Monday, October 20, 2014

Why Definitions Matter, Part 2: Demand or Quantity Demanded?

Here is my second installment on economic/business descriptive definitions and why they matter.  The first was on "bubbles".  Arguing for that distinction earned me the "pedantic" accusation on twitter from @patrick_hruby but he is just wrong, both in context and in label-slinging.  These types of distinctions are critical to communication; without them, we must always begin a conversation with, "What do you mean by that?"  And that seems inefficient and potentially quite confusing for no real reason.

Demand or Quantity Demanded?

This is an old favorite of economics professors and, judging from treatment in the press, always will be.  Just look at the two carefully:  "Demand" versus "Quantity Demanded".  They do not look the same and for good reason:  They do not mean the same thing!

Let's think about "demand" and "quantity demanded" in terms of what might be a current problem for college sports ADs, the recent decline in student attendance at football games.

If attendance falls off due to bad scheduling or ever-more-enticing TV viewing, that's a decrease in Demand.  The language is reserved for a change in attendance even at the same price, where it follows that attendance has changed at all prices that could be charged.  Responses to this type of decrease are aimed at changing Demand back to its previous levels:  If an AD brings in more air shows, flying rocket man for the pre-game, more blaring video boards, more extravagant half-time programs, or alters a non-market imposition on rights to student tickets, that is an attempt to change the product so that attendance will rebound even at the same price.  Again, if fans respond, that would be an increase in Demand.

[My friend and colleague Stef Szymanski recently turns this distinction to extremely good use by pointing out that rising EPL ticket prices will not drive fans away...when they are rising because fan demand is increasing in the first place!]

On the other hand, an increase in Quantity Demanded would follow a ticket price reduction to bring fans back, more people will come through the gate (it may take a dramatic drop as this type of consumption goes, but return they will).  The language is reserved for only the response of ticket holders to a change in the price of their ticket.  As price falls, more tickets are purchased.

The distinction is important because confusing the two descriptive definitions leads to less clear assessment of AD choices.  For example, different ideas about what to do in the case of a decrease in demand are made to appear in conflict when they are not.  One group might argue, "Lower ticket prices"; another might argue "Make the fan experience better".  Both will get more people through the gate, but with different consequences.

The Quantity Demanded for college football attendance appears quite unresponsive to price.  In such a situation, reducing price will lead to an increase in Quantity Demanded of tickets, but will also decrease revenue.  Enhancing the fan experience will require increased spending, but at the same time will increase revenue (if successful), that is, attendance will increase even at the same ticket price, an increase in Demand.

Again, to the press and casual fellow travelers, please do everybody a favor and keep this straight.  The difference between Demand and Quantity Demanded matters for judging AD choices.

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