Why is it important to adjust for inflation?

Question

When talking about movie prices and the highest-grossing films, the unadjusted leader is Titanic, while Gone with the Wind is the adjusted number one. Why have ticket prices changed? Why is it important to adjust for inflation, in the movie aspect, and in other scenerios too?

Answer 1

Prices are determined by how much people are willing to spend on an item, which is itself determined by the supply available. For instance, if a store has only a single loaf of bread and 50 potential customers, that loaf is worth as much as the highest bidder is willing to spend, maybe $10. If the same store has 500 loaves, the price would drop significantly.

The same is true for money itself. Every year, more money is created, but there is only a certain level of demand. The more money, the less the money is worth; the less money available, the more it is worth. Over time, the money supply increases, so if you were to stuff $1000 underneath your mattress, next year with that same $1000 you might only be able to buy what would have cost $970 the year before (this is 3% inflation, which is typical). To get $1000 worth of goods in last year's dollars, you would now need to spend $1031. Over time, this begins to make quite a big difference. After 20 years, that $1000 would now only be worth about $543.80.

A certain amount of inflation is a good thing for the economy. If inflation is too low (meaning that it keeps its value over time) , people will have no incentive to use the money for investing. If inflation is too high (called hyperinflation in its most extreme cases) people will spend all of their money as soon as they get it, because it won't be worth anything later on. Nowadays, the government focuses much of its economic policy on simply controlling and adjusting the inflation rate in order to keep the economy stable.

You have to adjust for inflation when talking about prices over a long period of time because otherwise the amounts can be very misleading. A 1965 Ford Mustang, for instance, cost $2,368. In 2005 dollars, that comes to over $14,000. A Ford Model-T in 1908 cost only $850. In 2005 dollars, however, it cost almost $17,000. The first number is accurate, of course, but meaningless today. You should always adjust for inflation when possible, because this allows you to directly compare the numbers.

As far as movie ticket prices go, this might not be the whole story. Increased salaries and other costs of production and distribution have undoubtedly played their part as well.

Answer 2

because inflation makes prices change. That is why many years ago you could buy a loaf of bread for a dime & today its $2.

Inflation measures the rising cost of goods & services. The current inflation rate is roughly 3%. What that means is that you will loose 3% of the value of $1 per year. Or in other terms, it will cost you 3% more to buy the same item next year. 50 years ago, it was a very big deal to be a millionare. Today, who cares about millionares? The Forbes list is all about BILLIONARES!

Inflation errodes the value of things because it makes them more expensive. It affects many aspects of things you may not be aware of. Lets say you earn $40k a year now. Using inflation, in 10 years from now, it will be as if you were earning $28,000 today. So what you make now, will not be of the same value later. That is why some folks get COLAs (Cost Of Living Increase) at work. Its to adjust for inflation since that dollar is not worth as much, you need more to just keep level, and much more to keep ahead.

Answer 3

it all has to do with the value of a dollar. When Gone with the Wind came out the value of a dollar was a lot more. Meaning that you did not have to pay 8 dollars to go see the movie, when it came out. You probably didnt even have to pay 1 dollar at that time. There for if you even the value of the dollar across the board and multiply it by the amount of viewers, you would get the actually adjusted value of the movie. Since Titanic came out more recently it would have cost more to see it now. Why there is inflation will take way to long to answer right now but all you need to know is that it has to do with the value of a dollar. EX. your parents probably have said "I remember when I was little you could get 2 candy bars for 10 cents." Now a candy bar cost from 75 cents to a dollar.

Answer 4

In order to effectively compare the popularity of two films like you do in your example, it is necessary to "level the playing field" by adjusting for inflation. Say for example that Titanic grossed $300M and GTW grossed $20M. Purely in terms of money earned, Titanic would be the miost popular film. But assume that the average ticket price in 1939 was probably $.25 , compared to about $7.00 when Titanic was out, and that translates into almost 40 million more tickets being sold to GTW.

Answer 5

Last year it was $8/ticket - they sold 10 tickets= $80.00

This year it is $10/ticket - they sold 10 tickets=$100.00

You adjust for inflation to see if there is any real increase in real revenues.