Food prices surge

The article from the WSJ reports that food prices are increasing. It is a great introduction to supply and demand; it illustrates nicely the effect of a decrease in supply.

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SUMMARY: Surging prices for food staples from coffee to meat to vegetables are driving up the cost of groceries in the U.S., pinching consumers and companies that are still grappling with a sluggish economic recovery.

CLASSROOM APPLICATION: Instructors can use the article as a supply and demand case, and also to examine the effect of increased input prices on firm decisions. With a decrease in the supply of food, prices increase. With regard to input prices and firm decisions, "Still, the price increases pose a challenge for food makers, restaurants and retailers, which must decide how much of the costs they can pass along and still retain customers at a time of intense competition and thin profit margins." The article also notes the effect of increases in food prices on consumer decisions.

QUESTIONS: 
1. (Introductory) What factors are causing a decrease in the supply of food? What is the effect of the decrease in supply of food on food prices?

2. (Advanced) How are food makers and restaurants responding to food price increases?

3. (Advanced) What is the effect of increased rice and wheat prices on meat and dairy prices?

Input prices rise in the energy industry

This article from the WSJ reports that "Labor and capital costs have doubled over the last decade" for energy companies. It is a good introduction to supply and demand and derived demand for inputs. It is also a illustration of why the long-run supply in perfect competition might slope upwards.

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SUMMARY: The energy industry loves to think big and tackle risky projects, but the number of those projects now underway is leading to soaring costs for people, materials and services.

CLASSROOM APPLICATION: Instructors can use the article to demonstrate that an increases in the demands for labor and capital cause short-run increases in wages and rental rates on capital. With increases in oil exploration and production, the demand for labor and capital increases. Therefore, in the short run, wages and rental rates on capital increase, thus increasing the short-run average cost of oil exploration.

QUESTIONS: 
1. (Advanced) What factors are causing the increased demand for labor and capital in the oil and gas industry?

2. (Advanced) What is the effect of the increased demand for labor and capital in the oil industry on the equilibrium wages and rental rates in this industry?

3. (Introductory) How will increased wages in the oil and gas industry affect the number of students majoring in chemical engineering and petroleum engineering?

Pricing seats in airplanes

This article from the WSJ reports how airlines price different classes of seats. It is a great example of indirect price discrimination through versioning.

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TOPICS: Pricing a Product Line

SUMMARY: For fliers, the ideal seat is usually in first or business class. For airlines, the sweet spot is, increasingly, farther back in the plane, in premium economy.

CLASSROOM APPLICATION: Instructors can present the selection issue associated with offering premium economy. "Airlines want economy fliers to buy pricier seats, rather than business travelers opting for cheaper ones." One way to reduce the selection problem of business travelers selecting down is to improve the quality of business class. "Only after Lufthansa in 2012 began upgrading its business class to horizontal beds from slanted ones was it confident of not cannibalizing its own premium traffic."

QUESTIONS: 
1. (Introductory) Why are airlines introducing premium economy class?

2. (Advanced) In the consideration of whether to introduce premium economy class, what issue concerns airlines about the demand for business class concern airlines?

3. (Introductory) What redesign of Luftansa planes reduced the problem of business travelers choosing premium economy class?

4. (Advanced) The article notes "down-sell risk" and "up-sell potential" for introducing premium economy class. Interpret these two terms.

Veblen goods?

This article from the WSJ reports on the effects of recent price increases in high-end luxury goods. It says that sales of such goods have risen and reports that one analyst says that "companies are selling few units." It mentions that firms use pricing as a way to segment sub-markets. The footnote mentions that an earlier version confused Giffen goods with Veblen goods.

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SUMMARY: The luxury-goods business has been relying on sharp price increases to drive sales. But there are signs that even the very rich are nearing their limits.

CLASSROOM APPLICATION: Students can investigate possible reasons for luxury good price increases. First, "An economic theory holds that for certain goods, higher prices increase desirability and drive sales, rather than suppress demand as they would for ordinary products. Economists refer to such luxury products as Giffen goods, named for Scottish economist Robert Giffen, who described the phenomenon." Second, "One reason ultraluxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share." Third, "High-end brands said the price increases are necessary to maintain quality and offset the rising costs of production." Fourth, "In Europe and the U.S., brands have pushed prices higher in part to capture more money from Chinese tourists who buy luxury goods abroad to avoid tariffs that can add 40% to prices at home."

QUESTIONS: 
1. (Advanced) Define "Giffen good." Include income and substitution effects in the definition. Do economists refer to luxury goods in which "higher prices increase desirability and drive sales" as Giffen goods? What is the "Veblen effect"? Do high-end luxury goods experience a Veblen effect?

2. (Introductory) Were the luxury-good price increases a result of the increased demand for luxury goods, in part driven by the greater Chinese demand for luxury goods?

3. (Advanced) Consider the statement, "One reason ultraluxury brands are raising prices is to distinguish their products from entry-level luxury goods that are fast picking up market share." Why would producers of high-end luxury goods raise prices in response to greater competition from low-end luxury goods? What factors distinguish high-end luxury good shoppers who consider entry-level luxury goods from those who do not?

4. (Introductory) What factors have driven the price increases of high-end luxury goods?