Marginal Utility

WEBVTT
Kind: captions
Language: en

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What I want to do in this
video is think about a concept

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that we've already thought
about multiple times

00:00:05.310 --> 00:00:07.560
in the context of
many, many videos.

00:00:07.560 --> 00:00:10.910
And this is the idea of
utility-- utility, which

00:00:10.910 --> 00:00:15.300
is really just a way of
saying how much benefit

00:00:15.300 --> 00:00:18.900
or satisfaction or
value do you get out

00:00:18.900 --> 00:00:21.190
of getting a good or service.

00:00:21.190 --> 00:00:23.390
But the angle that we're
going to take in this video

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is going to be
slightly different.

00:00:24.850 --> 00:00:28.180
In the past, when we were
measuring benefit or value,

00:00:28.180 --> 00:00:30.295
we either measured
in terms of dollars,

00:00:30.295 --> 00:00:34.540
where we said, hey, the benefit
of getting an incremental Honda

00:00:34.540 --> 00:00:36.182
Civic was $5,000.

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And we talk about
the incremental--

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we're talking about, and we've
heard the word many times--

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we were talking about
the marginal benefit.

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Or early on, when we
talked about the production

00:00:43.950 --> 00:00:46.830
possibilities
frontier and we talked

00:00:46.830 --> 00:00:49.150
about the marginal benefit
of another squirrel,

00:00:49.150 --> 00:00:51.025
we were talking about
it in terms of berries.

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We were talking
about it in terms

00:00:52.399 --> 00:00:54.371
of another good or service.

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What we're going
to do in this video

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is just think about
it in absolute terms.

00:00:57.950 --> 00:01:00.850
We're just going to think of
some arbitrary way of measuring

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utility and then just
assign values to.

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What's the value of
getting one chocolate bar?

00:01:06.590 --> 00:01:09.090
And then what's the value that
we give to the next chocolate

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bar and then the
chocolate bar after that?

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And we're going to do the
same things about fruit.

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And from that,
we're going to see

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if we can build up
some of the things

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that we already know
about demand curves

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and how things relate to price
and the price of other goods

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and things like that.

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And in particular, we're going
to focus on marginal utility.

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So obviously, you could
have total utility.

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If I have four
chocolate bars, you

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could say the total utility I'm
getting from all four of them.

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Or, you could think
about marginal utility,

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the utility I'm getting from
the next incremental chocolate

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bar or the next
incremental pound of fruit.

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And before I move on,
there's one thing--

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and this was a point
of confusion for me

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when I first learned
this-- is OK,

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I'm using the word
marginal utility now.

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In the past, I've used
the word marginal benefit.

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They sound very similar.

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In fact, I even used
the word benefit

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when I defined the word utility.

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How are these two
things different?

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And the simple answer is,
conceptually, they aren't.

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Conceptually, they are
the exact same thing.

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The difference is
how the words tend

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to be used in the context of
a traditional microeconomics

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class.

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So when people
talk about utility,

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they tend to measure it
in terms of some type

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of absolute measure that
they just came up with.

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You can view them
as utility unit,

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some type of satisfaction units.

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While when they talk
about marginal benefit,

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they tend to measure
it either in dollars

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or in terms of some other goods.

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But I've seen either
term used either way.

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So they really do mean
the exact same thing.

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But in this video, we're
going to use the term utility,

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and we're going to come
up with a measuring scale,

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and it's a somewhat
arbitrary one.

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And we're going to
use that to come up

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with some conclusions about
the basket of goods someone

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might purchase depending
on different prices.

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So as you could imagine, I
pre-wrote these two things.

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We're going to talk
about chocolate bars,

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and we are going to
talk about fruit.

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So right here in these
little tables here,

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I've shown the marginal
utility of each incremental.

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In the case of chocolate
bars, each incremental bar,

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and in the case of fruit, each
incremental pound of fruit.

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So this is saying that first
chocolate bar-- obviously,

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if I have no chocolate
bars I'm getting

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no utility from
chocolate bars-- and this

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is saying that that
first chocolate

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bar has a marginal utility.

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So the utility of that next
incremental one is 100.

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I'm not saying $100.

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I'm not saying it's equivalent
to 100 pounds of fruit.

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I'm not saying it's
equivalent to 100 berries.

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I'm just arbitrarily
saying it is 100.

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And what matters
is not that this

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is 100 or 1,000 or a million.

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What matters is how this
compares to other things.

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So for example, if I--
let's say this is 100,

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and if I know that I like
fruit-- a pound of fruit--

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20% more than that
first-- Or if I like

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an incremental-- my first
pound of fruit-- 20% more,

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then I would have to say
that the marginal utility

00:04:03.940 --> 00:04:06.920
of my first pound
of fruit is 120.

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And this is what we
said right over here.

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And if, another way
to think about it

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is, if the marginal utility
of the second chocolate

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bar I get-- because
I've already enjoyed

00:04:16.730 --> 00:04:19.240
a little bit of chocolate bar,
and I'm a little chocolated

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out-- is 20% less than
that, then if this is 100,

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then this would have to be 80.

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I could have set this
to be 1,000 and this

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to be 800 and this to be 1,200.

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I could have set this
to be 10 and this

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to be 8 and this to be 12.

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What matters is, is
that they really just

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have the same ratios
between them that really do

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reflect my actual preferences.

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So let's just think
about this a little bit.

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My first chocolate bar,
I'm pretty excited.

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I just call it 100.

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The next chocolate bar, I'm
a little bit less excited

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about it.

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I've already had some chocolate.

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My craving has been
satiated to some degree,

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but I still like chocolate.

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So I'll call that an 80.

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We could call it 80
satisfaction units,

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whatever you want to call it.

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Then the next chocolate
bar after this-- now I'm

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starting to get pretty stuffed,
and I'm really chocolated out.

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And so I'm not getting
as much benefit from it.

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And then finally if you give
me another chocolate bar,

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it's even less.

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And if we were to list
a fifth chocolate bar,

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I might not want it at all.

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My marginal utility
might go to 0 maybe

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for that fifth chocolate bar.

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Maybe that sixth chocolate bar,
I have to somehow get rid of it

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somehow, because I'm so
tired of chocolate bars.

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Maybe it'll have a
negative marginal utility.

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And we could think about
the same thing with fruit.

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The first pound of fruit, I'm
pretty excited about fruit.

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I have a fruit craving.

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I like that first pound
of fruit even more

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than that first chocolate bar.

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I like it 20% more.

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So I get to 120, you could
call it utility points

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or whatever arbitrary
unit you want to call it.

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Then my next pound
of fruit, once again

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I'm having diminishing
utility, diminishing benefit

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as I get more and more
incremental pounds of fruit.

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Now, it's very
important to realize

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this is marginal utility,
not total utility.

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This is a utility I'm getting
from each incremental pound.

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It's positive, so
I'm still enjoying

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that next incremental pound.

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I'm just enjoying it a little
bit less than the pound before.

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And to realize what
total utility is,

00:06:07.710 --> 00:06:09.670
if I were to have
two pounds of fruit,

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I would have 120 of utility
from that first pound.

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And then I would have 100
from the second pound.

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And so you would say I had
a total utility of 220,

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you could call them utility
units, from both pounds.

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Now with just the information
that I've given here,

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there's a few things
you could say.

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You could say, well look,
my first pound of fruit

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I enjoy more, 20% more than
my first chocolate bar.

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You could also say that
my second pound of fruit,

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I enjoy it or I could derive
about the same amount of value

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as my first chocolate bar.

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You could say that my
second chocolate bar

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I enjoy less than my
first chocolate bar.

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You could even say 20% less
if these numbers are good.

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But this still
doesn't give you a lot

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of information about
how you would actually

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spend your money.

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You might say, well,
obviously wouldn't you

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want to just buy fruit
over chocolate bars,

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or at least that first pound of
fruit over that first chocolate

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bar?

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Well, you might, but it depends
on how much that fruit actually

00:07:05.120 --> 00:07:06.300
costs.

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Just looking at this
alone, we can just

00:07:08.160 --> 00:07:10.000
make relative judgments
about how much

00:07:10.000 --> 00:07:13.075
we prefer each incremental
bar or each incremental pound

00:07:13.075 --> 00:07:14.675
or them relative to each other.

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But it really
doesn't tell us how

00:07:16.050 --> 00:07:18.464
we would spend our actual money.

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So let's think about things.

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Let's put some prices
on some of these goods

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and think about how
we would actually

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allocate our dollar given
these marginal utility

00:07:25.970 --> 00:07:27.990
numbers right over here.

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So let's say that the
chocolate bars are $1 per bar.

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And let's say that the
fruit is $2 per pound.

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So this is going
to be per pound.

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This is going to be per bar.

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And what we're
going to think about

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is we're going to think
about marginal utility

00:07:47.830 --> 00:07:51.850
for that incremental
chocolate bar per price

00:07:51.850 --> 00:07:53.590
of that incremental
chocolate bar.

00:07:53.590 --> 00:07:57.490
And here the price is going
to be at $1 per pound.

00:07:57.490 --> 00:08:01.250
So here, for that first bar,
I'm going to be spending $1,

00:08:01.250 --> 00:08:03.380
and I'm getting 100
marginal utility

00:08:03.380 --> 00:08:05.000
points, whatever
you want to call it.

00:08:05.000 --> 00:08:07.760
So I'm getting 100 marginal
utility points for that dollar.

00:08:07.760 --> 00:08:11.870
So I'm getting 100 marginal
utility points per dollar.

00:08:11.870 --> 00:08:13.370
Here, same logic.

00:08:13.370 --> 00:08:15.730
I'm getting 80 marginal
utility points per dollar.

00:08:15.730 --> 00:08:16.930
This is pretty simple math.

00:08:16.930 --> 00:08:19.880
Here I'm getting 60 marginal
utility points for the dollar.

00:08:19.880 --> 00:08:21.359
Here I'm getting 40.

00:08:21.359 --> 00:08:22.900
So that doesn't seem
too interesting.

00:08:22.900 --> 00:08:24.858
It might be a little bit
more interesting here.

00:08:24.858 --> 00:08:27.960
What is the marginal utility
per incremental fruit

00:08:27.960 --> 00:08:33.090
that I'm getting per dollar,
per price, or actually per price

00:08:33.090 --> 00:08:35.510
of the incremental fruit here?

