Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the January 7, 2010 Reuters article "U.S. airlines align to start new year with higher fares," Karen Jacobs and Deepa Seetharaman report U.S. consumers can expect to pay more for air travel in 2010.

Can you illustrate these changes in the market for air travel using supply and demand analysis?

Do these changes include (a) an increase in the supply of air travel, (b) a decrease in the supply of air travel, (c) an increase in the demand for air travel, or (d) a decrease in the demand for air travel?

Read the article below and then illustrate these changes in the market for air travel with a graph that shows the initial positions of the supply and demand for air travel and the new positions of the supply and demand curves. (Hint: Do both curves shift?) There is a link at the bottom that provides the answer.

ATLANTA/NEW YORK – If you thought U.S. airlines would reduce fares following a laundry list of new security rules after an attempt to blow up a U.S.-bound plane on Christmas day, you would be wrong.

Rising oil prices and signs that business travelers are gradually booking more flights has emboldened some U.S. airlines to ring in the New Year with higher ticket prices.

UAL Corp's United Airlines instituted a $6 to $10 domestic roundtrip fare increase on December 30 that was matched by other major carriers, according to FareCompare.com.

"Given the pressure on (airlines') bottom lines and if oil continues to rise, the pressure is going to be there to find additional sources of revenue," said Brian Clark, general manager of fly.com, an airfare search engine that is a unit of TravelZoo.

The post-holiday period is among the most lackluster for travel companies as the reopening of schools and cold weather discourages travel. The success of fare increases hinges on whether airlines can align to prop up prices.

Clark said current fares are less than 5 percent higher than a year earlier, while Rick Seaney, chief executive of FareCompare.com, noted that some pricing is back up to pre-2008 levels.

"I don't expect prices to go up dramatically, but I do expect them to increase incrementally," Seaney said, adding that he did not expect the latest security concerns to cause as much disruption for airlines as the 2009 H1N1 swine flu outbreak, which soured demand for travel to Mexico.

Seaney said U.S. airfares reached bottom at the end of May and early June as carriers sought to occupy seats in the weak economy, while international ticket prices touched the lowest point of their declines in late July and early August.

Airlines have been encouraged by signs that business demand was recovering from the deepest recession since the Great Depression. Executives at carriers such as AMR Corp's American Airlines and US Airways Group last month cited evidence that business demand was improving.

This week, Continental Airlines, which depends heavily on business traffic, estimated that its mainline unit revenue fell between 4.5 percent and 5.5 percent in December. In November, this measure fell 9.8 percent and in October, it dropped 15.2 percent.

"The trends are definitely up for business travel coming back," Seaney said. "But it's a slow trickle, it's not a quick jump."

Shares of major U.S. carriers rose on Thursday as oil prices pulled back. The Arca Airline index was up 2.3 percent in morning trading.

Delta Air Lines shares gained about 5 percent, while Continental, UAL and AMR were up more than 4 percent in late-morning trading.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the January 6, 2010 article "Cold grips much of US, Fla. races to save crops," Associated Press writer Melissa Nelson reports that freezing temperatures in Florida might destroy "millions of dollars' worth of strawberries and other crops."

Using the ceteris paribus assumption that ignores other potential changes, what is the likely effect on the market for strawberries if the freeze destroys the ones grown in Florida.

Is this change in the strawberry market (a) an increase in the supply of strawberries, (b) a decrease in the supply of strawberries, (c) an increase in the demand for strawberries, or (d) a decrease in the demand for strawberries? Will the equilibrium price of strawberries increase or decrease as a result of the damage from cold temperatures?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for strawberries and the new positions of the supply and demand curves. (Hint: Only one of the curves shifts.) There is a link at the bottom that provides the answer.

PENSACOLA, Fla. – A stubborn cold wave locked freezing temperatures in place across the central and eastern U.S. Wednesday as far south as Florida, where farmers worked to salvage millions of dollars' worth of strawberries and other crops.

Arctic air was expected to hover through the weekend. In a rare turn for the South, forecasters warned that snow and ice were possible Thursday from South Carolina to Louisiana and wind chills in the region could get down to near zero at night.

In central and south Florida, farmers were trying to salvage citrus and vegetable crops by spraying them in protective layers of ice and covering them in plastic. Florida Gov. Charlie Crist signed an executive order Wednesday that gave the state's Division of Emergency Management and other agencies the authority to provide farmers with assistance.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

Click on the image above to enlarge it.

In the January 6, 2010 Wall Street Journal article "Cramped on Land, Big Oil Bets at Sea," Ben Casselman and Guy Chazan report that oil companies exploring in deep ocean waters have discovered "unexpectedly large quantities of oil -- oil that only they have the technology and financial muscle to find and produce."

Using the ceteris paribus assumption that ignores other potential changes, what is the likely effect of this discovery on the market for oil?

Is this change in the oil market (a) an increase in the supply of oil, (b) a decrease in the supply of oil, (c) an increase in the demand for oil, or (d) a decrease in the demand for oil? Will the equilibrium price of oil increase or decrease as a result of these newly found oil reserves?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for oil and the new positions of the supply and demand curves. (Hint: Only one of the curves shifts.) There is a link at the bottom that provides the answer.

Big Oil never wanted to be here, in 4,300 feet of water far out in the Gulf of Mexico, drilling through nearly five miles of rock.

It is an expensive way to look for oil. Chevron Corp. is paying nearly $500,000 a day to the owner of the Clear Leader, one of the world's newest and most powerful drilling rigs. The new well off the coast of Louisiana will connect to a huge platform floating nearby, which cost Chevron $650 million to build. The first phase of this oil-exploration project took more than 10 years and cost $2.7 billion -- with no guarantee it would pay off.

Chevron came here, an hour-long helicopter ride south of New Orleans, because so many of the places it would rather be -- big, easily tapped oil fields close to shore -- have become off-limits. Western oil companies have been kicked out of much of the Middle East in recent decades, had assets seized in Venezuela and seen much of the U.S. roped off because of environmental regulations. Their access in Iran is limited by sanctions, in Russia by curbs on foreign investment, in Iraq by violence.

So, Chevron and other major oil companies are moving ever farther from shore in search of oil. That quest is paying off as these companies discover unexpectedly large quantities of oil -- oil that only they have the technology and financial muscle to find and produce.

In May, the first wells from Chevron's latest Gulf of Mexico project came online. The wells are now pumping 125,000 barrels of oil a day, making the project one of the gulf's biggest producers. In September, BP PLC announced what could be the biggest discovery in the gulf in years: a field that could hold three billion barrels.

Beyond the Gulf of Mexico, companies have announced big finds off the coasts of Brazil and Ghana, leading some experts to suggest the existence of a massive oil reservoir stretching across the Atlantic from Africa to South America. Production from deepwater projects -- those in water at least 1,000 feet deep -- grew by 67%, or by about 2.3 million barrels a day, between 2005 and 2008, according to PFC Energy, a Washington consulting firm.

The discoveries come as many of the giant oil fields of the past century are beginning to dry up, and as some experts are warning that global oil production could soon reach a peak and begin to decline. The new deepwater fields represent a huge and largely untapped source of oil, which could help ease fears that the world won't be able to meet demand for energy, which is expected to grow rapidly in coming years.

For oil companies, the discoveries mean something more: After a decade of retreat, large Western energy companies are taking back the lead in the quest to find oil. "A lot of people can get the very easy oil," says George Kirkland, Chevron's vice chairman. "There's just not a lot of it left."

There are challengers to Big Oil's deepwater dominance. Brazil recently has moved to give a larger share of its offshore oil to its state-run oil company, Petrobras. A handful of smaller companies, such as Anadarko Petroleum Corp. and Tullow Oil PLC, have had success offshore, particularly in Ghana, where giants like BP and Exxon Mobil Corp. are now playing catch-up.

The enormous investments of time and money required for such projects have made many experts skeptical that they can ease the long-term pressure on global oil supplies. The scale of the projects means that few smaller companies have the resources to take them on. Devon Energy Corp., an independent producer based in Oklahoma City, recently announced plans to abandon its deepwater-exploration business to focus on less-expensive onshore projects, which is says will produce a better return.

"This is technology capable of going to the moon," says Robin West, chairman of consulting firm PFC Energy, involving "extraordinary uncertainty, immense levels of information processing, staggering amounts of capital."

