Question

In 2006, the average price for a daily edition of a Baltimore newspaper 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 1: The higher price for Baltimore newspapers is good news because it means the population is better informed about public issues. These data clearly show that the citizens of Baltimore have a new, increased regard for newspapers.

Analyst 2: The higher price for Baltimore newspapers is bad news for the 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 Baltimore?

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 favour of newspapers, which would mean a shift in the demand curve to the right. With upward-sloping supply, such a shift would produce a price increase. So Analyst 1’s story is plausible.

Referring to the case study above, Analyst 1 suggested that the demand curve for newspapers in Baltimore might have shifted to the right because people were becoming more literate. Think of two other plausible stories that would result in this demand curve shifting to the right.

Answer 1

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