Introduction to Open-Economy Macroeconomicsecon.ucsb.edu/~lowell/191ac/Lecture Notes/Lecture 5 Slides.pdf · 4/16/2012 Econ 191ac -- Lecture 5 6 . HW3 for Weds 4/11 (1) You are the

Lecture 5 Firms and Markets

in the Performing Arts

Professor Julia Lowell [email protected]

Spring 2012

4/16/2012 1 Econ 191ac -- Lecture 5

Outline: Lecture 5

• Key points from Lectures 3 & 4 • Go over HW3 and HW4 (due today) • Organizations in the arts: nonprofits

versus for-profits • Firms and markets in the performing

arts • Homework for Wednesday 4/18

4/16/2012 Econ 191ac -- Lecture 5 2

Slope vs. Elasticity (1)

The slope of the demand curve measures the effect of a change in quantity demanded on the price

Slope = ΔP/ΔQ

Elasticity is the percent change in the quantity demanded of a good in response to a percent change in some other variable.

When that variable is the price of the good, then we are talking about the elasticity of the demand curve.

εp = ΔQ/Q ΔP/P

4/16/2012 Econ 191ac -- Lecture 5 3

At Low Ticket Prices, Demand Is Relatively Inelastic

4/16/2012 Econ 191ac -- Lecture 5 4

D

ticket price (P)

seats per performance (Q)

slope: ΔP/ ΔQ is constant along demand “curve”

elasticity: (ΔQ/Q)/( ΔP/P) = ΔQ * P Q ΔP = ΔQ * P = 1 * P ΔP Q slope Q

elastic

inelastic

Steeper Demand Curves Are Typically Less Elastic

4/16/2012 Econ 191ac -- Lecture 5 5

D1

ticket price

seats per performance

elasticity: = 1 * P slope Q

A

D2

At point A, P/Q is the same for both D1 & D2, but slopes are different. Since D2 has steeper slope than D1, (1/slope) is smaller D2 is less elastic (more inelastic) than D1

P

Q

What We Know About Own-Price Elasticity in the Live Arts

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 implies that, under most conditions, 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?)

4/16/2012 Econ 191ac -- Lecture 5 6

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 if helpful. 4/16/2012 Econ 191ac -- Lecture 5 7

Broadway Show Elasticity Problem Homework 10/6 (1)

4/16/2012 Econ 191ac -- Lecture 5 8

What do we know? (1) Have excess

demand at current price

(2) No cost to move from s1 to s2 or s3

(3) Lots of other Broadway shows—so demand curve is elastic—probably D2, not D

(4) When demand is D2, get greater revenue gain from moving to s2 than from moving to P2

D

S1 ticket price

seats per performance QS1

P1


4/16/2012 Econ 191ac -- Lecture 5 9






D

S1 ticket price


P1

S2 S3


4/16/2012 Econ 191ac -- Lecture 5 10






D

S1 ticket price


P1

S2 S3

D2


4/16/2012 Econ 191ac -- Lecture 5 11






vs ELASTIC DEMAND s3

D2

When Demand Is Elastic, Maximize Revenue By Expanding Supply

Class Project Homework (HW4) for Monday 4/16 (1)

First step toward class project – report on Excel sheet (1) Choose 5 U.S. cities/metropolitan areas that

had populations of 80,000 to 400,000 in 2010 Data: US Census Bureau, Census 2010, www.census.gov (try the ranking and comparisons tables)

(2) For each city/metro area, report • Population • Percent of population 65 years and older • Percent speaking a language other than English at home • Percent that are college-educated (BA or higher) • Per capita money income • Percent of persons below poverty line Data: US Census Bureau, State and County Quick Facts (navigate from Census 2010 page)

4/16/2012 Econ 191ac -- Lecture 5 12

http://www.census.gov/

HW4 (1) – Thanks, Josue

4/16/2012 Econ 191ac -- Lecture 5 13

Population 65 or olderOther language

BA or higher

Per capita money income

percent below poverty line

Pittsburgh, PA 305,704 13.80% 9.80% 33.80% $24,833 21.90%

Reno, NV 225,221 11.70% 24.40% 28.50% $27,589 16.30%

Berkeley, CA 112,580 11.70% 28.70% 68.20% $36,498 18.90%

Cincinnati,OH 296,943 10.80% 6.80% 30.80% $23,982 27.20%

Springfield, IL 116,250 14.30% 5.50% 32.50% $28,542 16.20%

Class Project Homework (HW4) for Monday, 4/16 (2)

• Explain the difference between a Metropolitan Statistical Area and a census defined city (incorporated place). Which is usually bigger?