Offshore drilling is almost as old as the oil industry itself. In the 1890s, companies began prospecting for oil from piers extending off the beach near Santa Barbara, Calif. Gulf Oil drilled the world's first fully offshore well from cedar pilings on a shallow lake near Oil City, La., in 1911.

From there, the industry pushed gradually outward, from the Louisiana bayous in the 1920s into the Gulf of Mexico, where Kerr McGee drilled the first well out of sight of land in 1947.

The push into deeper water has come in the past decade.

"What has enabled us to do that is technology," says David Rainey, BP's head of exploration for the Gulf of Mexico. "We have been pushing the limits of seismic-imaging technology and drilling technology."

Perhaps a bigger reason for the recent emphasis on deepwater exploration is that companies had few other places to go. In the early decades of oil exploration, Western companies were the only ones with the technology to manage big oil projects. But as technology spread and state-run oil companies became more sophisticated, foreign governments have relied less on outside help and have demanded greater control of their own oil resources.

With a few exceptions, state-run companies have largely stayed out of the deep water, with its enormous technical challenges and multibillion-dollar investment requirements. Western companies have steadily pushed farther offshore, not just in the Gulf of Mexico but in places like Nigeria, Malaysia, Norway and Australia.

At the same time, traditional oil fields have begun to dry up. In Mexico, the world's seventh-largest oil producer, daily production has dropped 23% since 2004 as output from its giant Cantarell field fell sharply. Other countries have seen their own, mostly smaller, declines.

Falling output from old fields has stoked fears that world-wide production could be nearing its peak. Global oil reserves -- a measure of oil that has been found but not yet produced -- fell in 2008 for the first time in a decade, according to BP's annual statistical review. Moreover, there are signs demand could soon catch up to supply. Global oil consumption has risen by 5.4 million barrels a day in the past five years, while production has risen by just 4.8 million barrels a day.

Such fears helped drive a rapid run-up in oil prices to nearly $150 a barrel in July 2008. The global recession cooled demand, driving down prices, although many experts expect prices to rise again when the economy recovers. Already, prices have rebounded to about $80 a barrel, from under $35 in December 2008.

Rising prices have spurred offshore exploration. By 2008, about 8% of global oil production came from deepwater fields.

Yet even the biggest deepwater projects aren't enough to put a dent in global supply problems on their own. The world's largest deepwater platform, BP's Thunder Horse in the Gulf of Mexico, produces 250,000 barrels of oil a day, just 0.3% of global consumption.

"These discoveries are changing the debate," says Ed Morse, chief economist for LCM Commodities, a brokerage firm. What remains unclear, he says, is whether the deepwater projects will ensure that new discoveries continue to meet demand.

Many in the industry argue the new fields have expanded the limits of where the industry can find oil, potentially delaying a decline in global production.

"There are vast unexplored areas in deep water, so tremendous opportunities for growth," says Steven Newman, president of Transocean Ltd., which owns the Clear Leader rig.

The push into deeper water hasn't always been smooth sailing. Offshore projects are expensive, time-consuming and prone to failure. Chevron boasts of a 45% exploration overall success rate in recent years, a remarkable run by industry standards, but one that also means the company has spent billions on projects that haven't panned out.

Chevron's successes have outweighed its failures. It was expected to be the fastest-growing big oil company in 2009, as measured by oil production, in large part because of new offshore projects in the Gulf of Mexico and off Brazil. Other companies that have embraced offshore exploration, such as BP, are also seeing big growth, while those that haven't are scrambling.

Exxon, which hasn't emphasized deepwater exploration as much as competitors, recently offered $4 billion for a stake in an oil field off the coast of Ghana.

Chevron made its big offshore bet in the 1990s, when it began buying up leases in the Gulf of Mexico that were in such deep water, the technology didn't yet exist to drill there. Confident that technology would catch up, the company in 1996 bid in and won a U.S. government auction for the right to explore for oil in several areas of the gulf, in hopes that a fraction would turn into producing fields.

Chevron then spent six years analyzing its new holdings, figuring out which were most likely to hold oil. The key tool in its arsenal: seismic imaging, a sonar-like process in which sound waves are shot into the rock, and their echoes are picked up by sensors on the surface.

Adding to the challenge: The oil that Chevron was pursuing lay beneath a thick layer of salt, which disrupts seismic sound waves and blurs the images like a smudge on a camera lens. The company had to analyze the data with supercomputers to clear up that distortion.

The analysis revealed a potentially huge oil reservoir. Even so, Chevron estimated it had only a one-in-eight chance of finding commercial quantities of oil. The only way to know for sure was to drill.

So, in 2002, Chevron spent about $100 million to sink its first well in the field, which came to be known as Tahiti. That well needed to hit a 200-foot-long target from five miles away -- akin to hitting a dart board from a city block away.

"You have to roll the dice, and the dice roll now is north of $100 million," says Gary Luquette, president of Chevron's North American exploration and production division.

Chevron's first Tahiti well struck enough oil to make it worth more drilling to see how big the field might be. By 2005, the company had learned enough to go forward with the project. That required building a 700-foot-tall, 45,000-ton floating oil-production platform, and drilling a half dozen wells to feed oil to it. Tahiti produced its first commercial quantities of oil in May.

On a recent morning, the Clear Leader rolled on the waves 190 miles south of New Orleans, held almost perfectly in place by its satellite-controlled navigation system and six Korean-made engines.

In a cabin on the ship's deck, a team of drillers in coveralls monitored computer terminals as they used joysticks to control a drill bit more than 12,800 feet below. The oil they were targeting lay another 14,000 feet underground -- an easy reach for a ship that can drill down 7.5 miles.

The well is part of a second phase of the Tahiti project, which will require drilling several more wells and expanding the floating platform -- an additional $2 billion in spending, still with no guarantee of success.

Kevin Ricketts, a Chevron engineer who worked on both phases of the Tahiti project, recalled looking up at the massive platform while it was still on shore, and reflecting on how his team's analysis had led to its construction.

"I'd never seen anything that big," Mr. Ricketts said. "I thought, holy moly, our production forecast led to that thing being built. I sure hope we're right."

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the January 1, 2010 New York Times article "Next Up on Cable TV, Higher Bill for Consumers," Brian Stelter reports that cable TV companies are paying higher fees for the programs they broadcast.

Using the ceteris paribus assumption that ignores other potential changes, what is the likely effect on the market for cable TV if increasing numbers of networks demand higher fees from the cable companies in order to broadcast their programs?

Is this (a) an increase in the supply of cable TV, (b) a decrease in the supply of cable TV, (c) an increase in the demand for cable TV, or (d) a decrease in the demand for cable TV? Will the equilibrium price of cable TV increase or decrease as a result of cable TV companies paying higher fees for the programs they broadcast ?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for cable TV and the new positions of the supply and demand curves. (Hint: Does an increase in the costs of production shift the supply curve or the demand curve? Is it a shift to the right or left?) There is a link at the bottom that provides the answer.

The performances on “American Idol” may be erratic and the plot twists on “Lost” may be unpredictable, but one facet of television is certain: the costs just keep going up.

On New Year’s Day, the News Corporation, the media empire controlled by Rupert Murdoch, wrangled new payments from Time Warner Cable, including subscriber fees for the Fox Broadcasting network, which is free for viewers with over-the-air antennas.

The high-stakes deal reflected the scramble by media companies to reduce their dependence on advertising.

Something else also happened that day: Time Warner Cable put another rate increase into effect.

It will not be the last time. Along with Fox, other broadcasters say they deserve a share of the cable and satellite bills that roughly 100 million American households pay each month. At the same time, the cable-only channels that have lured viewers away from broadcast, with shows like “SpongeBob SquarePants” and “The Closer,” are lining up for further fee increases.

Viewers usually do not notice until the price goes up, but their pay TV bills are a battleground for media companies. “Content providers are testing the limits — hoping to raise the bar as high as possible,” said Steve Ridge, the president of the media strategy group for the consulting firm Frank N. Magid Associates.

These battles are playing out just as the television industry is coping with the wrenching changes brought on by new competition from the Internet.

Broadcasters have long envied the fact that their cable channel competitors are paid two ways, through advertising and subscriber fees. So now, the television networks are fighting for every penny they can.

Several years ago, CBS started asking for fees, and the News Corporation followed in negotiations last month, demanding a dollar for each subscriber every month from Time Warner Cable. The average digital cable customer already pays nearly $75 a month, the research firm Centris found last year.

