ECON 110 1st EditionLecture 10Outline of Last Lecture I. Clicker Review question on Equilibrium calculationsII. The Economics of Valentines DayIII. Elasticity: Measuring the response in the marketa. Demand Elasticity: Price Elasticity, Income Elasticity, Cross-Price Elasticityb. Supply Elasticity: Price Elasticityc. Examplesd. Surge Pricinge. Elasticity vs. Cost Differencesf. Elasticity Equationi. Equationii. Exampleg. 3 Factors i. Timeii. Substitutesiii. SignificanceOutline of Current Lecture I. Clicker ReviewII. Cross price elasticity: How the change in price of one good affects the demand for another good.III. Clicker Question: Elasticity of supply a. An application: cable car storyb. Another Application: Can good news for farming be bad news for farmers?IV. Revisiting market equilibriumV. eBay and consumer surplusCurrent Lecture – Elasticity of Supply Clicker ReviewWhen the price of a ride is $10, there are 200 rides per hour supplied by iRide drivers, when the price rises to $15, the amount supplied rises to 350. What is the price elasticity?A. 0.43B. -0.67These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.C. -0.87D. 1.36Answer: D. 1.36.E = %change in quantity / %change in price = ((350-200)/((350+200)/2)) / ((15-10) / ((15+10)/2)) = (150/275) / (5/12.5) = 1.36Cross price elasticity: How the change in price of one good affects the demand for another good.For example, let’s look at Coke vs. Pepsi. The cross price elasticity of Pepsi with respect to Coke is 0.80. The cross price elasticity of Coke with respect to Pepsi is 0.61. Notice that they are different; this implies that a change in price of Coke will not affect demand for Pepsi as much as a change in price of Pepsi would affect demand for Coke. Now the question is, are they strong or weak substitutes? Because the elasticity is less that one, they are weak substitutes. Clicker Question: Elasticity of supply: Air travel between NY and SF. The demand for flights increases, and leads to an increase in price from $300 to $400 and the seats supplied increase from 4000 per day to 6000. What is the supply elasticity?1. 0.7142. 0.40 3. 1.40Answer: 3. 1.40E = %change in quantity / %change in price = ((6000-4000)/(6000+4000)/2) / ((400-300) / ((400+300)/2))An application: cable car storyLet’s discuss the cable car system in San Francisco. In 2005, they raised fares from $3 to $5. That is, their rates increased in price by 67%. You would think that they’re revenue would godown right? Wrong. Their revenue went up by 23%. Why? It's a tourist attraction regardless ofprice. The attraction of the trolley is mostly towards tourists, rather than locals, and when tourists spend thousands of dollars to buy plane tickets to SF and get a hotel there, a few more dollars to ride the trolley (so that they could say that they did) does not make a difference. Another Application: Can good news for farming be bad news for farmers?Let’s say that a new hybrid of wheat increases production of wheat per acre by 20%. Thisimplies that the supply curve will shift to the right (more can be produced at the same price.) Which means that overall there will be a higher quantity supplied at a lower price. But for wheat, demand is inelastic, meaning that an increase in supply and decrease of prices does not increase demand. As a result, total revenue will fall. This is why today we have public policy that pays farmers not to plant more crops.Revisiting market equilibrium- Do the equilibrium price and quantity maximize the total welfare of buyers and sellers? - Market equilibrium reflects the way markets allocate scarce resources.- Whether the market allocation is desirable can be addressed by welfare economics.eBay and consumer surplus- What do you know about auctions?- What do you know about eBay?- How does it work?In particular, if you are a buyer, how do you bid—and more importantly and more to the point—what determines the amount that you bid? You only bid once, the maximum amount that you're willing to bid. Value determines bidding: how much you value the object. The idea ofthe auction is to leave no consumer surplus, forcing the customer to bid exactly as much as theyare willing to pay, therefore increasing seller