Transcript com423-basics

Political economy of the media
Definition of political economy
• A study of the interrelationships between political and
economic institutions and processes.
• A study of the ways in which various sorts of
government affect the allocation of scarce resources
in society through their laws and policies
• A study of the ways in which the nature of the
economic system and the behavior of people acting
on their economic interests affects the form of
government and the kinds of laws and policies that
get made.
Definition of political economy
• Political economy examines the political, economic
and cultural factors that affect the production and
distribution of wealth
• It is a recognition that economic activities (production
etc) are affected by economic approaches, politics,
ideology, philosophy, cultural values.
Political economic factors
that shape the news
• Political and economic systems of the society
in which the media operate
• Political and economic status of the country
• Dominant cultural and social values
• Cultural/national alignments or conflicts
• International relations
Types of economic schools:
mercantilism (statism), 1500-1750
• Extensive state regulations of economic
activities in the interest of the national
economy.
• The quest to increase state’s economic and
political power.
• Mercantilism was economic warfare
• Some principles: trade balance, protectionism,
maximizing tangible assets (gold etc).
Neo-mercantilism / statism
• Many of the old ideas are still alive today:
trade balance, protectionism, maximizing
tangible assets (currency reserve).
• In the 1960 Japan used mercantilist approach
• Today China is pursuing an essentially
mercantilist trade policy
• Recommended reading: China's Wrong Turn on Trade by
Robert Samuelson, Newsweek, 2007
Types of economic schools: classical
• New thinkers: Adam Smith, David Ricardo,
Thomas Malthus, John Stuart Mill (18-19th cent).
• Primarily concerned with the dynamics of economic
growth.
• Stressed economic freedom and promoted ideas such
as laissez-faire and free competition.
The Wealth of Nations (1776)
Adam Smith
• A Quote from Smith: “It is not from the benevolence of the
butcher, the brewer, or the baker that we expect our dinner, but
from their regard to their own interest. We address ourselves
not to our humanity but to our self-love.”
• Key points:
• The free market is self-regulating to produce the right amount
and variety of goods
• Self-regulation (“invisible hand”) through self-interested
competition in the free market (keeping prices low and giving
an incentive for a wide variety of goods and services).
• Smith: "by pursuing his own interest, [the individual]
frequently promotes that of the society more effectually than
when he intends to promote it."
The Theory of Moral Sentiments (1759)
Adam Smith
• Smith suggested that conscience arises from social
relationships.
• People have a natural inclinations toward selfinterest. However, self-interest is mitigated by the
need for mutual relationships.
• A theory of sympathy: the act of observing others
makes people aware of themselves and the morality
of their own behavior.
David Ricardo: comparative advantage
• Smith: absolute advantage
• Free trade is beneficial when each nation can
produce some particular commodity more
efficiently than any other.
• Ricardo: comparative advantage
• Even if a country/firm has no absolute
advantage, it can still derive gains from
trade/exchange
Comparative advantage
• Absolute advantage
• Comparative advantage
• Opportunity cost: What it costs someone to
produce something; the value of what is given
up
• Someone may have an absolute advantage at
producing every single thing, but he has a
comparative advantage at many fewer things
Mercantilism v. classical liberalism
• Mercantilism: subordinates economics to
politics
• Liberalism: subordinates politics to
economics to the point of nonexistence
Karl Marx: socialism
• Free market economy leads to improved quality of life.
However, at the same it causes polarization of wealth (rich get
richer and poor get poorer).
• According to his labor theory of value, the value of a
commodity is the socially necessary labor time invested in it.
However, capitalists never pay full labor value (unpaid
labor=surplus value).
• Thus:
• (1) alienation of workers from the products of their labor
• (2) exploitation of workers
• (3) imperialism (the need for accumulation of wealth)
Marx and Marxism
• Socialist economy: Communal ownership of
the means of production is the only way of
ensuring an equitable distribution of wealth.
People act out of solidarity and for the good of
society as a whole.
