the dog to get them for us.  Why, after all these years of profits, are newspaper companies losing circulation? 

            The newspaper industry has enjoyed a high level of inelasticity of demand for many years.  There is a high amount of cost that goes into starting a newspaper company.  There is usually only one newspaper company in a small town or city.  It would seem that newspaper companies would have a monopoly or at least an oligopoly.  I believe that has been the case for hundreds of years. 

            Thanks to the information super highway, we now have a much larger market for news and information.  The cost to print something on paper is far too high compared to the almost free cost of publishing something online. Nobody wants to pay for information or intellectual property anymore. Nobody wants the inconvenience of finding their paper every morning or wasting time training the dog to do it.  Also, I don’t like to get my hands black with the ink from the pages. 

            The argument can be made that the quality of the reporting has decreased since the birth of the internet, but I don’t think that will stop it.  I can’t see how any newspaper company can survive when the competition can create a similar product for pennies on the dollar.

Supply and Demand

The first several chapters of the book have dealt with demand, elasticity and supply. When we speak of demand and supply, we shouldn’t overlook the issues that seem to be swirling around the release of Apple’s new iPhone 5. These represent real-world supply and demand issues. According to Bloomberg Businessweek, Apple is suffering from a supply shortage due to the popularity of the new iPhone, or too high of demand. According to their article, there are several factors that are restricting supply. The first is the new ‘in-cell screen technology’ which requires a more painstaking process to manufacture than the previous technology that was utilized by Apple in former versions of the iPhone. This appears to be causing a bottleneck in the production of iPhones, however, the article goes on to say that other issues at hand involve other technologies that are also emerging and evolving, one of them being the LTE or long-term evolution chips that power the phone. According to Qualcomm, they are reporting ‘constrained’ supplies due to the new manufacturing process. 

While there may be issues with supply, the demand doesn’t seem to be far enough ahead of the supply to require alarm as several news agencies are reporting. Apple, by their own account, has shipped over 5 million phones during the first three days of production, with orders to ship many more. According to Bloomberg, they are projected to sell over 170 million phones in the next year. The shipment of over 5 million phones in the first three days seems a bit absurd to state that there are serious restrictions on supply. On top of this, it doesn’t seem like there are too many people crying that the new iPhone is just not available. Everyone who orders a phone receives an expected delivery date. Furthermore, Apple is very good about taking care of its customers and following through on their promises. I say to be able to keep up with demand in the fashion that only Apple can do, is remarkable. Any management team that can deliver that kind of supply, under the conditions that Apple routinely does, should not only be applauded, but also replicated to the success of that business.

Not a normal analysis on the NFL

Yesterday was the day that might change the opinion of ESPN analyst and Hall of Fame quarterback Steve Young.  After the game last Monday night he said that the NFL is “inelastic for demand.” Thus he believes that no matter what happens with the current NFL officials strike and the outrage over the replacement refs, the NFL will continue to hold strong and steady in ticket sales and viewer ratings. Yesterday; however, may have put the kink in that thought. The scandal involving the ending to the Packers and Seahawks Monday night game may be the beginning of the undoing of Steve Young’s beliefs. Important figures in the football world have been rumored to be debating a strike until there is a resolution with the qualified officials.

I believe that the integrity of the game that so many are talking about may have the power to alter the numbers that the NFL is counting on to maintain their position at the bargaining table. Too many issues of this magnitude will bring about the changes in ticket sales and viewer numbers that some believe to be unchanging. We have seen many stoppages in play from other professional sport organizations and in most cases things really do turn out to be just fine. Unfortunately baseball had to be the one that took it so hard when they could not reach an agreement so many years ago. I remember looking at nearly empty stadiums designed to seat tens of thousands and this continued for a couple of years until the fans slowly started to filter back to the game they love.

It is just the beginning of the season but I must disagree that they NFL is inelastic for demand. Give it more than 3 weeks and people will start to wonder why they continue to pay extremely high rates to watch a disgraced product that does not resemble the product they know and love.

 

http://espn.go.com/blog/nfcnorth/post/_/id/46455/steve-young-nfl-is-inelastic-for-demand

Is the NFL "inelastic for demand" in regards to it's officials?

Is Steve Young right in his assertion that the NFL is inelastic for demand with regards to it's officials?

I believe that we first need to define what it means to be inelastic for demand. As referenced in Chapter 3 of our textbook, inelastic demand essentially means that the demand for a good will be unaffected when the price of that good or service changes. In this case, "price," represents the difference in the officiating between the normal officials and the "substitute officials."This is why Steve Young made this comment. He said that viewers of NFL games will watch whether the officiating is good or bad. It can be assumed that the league knows this, and that is why they are taking such a hard stance on the labor issues in the referee's holdout. So is Steve Young right? Is the NFL inelastic for demand? Will viewers of NFL games watch even though the quality of the games is diminishing? Will the NFL start to feel pressure that is being applied by the players, coaches, and commentators to quickly rectify this situation? If they do not come to terms quickly, will reputation of the NFL be seriously damaged?