• For each data element you collected on your cities (percent elderly, non-English speaking, college-educated, etc.) tell whether that makes citizens more or less likely to participate in the arts. Explain what you mean by “arts.”

4/16/2012 Econ 191ac -- Lecture 5 14

HW4 (2) – Thanks, Megan

Metropolitan Statistical Area: A region with relatively high population density at the core that has close economic ties around the area. The region is not legally incorporated as a city or town. A metropolitan area is usually centered around a single large influential city. Census Defined City (Incorporated Place): A type of governmental unit incorporated under state law as a town, city, borough, or village. They have legally prescribed limits, powers, and functions and the requirements vary among states.

4/16/2012 Econ 191ac -- Lecture 5 15

HW4 (2) – Thanks, Megan Percent of population 65 years and older: Elderly people are more likely to

participate in the arts because they would most likely be retired and therefore have more time and appreciation for it.

Percent speaking a language other than English at home: They would be less likely to participate in the arts because most advertisements market towards the English speaking population.

Percent that are college-educated (BA or higher): They would be more likely to participate in the arts because they are more educated, they would more likely know more about the arts or have more arts education.

Per capita money income: Families with less income are going to be less likely to participate in the arts because a lot of art galleries, shows, and performances are pretty pricey.

Percent of persons below poverty line: States with higher percentages of people below the poverty line would be less likely to participate in the arts for the same reasoning as the low income families. Attending and participating in the arts can be expensive.

By “arts” I mean mostly the benchmark arts, attending perfomances,

museums, galleries, arts and craft fairs, etc.

4/16/2012 Econ 191ac -- Lecture 5 16

About the Class Project (30% of Final Grade)

• Characterize a medium-sized U.S. city or metro area in terms of its socio-demographics and economic base – characterize population in terms of age, gender, education level,

income – characterize economy in terms of major industries, level of

employment, prevalent occupations

• Describe its cultural economy – Number of businesses involved in the production & support of culture – Employment in cultural occupations – Participation by city residents in cultural activities and events – Nature of support for culture (public arts council? private

foundations?)

• Propose a cultural project to benefit residents – Provide a broad justification for the use of public money (include non-

economic benefits) on this project – Analyze its probable economic impacts on the community (who will

benefit?

4/16/2012 Econ 191ac -- Lecture 5 17

Tips on Data Collection (for Project Homeworks)

• Always make sure your name is on your work, even if e-mailed. On Excel spreadsheets, put it on each sheet

• Always give the date (year) associated with the data

• Always reference data sources somewhere on page, even if they are the data sources I asked for, e.g., – Census Bureau, 2002 Economic Census – Bureau of Labor Statistics, Occupational Employment

Statistics, May 2009

• Whenever possible, present data elements in the order they were given in the assignment (pop, 65+, non-English, etc.)

• Always check the class website for information on where to get data, how to get data, etc.

4/16/2012 Econ 191ac -- Lecture 5 18

ORGANIZATION OF THE ARTS INDUSTRY: WHY ARE THERE SO MANY NONPROFITS?

