Political economy of the media

1. Political economy of the media

2. 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.

3. 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.

4. 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

5. 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).

6. 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

7. Types of economic schools: classical • New thinkers: Adam Smith, David Ricardo, Thomas Malthus, John Stuart Mill (18-19thcent). • Primarily concerned with the dynamics of economic growth. • Stressed economic freedom and promoted ideas such as laissez-faire and free competition.

8. 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."

9. The Theory of Moral Sentiments (1759) Adam Smith • Smith suggested that conscience arises from social relationships. • People have a natural inclinations toward self-interest. 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.

10. 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

11. 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

12. Mercantilism v. classical liberalism • Mercantilism: subordinates economics to politics • Liberalism: subordinates politics to economics to the point of nonexistence

13. 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)

14. 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.

15. 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

16. 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

17. 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.

18. 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.

19. Neoclassical economics • Neoclassical economics systematized supply and demand as joint determinants of price and quantity in market equilibrium.

20. 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.

21. 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

23. 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.

24. 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

25. Supply and demand equilibrium

26. Market demand for DVD Players (monthly) Market demand (000s) 700 Point Price ($ per unit) 20 A Price ($ per unit) A Demand Quantity (000s)

27. Market demand for DVD players (monthly) Market demand (000s) 700 500 350 Point Price ($ per unit) 20 40 60 A B C C Price ($ per unit) B A Demand Quantity (000s)

28. Other determinants of demand • tastes • number and price of substitute goods • number and price of complementary goods • income • distribution of income • expectations

29. 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)

30. Elastic demand between two points Revenue increases When price decreases P($) b 5 a 4 D 0 20 10 Q (millions of units per period of time)

31. Inelastic demand between two points Revenue decreases as price decreases c 8 P($) a 4 D 0 15 20 Q (millions of units per period of time)

32. b 8 100 Unit elastic demand (PÎD = –1) P a 20 D 40 O Q

33. 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).

34. 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).

35. 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.

36. 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

37. 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

38. The four market structures • perfect competition • monopoly • monopolistic competition • oligopoly

39. Features of the four market structures

40. Perfect Competition • Assumptions • firms are price takers (market sets prices) • freedom of entry • identical products • perfect knowledge

41. 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

42. 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

43. 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

44. 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

45. 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