Neo-marxism: Dependency theory
• The world economic system is designed to
promote interests of the developed countries.
• The First World dominates developing
countries through:
• The wealth and technology
• Multi-nationals
• Indigenous capitalists
Neo-marxism: cultural critique/theory
• Cultural theory: analysis of the production,
interpretation, and reception of cultural
artifacts within concrete socio-historical
conditions; contesting the cultural hegemony
• The Frankfurt School and Critical Theory
• The Birmingham School and cultural studies
Neoclassical economics
• The classical theories of value =value to be a
property inherent in an object
• However, people are often willing to pay more than
an object is "worth.“
• New theory: value is associated with the relationship
between the object and the person obtaining the
object, the"supply" and "demand” relationship
• It dispensed with the labor theory of value in favor
of a marginal utility theory.
Neoclassical economics
• Marginal utility. Buyers attempt to maximize
their gains from getting goods by increasing
their purchases of a good until what they gain
from an extra unit is just balanced by what they
have to give up to obtain it.
• In this way they maximize "utility"—the
satisfaction associated with the consumption of
goods and services. Individuals make choices
at the margin.
Neoclassical economics
• Neoclassical economics systematized supply
and demand as joint determinants of price
and quantity in market equilibrium.
Keynesian economics
• Aggregate demand is influenced by a host of economic
decisions—both public and private—and sometimes behaves
erratically. The public decisions include, most prominently,
those on monetary and fiscal (i.e., spending and tax) policies.
• Fiscal and monetary policies affect aggregate demand.
• Many Keynesians advocate activist stabilization policy to
reduce the amplitude of the business cycle, which they rank
among the most important of all economic problems.
Economic systems
Free market ←------------------→ Command
mixed
In the U.S. primarily free market capitalist
system with limited government intervention.
Almost the entire production is from private
sector
ECONOMIC SYSTEM
CHARACTERISTICS
EXAMPLES
CAPITALISM
Producer-oriented
Private ownership of
productive resources;
Low taxes;
Low regulations &
subsidies
Japan, South Korea,
Taiwan
CAPITALISM
Consumer-oriented
Private ownership of
productive resources;
Higher taxes &
regulations
United States, Europe
MARKET SOCIALISM
High level of
government ownership
of productive resources;
high regulations
Middle East, South
America, Africa
PLANNED SOCIALISM
Command Economy
Former Soviet Union;
Government owns
productive resources and North Korea, Cuba
directs them centrally
Macro- and microeconomics
Macroeconomics:
Political economy
Aggregates in the economy (e.g. production and
consumption, GDP). Growth, employment and inflation
Microeconomics:
Specific markets
How individual economic units (households and
firms) decide their economic activity.
Supply and Demand
• Supply: the quantity of a product or service
that will be offered for sale at each price.
• Demand: the quantity of a particular product
or service that consumers will purchase at each
price
Supply and demand equilibrium
Market demand for DVD Players (monthly)
Point Price
($ per unit)
100
Price ($ per unit)
A
Market demand
(000s)
20
700
80
60
40
A
20
Demand
0
0
100
200
300
400
Quantity (000s)
500
600
700
800
Market demand for DVD players (monthly)
Point Price
($ per unit)
Price ($ per unit)
100
80
Market demand
(000s)
A
20
700
B
C
40
60
500
350
C
60
B
40
A
20
Demand
0
0
100
200
300
400
Quantity (000s)
500
600
700
800
Other determinants of demand
– tastes
– number and price of substitute goods
– number and price of complementary
goods
– income
– distribution of income
– expectations
Elasticity of demand: the responsiveness of
demand and supply (response to pricing)
Price elasticity of demand =
change in quantity ÷ change in price
• Elastic (>1) : change in quantity greater than change in
price (Revenues increase when price decrease)
• Unit-elastic demand (=1): a change in the price results in
an equivalent change in quantity (proportional)
• Inelastic (<1): change in quantity less than change in
price (revenue decreases when price decreases)
Elastic demand between two points
Revenue increases
When price decreases
P($)
5
b
a
4
0
D
10
20
Q (millions of units per period of time)
Inelastic demand between two points
Revenue decreases
as price decreases
8
c
P($)
a
4
D
0
15
20
Q (millions of units per period of time)
P
20
Unit elastic demand (PD = –1)
a
b
8
D
O
40
100
Q
Typical inelastic goods
• When the price of inelastic goods rises,
consumers will cut back on the quantity
purchased. However, the increased price does
not discourage consumption enough to
decrease revenue.
