EROTIC Why Do the Prices of Newspapers Rise? (; {In 2006, the average price for a daily edition of a Baltimore newspa- per was $0.50. In 2007, the average price had risen to $0.75. Three different analysts have three different explanations for the higher equilibrium price. Analyst I: The higher price for Baltimore newspapers is good ‘ews because it means the population is better informed about Public issues. These data clearly show that the citizens of Baltimore have a nev, increased regard for newspapers. Analyst 2: The higher price for Baltimore newspapers is bad ‘news forthe citizens of Baltimore. The higher cost of paper, ink, and distribution reflected in these higher prices will further diminish the population's awareness of public issues. ‘Analyst 3: The higher price for Baltimore newspapers is an unfortunate result of newspapers trying to make money as many ‘consumers have turned to the Internet to access news coverage for free. As economists, we are faced with two tasks in looking at these explanations: Do they make sense based on what we know about «economic principles? And if they do make sense, can we figure out ‘which explanation applies to the case of rising newspaper prices in Baltmore? ‘What is Analyst 1 saying? Her observation about consumers’ ‘new increased regard for newspapers tells us something about the demand curve. Analyst 1 seems to be arguing that tastes have changed in favor of newspapers, which would mean a shift ih the demand curve to the right. With upward-sloping supply, such a shift would produce a price increase. So Analyst I's story is plausible, ‘Demand shifts to the ight Cerpeee ds — aoe eee CHAPTER 3. Demand, Supply,and Market Equilibrium 10S Analyst 2 refers to an increased cost of newlines ‘cause production costs of newspapers to rise, shite teat 4 curve to the let. A downward-sloping demand curve iso Her? increased prices. So Analyst? alo has a plausible story Since Analyst 1 and Analyst 2 have plausible stories based on economic principles, we can look st evidence to se who is in fact fight Ifyou go back to the graphs in Figure 3.12 on p 103, you will find a clue, When demand shifts to the right (asin Analyst sory) the price rises but so does the quantity as shown in igure (2). When supply shifts to the left (asin Analyst 2 story) the price fies, but the quantity falls as shown in Figure (6), So we would look at what happened to newspaper circulation during this period to sce whether the price increase is from the demand side or the supply side. In fact, in most markets, including Baltimore, quant ties of newspapers bought have been falling, so Analyst 2 is most likely correct. But be cael. Hoth analysts maybe correc. If demand shifts to the right and supply shifts tothe lef by «greater amount the price willise and the quantity sold will ‘What bout Analyst 37 Analyst 3 clearly never had an economics, course! ree Internet acces to news isa substitute for print media. A decrease inthe price of this substitute should shift the demand for newspapers tothe let The result should be a lower price nota price increase. The fact that the newspaper publishers are trying to make money” iced with this new competition does not change the laws of supply and demand. 1. Supply shiftstothe lft Price af newspaper > @ Ca —— on ‘Quantity of newspapers Quantity of nevwipapers106 PARTI Incroduction wo Economics provide existing firms with an incentive to expand and new firms with an incentive to enter the industry. Thus, the decisions of independent private firms responding to prices and profit opportunities determine what will be produced. No central direction, ‘Adam § nith saw this self-regulating feature of markets more than 200 years ago: Every individual... by pursuing his own interest... promotes that of society. He i ed by an invisible hand to promote an end which was no part of his intention * ‘The term Smith coined, the invisible hand, has passed into common parlance and is still used by economists to refer to the self-regulation of markets. |© Firms in business to make a profit have a good reason to choose the best available technology— lower costs mean higher profits. Thus, individual firms determine how to produce their prod ucts, again with no central direction. '§ So far, we have barely touched on the question of distribution—who gets what is produced? ‘You can see part of the answer in the simple supply and demand diagrams. When a good. short supply, price rises. As they do, those who are willing and able to continue buying do so; ‘others stop buying. ‘The next chapter begins with a more detailed discussion of these topics. How, exactly, is the final allocation of resources (the mix of output and the distribution of output) determined in a market system? SUMMARY 1. Insocieties with many people, production must satisfy wide-ranging tastes and preferences, and producers must therefore specialize. FIRMS AND HOUSEHOLDS: THE BASIC DECISION- ‘MAKING UNITS » 7» 2. A firm exists when a person or a group of people decides to produce a product or products by transforming resources, or inputs, into outputs—the product that are sold in the mat- ket. Firms are the primary producing units in a market economy. We assume that firms make decisions to try to maximize profits. 3. Households are the primary consuming units in an economy. Al households incomes are subject to constraints. INPUT MARKETS AND OUTPUT MARKETS: THE CIRCULAR FLOW 50 4, Households and firms interact in two basic kinds of markets: product or output markets and input ot factor ‘markets. Goods and services intended for use by house- holds are exchanged in output markets, In output * dam Sith, The ‘markets, competing firms Supply and competing house- holds demarid. In input markets, competing firms demand and competing households supply. 5. Ultimately, firms choose the quantities and character of outputs produced, the types and quantities of inputs demanded, and the technologies used in production, Households choose the types and quantities of pro- ducts demanded and the types and quantities of inputs supplied. DEMAND IN PRODUCT/OUTPUT MARKETS 9.22 66. The quantity demanded of an individual product by an indi- vidual houschold depends on (1) price, (2) income, (3) wealth, (A) prices of other products, (5) tastes and preferences, and (©)expectations about the future. 7. Quantity demanded isthe amount of a product that an indi- vidual household would buy ina given period if it could buy all that it wanted atthe current price. 8. A demand schedule shows the quantities of a product, that a household would buy at different prices. The same information can be presented graphically in a demand curve. eat of Non Modern Liar Eton (New Yr: Random Howse, 1937) 7.486 (Ise, 1776.