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Borat: Economic Learnings for Make Smart about Elasticity

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Title: Borat: Economic Learnings for Make Smart about Elasticity


1
Borat Economic Learnings for Make Smart about
Elasticity
2
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.
  1. True
  2. False

3
If the demand curve for a performance is price
elastic, then revenue will increase if the seller
reduces the ticket price.
  1. True
  2. False

4
Test of reflex speed
  • Enter the letter A on our clicker.

5
(No Transcript)
6
Demand for Borat
7

8
(No Transcript)
9
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10
Shifting Demand Curve for Borat How fickle is
fashion?
Note that Price is on horizontal axis here and
quantity on vertical
11

12
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?

13
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 1507500.
  • What is wrong with this?

14
Campbell 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?

15
The Tax Collector
Jan Sanders von Hemessen (1536)
16
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.

17
Sales tax collected from suppliers
supply curve With tax
B
tamount of tax
A
Supply curve without tax
C
18
Tax 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.

19
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
    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.

20
Sales tax collected from demanders
Demand curve without tax
B
A
C
tamount of tax
Demand curve With tax
21
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 CtB.

22
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.

23
The 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.

24
If 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.

25
Why is that?
Supply curve with tax
10
Supply curve Without tax
26
If 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

27
Why is that ?
10
28
Announcement
  • First midterm next Wednesday.
  • Covers all assigned material .

29
And were out of here
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