Title: Borat: Economic Learnings for Make Smart about Elasticity
1Borat Economic Learnings for Make Smart about
Elasticity
2If 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.
- True
- False
3If the demand curve for a performance is price
elastic, then revenue will increase if the seller
reduces the ticket price.
- True
- False
4Test of reflex speed
- Enter the letter A on our clicker.
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6Demand for Borat
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10Shifting Demand Curve for Borat How fickle is
fashion?
Note that Price is on horizontal axis here and
quantity on vertical
11 12How 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?
13Scaling 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 1507500.
- What is wrong with this?
14Campbell Hall capacity
- 860 seats
- Hall would be sold out at 20.
- With 50 tickets, about 50 people from class say
they would go. 50x502500. - Could charge more.
- Do we believe this?
15The Tax Collector
Jan Sanders von Hemessen (1536)
16A 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.
17Sales tax collected from suppliers
supply curve With tax
B
tamount of tax
A
Supply curve without tax
C
18Tax paid by supplier
- Supply curve shifts up. Price paid by consumers
rises from A to B. - Price received by suppliers is B-tC.
- 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.
19A 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
pt. - 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.
20Sales tax collected from demanders
Demand curve without tax
B
A
C
tamount of tax
Demand curve With tax
21Tax 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 CtB.
22Quantity 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.
23The effect on price of a sales tax collected
from buyers is the same as the effect of
- An upward shift of the demand curve.
- A downward shift of the demand curve .
- An upward shift of the supply curve.
- A downward shift of the supply curve.
24If the supply curve is horizontal, a 10 per
unit tax collected from sellers will increase
the equilibrium price paid by demanders
- By 10.
- By less than 10.
- By more than 10.
25Why is that?
Supply curve with tax
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Supply curve Without tax
26If the supply curve is vertical, and a 10 per
unit tax is collected from demanders what happens
to price demanders pay to suppliers.
- Falls by 10
- Falls by less than 10.
- Falls by more than 10.
- Rises
27Why is that ?
10
28Announcement
- First midterm next Wednesday.
- Covers all assigned material .
29And were out of here