Borat: Economic Learnings for Make Smart about Elasticity

If the demand curve for tickets to a performance is price inelastic at

the current price, then revenue will increase if the seller raises

the ticket price.

A) True

B) False

If the demand curve for a performance is price elastic, then revenue will increase if the seller

reduces the ticket price.

A) True

B) False

Test of reflex speed

Enter the letter A on our clicker.

Demand for BoratWillingness Number of Demand Table Revenueto pay people Price

100 15 100 15 150080 1 80 16 128075 3 75 19 142560 5 60 24 144059 1 59 25 147555 2 55 27 148550 22 50 49 245045 5 45 54 243040 16 40 70 280035 9 35 79 276530 22 30 101 303025 23 25 124 310020 40 20 164 328015 24 15 188 282010 42 10 230 2300

5 35 5 265 13252 24 2 289 5780 29 0 318 0

Shifting Demand Curve for Borat: How fickle is fashion?

Note that Price is on horizontal axis here and quantity on vertical

How about the whole campus

• We found that to maximize revenue from members of this class, we would charge $20 and about 150 people would come.

• That would raise only about $3000. Probably not enough to bring Borat.

• But what if whole campus is invited?

Scaling up

• Class had 320 people.

• Campus has about 21,000 students.

• 21,000/320 =65

• Lets be conservative and say 50 times as many.

• At $20, demand would be 50 x 150=7500.

What is wrong with this?

Campbell Hall capacity

• 860 seats

• Hall would be sold out at $20.

• With $50 tickets, about 50 people from class say they would go. 50x50=2500.

• Could charge more.

• Do we believe this?

The Tax Collector

Jan Sanders von Hemessen (1536)

A sales tax collected from the suppliers

• Suppose that the government collects a tax of $t from suppliers on every unit they sell.

• This is equivalent to an increase of t in their costs per unit.

• To get them to produce the same amount they did before the tax, the price has to be $t higher than it was without the tax.

• This shifts the supply curve up by $t.

Sales tax collected from suppliers

CA

B

supply curve With tax

Supply curve without tax

t=amount of tax

Tax paid by supplier

• Supply curve shifts up. Price paid by consumers rises from A to B.

• Price received by suppliers is B-t=C.

• So price received by suppliers falls by A-C.

• Price paid by demanders rises by B-A.

• In this case, demand curve is steeper than supply curve so that cost to consumers rises more than net price to suppliers falls.

A sales tax collected from demanders

• Where p is the price paid to suppliers, and t the tax rate, the total price paid by demanders is p+t.

• For a demander to choose the same quantity as before tax, the price p would have to be t units lower.

• Sales tax shifts the demand curve down by the amount of the tax.

Sales tax collected from demanders

CA

B

Demand curve With tax

Demand curve without tax

t=amount of tax

Tax collected from demander

• Price received by supplier falls (because demand curve shifts down) from A to C.

• But price paid by demander rises (because he pays the tax) from A to C+t=B.

Quantity is the same whether tax collected from buyer or from

seller.Quantity chosen is the quantity such that

vertical distance between demand curve and supply curve is equal to the amount of the tax.

Whoever you collect the tax from, the demander pays $t more per unit than the supplier receives.

In market equilibrium demand equals supply.

The effect on price of a sales tax collected from buyers is the

same as the effect of A) An upward shift of the demand

curve.

B) A downward shift of the demand curve .

C) An upward shift of the supply curve.

D) A downward shift of the supply curve.

If the supply curve is horizontal, a $10 per unit tax collected from

sellers will increase the equilibrium price paid by demanders

A) By $10.

B) By less than $10.

C) By more than $10.

Why is that?

Supply curve with tax

Supply curve Without tax

$10

If the supply curve is vertical, and a $10 per unit tax is collected

from demanders what happens to price demanders pay to suppliers.

A) Falls by $10

B) Falls by less than $10.

C) Falls by more than $10.

D) Rises

Why is that ?

$10

Announcement

• First midterm next Wednesday.

• Covers all assigned material .

And we’re out of here