The companies will not reveal what compromise they reached, but that figure will most likely become a benchmark for future deals. Disney is expected to ask for sizable fees for its ABC stations in negotiations this year.

In a twist, Comcast, the country’s largest cable provider, will soon own NBC Universal, if its acquisition is approved by the government, putting it in a position to pay out as well as collect fees for NBC.

Cable and satellite distributors are resisting the demands, but a “power shift,” as Mr. Ridge put it, is under way as broadband Internet becomes pervasive, putting a seemingly infinite variety of choices in front of consumers. Of course, broadband is not free, either, and it is often provided by the same companies that distribute television programming.

The News Corporation fight was unusual because it played out in public, with Time Warner Cable arguing that it wanted to hold the line on further fee increases. That looks impossible, however, as newly powerful cable channels seek to cash in.

They argue that they deserve more money for having invested millions in their original programming. Cable executives say privately that the demands, and resulting fights, are increasing in frequency. And every time they clash, there is a chance that viewers will miss out.

The sports network Versus, owned by Comcast, has been off of DirecTV’s satellite service for three months in a fee battle. More prominently, the Food Network and HGTV disappeared from Cablevision’s lineups in New York and New Jersey on Friday after talks broke down with the owner of the channels, Scripps Networks.

The Food Network costs distributors 8 cents a viewer on average now; Scripps wants a roughly 300 percent raise, according to people briefed on the negotiations. That might seem drastic, but 30 other channels, some with lower ratings, already earn that much. “We were really, really undervalued,” said Brooke Johnson, the president of the Food Network.

For ardent fans of “Iron Chef America,” the Food Network is undoubtedly worth 25 cents a month. But that logic, applied to dozens of channels, can become pretty expensive for viewers. For example, the owners of Oprah Winfrey’s cable channel, set to begin one year from now, are hoping that her star power will be worth 50 cents for each subscriber a month. The channel it is replacing, Discovery Health, gets only 12 cents now.

Consumers already pay dimes or quarters for most cable channels each month, whether they watch them or not. ESPN earns the most by far, $4.10 on average, and is forecast to receive more than $5 a month by 2012, according to the research firm SNL Kagan. Fox Sports Network gets $2.37 on average.

The next-highest paid channel, TNT, gets 96 cents. The Disney Channel, NFL Network, Fox News, USA and ESPN2 each get more than 50 cents. For every channel, the price per month is expected to rise each year.

“We hear from consumers that they are paying too much and getting too little for it. And there seems to be no end to the rate hikes in sight,” Mindy Spatt, a spokeswoman for The Utility Reform Network, said.

Even as consumers recover from the recession, there is little evidence that people are canceling cable en masse, although some know that calling up their local provider and threatening to cancel can quickly earn them a big discount.

Time Warner Cable is not alone in raising rates; higher prices go into effect for DirecTV and AT&T’s customers next month.

In Washington, where proposals for “à la carte” cable pricing were popular in recent years, some lawmakers and regulators now look to the Web as a more attractive, market-driven solution. Viewers will increasingly be able to bypass pay TV service and watch whatever they like online.

Distributors are trying to put a system into effect that will offer some TV shows online to existing subscribers only.

Time Warner Cable asserts that the power ultimately rests with the consumer. “They’re the ones who are going to resist these price increases that the programmers are trying to push,” said Alex Dudley, a spokesman for the company. “One need look no further than the music industry for an example of what happens when consumers feel taken advantage of by an entire industry.”

Lest anyone doubt that Americans, who watch an average of five hours of television a day, cannot part with their sets, look no further than Orange County, Fla., where two football fans sought an emergency injunction to avert a Fox blackout of their alma mater’s bowl game on Friday as the dispute with Time Warner Cable persisted. No one, not even Mr. Murdoch, was going to interrupt their viewing of the Sugar Bowl.

The fans lost the case but won their Fox, as the two companies committed to a new contract about 45 minutes before kickoff. Soon enough, though, those fans will be paying for it.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the October 1, 2009 article "Mets cutting season ticket prices 10-20 percent," Associated Press baseball writer Ronald Blum reports that ticket prices for Mets baseball games are decreasing for 2010.

Can you illustrate this price change in the market for Mets baseball tickets using supply and demand analysis?

Is the decrease in the price of tickets caused by (a) an increase in the supply of tickets to Mets baseball games, (b) a decrease in the supply of tickets to Mets baseball games, (c) an increase in the demand for tickets to Mets baseball games, or (d) a decrease in the demand for tickets to Mets baseball games?

Read the article below and then illustrate these changes in the market for tickets to Mets baseball games with a graph that shows the initial positions of the supply and demand for Mets tickets and the new positions of the supply and demand curves.

(Hint: Only one of the curves shifts. This article discusses the prices the Mets organization will charge. So this is not asking about the resale market. Have the Mets changed the number of seats in the stadium?)

There is a link at the bottom that provides the answer.

NEW YORK (AP)—Ticket prices are tumbling for the New York Mets, mirroring their performance on the field.

The Mets said Thursday they are cutting the price of 2010 season tickets by an average of at least 10 percent and in some categories more than 20 percent following a disappointing opening year at Citi Field.

“What happened on the field this year was certainly disappointing,” Mets executive vice president Dave Howard said. “We think it will prove to be an aberration. The injuries were so widespread and had such an impact. We’re confident we’ll come back healthy and better next year. But the economy is still a challenge and we just wanted to be as aggressive as we could in reducing the pricing.”

Picked by some to reach the World Series, the Mets were devastated by injuries to Carlos Delgado, Carlos Beltran, Jose Reyes, David Wright, Johan Santana, J.J. Putz and others. They head into the final weekend of the season with a 67-92 record, their worst since 2003.

In a sign that general manager Omar Minaya will return, the Mets mentioned him as part of rebuilding plans in an e-mail sent Thursday to season ticket holders announcing the price cut.

“You soon will hear from ownership and Omar about how we plan to improve the ballclub through a combination of player signings, trades, enhanced player development and continued commitment to one of the highest player payrolls in Major League Baseball,” the e-mail said.

While the Mets’ full-season equivalents increased 9 percent to about 25,000 this year, Howard said the Mets noticed which high-priced areas didn’t sell well, such as lower-deck seats behind the photo cages and first- and second-deck seats as they wrapped into the outfield. The team heads into its final series averaging nearly 39,000 fans per game at Citi Field, where the listed capacity is 41,800.

While the team will retain its five-tiered pricing structure next season, the mix will change. There were 34 platinum and gold games this year, up from 27, while the bronze and value dates decreased from 34 to 28.

“There will be a higher percentage of the bronze and value dates,” Howard said.

The Yankees announced two weeks ago that 84 percent of their seats will have the same price as part of season tickets next year, 13 percent will have a decrease and just 3 percent will have an increase—in the section just to each side of the premium seats in the second deck.

The cuts at Yankee Stadium are among their most expensive tickets, which run from $325 to $2,500 per game as part of season plans.

The Mets charge the same price for individual seats and season tickets. Their highest-priced seats averaged $495 per game this year and their cheapest seats averaged $19.

CLICK HERE FOR THE ANSWER. (Since the number of seats cannot be changed in the short term, one could argue that the supply curve for tickets is vertical. The attached graph does not show this.)

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the September 12, 2009 article "Airlines offer lightest fall schedules since 2001," Associated Press airlines writer David Koenig reports that the airline industry is reducing the number of flights because of "falling demand for air travel."

Can you illustrate these changes in the market for air travel using supply and demand analysis?

Do these changes include (a) an increase in the supply of air travel, (b) a decrease in the supply of air travel, (c) an increase in the demand for air travel, or (d) a decrease in the demand for air travel? What is happening to the equilibrium price of air travel as a result of these changes in the airline industry?

Read the article below and then illustrate these changes in the market for air travel with a graph that shows the initial positions of the supply and demand for air travel and the new positions of the supply and demand curves. (Hint: Do both curves shift?) There is a link at the bottom that provides the answer.

DALLAS – The U.S. airline industry is shrinking to a size not seen since the months after the 2001 terror attacks.

The airlines have been trimming flights for the past two years, matching the falling demand for air travel. Additional capacity cuts are under way at American, the nation's second-largest carrier, and at No. 3 United.

It could get worse.