4/16/2012 Econ 191ac -- Lecture 5 19

Distribution of Live Performing Arts Organizations by Tax Status, 2002

4/16/2012 Econ 191ac -- Lecture 5 20

0

10

20

30

40

50

60

70

80

90

100

Theater Dance Opera ClassicalMusic

Other Music

Percent of Organizations

Commercial

Nonprofit

Governance Structure of U.S. Museums, 2008

4/16/2012 Econ 191ac -- Lecture 5 21

Four Models of Governance for Organizations

• Commercial firms

• Nonprofit firms

• Public organizations – Government-owned, government-operated

(GOGOs) ex: military base – Government-owned, privately-operated

(GOCOs) ex: Lawrence-Berkeley labs, UCSB

• Amateur organizations

4/16/2012 Econ 191ac -- Lecture 5 22

What Are the Objectives of Arts-Producing Organizations? (1)

• Commercial firms want to maximize profits, though they often care about quality as well

• Nonprofit firms want to – maintain financial viability – produce high quality art – reach as many people as possible

4/16/2012 Econ 191ac -- Lecture 5 23

What Are the Objectives of Arts Producing Organizations? (2)

• Public organizations want to – serve all taxpayers – ensure equal access (?)

• Amateur organizations want to – help members pursue their individual

artistic expressions – create and strengthen their local

communities

4/16/2012 Econ 191ac -- Lecture 5 24

There Are Many Kinds of “Tax-Exempt” Organizations – Our Focus Is 501(c)(3)s

U.S. Tax Code

Description Tax-deductable contributions ok?

501(c)(1) Government corporation Yes 501(c)(3) Public charities Yes 501(c)(4) Civic leagues, labor unions,

lobbying groups, etc. No

501(c)(5) Labor, agricultural, and horticultural organizations

No

501(c)(6) Chambers of commerce, etc. No 501(c)(7) Social and recreational clubs No 501(c)(13) Cemetery companies Yes 501(c)(19) & 501(c)(23)

Military veterans organizations No

501(k) Child care organizations Yes 4/16/2012 Econ 191ac -- Lecture 5 25

Focus on Nonprofits: What Is A Nonprofit?

Nonprofits are: • Usually incorporated by the state in which they

operate

• Governed by a board of directors or trustees; no shareholders

• Can have earnings in excess of expenditures, but – must devote excess earnings to production (“reasonable

compensation” of employees ok)

– can’t distribute profits to officers, directors, trustees, or members

4/16/2012 Econ 191ac -- Lecture 5 26

How Are 501(c)(3) Nonprofits Treated by Federal & State Governments?

• No corporate income tax, often no sales tax

• No unemployment taxes (& no benefits for employees)

• Exempt from certain federal rules governing – financial accounting practices, bankruptcy,

unfair competition, and postal rates

Donors to certain types of tax-exempt organizations can take income tax deductions, but these organizations are not allowed to do political lobbying

4/16/2012 Econ 191ac -- Lecture 5 27

Why Do Nonprofits Get All These Breaks? (1)

• Provide a public benefit

• Encourage citizens to become engaged

• Provide higher quality of product/service than for-profit firms do

• Cannot operate without subsidy

4/16/2012 Econ 191ac -- Lecture 5 28


• Provide a public benefit – Must benefit nonparticipants as well as

participants



• Cannot operate without subsidy

4/16/2012 Econ 191ac -- Lecture 5 29



• Encourage citizens to become engaged – A well-functioning democracy requires an

active citizenry, not simply passive taxpayers


• Costs too high to operate without subsidy

4/16/2012 Econ 191ac -- Lecture 5 30




• Provide higher quality of product/service than for-profit firms do – For-profit firms have greater incentives to cut corners – Managers of nonprofits more apt to share preferences

with customers – Employees may work better for nonprofit managers

• Costs too high to operate without subsidy

4/16/2012 Econ 191ac -- Lecture 5 31



• Provide high quality product or service

• Can’t operate without subsidy

Consumers’ total willingness to pay doesn’t cover fixed costs


4/16/2012 Econ 191ac -- Lecture 5 32

Fixed vs Variable vs Sunk Costs

• Fixed costs – Do not vary with the quantity of output

produced

• Variable costs – Vary with the quantity of output produced

• Sunk costs – Cannot be recovered or reversed if the activity

is ceased

4/16/2012 Econ 191ac -- Lecture 5 33

Fixed vs Variable vs Sunk Costs

• Fixed costs – Do not vary with the quantity of output

produced

• Variable costs – Vary with the quantity of output produced

• Sunk costs – Cannot be recovered or reversed if the activity

is ceased (these are usually fixed, but can be variable)

4/16/2012 Econ 191ac -- Lecture 5 34

How Do We Measure Quantity of Output in the Live Performing Arts?