00:08:35.510 --> 00:08:37.190
Well here, that first
pound of fruit I'm

00:08:37.190 --> 00:08:40.900
getting 120 marginal utility
points we could call them.

00:08:40.900 --> 00:08:42.730
But I paid $2 for it.

00:08:42.730 --> 00:08:46.900
So 120-- let me
write it over here.

00:08:46.900 --> 00:08:48.620
So for that first
incremental fruit,

00:08:48.620 --> 00:08:52.350
the marginal utility for
that first fruit is 120.

00:08:52.350 --> 00:08:57.090
And the price of that first
pound of fruit is equal to 2.

00:08:57.090 --> 00:09:00.990
So I'm getting 60 marginal
utility points per dollar.

00:09:00.990 --> 00:09:02.550
I'm getting 60.

00:09:02.550 --> 00:09:06.000
Here, 100 marginal utility
points, but I'm spending $2.

00:09:06.000 --> 00:09:08.060
So that's 50 points per dollar.

00:09:08.060 --> 00:09:10.130
This is 25 points per dollar.

00:09:10.130 --> 00:09:12.770
This is 10 points per dollar.

00:09:12.770 --> 00:09:15.380
Now this makes things a
little bit more interesting.

00:09:15.380 --> 00:09:24.043
If I had $5 to spend, how
would I want to spend my $5?

00:09:27.072 --> 00:09:28.780
What you really just
want to think about,

00:09:28.780 --> 00:09:31.670
where are you getting the most
satisfaction for each dollar?

00:09:31.670 --> 00:09:34.340
Where are you getting the
most bang for your buck?

00:09:34.340 --> 00:09:36.730
So where am I going to
spend my first dollar?

00:09:36.730 --> 00:09:38.040
So dollar one.

00:09:38.040 --> 00:09:39.600
So let's think about
it a little bit.

00:09:39.600 --> 00:09:43.930
My first dollar,
where am I going

00:09:43.930 --> 00:09:46.685
to get the most
satisfaction per dollar?

00:09:46.685 --> 00:09:48.060
Well, I get the
most satisfaction

00:09:48.060 --> 00:09:49.250
per dollar right over here.

00:09:49.250 --> 00:09:51.750
I get 100 satisfaction
units for a dollar.

00:09:51.750 --> 00:09:53.890
Even though I like
a pound of fruit,

00:09:53.890 --> 00:09:56.305
I'm getting less
satisfaction per dollar.

00:09:56.305 --> 00:09:58.580
So I'm getting less
bang for my buck.

00:09:58.580 --> 00:10:02.160
So my first dollar is going
to go right over there.

00:10:02.160 --> 00:10:04.950
I'm going to buy one candy bar.

00:10:04.950 --> 00:10:08.330
Then where am I going to
spend my second dollar?

00:10:08.330 --> 00:10:10.724
So once again, I just want
to look at all of my options,

00:10:10.724 --> 00:10:12.140
and we're going
to assume that I'm

00:10:12.140 --> 00:10:14.230
going to spend my $5 on
either of these two just

00:10:14.230 --> 00:10:16.310
to limit our universe.

00:10:16.310 --> 00:10:19.120
Once again, I'm going to
maximize my bang for buck.

00:10:19.120 --> 00:10:22.480
I get 80 satisfaction points
or marginal utility points

00:10:22.480 --> 00:10:23.550
over here per dollar.

00:10:23.550 --> 00:10:24.890
I only get 60 over here.

00:10:24.890 --> 00:10:27.580
So I'm going to buy even
a second chocolate bar.

00:10:30.952 --> 00:10:31.660
Let's keep going.

00:10:31.660 --> 00:10:34.200
Where am I going to
spend my third dollar?

00:10:34.200 --> 00:10:37.950
Now, it gets a little
bit interesting.

00:10:37.950 --> 00:10:40.600
I could spend my third dollar
right over here and get

00:10:40.600 --> 00:10:44.470
60 points per dollar,
or I could spend it over

00:10:44.470 --> 00:10:46.586
here and get 60
points per dollar.

00:10:46.586 --> 00:10:47.960
I'd actually get
the same amount.

00:10:47.960 --> 00:10:49.610
There are both 60
points per dollar.

00:10:49.610 --> 00:10:50.690
So I'm kind of neutral.

00:10:50.690 --> 00:10:52.440
I'm going to get the
same bang for my buck

00:10:52.440 --> 00:10:53.950
whether I get
another chocolate bar

00:10:53.950 --> 00:10:55.815
or whether I get another fruit.

00:10:55.815 --> 00:10:57.190
So just for
simplicity, let's say

00:10:57.190 --> 00:10:59.150
I get another chocolate bar.

00:10:59.150 --> 00:11:01.200
I could have got the fruit too.

00:11:01.200 --> 00:11:02.465
It's really a toss up.

00:11:02.465 --> 00:11:04.290
I could flip a
coin, and I choose

00:11:04.290 --> 00:11:06.030
to get another chocolate bar.

00:11:06.030 --> 00:11:09.430
So I first spent my first
$3 on three chocolate bars.

00:11:09.430 --> 00:11:11.820
Now where am I going to
spend my fourth dollar?

00:11:11.820 --> 00:11:15.290
Well, my fourth dollar, now
my best bang for my buck

00:11:15.290 --> 00:11:16.780
isn't to get another
chocolate bar.

00:11:16.780 --> 00:11:19.340
I'm only going to get
40 units per buck there.

00:11:19.340 --> 00:11:21.280
Now it is to spend it on fruit.

00:11:21.280 --> 00:11:24.970
So now the next dollar I could
spend on half a pound of fruit,

00:11:24.970 --> 00:11:27.310
and I would get this.

00:11:27.310 --> 00:11:30.160
So my fourth dollar
I could spend

00:11:30.160 --> 00:11:32.610
on this for half
a pound of fruit

00:11:32.610 --> 00:11:34.290
because it's $2 per pound.

00:11:34.290 --> 00:11:37.400
And then I could spend my
fifth dollar there too.

00:11:37.400 --> 00:11:39.862
So this is my fourth and my
fifth dollar because it's $2.

00:11:39.862 --> 00:11:41.570
You could think of it
that we're spending

00:11:41.570 --> 00:11:43.970
$2 for one pound of fruit.

00:11:43.970 --> 00:11:46.700
And we're getting 60
utility points per dollar.

00:11:46.700 --> 00:11:49.960
So we're getting the best bang
for our buck right over there.

00:11:49.960 --> 00:11:51.470
But what was useful
about this is

00:11:51.470 --> 00:11:53.220
it allowed us without
thinking about money

00:11:53.220 --> 00:11:55.810
to say how much do we like
these things irrespective

00:11:55.810 --> 00:11:58.980
of their actual price and
then give it a certain price.

00:11:58.980 --> 00:12:01.570
It allowed us to think
rationally about, well,

00:12:01.570 --> 00:12:03.460
how would we actually
spend our money.

00:12:03.460 --> 00:12:06.210
In this case, when
chocolate bars are $1

00:12:06.210 --> 00:12:08.780
and fruit is $2 per
pound, we decided

00:12:08.780 --> 00:12:14.220
to buy three chocolate bars
and only one pound of fruit.


Taxes and perfectly elastic demand

WEBVTT
Kind: captions
Language: en

00:00:00.616 --> 00:00:04.529
Let's think about how a tax on a product might affect it,

00:00:04.529 --> 00:00:10.879
if the demand for it is very, very, very elastic.

00:00:10.879 --> 00:00:13.259
So what I've done here -- We're going to think about flags --

00:00:13.259 --> 00:00:17.519
the market for a certain type
of flag that's made in China.

00:00:17.519 --> 00:00:20.650
And to think about this flag -- think about it this way.

00:00:20.650 --> 00:00:24.859
If the price -- the price right now -- the equilibrium price between

00:00:24.859 --> 00:00:27.880
where the supply and the demand intersect --

00:00:27.880 --> 00:00:29.880
the supply curve and the demand curve intersect --

00:00:29.880 --> 00:00:32.416
is right about seventy dollars per flag.

00:00:32.416 --> 00:00:35.682
So this is a pretty nice flag. It's right at seventy dollars per flag.

00:00:35.682 --> 00:00:39.530
And the quantity demanded, in thousands per year,

00:00:39.530 --> 00:00:41.450
it looks like it's about twenty five thousand

00:00:41.450 --> 00:00:44.820
flags are demanded per year.

00:00:44.820 --> 00:00:49.550
Now if at the price were to go slightly above

00:00:49.550 --> 00:00:50.490
that equilibrium price,what's going to happen?

00:00:50.490 --> 00:00:54.484
Well, if the price goes slightly above that

00:00:54.484 --> 00:00:55.812
equilibrium price, people are going to say,

00:00:55.812 --> 00:00:57.140
"Well, I can go by the American flags made in Taiwan,

00:00:57.140 --> 00:00:59.420
or even the ones made in America, or made in Mexico,

00:00:59.420 --> 00:01:02.810
or made some place else. [Because...]

00:01:02.810 --> 00:01:05.439
"People won't be able to tell the difference from a distance."

00:01:05.439 --> 00:01:07.140
So I'm going to buy one of the substitutes --

00:01:07.140 --> 00:01:09.380
[because] especially the ones from Taiwan or Mexico

00:01:09.380 --> 00:01:12.893
or wherever else. are identical to the ones made in China.

00:01:12.893 --> 00:01:15.761
So if the price for slightly -- even slightly higher,

00:01:15.761 --> 00:01:19.068
the quantity demanded would be much, much, much lower.

00:01:19.068 --> 00:01:23.320
And if the price were even a little bit lower,

00:01:23.320 --> 00:01:26.828
then people say, "I'm not going to buy the Mexican flag--

00:01:26.828 --> 00:01:27.979
or the Taiwanese [or] American flags.

00:01:27.979 --> 00:01:29.130
I'm going to buy the ones that were made in China."

00:01:29.130 --> 00:01:32.060
And then the quantity demanded would be much larger.

00:01:32.060 --> 00:01:37.030
And so what you have here is a very large,

00:01:37.030 --> 00:01:39.194
a high elasticity of demand.

00:01:39.194 --> 00:01:41.359
So this right over here, this is almost perfectly elastic.

00:01:41.359 --> 00:01:44.329
If it was perfectly elastic, it would be completely horizontal.