Most big airlines depend heavily on a relatively small chunk of passengers who pay the highest fares, "and that's generally business travelers," says Robert Mann, an aviation consultant in Port Washington, N.Y. "If business travel doesn't rebound, we're going to see further (capacity) cuts."

Less capacity means consumers will be left with fewer flights to choose from and planes will be crowded. Fewer seats normally means higher fares but that might not happen this time unless the economy begins a true recovery and passenger traffic picks up.

Airlines measure capacity in "seat miles," the number of miles flown multiplied by the number of seats on the planes. Capacity is crucial in the airline industry in the same way that inventories matter to car dealers and retailers. Too much capacity, and airlines have to cut prices, just as a department store stuck with too many suits and dresses will hold a fire sale. Airlines cut capacity by reducing the number of flights or using smaller planes that carry fewer passengers.

The Air Transport Association, the trade group for big U.S. airlines, estimates that carriers will offer fewer than 12.5 billion seat miles in the U.S. in the fourth quarter. That's not much more than the low of 12.1 billion late in 2001, when airlines were reeling from the Sept. 11 terror attacks, and it's down 13 percent from the fourth quarter of 2000.

After such a steep decline in demand, airline executives and analysts are looking eagerly for any signs of improvement. About the best they can say is that things aren't getting much worse. Airline executives say business traffic is a bit better than it was in the spring but still far behind last year's pace.

David Swierenga, former chief economist for the Air Transport Association and now an airline consultant in Texas, said the decline in demands slows with each passing month.

"The economy has bottomed and is beginning to turn around. Carriers will sit tight and go with the (capacity) cuts they've already made," he says.

Hunter Keay, an analyst for Stifel Nicolaus & Co., also doesn't expect dramatic cuts beyond those already announced. If airlines cut more capacity, he says, it will be on international routes favored by business travelers.

Eventually the economy will recover and airlines will consider adding back service. In past recoveries, airlines added capacity quickly as they scrambled for market share. That created a glut of seats, leading to fare wars and more financial problems.

Aviation consultant Mann said that's because airlines are hooked on growth, which helps them spread out fixed costs.

"They always want to be in a growth mode," he says. "The problem is, you can be in a profitless growth mode too."

Darryl Jenkins, an airline consultant in Virginia, says this recovery will be different because the big carriers have been chastened by overly aggressive growth, high fuel prices and the recession. They've cut costs and don't want to undo those efforts by rushing to add back capacity.

This summer the airlines were busy, but weak fall bookings led them to offer deeply discounted fares to fill seats normally taken by business travelers. Southwest ran a sale with some seats as cheap as $30 each way on some routes.

Rick Seaney, the CEO of FareCompare.com, thinks the best of the fall sales are over. With airlines cutting capacity, and having sold many fall seats during the recent promotions, planes will be crowded.

"I can't imagine we'll see anything but firm pricing," Seaney said. "There are still some $99 coast-to-coast deals occasionally, but it's much more random."

During the recession, low-fare airlines such as JetBlue, AirTran and Southwest have done better than their bigger rivals. The discounters set the prices on many routes, and the network carriers generally match them.

Even Southwest, however, is shrinking about 6 percent this year, and has announced a slightly scaled-back schedule for early 2010.

Bill Owen, Southwest's chief scheduler, says the airline has been trimming unprofitable routes, but "If it's full of full-fare business travelers, we're not about to cut that flight."

JetBlue is bucking the industrywide contraction and will add capacity in the second half of the year. The New York-based airline caters to U.S. leisure travelers and has avoided the meltdown in international business travel. It picks targets for growth carefully — it's expanding in the Caribbean while shrinking on cross-country U.S. routes.

In setting capacity, JetBlue of course studies its own traffic but also keeps an eye on what competitors are doing. Robin Hayes, JetBlue's chief commercial officer, insists that the airline doesn't try to forecast the economy.

"These are plans we put in place back in the spring," he says of the expansion now taking place. "We take a long-term view, and we don't try to guess when the recession will end."

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the September 12, 2009 Milwaukee Journal Sentinel article "Airline competition driving down prices at Mitchell," Tom Daykin reports that airfares from Milwaukee have decreased recently.

Is the reduction in the price of Milwaukee airfares caused by (a) an increase in the supply of flights from Milwaukee, (b) a decrease in the supply of flights from Milwaukee, (c) an increase in the demand for flights from Milwaukee, or (d) a decrease in the demand for flights from Milwaukee?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for a seat on a flight from Milwaukee and the new positions of the supply and demand curves. (Hint: Only one of the curves shifts.) There is a link at the bottom that provides the answer.

With AirTran Airways and Southwest Airlines providing more competition, now is a good time to book a flight out of Milwaukee's Mitchell International Airport.

Fares for flights departing from Milwaukee this fall have dropped 20% compared with fall 2008, according to data compiled by Kayak.com.

Also, flights booked through Orbitz.com departing Milwaukee between the day after Labor Day and the Sunday before Thanksgiving are 21% cheaper than the same period last year.

But it gets even better, according to Simon Bramley, vice president of flights for Travelocity.com.

His numbers show that the average airfare for a Milwaukee departure is 16% less than the national average for January through October. But for the upcoming period from November through March, the average airfare for a Milwaukee departure will be 30% less than the national average.

"That's a pretty significant discount," Bramley said.

Not coincidentally, Southwest Airlines begins service in Milwaukee on Nov. 1. The discount carrier will offer 12 daily nonstop flights to Baltimore, Kansas City, Las Vegas, Phoenix, Orlando and Tampa, Fla.

"It's obviously true that when any new airline starts service in a city, prices drop," Bramley said.

While Southwest has built its business as a low-fare carrier, some of the big savings can be found on its rivals flying from Milwaukee, Bramley said. Some airlines offer flight and hotel packages that Southwest doesn't provide - providing another way to find a bargain, he said.

Even before Southwest announced its plans for Milwaukee, fares were dropping because AirTran, another discount carrier, was greatly expanding its service, said Bramley and Vaughn Cordle, an airline industry consultant.

"It was kind of a no-brainer" that Southwest and AirTran service expansions would drive down fares for Milwaukee travelers, said Cordle, who operates Airline Forecasts LLC.

Both AirTran and Southwest have been adding flights after Oak Creek-based Midwest Airlines cut service nationwide by around 40% last year.

As a result of those reductions, Midwest, long the dominant carrier in Milwaukee, saw its market share drop. Midwest, which in recent years had a market share of around 50%, had a 34% share in June, the latest month for which airport data was available.

AirTran in June had a 24% market share at Mitchell International.

Midwest was recently sold to Indianapolis-based Republic Airways Holdings Inc., which has restored service from Mitchell International to Los Angeles and Louisville, Ky., and plans to add more flights out of Milwaukee.

Meanwhile, travelers like Jim Fontanini are enjoying the savings.

Fontanini regularly travels from Milwaukee to St. Louis to see his girlfriend. He used to pay around $150 for a roundtrip flight on Midwest Connect, the Midwest Airlines commuter service. But Midwest dropped nonstop flights from Milwaukee to St. Louis last year, so Fontanini began to drive instead.

Fontanini lately has been finding cheap flights, including a $78 roundtrip ticket booked for October on American Airlines.

"I'm back to flying," he said.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In his September 9, 2009 blog entry "Apple sets stage for music event with iPod price cuts," Ben Patterson announces Apple is lowering the price of its iPod music players.

Is the reduction in the price of iPods caused by (a) an increase in the supply of iPods, (b) a decrease in the supply of iPods, (c) an increase in the demand for iPods, or (d) a decrease in the demand for iPods?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for iPods and the new positions of the supply and demand curves. (Hint: Both of the curves shift.) There is a link at the bottom that provides the answer.

Just hours before its "rock and roll" music event was set to kick off in San Francisco, Apple went ahead and chopped the price of its entire iPod Touch line by as much as $120. Also: price cuts for the Nano, Classic.

The 32GB iPod Touch—formerly $399, or a whopping $110 more than the upcoming 32GB version of the competing Zune HD—now sells for $279, a $120 discount that slightly undercuts the new Zune.

Meanwhile, the 16GB version of the Touch got a $50 price cut to $249—cheaper, but still $30 more than the 16GB Zune HD (which is slated to go on sale next week; check out my hands-on impressions). Finally, the 8GB Touch got a $40 haircut, to $189 from $229.

