Kathy Posner

Good morning, students. Today we will discuss the economic law of supply and demand (S&D) and correlate that to whether admission should be charged at The Taste of Chicago.

The theory of S&D is very easy to understand. It is an economic model that determines that the price of something in a competitive market will vary until it reaches the point where the quantity demanded by consumers, at a particular price point, will equal the quantity supplied by the producer at that same price. That results in economic equilibrium.

The four basic laws of supply and demand are:

( source:Microeconomics By Besanko & Braeutigam)

1. If demand increases and supply remains unchanged then higher equilibrium price and unchanged quantity.

2. If demand decreases and supply remains the same then lower equilibrium price and unchanged quantity.

3. If supply increases and demand remains unchanged then lower equilibrium price and higher quantity.

4. If supply decreases and demand remains the same then higher price and lower quantity

A simple example would be pricing for a dozen eggs. If a store charges $3.00/dz. and only gets only a few customers, they lower the price to $2.50/dz. and demand increases. When consumers increase the quantity demanded at a given price, it is referred to as an increase in demand. Increased demand can be represented on the graph as the curve being shifted to the right.

If the demand decreases, then the opposite happens: a shift of the curve to the left. The quantity supplied at each price is the same as before the demand shift, reflecting the fact that the supply curve has not shifted; but the equilibrium quantity and price are different as a result of the change (shift) in demand.

Students, you may now take a short break as I prepare for the second part of the lecture. Please watch this very funny video about economics that will help you understand this lecture.

For those who left the room, thank you for returning to class so promptly.

We will apply what we have just learned in a discussion about an event, The Taste of Chicago, and six other lakefront festivals. The City of Chicago has lost nearly $7 million in the past three years running these events.

In earlier years, The Taste was very successful. According to the Sun-Times, in 2008, it “generated $14.4 million in (food) ticket sales, $2.4 million in sponsorship fees and gross revenues of $17.3 million. After expenses, it showed a profit of $2.5 million. One year later, Taste lost $1.5 million after expenses. Ticket sales had dropped to $11.8 million. Sponsorship was down to $1.7 million.”

Because Chicago is broke, Mayor Daley has changed his tune about opposition to admission fees for this free event and City Hall has issued an RFP for bids for outside companies to run the summer festivals.

The Sun-Times said, “In a question-and-answer form distributed to prospective bidders, the city was asked whether producers would be ‘allowed to charge admission to all or parts’ of Taste and six other events: Viva Chicago and Blues, Jazz, Celtic, Country and Gospel Fests.

The city replied, ‘Ideally, these festivals would remain free. But, respondents should submit responses that include recommendations on the economic model, which can include an entrance fee.’ “

Back to our supply and demand lesson. If less people are attending festivals when they are FREE, what economic model would show more people attending if they had to PAY? None that this professor can think of!

The solution to the woes of the money-losing festivals is a lesson for another day, but it is simply if expenses are more than revenue, one must cut expenses to show a profit! What a novel idea. I wonder why Chicago economists haven’t figured that out!

Class is now over. See you next week when we discuss under-funded pensions. Please read pages 50-100 of your text book.

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