00:01:44.329 --> 00:01:48.020
So this is almost almost almost perfectly --

00:01:48.020 --> 00:01:55.020
perfectly elastic -- elastic demand.

00:01:55.520 --> 00:01:59.630
A very small change in price leads to a huge change in quantity.

00:01:59.630 --> 00:02:02.159
In particular a very small percentage change in price

00:02:02.159 --> 00:02:07.399
leads to a huge percent change in quantity.

00:02:07.399 --> 00:02:08.679
So let's say that -- that some government

00:02:08.679 --> 00:02:09.960
official decides, "You know what? [I] don't like the

00:02:09.960 --> 00:02:15.930
idea of American flags being made in China."

00:02:15.930 --> 00:02:17.770
So they decide to tax American flags made in China.

00:02:17.770 --> 00:02:19.610
So what they do is that they place a tax, they place a tax --

00:02:19.610 --> 00:02:22.170
And once again I'll do a fixed dollar tax.

00:02:22.170 --> 00:02:26.060
It could be a percentage and if a percentage
then it'll change the sup -- the supply

00:02:26.060 --> 00:02:28.310
plus tax curve
It'll be -- the shift will will be a percentage change

00:02:28.310 --> 00:02:31.500
instead of a fixed change.

00:02:31.500 --> 00:02:33.180
But the fixed change
is a little bit easier to draw,

00:02:33.180 --> 00:02:35.580
so I'll do that.

00:02:35.580 --> 00:02:37.750
So let's say that there is a tax --

00:02:37.750 --> 00:02:39.920
Let me do that in a different color
Let's say that there's a tax placed of ten dollars --

00:02:39.920 --> 00:02:41.620
ten dollars per flag.

00:02:43.320 --> 00:02:45.430
Ten dollars, actually --
Let's do an even a smaller amount.

00:02:45.430 --> 00:02:51.100
Let's say that there is a tax placed of
of one dollar per flag -- one dollar per flag.

00:02:51.100 --> 00:02:55.290
I'll make it a little bit larger.
Let's say it's five dollars per flag --

00:02:55.290 --> 00:02:58.040
five dollars per flag.

00:02:58.040 --> 00:03:03.080
So now what is the supply plus tax curve?
So the supplier / just to make the flags in

00:03:03.080 --> 00:03:05.120
China and ship them to United States and get the

00:03:05.120 --> 00:03:07.840
story here even to get that first flag done

00:03:07.840 --> 00:03:10.510
even if is that in the most efficient way
possible

00:03:10.510 --> 00:03:14.590
looks do you need at least looks like around
fifty to fifty three dollars now

00:03:14.590 --> 00:03:16.670
Now they're going now
they're still going to need that

00:03:16.670 --> 00:03:18.750
plus there's going to be a five dollar tax

00:03:18.750 --> 00:03:21.830
on it
So supply plus tax is going to be that plus

00:03:21.830 --> 00:03:24.440
five dollars is going to be right around there

00:03:24.440 --> 00:03:27.950
Over here, you add five dollars.

00:03:27.950 --> 00:03:30.310
So at any given point, we're gonna add fivedollars
to essentially what the consumer would have to see.

00:03:32.940 --> 00:03:34.500
\\So you would have a curve that looks something

00:03:34.500 --> 00:03:36.060
like this you would have a curve that looks
something

00:03:36.060 --> 00:03:37.780
like this
you would have a curve that looks something

00:03:37.780 --> 00:03:41.200
like this.
That dotted line right over there is our supply

00:03:41.200 --> 00:03:43.690
is our supply plus tax.

00:03:43.690 --> 00:03:48.810
This right over here was just our supply --was
just our supply.

00:03:48.810 --> 00:03:51.550
So you're essentially --
So let's think about what happens here.

00:03:51.550 --> 00:03:57.300
Your equilibrium price was at seventy before.
Now our equilibrium price is still --

00:03:57.300 --> 00:04:01.320
Our equilibrium price is still pretty much
at seventy.

00:04:01.320 --> 00:04:04.820
But our equilibrium quantity has gone down
dramatically.

00:04:04.820 --> 00:04:07.890
Our equilibrium quantity has gone down to
--

00:04:07.890 --> 00:04:11.380
our equilibrium quantity has gone down to
--

00:04:11.380 --> 00:04:14.020
I don't know.
It looks like about eighteen thousand.

00:04:14.020 --> 00:04:17.219
Eighteen thousand flags per year.

00:04:17.219 --> 00:04:21.159
So who bore -- who bore the bulk of this right
over here?

00:04:21.159 --> 00:04:25.810
So let's think about the tax revenue
So the tax revenue in this situation is going

00:04:25.810 --> 00:04:28.219
to be eighteen thousand
times the five dollars.

00:04:28.219 --> 00:04:33.020
So this is the five dollars right over here.
That is five dollars -- and then times eighteen

00:04:33.020 --> 00:04:36.289
thousand --
times eighteen thousand.

00:04:36.289 --> 00:04:40.719
So this right over here is the tax revenue.
That right over there is a tax revenue.

00:04:40.719 --> 00:04:45.349
Actually, let me draw a little bit more carefully
so the tax revenue is

00:04:45.349 --> 00:04:50.030
This is going to be between this line right
over here and five dollars.

00:04:50.030 --> 00:04:52.889
So just like that.
So that's all the tax revenue.

00:04:52.889 --> 00:04:55.810
And notice.
It all came out of the producer surplus.

00:04:55.810 --> 00:05:00.210
The original producer surplus -- the original
producer surplus was --

00:05:00.210 --> 00:05:02.039
Especially if we assume perfect elasticity
--

00:05:02.039 --> 00:05:08.889
The original producer surplus was this green
rectangle plus this and plus this.

00:05:08.889 --> 00:05:12.249
Now this is going to be --
This little area right over here is going

00:05:12.249 --> 00:05:15.599
to be dead weight loss --
dead-weight loss.

00:05:15.599 --> 00:05:18.669
And all of that came from the producer's
surplus.

00:05:18.669 --> 00:05:22.629
And then the all the tax revenue, also --
If you especially if you assume this top-line

00:05:22.629 --> 00:05:27.430
was horizontal --
also came out of the producer surplus.

00:05:27.430 --> 00:05:29.520
So in this situation where you had almost
where you

00:05:29.520 --> 00:05:35.240
We could say, if if you do have perfect elasticity
if you have perfect elasticity of demand for

00:05:35.240 --> 00:05:38.819
the product,
The person who's going to bear the the brunt

00:05:38.819 --> 00:05:41.960
of the tax --
so -- is going to be the producer.

00:05:41.960 --> 00:05:45.419
The producer surplus is going to be eaten
into from the tax.

00:05:45.419 --> 00:05:49.069
Bears -- bears the
Actually that's not -- that's not

00:05:49.069 --> 00:05:51.949
(I'm not talking about the animal, "bears.")
The producer, --

00:05:51.949 --> 00:05:56.629
You know -- I'm not -- well --
The producer gets the burden the producer

00:05:56.629 --> 00:06:00.219
The producer gets the burden in that situation.

00:06:00.219 --> 00:06:02.349
And this is an interesting thing to think
about.

00:06:02.349 --> 00:06:05.650
Because when you have almost perfectly elastic
demand --

00:06:05.650 --> 00:06:08.650
so a -- almost -- or if you said perfectly
elastic demand --

00:06:08.650 --> 00:06:12.050
a flat -- a flat demand curve right over here
--

00:06:12.050 --> 00:06:15.110
there's -- there's actually no consumer
surplus,

00:06:15.110 --> 00:06:18.520
because the marginal benefit, even the incremental
marginal or --

00:06:18.520 --> 00:06:21.539
(I'm -- I'm being redundant with the words
incremental and marginal.)

00:06:21.539 --> 00:06:25.259
But the marginal benefit at any point for
the consumer for -- that -- for that next

00:06:25.259 --> 00:06:29.069
unit is equal to
the price they're paying, when you have --

00:06:29.069 --> 00:06:32.689
There's no -- There's --
Especially if the the especially if the demand

00:06:32.689 --> 00:06:35.610
curve is perfectly elastic -- and it's perfectly
horizontal --

00:06:35.610 --> 00:06:39.969
There is no area between the demand curve
and the price paid.

00:06:39.969 --> 00:06:42.719
So there's actually --
There's isn't any -- even any consumer surplus

00:06:42.719 --> 00:06:46.639
to take any --
to take any of the -- to take -- to eat into.

00:06:46.639 --> 00:06:50.349
It all gets eaten out of the out of the producer
surplus.


Taxes and perfectly inelastic demand

WEBVTT
Kind: captions
Language: en

00:00:00.432 --> 00:00:02.940
Let's think about who bears the burden

00:00:02.940 --> 00:00:04.767
of a tax in different situations.

00:00:04.767 --> 00:00:06.678
In this video, we're
going to focus on insulin.

00:00:06.678 --> 00:00:08.133
Insulin is interesting.

00:00:08.133 --> 00:00:10.736
It's what's needed by Diabetes

00:00:10.736 --> 00:00:12.181
in order to maintain
their blood sugar level

00:00:12.181 --> 00:00:14.347
so for them, you can almost imagine

00:00:14.347 --> 00:00:16.150
they need this just to survive.

00:00:16.150 --> 00:00:18.606
It almost has an infinite
marginal benefit for them.

00:00:18.606 --> 00:00:21.069
So they're willing, no
matter what the price,

00:00:21.069 --> 00:00:22.536
they're essentially willing to take the

00:00:22.536 --> 00:00:24.066
insulin that they need to take.

00:00:24.066 --> 00:00:26.596
So, for example, even if
the price of insulin were

00:00:26.596 --> 00:00:29.613
a dollar, if the doctors in
this town say collectively

00:00:29.613 --> 00:00:31.800
all the diabetics need 3,000 vials a year,

00:00:31.800 --> 00:00:33.929
they will take 3,000 vials a year.

00:00:33.929 --> 00:00:35.592
If the price is $80 a vial,

00:00:35.592 --> 00:00:37.348
they'll still take 3,000 vials a year.

00:00:37.348 --> 00:00:38.936
So within reason, within a reasonable

00:00:38.936 --> 00:00:41.013
price range, you have no change

00:00:41.013 --> 00:00:42.542
in quantity demanded.