The iPod Touch wasn't the only iPod model to get a price cut. Apple also trimmed the price tag of its iPod Nano players by $50 for the 16GB version (was $199, now $149) and $20 for the 8GB device (was $149, now $129). Also cheaper: the venerable, 120GB iPod Classic, now $229 after a $20 price cut.

The discounts come amid rumors of new iPods with built-in cameras (which may or may not be unveiled later today), although there has been chatter (all unconfirmed) of manufacturing problems that may delay their release.

And then there's the touchscreen Zune HD, set for release Sept. 15, that boasts 720p HD video playback on an external HDTV with the help of an optional HDMI-enabled A/V dock. The Zune, of course, has a mighty big hill to climb before it can even begin to compete with iPod sales, but the Zune HD's price tags—$289 for the 32GB model, and $219 for the 16GB version—were considerably cheaper than those of the iPod Touch before today's price cut.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the September 5, 2009 article "Demand for electricity sputters and bills may fall," Associated Press energy writer Mark Williams reports that reduced demand for electricity may cause prices to fall.

Read the article below and then illustrate this market change with a graph that shows the initial positions of the supply and demand for electricity and the new positions of the supply and demand curves. (Hint: Only one of the curves shifts.) There is a link at the bottom that provides the answer.

COLUMBUS, Ohio – Consumers and businesses may finally be seeing some relief from rising utility bills, thanks to the biggest decline in U.S. electricity demand in decades.

Prices on wholesale markets are expected to decline for the rest of 2009, according to the Energy Information Agency. While rates will probably begin edging up again in 2010, it will likely be less than half the 6.2 percent jump recorded last year.
For decades as Americans bought more electronics, more appliances, air conditioners and other gizmos, energy demand has only moved in one direction and prices have followed suit.

The decline in power usage over the past year is a rarity and also an indication of how badly the recession has jolted the economy and changed the way Americans spend.

The shift began last year, when power consumption fell 1.6 percent. Government forecasters see consumption falling another 2.7 percent this year. That would mark the first time since 1949 that the nation has seen energy demand fall in consecutive years.

Given the broad apprehension over the economy, any money consumers can keep in their pockets may help.
"You might see a decrease in your bill or, at the very least, less of an increase. And these days that's not bad," said Charlie Acquard, executive director of the National Association of State Utility Consumer Advocates.

You can trace the shift from major industrial power users all the way back to individual consumers to see what has happened.
The number of unemployed Americans is nearing 15 million and prospects for the job market remain gloomy. Retailers just reported their 12th straight month of declining sales and many people are buying only what they must.

Power consumption by the industrial and manufacturing companies that make everything from cars to cotton swabs has fallen faster than anywhere else — 10 percent this year by government estimates. Industrial consumption fell about 20 percent in parts of the Midwest, Carolinas and the South during the second quarter, utilities say.

This pullback by some of the biggest energy users in the U.S. may provide a silver lining for millions of people and businesses in the form of declining or flattening utility bills.

The recession has suppressed demand for coal, natural gas and oil. This has sent a ripple through wholesale electric markets, where fossil fuels are turned into energy.

In the PJM wholesale market that coordinates prices in all or parts of 13 states in the eastern half of the country, prices are down about 40 percent from a year ago.

The weather is helping as well. After a very mild summer in which it made more sense to open the windows of your home rather than crank up the air conditioning, most meteorologists see a relatively warm winter on the way.

How much of a break you get in your bill, if any, and for how long comes down to where you live.

If you reside in the Northeast, West or in a central state like Texas where rates are based on spot prices, you stand a good chance of getting some relief.

Customers in more regulated markets or in spots where utilities calculate bills based on long-term contracts will not benefit so much. In those markets, rates tend to be more stable.

In Texas, about 250,000 of the 2.2 million customers of TXU Energy saw monthly rates fall 15 percent in August. In the Washington, D.C. area, prices for Pepco's 750,000 customers are up this summer.

The difference is that TXU buys power based off spot natural gas prices, down about 80 percent in the past year; Pepco buys power on wholesale markets with a three-year time horizon that is designed to eliminate roller-coaster like swings in prices.
"Nobody wants that when you're budgeting energy for home or business," Pepco spokesman Clay Anderson said.

He expects prices to begin dropping gradually.

If you are getting a break from your power provider already, enjoy it while you can. There are many factors that affect your bill and most of them tend to drive it higher.

A rebounding economy will certainly give energy prices a boost.

What's more, the U.S. power infrastructure is aging and new plants and transmission lines must be built or replaced. That is going to cost businesses and consumers in the years ahead.

The big wild card is the legislation pending in Congress that may require utilities to cut emissions of carbon dioxide to address global warming. Utilities, especially those that rely on coal, will spend tens of billions of dollars to come up with ways to remove carbon dioxide from emissions.

They are going to want to recoup some of those costs. Customers will feel it in their wallets when they do.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the September 1, 2009 article "BP Makes `Giant´ Oil Find in Gulf of Mexico," Tom Bergin explains that the discovery of new oil reserves in the Gulf of Mexico may affect the future price of oil. Using the ceteris paribus assumption that ignores other potential changes, what is the likely effect of this discovery on the market for oil?

Is this change in the oil market (a) an increase in the supply of oil, (b) a decrease in the supply of oil, (c) an increase in the demand for oil, or (d) a decrease in the demand for oil? Will the equilibrium price of oil increase or decrease as a result of these newly found oil reserves?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for oil and the new positions of the supply and demand curves. (Hint: Only one of the curves shifts.) There is a link at the bottom that provides the answer.

LONDON (Reuters) - Oil major BP Plc said it has made an oil discovery in the Gulf of Mexico, which analysts believe could contain over 1 billion barrels of recoverable reserves, reaffirming the Gulf's strategic importance to the industry.

BP said in a statement on Wednesday that it had made the "giant" find at its Tiber Prospect in the Keathley Canyon block 102, by drilling one of the deepest wells ever sunk by the industry.

Further appraisal will be required to ascertain the size of volumes of oil present, but a spokesman said the find should be bigger than its Kaskida discovery which has over 3 billion barrels of oil in place.

Estimates of recoverable reserves range from around 20 percent of oil in place.

"Assuming reserves in place of 4 billion barrels and a 35 percent recovery rate, BP's proven reserves .. would rise by 868 million barrels -- equivalent to 4.8 percent of the group's 18.14 billion barrels of proven reserves," Aymeric De-Villaret, oil analyst at Societe Generale said in a research note.

BP, the biggest oil producer in the U.S. and biggest leaseholder in the Gulf of Mexico, has a 62 percent working interest in the block, while Brazilian state-controlled Petrobras owns 20 percent and U.S. oil major ConocoPhillips owns 18 percent.

Iain Armstrong, analyst at Brewin Dolphin, said the discovery may have implications for long-term oil prices.

"It will ease concerns about peak oil because it shows there is life left in these mature areas," he said, adding that it could be the second half of the next decade before the find is producing.

The discovery also bodes well for other exploration in that part of the Gulf of Mexico, including at Royal Dutch Shell's nearby Great White field, Jason Kenny, oil analyst at ING in Edinburgh, said.

BP shares, which had been trading slightly down ahead of the statement, closed up 4.3 percent at 541 pence, outperforming a 1.75 percent rise in the DJ Stoxx European oil and gas sector index.

The Gulf of Mexico has become increasingly important to Western oil majors as oil rich-countries such as Saudi Arabia, Venezuela and Russia reserve their richest fields to be developed by their state-owned oil companies.

The Gulf is especially attractive because it offers high profit margins, due to relatively low taxation compared to countries such as Russia and Nigeria, and because of the low political risk.

As nearer-shore discoveries dry up, companies have pushed further out to sea, which has forced them to develop new technologies to detect and extract the oil.

The prospects for massive discoveries in the deep water of the Gulf of Mexico is also good news for U.S. politicians' ambitions to reduce the country's reliance on imported oil, although oil executives doubt the U.S. is capable of becoming self sufficient in oil.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the January 3, 2008 article "Freak Florida Freeze Drives Up Orange Juice Prices," Dan Shapley explains that when freezing temperatures damage Florida orange groves, the price of orange juice increases.

