1. 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

2. 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.

3. Don’t memorize! Draw the graph. Demand curve shifts down. Price stays constant. Quantity falls. Q P

4. And on to our main lecture…

5. 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? 1.50 percent 2.40 percent 3.100 percent 4.20 percent 5.25 percent

6. Q P Quantity falls by 20% If price rises by 40%, then elasticity is -20/40=-.5

7. 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.

8. 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.

9. 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. 100% 2.50% 3.75% 4.25%

10. $10 $5 P Q Price falls by 50%, from $10 to $5. If price elasticity is 1.5, then (% change in quantity) divided by (% change in price) =-1.5. So % change in quantity =75. Supply curve shifts down.