• Number of tickets sold (quantity demanded)

• Number of tickets available for sale (supply of seats per performance)

• Number of performances

• Number of productions

4/16/2012 Econ 191ac -- Lecture 5 35

Costs of Staging a Play or Opera

• What are the costs?

4/16/2012 Econ 191ac -- Lecture 5 36

Some Costs of Staging a Musical or an Opera

4/16/2012 Econ 191ac -- Lecture 5 37

– Venue rental (or mortgage payment)

– Rehearsal time

– Scenery, props, costumes (for theatre & opera)

– Salaries of managers, actors, singers, musicians

– Wages of stagehands & technical crew

– Wages of ushers and ticket-takers

– Wages of “back-office” personnel (accountants, receptionists, etc.)

– Advertising & publicity

Fixed vs Variable Costs of Staging a Musical or an Opera (1)

4/16/2012 Econ 191ac -- Lecture 5 38

Are these costs fixed or variable? – Venue rental (or mortgage payment)

– Rehearsal time

– Scenery, props, costumes (for theatre & opera)

– Salaries of managers, actors, singers, musicians

– Wages of stagehands & technical crew

– Wages of ushers and ticket-takers

– Wages of “back-office” personnel (accountants, receptionists, etc.)

– Advertising & publicity

Fixed vs Variable Costs of Staging a Musical or an Opera (2)

4/16/2012 Econ 191ac -- Lecture 5 39

Depends on the unit of output – venue rental or mortgage

payment – rehearsal time – scenery, props, costumes

(for theatre & opera) – salaries of managers,

actors, singers, musicians – wages of stagehands &

technical crew – wages of ushers and

ticket-takers – wages of back-office

personnel – advertising & publicity

Units of output

• tickets sold

• tickets available for sale

• performance

• production

Fixed vs Variable Costs of Staging a Play or an Opera (1)

4/16/2012 Econ 191ac -- Lecture 5 40

• Fixed costs per production

?

• Variable costs per performance ?

Fixed vs Variable Costs of Staging a Play or an Opera

4/16/2012 Econ 191ac -- Lecture 5 41

• Fixed costs per production – venue rental or mortgage payment

– rehearsal time

– scenery, props, costumes

– wages of back-office personnel

– advertising & publicity

• Variable costs per performance – salaries of managers & actors

– wages of stagehands, technical crew, ushers, etc.

Which Cultural Form Has the Highest Fixed Costs?

• Theater • Ballet & other dance • Opera & musical theater • Classical music • Popular music (rock, country, techno, etc.)

4/16/2012 Econ 191ac -- Lecture 5 42

The Distribution of Live Performing Arts Organizations May Provide A Clue

4/16/2012 Econ 191ac -- Lecture 5 43

0

10

20

30

40

50

60

70

80

90

100

Theater Dance Opera ClassicalMusic

Other Music

Percent of Organizations

Commercial

Nonprofit

HOMEWORK – PLEASE E-MAIL TO ME BY TUESDAY NIGHT, IF POSSIBLE

4/16/2012 Econ 191ac -- Lecture 5 44

Class Project Homework for Wednesday, 4/18

• Get data for each of your cities – number of establishments (by tax status if available) – receipts/revenue – number of employees

• For – architectural services – historical sites – theater companies – graphic design establishments – sound recording studios

If the data don’t exist at the city level, try the metro level. If not at the metro level, just report that data weren’t found.

Source: U.S. Census Bureau, Economic Survey 2007, Industry Surveys by Geographic Area

4/16/2012 Econ 191ac -- Lecture 5 45

Documents

Introduction to Open-Economy Macroeconomicsecon.ucsb.edu/~lowell/191ac/Lecture Notes/Lecture 5 Slides.pdf · 4/16/2012 Econ 191ac -- Lecture 5 6 . HW3 for Weds 4/11 (1) You are the