Is the increase in the price of orange juice caused by (a) an increase in the supply of orange juice, (b) a decrease in the supply of orange juice, (c) an increase in the demand for orange juice, or (d) a decrease in the demand for orange juice?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for orange juice and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

The threat of a frost damaging enough to devastate Florida's citrus crop sent the price of orange juice soaring on the commodities market Wednesday. Strawberry growers were also particularly worried, as the short growing season would end before a frost-damaged crop might recover, according to The St. Petersburg Times.

The impact of the frost was still being assessed Thursday.

The Arctic blast threatened to bring record-low temperatures, or at least the lowest temperatures seen in decades, to parts of Florida, the nation's biggest fruit producer. By this weekend, however, it will be sunny and 70 degrees.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

The article "Texas Cattlemen v. Oprah Winfrey" provides a summary of the 1998 trial in which Texas cattlemen sued Oprah Winfrey for causing them financial harm in 1996. Was the decrease in the price of beef after the airing of Oprah's television show caused by (a) an increase in the supply of beef, (b) a decrease in the supply of beef, (c) an increase in the demand for beef, or (d) a decrease in the demand for beef?

Read the article below and then illustrate this price change with a graph that shows the initial positions of the supply and demand for beef and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

Significance: The ruling in this case reaffirmed the right of a person to freely speak his or her opinion without fear of prosecution. Also, it was determined that beef does not qualify as perishable food under the Texas False Defamation of Perishable Food Products law. (The law is commonly known as the "veggie libel" law.)
Oprah Winfrey's talk show has covered many controversial topics since her national television debut in 1984. "Dangerous Foods" aired on April 16, 1996, and focused, among other things, on the potential risk of contracting "Mad Cow" disease in America.

This was prompted in part by a recurrence of the disease in Europe, where it had previously manifested in the 1980's. Howard Lymans, a vegetarian activist, said there was a high potential for contracting of the disease, because cattlemen routinely feed ground animal parts to cattle. Winfrey, upon hearing this, declared the information "Stopped (her) cold from eating another burger."

Beef prices fell after the show's airing, and did not rise again for two weeks. Texas rancher Paul Engler was displeased with the statement and the show and deemed the statement "incorrect" and "negative." He claimed to have lost seven million dollars after the show aired. Engler and several other cattlemen claimed a collective loss of more than $12 million under the Texas law which holds people liable for falsely disparaging food products. The federal lawsuit is regarded as the biggest test to date of the so-called "veggie libel" laws. It was determined that the farmers didn't have a case under the "veggie libel" law, so the case was decided solely on the business disparagement law. This required them to prove that Oprah had acted with actual malice.

On February 26, 1998, almost two months after the trial began, the jury decided the case in favor of Oprah Winfrey. They determined that her statements did not constitute libel against the cattlemen. After the trial Winfrey said, "FREE SPEECH NOT ONLY LIVES, IT ROCKS!" The Texas Cattlemen's Association is appealing the verdict.

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If you have an interest in reading more about this incident, here are some other accounts:
http://www.vegsource.com/lyman/lawsuit.htm
http://www.madcowboy.com/01_BookOP.000.html
http://www.pbs.org/newshour/bb/law/jan-june98/fooddef_1-20.html
http://www.cnn.com/US/9802/26/oprah.verdict/
http://www.extension.iastate.edu/agdm/articles/hayenga/Hay%20Aug98.htm

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the August 30, 2009 article "As hybrid cars gobble rare metals, shortage looms," Steve Gorman explains that the increasing popularity of hybrid automobiles is affecting the market for rare earth metals. What is the likely effect of this? Will the price of rare earth metals increase or decrease? How will this affect the market for hybrid cars?

Part One: The Market for Rare Earth Metals

According to the article, is there (a) an increase in the supply of rare earth metals, (b) a decrease in the supply of rare earth metals, (c) an increase in the demand for rare earth metals, or (d) a decrease in the demand for rare earth metals?

Read the article and then illustrate this change with a graph that shows the initial positions of the supply and demand for rare earth metals and the new positions of the supply and demand curves. Have both curves shifted? Or has there been a shift in only one curve? There is a link after the article (below) that provides the answer.

LOS ANGELES (Reuters) – The Prius hybrid automobile is popular for its fuel efficiency, but its electric motor and battery guzzle rare earth metals, a little-known class of elements found in a wide range of gadgets and consumer goods.

That makes Toyota's market-leading gasoline-electric hybrid car and other similar vehicles vulnerable to a supply crunch predicted by experts as China, the world's dominant rare earths producer, limits exports while global demand swells.

Worldwide demand for rare earths, covering 15 entries on the periodic table of elements, is expected to exceed supply by some 40,000 tonnes annually in several years unless major new production sources are developed. One promising U.S. source is a rare earths mine slated to reopen in California by 2012.

Among the rare earths that would be most affected in a shortage is neodymium, the key component of an alloy used to make the high-power, lightweight magnets for electric motors of hybrid cars, such as the Prius, Honda Insight and Ford Focus, as well as in generators for wind turbines.

Close cousins terbium and dysprosium are added in smaller amounts to the alloy to preserve neodymium's magnetic properties at high temperatures. Yet another rare earth metal, lanthanum, is a major ingredient for hybrid car batteries.

Production of both hybrids cars and wind turbines is expected to climb sharply amid the clamor for cleaner transportation and energy alternatives that reduce dependence on fossil fuels blamed for global climate change.

Toyota has 70 percent of the U.S. market for vehicles powered by a combination of an internal-combustion engine and electric motor. The Prius is its No. 1 hybrid seller.

Jack Lifton, an independent commodities consultant and strategic metals expert, calls the Prius "the biggest user of rare earths of any object in the world."

Each electric Prius motor requires 1 kilogram (2.2 lb) of neodymium, and each battery uses 10 to 15 kg (22-33 lb) of lanthanum. That number will nearly double under Toyota's plans to boost the car's fuel economy, he said.

Toyota plans to sell 100,000 Prius cars in the United States alone for 2009, and 180,000 next year. The company forecasts sales of 1 million units per year starting in 2010.

As China's industries begin to consume most of its own rare earth production, Toyota and other companies are seeking to secure reliable reserves for themselves.

Reuters reported last year that Japanese firms are showing strong interest in a Canadian rare earth site under development at Thor Lake in the Northwest Territories.

A Toyota spokeswoman in Los Angeles said the automaker would not comment on its resource development plans. But media accounts and industry blogs have reported recently that Toyota has looked at rare earth possibilities in Canada and Vietnam.

CLICK HERE FOR THE ANSWER TO PART ONE: THE MARKET FOR RARE EARTH METALS

Part Two: The Market for Hybrid Cars

What affect will this have on the market for hybrid cars? Will a change in the price of rare earth metals affect the supply or demand for hybrid cars? (Hint: Does a change in the cost of inputs affect the supply or demand of a product?)

Will the change in the price of rare earth metals cause (a) an increase in the supply of hybrid cars, (b) a decrease in the supply of hybrid cars, (c) an increase in the demand for hybrid cars, or (d) a decrease in the demand for hybrid cars?

Can you illustrate this change with a graph that shows the initial positions of the supply and demand for hybrid cars and the new positions of the supply and demand curves. Have both curves shifted? Or has there been a shift in only one curve? The link below provides the answer.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the August 26, 2009 article "Diplomats Help Boost Rates at World's Most Expensive Hotels" Tara Loader Wilkinson explains that in the midst of the recession, some of the world's most expensive hotels are raising the prices of their luxury suites. Is this increase in the price of renting a luxury hotel room caused by (a) an increase in the supply of luxury hotel rooms, (b) a decrease in the supply of luxury hotel rooms, (c) an increase in the demand for luxury hotel rooms, or (d) a decrease in the demand for luxury hotel rooms?

Read the article and then illustrate this price change with a graph that shows the initial positions of the supply and demand for luxury hotel rooms and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

Amid the recession, rock stars, diplomats and other celebrities find solace from the doom and gloom by spending their time in sanctuary provided by the world's most luxurious, and expensive, hotels. While many of us are tightening our belts, shortening our summer holidays or even abandoning them, hoteliers to the rich and famous claim to have no trouble filling their most exclusive accommodations, and in the case of the most expensive suite in the world, managing to double its rate to $65,000 (€45,642) a night.

In an annual survey by Financial News' sister publication Wealth Bulletin, the Royal Penthouse Suite at the President Wilson Hotel in Geneva, Switzerland, tops the list as the most expensive hotel room in 2009, commanding $65,000 for its four-bedroom penthouse -- twice as much as patrons paid a year ago for its luxurious setting and views of Lake Geneva and Mont Blanc.