00:00:42.542 --> 00:00:43.802
So, in this case,

00:00:43.802 --> 00:00:46.312
at least in a reasonable price range,

00:00:46.312 --> 00:00:51.189
the demand curve for insulin is vertical.

00:00:51.189 --> 00:00:52.990
Obviously, if we went up to prices like

00:00:52.990 --> 00:00:56.462
$9 million per vial, then all of a sudden,

00:00:56.462 --> 00:00:58.728
some of the diabetics just won't be able

00:00:58.728 --> 00:00:59.923
to afford it, and all of a sudden,

00:00:59.923 --> 00:01:01.528
the curve wouldn't be able
to be vertical anymore.

00:01:01.528 --> 00:01:03.394
But at least in a reasonable price range,

00:01:03.394 --> 00:01:05.257
you have a vertical curve.

00:01:05.257 --> 00:01:07.772
So this right over here
is our demand curve.

00:01:07.772 --> 00:01:09.923
That is our demand curve.

00:01:09.923 --> 00:01:11.124
You might remember when

00:01:11.124 --> 00:01:12.322
we talked about elasticity,

00:01:12.322 --> 00:01:15.055
this is perfectly inelastic demand.

00:01:15.055 --> 00:01:19.924
It's perfectly inelastic
... perfectly inelastic.

00:01:20.955 --> 00:01:21.858
The way you can think about it,

00:01:21.858 --> 00:01:22.982
I kind of think of a brick

00:01:22.982 --> 00:01:24.263
as perfectly inelastic.

00:01:24.263 --> 00:01:25.861
No matter how much you
push or pull on the brick

00:01:25.861 --> 00:01:28.932
within reason, at least
with my level of strength,

00:01:28.932 --> 00:01:31.729
you're not going to be
able to deform the brick.

00:01:31.740 --> 00:01:33.336
That's the opposite of a rubber band,

00:01:33.336 --> 00:01:35.279
which is very elastic, or you can

00:01:35.279 --> 00:01:37.279
think about the definition of elasticity,

00:01:37.279 --> 00:01:38.445
the one that we've been using,

00:01:38.445 --> 00:01:41.746
elasticity is equal to percent,

00:01:41.746 --> 00:01:48.030
change in quantity over
percent, change in price.

00:01:48.030 --> 00:01:49.135
Over here, no matter how much we

00:01:49.135 --> 00:01:50.940
change price within reason,

00:01:50.940 --> 00:01:53.401
at least in this range of
price along this curve,

00:01:53.401 --> 00:01:55.382
people are still going to demand

00:01:55.382 --> 00:02:00.211
a quantity of 3,000 vials per year.

00:02:00.211 --> 00:02:04.379
Let's just draw a supply curve here,

00:02:04.379 --> 00:02:05.800
so let's do a supply curve,

00:02:05.800 --> 00:02:07.625
looks something like that,

00:02:07.625 --> 00:02:11.664
So if you have ... this is supply,

00:02:11.664 --> 00:02:13.882
so if you have no taxes,

00:02:13.882 --> 00:02:16.297
no regulation of this market,

00:02:16.297 --> 00:02:18.303
based on the way I've
drawn it right over here,

00:02:18.303 --> 00:02:19.630
the equilibrium price lands us

00:02:19.630 --> 00:02:21.808
right around $75.

00:02:21.808 --> 00:02:23.342
I did a little research before this video,

00:02:23.342 --> 00:02:24.122
it actually turns out that is

00:02:24.122 --> 00:02:26.889
about the market price
for a vial of insulin.

00:02:26.889 --> 00:02:29.229
The equilibrium quantity, because that is

00:02:29.229 --> 00:02:30.564
the exact quantity that people need

00:02:30.564 --> 00:02:32.064
is 3,000 vials.

00:02:32.064 --> 00:02:34.477
A slightly interesting
thing to think about

00:02:34.477 --> 00:02:36.396
in this situation where you have perfectly

00:02:36.396 --> 00:02:39.942
inelastic demand, is
what is the producer's

00:02:39.942 --> 00:02:42.290
surplus and the consumer's surplus?

00:02:42.290 --> 00:02:44.944
The producer's surplus is how much more

00:02:44.944 --> 00:02:46.356
money they're getting relative to their,

00:02:46.356 --> 00:02:48.801
you can view them as
their opportunity cost

00:02:48.801 --> 00:02:50.803
or their incremental marginal cost,

00:02:50.803 --> 00:02:52.120
and here we will [unintelligible]

00:02:52.120 --> 00:02:53.115
multiple times, this is the producer's

00:02:53.115 --> 00:02:54.448
surplus right over here.

00:02:54.448 --> 00:02:56.256
It's the area between the prices equal

00:02:56.256 --> 00:02:58.391
to the clearing price
and our supply curve.

00:02:58.391 --> 00:03:00.736
So, that's our producer surplus.

00:03:00.736 --> 00:03:03.571
Producer surplus.

00:03:03.571 --> 00:03:05.824
Our consumer surplus is where things

00:03:05.824 --> 00:03:06.993
get a little bit interesting.

00:03:06.993 --> 00:03:09.119
Consumer surplus is how much more

00:03:09.119 --> 00:03:10.390
marginal benefit people are getting

00:03:10.390 --> 00:03:12.460
than what they are paying.

00:03:12.460 --> 00:03:14.657
We've traditionally said that's the area

00:03:14.657 --> 00:03:17.574
between the demand curve and the price.

00:03:17.574 --> 00:03:21.047
But now, all of a sudden,
this area is infinite.

00:03:21.063 --> 00:03:22.879
This area is infinite.

00:03:22.879 --> 00:03:24.198
One way to think about it is that

00:03:24.198 --> 00:03:25.878
these diabetics get, you could almost say

00:03:25.878 --> 00:03:27.657
close to infinite marginal benefit

00:03:27.657 --> 00:03:28.391
from that insulin.

00:03:28.391 --> 00:03:30.211
It allows them to have a healthy life.

00:03:30.211 --> 00:03:32.547
It allows them to stay alive.

00:03:32.547 --> 00:03:34.932
For them, it's essentially priceless.

00:03:34.932 --> 00:03:37.550
It's kind of an interesting idea that

00:03:37.550 --> 00:03:39.592
you have infinite consumer surplus.

00:03:39.592 --> 00:03:40.993
It's not necessarily saying that this

00:03:40.993 --> 00:03:42.590
is like a great deal for the diabetics,

00:03:42.590 --> 00:03:43.727
it's really just saying that their benefit

00:03:43.727 --> 00:03:45.731
is something that they need to survive.

00:03:45.731 --> 00:03:47.945
If this was just slightly more elastic,

00:03:47.945 --> 00:03:49.445
so if we were to get, maybe to a slghtly

00:03:49.445 --> 00:03:50.713
more real world scenario.

00:03:50.713 --> 00:03:52.197
In a real world, if things got

00:03:52.197 --> 00:03:53.112
a little bit more expensive,

00:03:53.112 --> 00:03:54.279
there might be a few diabetics who

00:03:54.279 --> 00:03:55.318
would all of a sudden try to lower

00:03:55.318 --> 00:03:57.382
their dose or something like that.

00:03:57.382 --> 00:03:59.913
The curve, in a real world, actually might

00:03:59.913 --> 00:04:01.779
have some very slight elasticity.

00:04:01.779 --> 00:04:03.117
It would still be a very steep slope,

00:04:03.117 --> 00:04:05.532
but it would actually have
some slight elasticity.

00:04:05.532 --> 00:04:07.284
You could imagine if I kept taking this

00:04:07.284 --> 00:04:09.525
up and up and up, and at some point,

00:04:09.525 --> 00:04:11.616
it actually would bound the area,

00:04:11.616 --> 00:04:13.443
but it would, so maybe it goes up here.

00:04:13.443 --> 00:04:15.717
Maybe if this was like $2 million up here,

00:04:15.717 --> 00:04:17.777
then the demand would
go down dramatically,

00:04:17.777 --> 00:04:19.779
but it would be bounded.

00:04:19.779 --> 00:04:23.049
But it is a very, very,
very large consumer surplus.

00:04:23.049 --> 00:04:24.112
Now with that out of the way,

00:04:24.112 --> 00:04:25.448
let's think about what happens

00:04:25.448 --> 00:04:26.861
if some misguided politician decides

00:04:26.861 --> 00:04:28.286
to tax insulin.

00:04:28.286 --> 00:04:29.650
Obviously a very bad idea,

00:04:29.650 --> 00:04:30.717
and nothing that I would ever advocate,

00:04:30.717 --> 00:04:33.316
but let's think about who
would bear the burden?

00:04:33.316 --> 00:04:34.316
I think you could probably guess

00:04:34.316 --> 00:04:35.713
who would bear the burden if you had

00:04:35.713 --> 00:04:37.447
to put a tax, but we'll actually see it.

00:04:37.447 --> 00:04:38.585
We'll think it through with our

00:04:38.585 --> 00:04:42.199
supply and our perfectly
inelastic demand curve.

00:04:42.199 --> 00:04:45.613
What ends up getting passed is a tax

00:04:45.613 --> 00:04:48.383
of $10 per vial.

00:04:48.383 --> 00:04:50.049
I'm just making it,
instead of a percentage,

00:04:50.049 --> 00:04:51.531
I'm just doing it as a fixed amount

00:04:51.531 --> 00:04:53.311
so that we get kind of a fixed shift

00:04:53.311 --> 00:04:57.276
in terms of the perceived supply price.

00:04:57.276 --> 00:04:59.313
For the producers, this
is what they need to get.

00:04:59.313 --> 00:05:01.049
If you want them to produce 3,000 vials,

00:05:01.049 --> 00:05:03.280
they need to get $75.

00:05:03.280 --> 00:05:05.713
If you [unintelligible] that first vial,

00:05:05.713 --> 00:05:07.443
they need to get $60.

00:05:07.443 --> 00:05:10.512
What the producers need
to get, plus the tax,

00:05:10.512 --> 00:05:11.532
we can draw a new curve.

00:05:11.532 --> 00:05:13.114
We've done this multiple times.

00:05:13.114 --> 00:05:15.445
For the very first vial,
the producer needs $60,

00:05:15.445 --> 00:05:17.980
but then you add the tax there,

00:05:17.980 --> 00:05:19.583
it's going to be $70.

