2 - Microeconomics of music: music as an economic good

Summary

The fundamentals of the music market economy

Music as an economic good is traded on different markets – for example the market for recorded music and the market for concerts. Before analysing music as an economic good, we have to understand how music markets work. The father of modern economics, Adam Smith (1723– 90), explained that the market allocates scarce resources like an “invisible hand”. In the first book of The Wealth of Nations, Smith (1811 [1776] I: 21) states: “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”. Thus, if individuals are driven by their self-interest the result is a free market economy that efficiently allocates scarce resources. The market, therefore, is a metaphorical place where demand meets supply (Figure 2.1).

Demand and supply are represented by curves. The demand curve (D) describes the consumers’ willingness to purchase a quantity of a good at a given price, whereas the supply curve (S) represents the producers’ willingness to sell a unit of a good at a given price. The market price of a good is represented by the point where the demand curve crosses the supply curve. At the market price, the supplied quantity of a good is entirely taken up by the buyers demanding the good. The market price remains in an equilibrium as long as all external factors are stable. Such a situation is called Pareto efficient. According to the Italian economist and sociologist Vilfredo Pareto, efficiency (or optimality) is a state of allocation of goods in which one individual cannot be made better off without making another individual worse off. Thus, the market provides Pareto efficient results (see Varian 2010: 15– 16).

In our model, a new price and new Pareto optimal state emerges if external factors change. Consider a concert of a famous band, for example. If rumour spreads that the concert could be the last one before the band dissolves, more fans might be inclined to buy a ticket than would otherwise be the case. Since the number of tickets is limited by the capacity of the concert venue, such additional demand would cause a rise in ticket prices.