ACTIVE LEARNING
1
Demand Curve
Draw a demand curve for music downloads.
What happens to it in each of
the following scenarios? Why?
A. The price of iPods
falls
B. The price of music
downloads falls
C. The price of CDs falls
0
ACTIVE LEARNING
2
Supply Curve
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Professional tax return preparers raise the
price of the services they provide.
1
ACTIVE LEARNING
1
Calculate an elasticity
Use the following
information to
calculate the
price elasticity
of demand
for hotel rooms:
if P = $70, Qd = 5000
if P = $90, Qd = 3000
2
ACTIVE LEARNING
Effects of a tax
Suppose govt
imposes a tax
on sellers of
$30 per room.
Find new
Q, PB, PS,
and incidence
of tax.
P
140
130
2
The market for
hotel rooms
S
120
110
100
90
80
D
70
60
50
40
0
Q
50 60 70 80 90 100 110 120 130
Willingness to Pay (WTP)
A buyer’s willingness to pay for a good is the
maximum amount the buyer will pay for that good.
WTP measures how much the buyer values the good.
name
WTP
Anthony $250
Chad
175
Flea
300
John
125
Example:
4 buyers’ WTP
for an iPod
CONSUMERS, PRODUCERS, AND THE EFFICIENCY OF
MARKETS
4
ACTIVE LEARNING
Analysis of tax
A. Compute
CS, PS, and
total surplus
without a tax.
B. If $100 tax
per ticket,
compute
CS, PS,
tax revenue,
total surplus,
and DWL.
1
P
The market for
airplane tickets
$ 400
350
300
S
250
200
150
D
100
50
Q
0
0
25
50
75 100 125
5