Borat Economic Learnings for Make Smart about Elasticity

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 curve for Borat, October 2007 100 90 80 70 60 Price 50 40 30 20 10 0 0 50 100 150 200 Quantity 250 300 350

Demand for Borat

3500 Price and Revenue for Borat, Oct 2007 3000 2500 2000 Revenue 1500 1000 500 0 0 10 20 30 40 50 Price per ticket 60 70 80 90 100

Price Elasticity of demand for Borat Price 0 0 -0, 5 -1 -1, 5 -2 -2, 5 -3 -3, 5 -4 -4, 5 -5 10 20 30 40 50 60 70 80 90

3500 Ticket Sales and Revenue 3000 2500 2000 Revenue Series 1 1500 1000 500 0 0 50 100 150 200 Number of Tickets Sold 250 300 350

Quantity Shifting Demand Curve for Borat: How fickle is fashion? Price

6000 Borat Ticket Price and Revenue, Jan 2007 5000 4000 Revenue 3000 Series 1 2000 1000 0 0 10 20 30 40 50 60 Number of tickets sold 70 80 90 100

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. 50 x 50=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 supply curve With tax B A C t=amount of tax Supply curve without 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 Demand curve without tax B A C t=amount of tax Demand curve With 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? $10 Supply curve with tax Supply curve Without tax

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