00:05:19.583 --> 00:05:21.650
For 1,000 vials, it looks
like it's going to be

00:05:21.650 --> 00:05:22.613
I don't know, 60 something ...

00:05:22.613 --> 00:05:25.980
you add the tax, it's
going to move up to here.

00:05:25.980 --> 00:05:28.361
For 3,000 vials, the producers need

00:05:28.361 --> 00:05:31.449
around $75, $76, you add $10 to it,

00:05:31.449 --> 00:05:33.779
it gets to $85, $86 like that.

00:05:33.779 --> 00:05:36.051
What you get is this new curve,

00:05:36.051 --> 00:05:39.112
you could use the price from the

00:05:39.112 --> 00:05:41.388
consumer's point of view,

00:05:41.388 --> 00:05:43.470
or you could view it as

00:05:43.470 --> 00:05:46.636
the supply plus tax curve.

00:05:46.636 --> 00:05:53.522
I'll call this supply plus tax curve

00:05:53.522 --> 00:05:54.549
and that's hard to read, but that

00:05:54.549 --> 00:05:56.056
says tax over there.

00:05:56.056 --> 00:05:57.888
This is the supply plus tax curve.

00:05:57.888 --> 00:06:00.806
Where does that intersect our perfectly

00:06:00.806 --> 00:06:02.807
inelastic demand curve?

00:06:02.807 --> 00:06:03.989
Well, you can imagine people,

00:06:03.989 --> 00:06:06.326
even though the prices are higher,

00:06:06.326 --> 00:06:10.258
people still have to get
exactly 3,000 vials per year.

00:06:10.258 --> 00:06:12.191
They intersect right at that quantity,

00:06:12.191 --> 00:06:14.328
but now we have a new equilibrium price.

00:06:14.328 --> 00:06:18.218
Our new equilibrium price
is exactly $10 higher.

00:06:18.218 --> 00:06:23.992
If this was $75 or $76,
this is $85 or $86.

00:06:23.992 --> 00:06:28.724
This distance right over here is $10.

00:06:28.724 --> 00:06:29.792
Let's think about a few things.

00:06:29.792 --> 00:06:31.190
Let's think about the total revenue

00:06:31.190 --> 00:06:34.804
that the government is going
to get in this situation.

00:06:34.804 --> 00:06:36.552
The total revenue is going to be

00:06:36.552 --> 00:06:40.460
that $10 times the
3,000 vials per year ...

00:06:40.460 --> 00:06:42.311
times 3,000.

00:06:42.311 --> 00:06:48.350
So they're going to get $30,000 per year.

00:06:48.350 --> 00:06:51.750
Let's think about whose
surplus that came out of.

00:06:51.750 --> 00:06:53.536
The tax revenue, this right over here

00:06:53.536 --> 00:06:55.339
is the tax revenue.

00:06:55.339 --> 00:06:57.338
That right over there is the tax revenue.

00:06:57.338 --> 00:06:58.605
The producers are still going to have the

00:06:58.605 --> 00:07:00.809
exact same producer surplus,

00:07:00.809 --> 00:07:04.421
so all of that tax revenue came directly

00:07:04.421 --> 00:07:06.871
out of the consumer surplus.

00:07:06.871 --> 00:07:09.876
Another interesting thing to note here is,

00:07:09.876 --> 00:07:11.871
because we had this
perfectly inelastic demand,

00:07:11.871 --> 00:07:13.421
that even when you raise the price,

00:07:13.421 --> 00:07:15.831
it didn't lower the quantity demanded

00:07:15.831 --> 00:07:17.866
that we actually don't have
a dead weight loss here

00:07:17.866 --> 00:07:19.415
because this was perfectly inelastic.

00:07:19.415 --> 00:07:21.268
We're actually having the
same quantity produced

00:07:21.268 --> 00:07:26.335
so you have a transfer of surplus from

00:07:26.335 --> 00:07:28.506
essentially the diabetics
to the government

00:07:28.506 --> 00:07:30.536
in this situation, but you don't have any

00:07:30.536 --> 00:07:36.068
lost surplus here because
there's no lost area,

00:07:36.068 --> 00:07:38.874
I guess you could say, between where

00:07:38.874 --> 00:07:43.863
the supply curve and the
demand curves intersect.

00:07:43.863 --> 00:07:45.069
Another way to think about it is

00:07:45.069 --> 00:07:47.833
the quantity demand
did not go down because

00:07:47.833 --> 00:07:51.000
the price went up.


Percentage tax on hamburgers

WEBVTT
Kind: captions
Language: en

00:00:00.352 --> 00:00:02.407
Voiceover: In the last
video on taxing hamburgers,

00:00:02.407 --> 00:00:04.673
I did a somewhat artificial thing

00:00:04.673 --> 00:00:06.437
where I taxed hamburgers

00:00:06.437 --> 00:00:08.439
with an absolute dollar amount.

00:00:08.439 --> 00:00:11.352
Typically, consumption
taxes are a percentage

00:00:11.352 --> 00:00:13.852
of the actual price of the goods.

00:00:13.852 --> 00:00:17.071
For example, sales taxes might be 8% or 9%

00:00:17.071 --> 00:00:18.871
of whatever you are buying.

00:00:18.871 --> 00:00:21.187
Let's think about how the supply curve,

00:00:21.187 --> 00:00:24.405
as perceived by the consumers, would look

00:00:24.405 --> 00:00:26.852
if we had a percentage tax.

00:00:26.852 --> 00:00:29.604
Now, our government, instead of taxing

00:00:29.604 --> 00:00:32.938
$1 per hamburger, let's
say that their tax is,

00:00:32.938 --> 00:00:36.870
and I'll make it big just to
make it a clear, so we can see

00:00:36.870 --> 00:00:41.937
the result of it, let's say
their tax is 20% of the price.

00:00:41.937 --> 00:00:44.603
20% of the price of the hamburger.

00:00:44.603 --> 00:00:46.186
Let's think what's going to happen.

00:00:46.186 --> 00:00:47.352
Just like we saw in the last video,

00:00:47.352 --> 00:00:48.936
in order for producers to even think

00:00:48.936 --> 00:00:51.268
about producing that first hamburger,

00:00:51.268 --> 00:00:54.004
they need to get $2 per hamburger for it,

00:00:54.004 --> 00:00:55.871
because that's their opportunity cost.

00:00:55.871 --> 00:00:59.340
Using those same inputs,
that same labor and resources

00:00:59.340 --> 00:01:03.404
their other opportunity
would give them at least $2,

00:01:03.404 --> 00:01:05.669
so you have to give them at
least $2 in order to focus

00:01:05.669 --> 00:01:07.002
on hamburgers.

00:01:07.002 --> 00:01:09.007
Every incremental hamburger after that,

00:01:09.007 --> 00:01:10.838
the opportunity cost goes more,

00:01:10.838 --> 00:01:13.134
because now they'll be using
things that are slightly

00:01:13.134 --> 00:01:15.424
less suited for making
hamburgers and maybe slightly

00:01:15.424 --> 00:01:18.468
more suited for making other things.

00:01:18.468 --> 00:01:21.340
Now, that very first
hamburger, you need to get $2

00:01:21.340 --> 00:01:24.133
for it from the supplier point of view,

00:01:24.133 --> 00:01:26.257
but from the consumer point
of view, they can't just pay

00:01:26.257 --> 00:01:27.267
$2 for it.

00:01:27.267 --> 00:01:31.600
They're going to have to
pay $2 plus 20% of the $2.

00:01:31.600 --> 00:01:36.163
20% of $2 is $0.40, so from
the consumer's point of view

00:01:36.163 --> 00:01:41.492
I'll do it in blue, they're
going to have to pay about $2.40.

00:01:42.591 --> 00:01:44.406
Right over here, if you
want to get the suppliers

00:01:44.406 --> 00:01:48.489
to produce about 2.5
million hamburgers per day,

00:01:48.489 --> 00:01:50.406
they're going to have
to get, especially for

00:01:50.406 --> 00:01:53.986
those incremental
hamburgers, in order to get

00:01:53.986 --> 00:01:56.921
2.5 million hamburgers
produced, you're going to have

00:01:56.921 --> 00:01:59.320
to give $3 per hamburger for the supplier,

00:01:59.320 --> 00:02:01.552
but the consumer's not
going to be able to pay $3,

00:02:01.552 --> 00:02:04.217
they're going to have to pay $3 plus 20%,

00:02:04.217 --> 00:02:11.367
so that's $3.60, so that will
put us right about there.

00:02:11.367 --> 00:02:14.815
If you go further,
instead of $4, if you want

00:02:14.815 --> 00:02:16.650
the producers to produce right

00:02:16.650 --> 00:02:19.983
around 4 million hamburgers
per day, you'd have

00:02:19.983 --> 00:02:22.119
to pay them $4, but the
consumers would have to pay

00:02:22.119 --> 00:02:24.150
20% more than that, so
they're going to have

00:02:24.150 --> 00:02:26.452
to pay $4.80.

00:02:26.452 --> 00:02:28.519
What you're going to see
is, from the consumer's

00:02:28.519 --> 00:02:30.982
point of view, the supply
curve, I should say,

00:02:30.982 --> 00:02:33.565
is going to look something like this.

00:02:33.565 --> 00:02:36.586
It's not going to shift a fixed amount up,

00:02:36.586 --> 00:02:40.064
it's going to shift 20% up.

00:02:40.064 --> 00:02:42.650
Let me do that ...

00:02:42.650 --> 00:02:44.983
It's going to shift something like that.

00:02:44.983 --> 00:02:46.563
For lower values, it's going to shift

00:02:46.563 --> 00:02:50.316
a less absolute amount,
because 20% of $2 is less

00:02:50.316 --> 00:02:55.316
than $20 of $3, which
is less than 20% of $4,

00:02:55.316 --> 00:02:58.316
so as we have more
quantity and more price,

00:02:58.316 --> 00:03:00.233
it'll shift up more and more,

00:03:00.233 --> 00:03:05.784
because 20% will then become
a larger absolute amount

00:03:05.784 --> 00:03:07.651
so the shift will look
something like this.

00:03:07.651 --> 00:03:15.523
At any given point, that is 20%.

00:03:15.523 --> 00:03:20.118
It's 20% higher than the
price that the suppliers

00:03:20.118 --> 00:03:22.650
and the producers would
see, so it's going to be 20%

00:03:22.650 --> 00:03:26.733
than $6 there, so this is
going to be $1.20 higher,

00:03:26.733 --> 00:03:28.452
but you have the same exact phenomenon

00:03:28.452 --> 00:03:30.520
that we saw in the previous video.