• Examples: Staple foods usually have very low
elasticities because there are few substitutes.
• Tobacco, gasoline (at least in short term).
Elastic goods:
consumers are price-sensitive
• When prices rise, consumers cut back.
However, the reduction in quantities more than
offsets the price increase, so total revenue
falls.
• Examples of elastic goods are less essential
items (restaurant meals) or items with a wide
range of substitutes (newspapers).
Factors which can influence the
demand elasticity curve
• The availability of substitutes: a wider array of substitutes
increases elasticity (for example the newspaper market).
• Whether the product is a necessity or a luxury: necessary
products, such as medicines, tend to be more inelastic that
luxury products
• The proportion of income that the item will take up: a
product which takes up more of consumer’s income will tend
to be more elastic, such as salmon being more elastic that tuna
• The time period of any changes: price elasticity will increase
in the long term as customers will have longer to adjust their
consumption patterns.
Price Discrimination
Greater profit extracted from the less elastic
buyer
Generally means higher prices charged to less
elastic demanders
Always greater profits than a single price
Example: airline seats
Classifying markets: the degree of
competition
– number of firms (also buyers)
– freedom of entry to industry
– nature of product (product differentiation)
– nature of demand curve
The four market structures
– perfect competition
– monopoly
– monopolistic competition
– oligopoly
Features of the four market structures
Type of
market
Number
of firms
Freedom of
entry
Nature of
product
Examples
Implications for
demand curve
faced by firm
Perfect
competition
Very
many
Unrestricted
Homogeneous
(undifferentiated)
Cabbages, carrots
(approximately)
Horizontal:
firm is a price taker
Monopolistic
competition
Many /
several
Unrestricted
Differentiated
Builders,
restaurants
Downward sloping,
but relatively elastic
Undifferentiated
Cement
or differentiated
cars, electrical
appliances
Downward sloping.
Relatively inelastic
(shape depends on
reactions of rivals)
Oligopoly
Monopoly
Few
One
Restricted
Restricted or
completely
blocked
Unique
Local water
company, train
operators (over
particular routes)
Downward sloping:
more inelastic than
oligopoly. Firm has
considerable
control over price
Perfect Competition
• Assumptions
– firms are price takers (market sets prices)
– freedom of entry
– identical products
– perfect knowledge
Perfect competition
Benefits of perfect competition
– price equals marginal cost
– prices kept low
– firms must be efficient to survive
Disadvantages: Incompatibility of economies of
scale with perfect competition
Monopolistic Competition
Assumptions of monopolistic competition
Barriers to entry: high (lower than in monopolistic
system)
Prices less competitive (Non-price competition)
• The public interest
– comparison with perfect competition
– comparison with monopoly
Monopoly: a single seller of a product
exists and dominates the market
• Barriers to entry: Very high
• Monopolies are price makers (setters)
• Disadvantages
– high prices / low output
– lack of incentive to innovate, inefficiency
• Advantages
– economies of scale
– profits can be used for investment
– high profits encourage risk taking
Oligopoly:
market dominated by a few firms
Barriers to entry: High
Interdependence of firms: action of one firm affects
other firms
• Competition versus collusion
• Collusive oligopoly: cartels
Examples of media markets
• Monopoly: newspapers, cable television
• Oligopoly: television networks, motion
picture studios, recording industry
• Monopolistic competition: Magazines
• Perfect competition: possibly internet based
material