The hotel's management puts the rise down to "buoyant demand" from government officials and U.N. diplomats.

Last year's winner, the iconic Ty Warner Penthouse at the Four Seasons Hotel in New York, came second this time, at $35,000, $1,000 up from last year.

New entries this year were the third-placed Presidential Suite at the Hotel Cala di Volpe in Sardinia, the Villa La Cupola Suite at the Westin Excelsior in Rome and the Presidential Suite at the Ritz-Carlton in Tokyo.

Despite the past year's financial and economic turmoil, prices at the best hotel suites have risen by an average of 10% this year. Herbert Ypma, founder of the Hip Hotels brand, said: "The very high end hasn't suffered all that much. A lot of hotels used to having upmarket clientele are getting the benefit of them taking far more time off than usual -- so they have more time to stay in hotels. Money was never the issue, time was."

Hoteliers said that although the number of business travellers has fallen in the past year, government officials have taken their place in the best rooms and suites.

President Barack Obama and his entourage took over the entire Ritz-Carlton Hotel in Moscow for three nights in June. The President Wilson Hotel said heads of state and other high-level government officials are fuelling demand for its hugely expensive Royal Penthouse Suite.

Vivian Deuschl, spokeswoman for Ritz-Carlton Hotels, said demand is also coming from wealthy leisure travellers: "Last year they might have taken three or four cheaper holidays. This year they are taking one big vacation, but pulling out all the stops."

The 10 most expensive hotel suites according to Wealth Bulletin's survey for 2009 are:

1. The Royal Penthouse Suite, President Wilson Hotel, Geneva -- $65,000 per night

Complete with a cocktail lounge, the Royal Penthouse Suite at the President Wilson is so exclusive that bookings reportedly have to be made through the hotel's chairman. The suite occupies the entire top floor of the hotel. It is reached by a private elevator, has four bedrooms overlooking Lake Geneva and Mont Blanc and comes with six bathrooms. Equipped with bulletproof windows and doors, it is almost exclusively reserved for celebrities or state heads, ideal with the United Nations headquarters a five-minute drive away.

2. Ty Warner Penthouse, Four Seasons Hotel, New York -- $35,000 per night

Business at the Ty Warner Penthouse at the Four Seasons Hotel in New York has remained as buoyant as when the suite opened in 2007, according to a spokeswoman. The nine-room suite has walls inlaid with thousands of pieces of mother-of-pearl. There is an indoor-outdoor Zen garden, a private spa room with a screen of living bamboo and a book-lined library, which has a grand piano at its centre.

3. The Presidential Suite, Hotel Cala di Volpe, Costa Smeralda, Sardinia -- $34,000 per night

The Presidential Suite at Hotel Cala di Volpe near Porto Cervo, averages around $34,000 a night, although during the peak summer season will cost as much as $45,000. Located in the hotel tower, the multi-level Presidential Suite sprawls across 2,500 sq ft and has three bedrooms, three bathrooms, a private gym, a steam room and a wine cellar. It is crowned by a rooftop terrace with an outdoor saltwater swimming pool.

4. Villa La Cupola Suite, Westin Excelsior, Rome -- $31,000 per night

Villa La Cupola Suite in Rome's Westin Excelsior embodies all things Roman and excessive: a cupola, a Pompeii-style Jacuzzi, frescoes and stained glass windows detailing allegories of a mythological figure paired with a modern one, such as Atlas and Television, Hypnosis and Neurosis, Hermes and Marketing and Hermaphrodite and Fashion. Located on the fifth and sixth floors, the suite covers 6,099 sq ft and has an additional 1,808 sq ft of balconies and terraces overlooking Via Veneto.

5. The Presidential Suite, Ritz-Carlton Tokyo -- $25,000 per night

The Presidential Suite, on the top floor of the city's tallest building, has spectacular views of Mount Fuji and Roppongi Hills, as well as an expansive vista of Tokyo's impressive cityscape. It occupies 2,368 sq ft. For refreshments, guests may enjoy the $18,000 Diamonds-Are-Forever Martini, which comes with a one-karat Bulgari diamond at the bottom.

6. The Bridge Suite, The Atlantis, Bahamas -- $22,000 per night

The 10-room Bridge Suite is actually a bridge spanning the two towers of the Atlantis Hotel. The 23rd-floor suite is decked with marble floors, a grand piano and a 22-carat gold chandelier. It was known in former times as "the Michael Jackson Suite" because of his regular stays. Prices have come down from $25,000 last year and fees are negotiable. Nevertheless, the suite is so exclusive the hotel does not even advertise it.

7. The Imperial Suite, Park Hyatt Vendôme, Paris -- $20,000 per night

The Imperial Suite at the Park Hyatt in Paris provides guests with an "in-suite-spa" concept -- with the bathroom/spa comprising a whirlpool bath, a steam shower room and a massage table. The 2,500 sq ft penthouse suite has a huge living room, a dining room, a kitchen and a work area.

8. Royal Suite, Burj Al Arab, Dubai -- $19,600 per night

Since it was built in the mid-1990s, the Burj Al Arab has become one of the world's most instantly recognizable hotels with its billowing sail-like structure stretching out on an artificial island into the Gulf of Arabia. The Royal Suite on the 25th floor has a marble-and-gold staircase, leopard print carpets, its own private lift and a rotating four-poster canopy bed.

9. Royal Armleder Suite, Le Richemond, Geneva -- $18,900 per night

The Royal Armleder Suite at the Le Richemond Hotel is named after the wealthy family who used to own the famous hotel before Rocco Forte bought it in August 2004. The three-bedroom suite, which stretches over 2,500 sq ft on the seventh floor, has a 1,000 sq ft terrace with panoramic views of Lake Geneva, a real log fire and floor-to-ceiling bulletproof windows. Olga Polizzi, Rocco Forte's sister and well-known hotel interior designer, designed the suite.

10. The Ritz-Carlton Suite, The Ritz-Carlton, Moscow -- $16,500 per night

To stay at the best suite in Moscow's Ritz-Carlton would cost around $16,000 a night -- $500 less than last year. Furnished in Russian imperial style, the 2,370 sq ft suite has views of famous Moscow sites including the Kremlin and Red Square. The suite comes with that necessity for the security-conscious Russian billionaire -- a panic room with its own energy and telecommunications facilities.

Research for this survey was compiled during mid-August. Prices are rate per night including taxes.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

Toward the end of the August 24, 2009 article "Attack on Obama riles Beck's advertisers," Associated Press television writer David Bauder suggests that the price of an advertisement on Glenn Beck's television program is likely to decline in the near future. Is this change in the price of a TV commercial during Glenn Beck's show caused by (a) an increase in the supply of ads during Beck's show, (b) a decrease in the supply of ads during Beck's show, (c) an increase in the demand for ads during Beck's show, or (d) a decrease in the demand for ads during Beck's show.

Read the article and then illustrate this price change with a graph that shows the initial positions of the supply and demand for ads of Glenn Beck's television show and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

NEW YORK – Glenn Beck returns to Fox News Channel on Monday after a vacation with fewer companies willing to advertise on his show than when he left, part of the fallout from calling President Barack Obama a racist.

A total of 33 Fox advertisers, including Wal-Mart Stores Inc., CVS Caremark, Clorox and Sprint, directed that their commercials not air on Beck's show, according to the companies and ColorofChange.org, a group that promotes political action among blacks and launched a campaign to get advertisers to abandon him. That's more than a dozen more than were identified a week ago.

While it's unclear what effect, if any, this will ultimately have on Fox and Beck, it is already making advertisers skittish about hawking their wares within the most opinionated cable TV shows.

The Clorox Co., a former Beck advertiser, now says that "we do not want to be associated with inflammatory speech used by either liberal or conservative talk show hosts." The maker of bleach and household cleaners said in a statement that it has decided not to advertise on political talk shows.

The shows present a dilemma for advertisers, who usually like a "safe" environment for their messages. The Olbermanns, Hannitys, O'Reillys, Maddows and Becks of the TV world are more likely to say something that will anger a viewer, who might take it out on sponsors.

They also host the most-watched programs on their networks.

"This is a good illustration of that conundrum," said Rich Hallabran, spokesman for UPS Stores, which he said has temporarily halted buying ads on Fox News Channel as a whole.

