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
P
r
i
c
e
60
50
40
30
20
10
0
0
50
100
150
200
Quantity
250
300
350
Demand for Borat
Willingness Number of
to pay
people
100
15
80
1
75
3
60
5
59
1
55
2
50
22
45
5
40
16
35
9
30
22
25
23
20
40
15
24
10
42
5
35
2
24
0
29
Demand Table
Price
100
15
80
16
75
19
60
24
59
25
55
27
50
49
45
54
40
70
35
79
30 101
25 124
20 164
15 188
10 230
5 265
2 289
0 318
Revenue
1500
1280
1425
1440
1475
1485
2450
2430
2800
2765
3030
3100
3280
2820
2300
1325
578
0
Price and Revenue for Borat, Oct 2007
3500
3000
2500
R
e 2000
v
e
n
u 1500
e
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
Ticket Sales and Revenue
3500
3000
2500
R
e
2000
v
e
n
1500
u
e
Series1
1000
500
0
0
50
100
150
200
Number of Tickets Sold
250
300
350
Shifting Demand Curve for Borat:
How fickle is fashion?
Green Curve, January 07 ----Red Curve,
Oct 07
120
Quantity
100
80
60
40
20
0
0
20
40
60
80
100
Price
Note that Price is on horizontal axis here and quantity on vert
Borat Ticket Price and Revenue, Jan 2007
6000
5000
4000
R
e
v
e 3000
n
u
e
2000
Series1
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. 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
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