A Primer on Real Life Action and Economics -II

The post ‘Primer on Real Life Action and Economics-I discussed how real life instances are theorized through the conceptual prism of economics. The current post continues the discussion applying the concept of economics to more areas.

Like in the previous post, one column highlights the real life phenomenon what we observe, while the second column builds up the theoretical linkage to economics.

Real Life Practice/ phenomenon	Economics Linkage
Live events	Humans enjoy live action. They love going to stadiums to watch sports events, visit theatre to enjoy live theatre performance, visit musical shows preferring their genre and likes. An interesting pointer would be an analysis of these live events through the economics angle. There is obviously the angle of utility maximization. People prefer entertainment and leisure and these activities offer the same to the consumers. Therefore they seek to maximise their utility by attending these events. Yet, in understanding their clamour for maximising utility, one has to analyse the supply physiognomies of the event. The event is one off or strictly finite. Each sports event or contest is different and unique in itself. Watching one cricket match is not the same as another cricket match though they can be close substitutes. Hence the supply curve for a live musical performance or a cricket or hockey or soccer match or athletic or for that matter any sports contest is vertical. Irrespective of the price and demand patterns, there is only one good on offer. The same applies to the live theatre or live circus performances. Secondly, once you gain access to the good, it is non rivalrous. Your enjoyment of the good is not through a deprivation of the same for another individual. Non-rivalrous doesn’t imply excludability. In fact it is excludable given the fact it is available only to those who buy the tickets. Further, it is finite expansible good. It is available only to those in the stadium or auditorium as the case might be. Therefore it can be characterised as a club good.
Tax concessions to local language movies	Often in states like Karnataka, the movie producers in the state language lobby with the government and pretty successfully at for tax concessions. The logic seems simple. The lower the price, there would be increase in quantity demanded and thus more people will watch the movies at a lower price. Yet the answer is only partly correct. There is more to the picture. To any movie producer, as the movie hits the theatre, there is a threat from similar movies hitting theatres around the same time. Moreover, as anecdotal evidence illustrates, most of the movie collection happens in Week I. Therefore, all the irresistible need to attract crowds during the week. The movie price is just not includes the recovery of fixed cost of movie production (essentially sunk at that moment) but also margins to distributors and exhibitors etc. It also comprises the tax component. When the movie producer is unable to cut costs anywhere else and is faced with implied demand uncertainty, he seeks to government for help. The ostensible reason is promotion of long language movies and culture yet the heart of it is little different. To a movie-watcher, there is a limited budget and she has choose among multiple movies. If her consumption of movies measured through the number of movies watch per month are measured along the two axis, they build up the indirect utility function. The budget line linking the willingness and ability to spend money indicates the constraint. The tax free status for local language movie would alter the dynamics of the prices and create swivelling of the budget along the axis. Given the constant income, lowering of the price of one movie will shift the demand dynamics towards a lower price movie. Alternatively we can imagine another scenario. If all movies were tax free and the government decides to tax non local language movies. The price of non-local language movies goes up but in the process also has brings down the consumption of local language movie through a process called income and substitution effect. Hence if the local language movie price is reduced, it not only increases the demand for local language movies but also increases the demand for non-local language movies through the reverse operation of the income and substitution effect. Thus there is a clamour and sub-conscious at that to seek tax exemptions for local language movies.
High prices of food at airports	As one enters the airport and if hungry, would naturally seek an eatery. Yet as one observes the prices, they seem exorbitant. A small plate of Idly and Vada which perhaps costs around Rs, 40 in normal restaurant, would perhaps cost around Rs, 200 or so. There is hardly any significant difference in the quantity nor sound great shakes in taste. A cursory glance might indicate the cost factor at play. For a restaurant, the costs at play are relatively limited. The rent and other fixed costs are relatively lower. As one might expect, the rents at the airport would obviously very high. Yet the rents are function of the vendor’s willingness and ability to pay. Assume the prospective vendor has the ability to pay. Yet there must be accompanied by equal willingness to pay. It is therefore a matter of puzzle to solve on why the vendor at the airport is willing to pay higher prices. One obvious reason is the limited space in airport for food courts. Very few vendors would be able to put up stalls in the food court. Moreover, given the long term nature of contracts, the first mover advantage is significant. Therefore, the vendor has move for the kill before others take over. Yet why there is clamour for competition in capturing the space that is finite, rivalrous and demands high rents. The answer again will seek towards the motivations for willingness to capture the space. The answer lies in the ability to charge high prices. If the fixed costs are high, they can be recovered either through volumes or economies of scale or through high margins on individual sales. While airports do offer small potential for scale and scope but the recovery is perhaps long over drawn. The solution there lies in the ability to recover high margins. High margins are possible if the good is highly inelastic and essential. In an airport, the customer is likely to relatively insensitive to the prices. Hence the good will be inelastic. Further relative inelasticity comes from the location. The customer is invariably a passenger killing time before boarding a flight or someone in hurry who want to grab a snack or two before boarding. The supply options are limited. The number of outlets are limited. Hence he has to do with the near monopoly situation that exists. The location that creates fertile ground for monopoly in addition to the resolution of need that is immediate creates the relative price inelasticity of the good. This price inelasticity of the good under consideration makes the prices higher at the airports.