I tend to agree with Steve Young that the NFL is inelastic for demand. The NFL is so beloved as a franchise that  lower quality officiating will not impact the demand for NFL games. Viewers will continue to buy tickets and watch games on TV no matter how bad the officiating gets.

Will the Housing Market Get Better?

There is still much speculation about the current state of the economy. Some say that it is on an upswing while others say that the worst still isn’t over. According to the last census data, there are many changing factors that suggest that there is hope in our recovering economy. Births aren't declining as they have been in past years. The job market is improving, allowing many who have finished college to find a job or a better job than they currently have. The housing market is showing signs of possible growth for 2012 as well.

I am very interested in seeing how the housing market will turn out since it was an enormous cause of our recession. This year we have seen interest rates very low, especially for mortgages. Many places don't even have mortgage rates above 4%, such as in Cedar City, UT. Something else has been happening. The gap between renting and buying a home has disappeared in many cases. An article in the Wall Street Journal online states "that, historically, the cost to rent an apartment has been about 10% lower than the after-tax cost of owning a home." However, "[b]y the end of 2011...research found that the cost to rent an apartment was about 15% higher than the cost to own a home." That is an enormous difference. With renting an apartment being more expensive, buying a home is the cheaper substitute. There are many factors that will affect the housing market, such as if potential buyers have steady jobs or not. Even with the other factors included, with record-low rates, high rent prices, and lower home prices, the demand for homes should increase.

Inflation. The Lessor of Two Evils?

    With the unemployment rate at 8 percent plus and after having the government put trillions of dollars into the economy in the form of stimulus, recovery and shovel read jobs, is high inflation next? Mohamed El-Erian, Pimco’s CEO believes that the Fed wants just that.  Pimco is a large bonding company, Mr. El-Erian’s company could benefit from people wanting to buy bonds, but his suggestions are ominous.   The US has issued so many bonds in the effort to buoy up the economy by keeping interest rates low,  rescuing “too big to fail” corporations, paying for so many expanding programs, and to pay for additional debt that the US government is taking on.

 The bond market includes bonds from corporations, cities, states, and counties.   US Bonds have always been the safety net for investors seeking no risk.  Bonds have been known and a desired vehicle to safeguard one’s money, especially during inflation or during periods of high interest rates. But with so many US Bonds in the market, almost to the point of flooding, would the bond market demand curve really move, or would just the quantity and price move along the same demand curve?  Will the Federal Reserve be able to balance inflation and encourage growth?   I think that we are heading into uncharted waters with this one.

 

http://finance.yahoo.com/news/fed-wants-inflation-now-clean-150823877.html

 

Saudis Boost the Supply

Speculators have been bidding up the price of oil since the last hurricane blew through the gulf and shut down domestic oil production in the region.  Pundits hypothesize on how high the price of West Texas Intermediate (WTI) will go. With the talk of trouble in the Middle East and Israel's threats to bomb Iran, its no surprise that fear of a constricted oil supply line has increased volatility in the price of oil and has again driven the price of crude oil skyward.

Is it any surprise then, that today, Saudi Petroleum in an attempt to stabilize markets, announced their intention to increase oil production to 10 million barrels a day, effectively expanding current Saudi oil exports and global supply. Their stated desire is to help boost the global economy and relieve present fears of potential diminishing supply. This puts Saudi production at 80-85% of current capacity and barely stays ahead of expanding demand from the third world of emerging markets.

Dr. Kent Moors doesn't think this will change the long term fundamentals and sees trouble. First he states that the current retracement (a short term reversal) of prices will not last. He argues "there are no essential fundamentals justifying a downturn. Second, and critical, international demand this year will still come in at more than 88 million barrels per day and exceed 89 million by June of 2013." <http://moneymorning.com/2012/09/19/kent-moors-current-oil-supply-remains-adequate/> Thirdly he raises the specter of quantitative easing from the Fed, the Bank of Japan and the European Central Bank; all adding to inflationary pressures of oil and commodities by increasing the supply of money that is trying to buy them. We all saw what previous rounds of QE1-2 did for the price of staples and groceries. The increased supply of dollars chasing a fixed supply of hard commodities with demand unchanged will increase prices. Its no secret that more of the same will lead to more of the same. He makes a compelling case that the long term price of crude will rise.

Dr. Moors is having dinner tomorrow with Persian Gulf ambassadors. I'd love to be a fly on the wall...

Address of email article https://mail.google.com/mail/u/0/?shva=1#inbox/139e0255c8000bc6
Dr Moors' homepage and archive location http://oilandenergyinvestor.com/archives/#articleIndex