00:03:30.520 --> 00:03:36.451
In the previous video, this
entire area was the surplus

00:03:36.451 --> 00:03:39.920
that both the consumers
and the producers share.

00:03:39.920 --> 00:03:46.918
Now, the equilibrium quantity is less.

00:03:46.918 --> 00:03:48.526
It's going to move right
over there, because we have

00:03:48.526 --> 00:03:50.051
this new curve.

00:03:50.051 --> 00:03:52.206
Our new equilibrium quantity is over here,

00:03:52.206 --> 00:03:54.456
so neither the consumers,
nor the government,

00:03:54.456 --> 00:03:57.718
nor the producers are going
to be able to take advantage

00:03:57.718 --> 00:04:01.586
of this surplus, which was
there when you didn't have

00:04:01.586 --> 00:04:02.872
the taxation.

00:04:02.872 --> 00:04:06.916
This is why taxation is
generally considered inefficient.

00:04:06.916 --> 00:04:08.261
Obviously you have to do some of it,

00:04:08.261 --> 00:04:09.611
but it's generally inefficient.

00:04:09.611 --> 00:04:12.947
It reduces some level of
economic activity, at least

00:04:12.947 --> 00:04:15.861
if you make all the
assumptions in this model,

00:04:15.861 --> 00:04:17.789
and you have this dead weight loss.

00:04:17.789 --> 00:04:20.989
This surplus that can't be had by anyone,

00:04:20.989 --> 00:04:27.362
so you still have a dead weight loss.

00:04:27.362 --> 00:04:29.696
If you look at the revenue
that the government

00:04:29.696 --> 00:04:34.587
will now have, it will
still be this quantity.

00:04:34.587 --> 00:04:36.030
It looks like our equilibrium quantity

00:04:36.030 --> 00:04:38.614
is now 3 million hamburgers per day,

00:04:38.614 --> 00:04:40.321
which is about what we
got in the last one.

00:04:40.321 --> 00:04:42.613
Obviously I'm not doing
this very precisely,

00:04:42.613 --> 00:04:46.921
and it's going to be $0.60,
so 20% times $3 is $0.60,

00:04:46.921 --> 00:04:49.195
so the height is going to be $0.60.

00:04:49.195 --> 00:04:52.780
This height right over
here is $0.60 and the width

00:04:52.780 --> 00:04:55.112
right over here is 3 million hamburgers.

00:04:55.112 --> 00:04:58.280
It's going to be $0.60 per hamburger,

00:04:58.280 --> 00:05:02.529
which is 20% of its price per hamburger

00:05:02.529 --> 00:05:13.279
times 3 million hamburgers,
gives us $1.8 million per day

00:05:13.279 --> 00:05:15.186
and just like the previous one,

00:05:15.186 --> 00:05:18.453
now the producer's surplus has shrunken.

00:05:18.453 --> 00:05:21.611
The producer's surplus
is now just going to be

00:05:21.611 --> 00:05:23.989
this area right over here.

00:05:23.989 --> 00:05:25.945
The producer's surplus is
just going to be that area

00:05:25.945 --> 00:05:27.787
right over there and the consumer surplus

00:05:27.787 --> 00:05:29.455
has also been shrunken.

00:05:29.455 --> 00:05:33.633
It's been bitten into by the tax revenue

00:05:33.633 --> 00:05:36.588
and the dead weight loss
takes from both the producer

00:05:36.588 --> 00:05:40.000
and consumer surplus.


Taxation and dead weight loss

WEBVTT
Kind: captions
Language: en

00:00:00.869 --> 00:00:02.538
Voiceover: Let's look a
little bit at the market

00:00:02.538 --> 00:00:04.603
for hamburgers.

00:00:04.603 --> 00:00:08.328
This is the supply and the
demand curve for the price

00:00:08.328 --> 00:00:11.659
and the quantity of
hamburgers sold per day.

00:00:11.659 --> 00:00:13.939
If we have a completely unfettered market,

00:00:13.939 --> 00:00:16.671
no intervention, no
taxes, nothing like that,

00:00:16.671 --> 00:00:18.671
then we see we have an equilibrium price

00:00:18.671 --> 00:00:20.081
and an equilibrium quantity.

00:00:20.081 --> 00:00:25.408
The equilibrium price
looks like it's about $3.75

00:00:25.408 --> 00:00:27.828
per hamburger.

00:00:27.828 --> 00:00:30.575
The equilibrium quantity looks like it's

00:00:30.575 --> 00:00:32.605
about a little bit more ...

00:00:32.605 --> 00:00:34.269
Maybe if I draw that line
a little bit differently,

00:00:34.269 --> 00:00:37.482
the equilibrium quantity
looks like it's about $3 -

00:00:37.482 --> 00:00:42.731
Sorry, it's about 3.5
million hamburgers per day.

00:00:42.731 --> 00:00:44.609
Just to review what we've
talked about before,

00:00:44.609 --> 00:00:50.895
up here, below the demand
curve and above the price.

00:00:52.078 --> 00:00:55.995
The price equals $3.75
line, right over here.

00:00:55.995 --> 00:00:59.078
This is how much value,
this is how much benefit

00:00:59.078 --> 00:01:01.193
the consumers are getting above and beyond

00:01:01.193 --> 00:01:02.661
what they have to pay.

00:01:02.661 --> 00:01:05.960
That is the consumer surplus.

00:01:09.128 --> 00:01:12.744
Then, between this price equals $3.75 line

00:01:12.744 --> 00:01:16.993
and the supply curve, you
have your producer surplus.

00:01:16.993 --> 00:01:20.193
This is how much more
the producers are getting

00:01:20.193 --> 00:01:22.928
for each hamburger, relative to what

00:01:22.928 --> 00:01:24.661
their opportunity cost of producing

00:01:24.661 --> 00:01:27.260
that incremental hamburger was.

00:01:27.260 --> 00:01:30.461
This right over here is
the producer surplus.

00:01:32.080 --> 00:01:33.126
Now, let's say ...

00:01:33.126 --> 00:01:36.858
Actually these numbers
are quasi-realistic.

00:01:36.858 --> 00:01:39.329
I have a 3.5 million hamburgers per day.

00:01:39.329 --> 00:01:40.526
I actually looked it up before this video.

00:01:40.526 --> 00:01:41.994
It looks like McDonalds, at least based

00:01:41.994 --> 00:01:44.660
on the information I
got, sells a little bit

00:01:44.660 --> 00:01:47.661
over 4 million hamburgers
per day in the United States.

00:01:47.661 --> 00:01:49.411
I didn't clarify whether
this is just hamburgers

00:01:49.411 --> 00:01:51.326
from one vendor or multiple vendors,

00:01:51.326 --> 00:01:53.326
but it's not a crazy number
of hamburgers to sell

00:01:53.326 --> 00:01:54.858
in a fairly large country.

00:01:54.858 --> 00:01:56.259
For the sake of this, it's not necessarily

00:01:56.259 --> 00:01:57.594
McDonalds hamburgers,
we're just talking about

00:01:57.594 --> 00:02:00.330
this is the total market
for hamburgers in a country.

00:02:00.330 --> 00:02:02.059
We're making the simplifying assumption

00:02:02.059 --> 00:02:04.391
that all hamburgers are created equal,

00:02:04.391 --> 00:02:06.825
which we know is not true.

00:02:06.825 --> 00:02:09.993
Now, the government in this
hypothetical civilization

00:02:09.993 --> 00:02:14.792
says, "Wow, a lot of
hamburgers are being sold.

00:02:14.792 --> 00:02:18.374
"We need more revenue for the government

00:02:18.374 --> 00:02:21.724
"to do other things," or
maybe to pay off their debt

00:02:21.724 --> 00:02:23.207
or whatever they need to do.

00:02:23.207 --> 00:02:26.057
So they decide to tax hamburgers.

00:02:26.057 --> 00:02:28.458
They want to tax hamburgers.

00:02:28.458 --> 00:02:29.594
They're going to make it very simple.

00:02:29.594 --> 00:02:30.658
They're not even going to do a percentage.

00:02:30.658 --> 00:02:33.592
Most sales taxes tend to be
a percentage of the price,

00:02:33.592 --> 00:02:35.991
but instead they're just
going to do a tax of $1

00:02:35.991 --> 00:02:38.173
per hamburger.

00:02:41.875 --> 00:02:46.666
Let's think about what
this does to the surplus,

00:02:46.666 --> 00:02:48.957
to the price at which
transactions will go on

00:02:48.957 --> 00:02:50.124
and what people will have to pay

00:02:50.124 --> 00:02:52.124
versus what they will have to get.

00:02:52.124 --> 00:02:56.123
At any given point, if we
look at the supply curve

00:02:56.123 --> 00:02:58.209
right over here, in order
to get someone to produce

00:02:58.209 --> 00:03:01.624
that very first hamburger,
they have to get at least $2

00:03:01.624 --> 00:03:03.541
for it, because that's
their opportunity cost.

00:03:03.541 --> 00:03:05.957
They could use those exact
same resources, that land,

00:03:05.957 --> 00:03:08.958
the labor, whatever else,
to produce something else

00:03:08.958 --> 00:03:11.457
that has $2 of value, so you
have pay them at least $2

00:03:11.457 --> 00:03:13.624
in order for them to produce hamburgers.

00:03:13.624 --> 00:03:15.791
The more hamburgers you want
the suppliers to produce

00:03:15.791 --> 00:03:17.126
you have to pay them more and more

00:03:17.126 --> 00:03:18.391
for those incremental hamburgers,

00:03:18.391 --> 00:03:20.207
because they're going
to start using resources

00:03:20.207 --> 00:03:23.124
that might have better
used for other things

00:03:23.124 --> 00:03:26.540
and that are not as efficiently
used for hamburgers.

00:03:26.540 --> 00:03:28.124
You have to pay them
more and more and more.

00:03:28.124 --> 00:03:31.041
This is what the supply
curve that I originally drew

00:03:31.041 --> 00:03:34.124
in magenta is what the
suppliers need to see

00:03:34.124 --> 00:03:35.659
in order to produce a certain quantity.

