In 2006, the average price for a daily edition of a Baltimore newspaper was $0.50. In 2007,

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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.

1. 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?

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

Analyst 2 refers to an increased cost of newsprint. This would cause production costs of newspapers to rise, shifting the supply curve to the left. A downward-sloping demand curve also results in increased prices. So, Analyst 2 also has a plausible story.

Since Analyst 1 and Analyst 2 have plausible stories based on economic principles, we can look at the evidence to see who is in fact right. By referring to the graphs below, you will find a clue. When demand shifts to the right (as in Analyst 1’s story) the price rises, but so does the quantity as shown in Figure (a). When supply shifts to the left (as in Analyst 2’s story) the price rises, but the quantity falls as shown in Figure (b). So we would look at what happened to newspapers circulation during this period to see whether the price increase is from the demand side or the supply side. In fact, in most markets, including Baltimore, quantities of newspapers bought have been falling, so Analyst 2 is most likely correct.

But be careful. Both analysts may be correct. If demand shifts to the right and supply shifts to the left by a greater amount, the price will rise and the quantity sold will fall.

What about Analyst 3? Analyst 3 clearly never had an economics course! Free internet access to news is a substitute for print media. A decrease in the price of this substitute should shift the demand for newspapers to the left. The result should be lower price, not a price increase. The fact that the newspaper publishers are “trying to make money” faced with this new competition does not change the laws of supply and demand.

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.