What is the most that you would be
willing to pay (in dollars) to hear
Sacha Baron Cohen (Borat) give a
live performance in Campbell Hall?
The supply curve for a good is vertical. A
natural disaster reduces the supply by 20 %.
The elasticity of demand is –0.5. By what
percent must price rise to restore
equilibrium?
A)
B)
C)
D)
E)
50 percent
40 percent
100 percent
20 percent
25 percent
P
Quantity falls by 20%
If price rises by 40%, then elasticity is
-20/40=-.5
Q
Elasticity tricks.
• Note that the definition of elasticity is an
equation of the form
E=A/B
where A is percent change in Quantity
and B is percent change in Price.
If we know any two of these variables, we can
always calculate the third.
In our previous example:
We are told that E=-0.5.
We are told that A=( % change in quantity) = –20
We need to solve for B= (% change in price).
• Since by definition
E=A/B
We have –0.5=-20 /B.
We solve this equation to find B=40 .
The supply curve is horizontal at $10. If
the supply curve shifts downward to $5 and
if the price elasticity of demand is -1.5,
then equilibrium sales increase by
1.
2.
3.
4.
100%
50%
75%
25%
Price falls by 50%, from $10 to $5.
P
If price elasticity is 1.5, then
(% change in quantity) divided by
(% change in price) =-1.5. So
% change in quantity =75.
$10
$5
Q
Supply curve shifts down.
If the demand for bananas is elastic
and half the banana crop is destroyed
by a hurricane
A) The price of bananas
rises and total revenue
falls.
B) The price of bananas
rises and total revenue
rises.
C) Price and quantity both
fall.
If the demand for bananas is
inelastic and the size of the banana
crop increases
A) Total revenue of
banana producers will
rise.
B) Total revenue of
banana producers will
fall.
How are the clickers doing
today?
A) I had no problems.
B) One time when I tried to answer a
question, I was unable to do so because
the clicker wouldn’t accept my answer.
C) More than on time when I tried to answer
a question, I was unable to do so because
the clicker wouldn’t accept my answer.
Up and in
• If the supply curve slopes upwards, what
does it mean for the supply curve to “shift
up” and is that different from “shift in”?
Shifting up and shifting in
Up not in
In not up
And on to our main lecture