00:03:35.659 --> 00:03:38.058
If you want them to produce
3 million hamburgers,

00:03:38.058 --> 00:03:43.325
you have to be willing
to pay $3 per hamburger,

00:03:43.325 --> 00:03:44.925
because that's their opportunity cost

00:03:44.925 --> 00:03:48.041
of those incremental hamburgers up here.

00:03:48.041 --> 00:03:49.958
Now, let's think about
what happens when you add

00:03:49.958 --> 00:03:51.059
the tax.

00:03:51.059 --> 00:03:53.058
This is what the
suppliers are going to get

00:03:53.058 --> 00:03:55.326
or the producers are going to get,

00:03:55.326 --> 00:03:57.124
but when you put a tax,
the consumers are going

00:03:57.124 --> 00:03:58.958
to have to pay a dollar more.

00:03:58.958 --> 00:04:01.392
Over here, in order to produce this much,

00:04:01.392 --> 00:04:05.326
the suppliers are going to
have to get $3 per hamburger,

00:04:05.326 --> 00:04:06.538
but then the consumers are going to have

00:04:06.538 --> 00:04:08.278
to pay a dollar more,
so they're going to have

00:04:08.278 --> 00:04:11.108
to pay $1 more.

00:04:11.108 --> 00:04:12.597
In order to get the suppliers to produce

00:04:12.597 --> 00:04:14.532
2 million hamburgers, you're
going to have to pay them

00:04:14.532 --> 00:04:15.853
this much, you're going
to have to pay them

00:04:15.853 --> 00:04:18.017
about $2.50, but then
the consumers are going

00:04:18.017 --> 00:04:19.794
to have to pay a dollar more than that.

00:04:19.794 --> 00:04:21.352
They're going to have to pay that much.

00:04:21.352 --> 00:04:23.100
In order to get them to produce it all,

00:04:23.100 --> 00:04:25.129
you're going to have to pay at least $2,

00:04:25.129 --> 00:04:28.268
but then if the suppliers
or producers are getting $2,

00:04:28.268 --> 00:04:30.268
the consumers are going to
have to pay a dollar more

00:04:30.268 --> 00:04:33.482
for the tax.

00:04:33.482 --> 00:04:36.119
One way to think about
it is the supply curve,

00:04:36.119 --> 00:04:39.150
from the consumer's point of
view, is going to be shifted

00:04:39.150 --> 00:04:42.590
a dollar more than the supply
curve from the producer's

00:04:42.590 --> 00:04:43.650
point of view.

00:04:43.650 --> 00:04:46.732
It's going to be shifted up
$1, so it's going to look

00:04:46.732 --> 00:04:48.522
something ... I can do
a better job than that.

00:04:48.522 --> 00:04:52.403
It's going to look something like that.

00:04:52.403 --> 00:04:54.315
At every point, because
this is a fixed dollar,

00:04:54.315 --> 00:04:56.650
it's not a percentage, at
every point, this distance

00:04:56.650 --> 00:05:01.116
right over here is going to be $1.

00:05:01.116 --> 00:05:02.182
What happens there?

00:05:02.182 --> 00:05:06.782
From the consumer's point
of view, what we have

00:05:06.782 --> 00:05:10.402
is now a new price that
they're willing to consume at,

00:05:10.402 --> 00:05:14.650
because now this reality
is not possible anymore.

00:05:14.650 --> 00:05:18.316
There's no way for the
consumers to pay $3.50

00:05:18.316 --> 00:05:21.582
and for the producers
to see $3.50, as well.

00:05:21.582 --> 00:05:25.653
So we get to a new equilibrium price

00:05:25.653 --> 00:05:28.315
and equilibrium quantity now, because now,

00:05:28.315 --> 00:05:30.581
since this is from the
consumer's point of view,

00:05:30.581 --> 00:05:33.248
the point at which they
intersect is right over there,

00:05:33.248 --> 00:05:36.734
which is about a little
bit over $4 per burger

00:05:36.734 --> 00:05:38.582
and it's a slightly lower quantity.

00:05:38.582 --> 00:05:41.316
It's about, let's just say
just for round numbers,

00:05:41.316 --> 00:05:44.847
that's about 3 million burgers per day.

00:05:44.847 --> 00:05:47.381
What happened there?

00:05:47.381 --> 00:05:50.183
Before this whole area
was a total surplus.

00:05:50.183 --> 00:05:52.566
Below this green line
was the producer surplus,

00:05:52.566 --> 00:05:54.984
above the green line and
below this curve right here

00:05:54.984 --> 00:05:56.583
was the consumer surplus.

00:05:56.583 --> 00:05:58.448
Now we've lost part of it.

00:05:58.448 --> 00:06:02.248
We've lost this part right over here,

00:06:02.248 --> 00:06:03.662
so this is our dead weight loss.

00:06:03.662 --> 00:06:06.080
This is no longer part
of the total consumer

00:06:06.080 --> 00:06:07.662
and producer surplus.

00:06:07.662 --> 00:06:09.456
That is dead weight loss.

00:06:09.456 --> 00:06:13.662
The taxation got us from
an efficient situation,

00:06:13.662 --> 00:06:16.664
where we had that maximum consumer

00:06:16.664 --> 00:06:19.381
and producer surplus.

00:06:19.662 --> 00:06:21.994
This is our dead weight loss over here.

00:06:21.994 --> 00:06:25.412
How much revenue is the
government going to get now?

00:06:25.412 --> 00:06:27.456
Well, if we assume that this is 3 million,

00:06:27.456 --> 00:06:31.048
they're going to have 3 million burgers.

00:06:31.048 --> 00:06:32.623
This is 3 million right over here.

00:06:32.623 --> 00:06:34.205
They're going to have 3 million burgers

00:06:34.205 --> 00:06:37.291
times a dollar per burger.

00:06:37.291 --> 00:06:38.714
Let me do it this way.

00:06:38.714 --> 00:06:41.706
This length right over here is going to be

00:06:41.706 --> 00:06:44.518
the area of this rectangle
that I'm doing in orange.

00:06:44.518 --> 00:06:47.316
This length right over here is 3.

00:06:47.316 --> 00:06:49.314
That length right over there is 3 million

00:06:49.314 --> 00:06:52.581
and then height is that dollar.

00:06:52.581 --> 00:06:54.316
Let me shade it in.

00:06:54.316 --> 00:06:58.014
The height is that
dollar right over there.

00:06:58.248 --> 00:06:59.982
This is going to be $1 height.

00:06:59.982 --> 00:07:02.914
The tax revenue that the
government is going to get

00:07:02.914 --> 00:07:04.784
is 3 million times $1.

00:07:04.784 --> 00:07:07.534
3 million burgers times
$1, which is going to be

00:07:07.534 --> 00:07:11.915
$3 million per day, which is interesting,

00:07:11.915 --> 00:07:13.647
because maybe the
government officials thought

00:07:13.647 --> 00:07:14.982
they were going to get
more, because they look

00:07:14.982 --> 00:07:16.535
at the projections and they say, "Wait.

00:07:16.535 --> 00:07:19.382
"There's going to be 3.5
million burgers sold per day,

00:07:19.382 --> 00:07:21.450
"so I'm going to get $3.5 million."

00:07:21.450 --> 00:07:22.849
What they didn't realize
is that they're making

00:07:22.849 --> 00:07:25.383
the burgers more
expensive, so there's going

00:07:25.383 --> 00:07:29.952
to be a lower quantity demanded.

00:07:29.952 --> 00:07:31.715
The actual clearing quantity

00:07:31.715 --> 00:07:34.286
or the actual equilibrium
quantity now is only going

00:07:34.286 --> 00:07:35.701
to be 3 million.

00:07:35.701 --> 00:07:38.582
The way we see it, it
removed this surplus here,

00:07:38.582 --> 00:07:40.204
from both the consumer surplus

00:07:40.204 --> 00:07:43.534
and the producer surplus
and no one's getting that,

00:07:43.534 --> 00:07:45.518
not even the government's getting that.

00:07:45.518 --> 00:07:47.618
No one's getting that
white part right over there

00:07:47.618 --> 00:07:49.648
and this orange part
right over here is eating

00:07:49.648 --> 00:07:55.095
into the consumer surplus,
so now they're paying more

00:07:55.095 --> 00:07:56.390
than ...

00:07:56.390 --> 00:07:58.429
Another way to think about
it is the difference between

00:07:58.429 --> 00:08:01.927
the benefit they're getting
and what they're paying

00:08:01.927 --> 00:08:04.857
at any given point, for any
given incremental consumer,

00:08:04.857 --> 00:08:09.126
is now less and the
producer surplus is less.

00:08:09.126 --> 00:08:12.458
The excess of what they're
getting for each hamburger

00:08:12.458 --> 00:08:15.427
versus their opportunity cost is now less.

00:08:15.427 --> 00:08:18.393
The producer surplus has
now been shrunken back

00:08:18.393 --> 00:08:21.260
to this area right over here
and these are curves here,

00:08:21.260 --> 00:08:23.525
so we can't just do simple
geometry to figure out

00:08:23.525 --> 00:08:24.602
the area of triangles.

00:08:24.602 --> 00:08:25.799
We would actually have
to do a little calculus

00:08:25.799 --> 00:08:27.732
to figure out the area of these curves.

00:08:27.732 --> 00:08:30.818
Then the consumer surplus
has been pushed back

00:08:30.818 --> 00:08:34.149
to this area above the
orange right over here.

00:08:34.149 --> 00:08:36.566
You see, governments, for the most part,

00:08:36.566 --> 00:08:39.399
have to do some type of
taxation in order to get revenue

00:08:39.399 --> 00:08:42.085
and it could be income tax
or it could be a sales tax,

00:08:42.085 --> 00:08:45.149
like this right over
here, but when they do it,

00:08:45.149 --> 00:08:47.596
it gets us into a non-efficient state

00:08:47.596 --> 00:08:51.654
and it does cause some,
depending on how these curves

00:08:51.654 --> 00:08:54.985
are shaped, it does cause
some dead weight loss.

00:08:54.985 --> 00:08:58.117
Some benefit in excess
of what had to be paid,

00:08:58.117 --> 00:09:01.016
some of that disappears,
but it allows, at least,

00:09:01.016 --> 00:09:02.851
the government to get
revenue, depending on whether

00:09:02.851 --> 00:09:05.416
you think that's a good thing or not.


