Transcript Where did you go to high school?

Where did you go to high school?
1. In California—North of
Santa Barbara
2. In California---Santa
Barbara or further South
3. In US---Outside of
California
4. Outside of the US
If the supply curve is horizontal and the
demand curve shifts down, what
happens to equilibrium price and
quantity?
1. Price and Quantity fall.
2. Price falls, quantity stays
same.
3. Quantity falls, price stays
same.
4. Price falls, quantity rises.
5. Price rises, quantity falls.
Don’t memorize! Draw the graph.
P
Demand curve shifts down.
Price stays constant.
Quantity falls.
Q
And on to our main lecture…
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?
1.
2.
3.
4.
5.
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.