Beck can bring the eyeballs. With the health care debate raising political temperatures, his show had its biggest week ever right before his vacation, averaging 2.4 million viewers each day, according to Nielsen Media Research.

He was actually on another Fox show July 28 when he referred to Obama as a racist with "a deep-seated hatred for white people." The network immediately distanced itself from Beck's statement, but Beck didn't. He used his radio show the next day to explain why he believed that. He would not comment for this article, spokesman Matthew Hiltzik said.

ColorofChange.org quickly targeted companies whose ads had appeared during Beck's show, telling them what he had said and seeking a commitment to drop him. The goal is to make Beck a liability, said James Rucker, the organization's executive director.

"They have a toxic asset," Rucker said. "They can either clean it up or get rid of it."

It's not immediately clear how many of the companies actually knew they were advertising on Beck's show. Sometimes commercial time is chosen for a specific show, but often it is bought on a rotation basis, meaning the network sprinkles the ads throughout the day on its own schedule. Sometimes ads appear by mistake; Best Buy said it bought commercial time for earlier in the day, and one of its ads unexpectedly appeared in Beck's show.

One company, CVS Caremark, said it advertises on Fox but hadn't said anything about Beck. Now it has told its advertising agency to inform Fox that it wanted no commercials on Beck.

"We support vigorous debate, especially around policy issues that affect millions of Americans, but we expect it to be informed, inclusive and respectful," said spokeswoman Carolyn Castel.

Besides the unpredictability of the opinionated cable hosts, the rapid pace of today's wired world complicates decisions on where to place ads, said Kathleen Dunleavy, a spokeswoman for Sprint. She said she was surprised at how fast the Beck issue spread across social media outlets and how quickly advertiser names were attached to it.

UPS' Hallabran said the decision to pull commercials "should not be interpreted as we are permanently withdrawing our advertising from Fox." He said the company wants to reach viewers with a wide spectrum of opinions.

Except for UPS Stores, there's no evidence that any advertisers who say they don't want to be on Beck's show are leaving Fox. Network spokeswoman Irena Briganti said the companies have simply requested the ads be moved elsewhere and that Fox hasn't lost any revenue.

She wouldn't say whether Fox was benefiting from any anti-anti-Beck backlash, with companies looking to support him. Some Beck supporters have urged fans to express their displeasure at companies for abandoning their man.

Beck supporters have suggested that retaliation might have something to do with ColorofChange.org's campaign. One of the group's founders, Van Jones, now works in the Obama administration and has been criticized by Beck. But Rucker said Jones has nothing to do with ColorofChange.org now and didn't even know about the campaign before it started.

Beck's strong ratings — even at 5 p.m. EDT he often outdraws whatever CNN and MSNBC show in prime-time — make it unlikely Beck is going anywhere even as the list of advertisers avoiding him approaches three dozen.

But it could mean advertising time becomes cheaper on his show than such a large audience would normally command. Some of his show's advertisers last week included a male enhancement pill, a law firm looking to sue on behalf of asbestos victims, a company selling medical supplies to diabetics and a water filter company.

Rucker said ColorofChange.org has contacted about 60 companies regarding Beck, and is heartened by the response.

"It's causing a certain conversation around Beck, which I think is important," he said.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

According to the August 21, 2009 article "Analysts: Without price cuts, Wii could be in trouble," Ben Silverman reports a change in the price of the Playstation 3 gaming system will affect the market for the Nintendo Wii game console. Will this decrease in the price of the Playstation 3 cause (a) an increase in the supply of the Nintendo Wii, (b) a decrease in the supply of the Nintendo Wii, (c) an increase in the demand for the Nintendo Wii, or (d) a decrease in the demand for the Nintendo Wii? Read the article and then illustrate the change in the market for the Nintendo Wii with a graph that shows the initial positions of the supply and demand for the Nintendo Wii and the new positions of the supply and demand curves. (Hint #1: Only one of the curves has shifted. Hint #2: Does a change in the price of a substitute good affect the supply or demand for a product?) There is a link at the bottom of this posting that provides the answer.

Thanks to months of rumors, Sony might not have shocked the gaming world by finally dropping the price of the Playstation 3 last week. But with a fresh, $299 model en route to retailers, they've certainly changed the face of the console war.

And according to multiple analysts, the company with the most to lose is none other than Nintendo and its market-leading Wii.

Game site Gamasutra checked in with a group of industry experts to get a glimpse into the post-PS3 price-cut future. The consensus? At $299, both the Xbox 360 and the PS3 are in perfect position to make some serious gains on Nintendo's Wii, which is the only system yet to see a price cut and is currently available at the suddenly not-so-bargain price of $250.

"I think that they may see sales suffer, and certainly will see sales down year-over-year," says oft-quoted Wedbush Morgan analyst Michael Pachter. "So we have to see if they cut, unbundle and cut, or rebundle (with Wii Sports Resort plus Wii Motion Plus). They’re hard to figure out."

His thoughts were echoed by Kaufman Bros. Todd Mitchell, who notes that Nintendo is "struggling to keep the Wii relevant."

Jesse Divnich from EEADR concurs. "While the target audience for the two platforms varies greatly, some consumers will face a tough decision to purchase the Wii with outdated processing power or the PlayStation 3 with a built-in Blu-Ray player," he says.

Earlier this month, however, Nintendo boss Satoru Iwata insisted that a Wii price cut simply wasn't on the radar, leaving consumers to wonder exactly what Nintendo is planning to do to combat the gains made by its rivals.

Whatever they do, they’d better do it quickly. Based on a chart-topping flood of pre-orders on both the US and UK versions of its site, Amazon is already warning consumers to expect shortages of the forthcoming PS3 Slim and has limited sales to one per household.

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Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the August 20, 2009 story "Fall airfare sales cutting deeper than usual," Associated Press writer Joshua Freed talks about airlines cutting airfares. Is this change in the price of air travel caused by (a) an increase in the supply of air travel, (b) a decrease in the supply of air travel, (c) an increase in the demand for air travel, or (d) a decrease in the demand for air travel? Read the article and then illustrate this price change with a graph that shows the initial positions of the supply and demand for air travel and the new positions of the supply and demand curves. (Hint: Only one of the curves has shifted.) There is a link at the bottom of this posting that provides the answer.

MINNEAPOLIS – Airlines are cutting fares deeper than usual this fall in an effort to fill seats.

American and Southwest both launched fare sales this week, and United is running several sales, too.

While it's common for airlines to use discounts to fill planes during the slower fall travel months, the discounts this year are deeper and more widely available than last fall, said FareCompare.com CEO Rick Seaney.

"The prices we're seeing now are just absolutely superb" compared with this time last year, he said. They're still a little above the fares airlines were offering over the winter and spring when demand was in a free-fall, he said.

Business travelers, the most profitable for airlines, have been staying home for months as companies cut travel back to only the most essential flying. Steep discounts kept leisure travelers in the air through the summer, though at prices that often don't cover the cost of the flight. Still, airlines are better off flying at a loss than parking the plane and incurring what would often be an even bigger loss.

Cheap seats are easier to get under some of the sales than others.

The sale by Southwest Airlines Co. applies to flights from Sept. 9 through Jan. 7, but sale fares aren't available on Fridays or Sundays. And it blacked-out flights around Thanksgiving — Nov. 24 through Dec. 1 — and near Christmas and New Year's Day — Dec. 18 through Jan. 4. Tickets must be purchased by Sept. 3. Some seats are as cheap as $59 each way plus taxes.

UAL Corp.'s United, meanwhile, is running several sales, with fares for travel between Chicago and Houston for $102 each way, and travel between Atlanta and Denver for $109 each way. Tickets have to be purchased by Tuesday for travel by Dec. 16.
Another sale covered Washington Dulles to several East Coast cities for travel through Nov. 18. Tickets must be purchased by Friday. Both sales are valid only for travel on Tuesday, Wednesday, or Saturday.

The sale by AMR Corp.'s American covered flights between New York and five other cities: Miami, Chicago, Dallas-Fort Worth, San Francisco, and Los Angeles.

The New York to California flights were $109 each way, a number that caught Seaney's eye. It's close to the $99 each-way fare for coast-to-coast travel that fliers watch for but seldom get, he said.

Also, some carriers are undercutting each others' direct flights with one-stop flights to the same cities.

"There's a lot of really low-ball deals out there if you're willing to put up with connecting," he said.

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