Minimum wage and price floors

WEBVTT
Kind: captions
Language: en

00:00:00.626 --> 00:00:02.958
Voiceover: Let's think a little
bit about the labor market.

00:00:02.958 --> 00:00:04.469
In all of these videos,
whether we're talking

00:00:04.469 --> 00:00:06.405
about renting units or hiring people,

00:00:06.405 --> 00:00:09.127
these are huge oversimplifications,
but we're doing it

00:00:09.127 --> 00:00:12.402
in this way so we can apply
some of these basic ideas

00:00:12.402 --> 00:00:14.409
that we're being exposed to in this survey

00:00:14.409 --> 00:00:16.541
of microeconomics, so that we can apply

00:00:16.541 --> 00:00:19.408
those basic ideas to real world things.

00:00:19.408 --> 00:00:20.802
It's important to realize we're making

00:00:20.802 --> 00:00:23.969
huge oversimplifications and
often times the real context

00:00:23.969 --> 00:00:26.122
can be more complicated
or a little bit nuanced,

00:00:26.122 --> 00:00:28.135
but it gives us a way of
thinking about things.

00:00:28.135 --> 00:00:30.924
This is the unskilled labor
market, so people who don't

00:00:30.924 --> 00:00:34.595
have any specific training or
experience for a given job.

00:00:34.595 --> 00:00:36.989
The vertical axis is
their wage rate per hour.

00:00:36.989 --> 00:00:38.886
It's essentially the price of labor.

00:00:38.886 --> 00:00:41.321
This little gap here
shows I started at zero,

00:00:41.321 --> 00:00:43.923
but then I jumped up to five, six, seven.

00:00:43.923 --> 00:00:45.719
This right here is a quantity of labor.

00:00:45.719 --> 00:00:47.719
We're measuring that in
terms of millions of hours

00:00:47.719 --> 00:00:48.588
per month.

00:00:48.588 --> 00:00:50.258
Once again, we have this
little gap here, so we can jump

00:00:50.258 --> 00:00:54.386
to 20 million hours, 21 million hours.

00:00:54.386 --> 00:00:56.990
It's important to realize,
when we think about demand

00:00:56.990 --> 00:00:59.055
in the labor market, we're not talking

00:00:59.055 --> 00:01:01.552
about individual consumers, we're talking

00:01:01.552 --> 00:01:03.219
about employers.

00:01:03.219 --> 00:01:04.593
In most cases, demand comes

00:01:04.593 --> 00:01:06.551
from individual consumers,
but now the demand

00:01:06.551 --> 00:01:07.857
is coming from employers.

00:01:07.857 --> 00:01:10.390
These are the people who are
essentially buying labor.

00:01:10.390 --> 00:01:12.968
The supply is not coming
from corporations.

00:01:12.968 --> 00:01:15.470
The supply is coming from
the people who provide labor,

00:01:15.470 --> 00:01:18.689
so now it's coming from
individual workers.

00:01:18.723 --> 00:01:21.052
Now it is coming from workers.

00:01:21.052 --> 00:01:24.323
Let's just say that this market starts off

00:01:24.323 --> 00:01:27.724
completely unregulated,
so it has a natural

00:01:27.724 --> 00:01:34.989
equilibrium price or
equilibrium wage at $6 an hour

00:01:34.989 --> 00:01:38.660
and an equilibrium
quantity of labor supplied,

00:01:38.660 --> 00:01:44.046
which is 22 millions of hours per month.

00:01:44.046 --> 00:01:47.389
Let's say the government
in this hypothetical city

00:01:47.389 --> 00:01:49.858
or country says, "You know what?

00:01:49.858 --> 00:01:52.723
"$6 is a really low wage.

00:01:52.723 --> 00:01:55.056
"We have trouble imagining
how people live well

00:01:55.056 --> 00:01:57.048
"off of a $6 an hour wage."

00:01:57.048 --> 00:01:59.256
They say this right over here is too low.

00:01:59.256 --> 00:02:01.721
The government does not
like it and maybe many

00:02:01.721 --> 00:02:03.723
of their voters are
people making that wage,

00:02:03.723 --> 00:02:05.129
so they say, "Hey, you know what?

00:02:05.129 --> 00:02:07.921
"We are going pass some
well-intentioned legislation.

00:02:07.921 --> 00:02:10.213
"We are going to pass a minimum wage.

00:02:10.213 --> 00:02:13.213
"We are going to pass a law, minimum wage,

00:02:13.213 --> 00:02:18.722
"that says any employer has
to pay at least $7 an hour."

00:02:18.722 --> 00:02:20.257
$7 an hour.

00:02:20.257 --> 00:02:22.923
It has to be at least $7 an
hour, so this right over here

00:02:22.923 --> 00:02:26.990
is a price floor.

00:02:26.990 --> 00:02:29.257
This is a minimum price in the market.

00:02:29.257 --> 00:02:30.857
When we talked about rent control,

00:02:30.857 --> 00:02:32.461
that was a price ceiling.

00:02:32.461 --> 00:02:33.803
That was a maximum price for rent,

00:02:33.803 --> 00:02:37.391
now this is a minimum price for labor.

00:02:37.391 --> 00:02:40.991
Since the price floor, this
minimum price, is higher

00:02:40.991 --> 00:02:42.924
than the actual clearing
price, it's going to distort

00:02:42.924 --> 00:02:43.963
the market.

00:02:43.963 --> 00:02:47.397
Our price floor is right over here, $7.

00:02:47.397 --> 00:02:52.889
This right over here is our minimum wage.

00:02:52.889 --> 00:02:54.396
What's going to happen here?

00:02:54.396 --> 00:02:56.398
If you look at the demand side of things,

00:02:56.398 --> 00:02:57.861
the employers are going to say, "Wow!

00:02:57.861 --> 00:03:01.396
"If I have to pay $7 an
hour now, I can only afford

00:03:01.396 --> 00:03:04.264
"21 million hours of labor."

00:03:04.264 --> 00:03:06.222
They're going to say,
"I can only afford now

00:03:06.222 --> 00:03:12.056
"21 million hours of labor,"
but if you look at the workers

00:03:12.056 --> 00:03:19.533
they're going to say, "Gee,
if I can make $7 an hour,

00:03:19.533 --> 00:03:21.681
"more people are going
to be willing to work."

00:03:21.681 --> 00:03:23.267
Either an individual might say,

00:03:23.267 --> 00:03:26.461
"If I was working 40 hours
a week making $6 an hour.

00:03:26.461 --> 00:03:28.014
"If I'm making $7 an
hour, I'm willing to work

00:03:28.014 --> 00:03:29.865
"45 hours a week."

00:03:29.865 --> 00:03:31.931
Or there might be a
student who's on the fence,

00:03:31.931 --> 00:03:32.680
who says, "Wow!

00:03:32.680 --> 00:03:34.194
"Now wages have gone up
enough that it makes sense

00:03:34.194 --> 00:03:35.264
"for me to work."

00:03:35.264 --> 00:03:37.861
There might be someone
who's retired and now,

00:03:37.861 --> 00:03:40.462
at $6 wasn't enough for them
to come out of retirement,

00:03:40.462 --> 00:03:41.594
but $7 is.

00:03:41.594 --> 00:03:44.335
Maybe a stay at home parent
now says $7 is enough

00:03:44.335 --> 00:03:45.663
for them to come out of retirement

00:03:45.663 --> 00:03:48.329
or not stay at home anymore.

00:03:49.191 --> 00:03:52.693
The labor, the quantity
supplied of labor, in terms

00:03:52.693 --> 00:03:54.650
of hours, will increase.

00:03:54.650 --> 00:03:58.049
At $7 an hour, people
will be willing to supply

00:03:58.049 --> 00:04:02.707
that much labor, but
what's going to happen

00:04:02.707 --> 00:04:05.070
in this situation right over here?

00:04:05.070 --> 00:04:06.468
In this situation you
have all of these people

00:04:06.468 --> 00:04:08.373
who want to work, but there's only demand

00:04:08.373 --> 00:04:10.669
for this much work.

00:04:10.669 --> 00:04:14.090
Right here, this is going to
be an oversupply of labor.

00:04:15.137 --> 00:04:16.873
Another way to think about
it, there's only jobs

00:04:16.873 --> 00:04:21.040
for 21 million people now
and now 23 million people

00:04:21.040 --> 00:04:22.468
want to work.

00:04:22.468 --> 00:04:24.956
You're going to have 2
million people who are,

00:04:24.956 --> 00:04:27.001
by the classical definition of unemployed,

00:04:27.001 --> 00:04:28.539
people who are looking for work

00:04:28.539 --> 00:04:30.670
who can't find work now.

00:04:30.670 --> 00:04:32.707
Once again, this is
completely oversimplified,

00:04:32.707 --> 00:04:34.734
because at this point right over here,

00:04:34.734 --> 00:04:36.039
based on the way I just viewed that,

00:04:36.039 --> 00:04:38.735
you would have no
unemployment and we all know

00:04:38.735 --> 00:04:40.873
even when the economy is humming maximumly

00:04:40.873 --> 00:04:43.611
and there's no regulation,
there is some unemployment,

00:04:43.611 --> 00:04:45.126
just due to frictions in the market,

00:04:45.126 --> 00:04:48.694
people just randomly
quitting jobs or looking

00:04:48.694 --> 00:04:51.129
for a new job, so you
could almost view this

00:04:51.129 --> 00:04:52.267
as excess unemployment.

00:04:52.267 --> 00:04:53.662
Or you could view this as just a very

00:04:53.662 --> 00:04:56.280
oversimplified model and in
the ideal world you'd get

00:04:56.280 --> 00:04:57.861
close to zero unemployment.

00:04:57.861 --> 00:05:00.061
Now you have more people looking for jobs,

00:05:00.061 --> 00:05:02.662
because the wages have
gone, but fewer jobs,

00:05:02.662 --> 00:05:06.159
because the employers
are forced to pay more.

00:05:06.444 --> 00:05:07.994
If we make all of these
assumptions in the model

00:05:07.994 --> 00:05:10.662
and you just want to say how
many fewer jobs are there,

00:05:10.662 --> 00:05:12.462
because this, obviously, we're
talking about more people

00:05:12.462 --> 00:05:14.662
even looking for jobs
because the perceived wages

00:05:14.662 --> 00:05:15.859
have gone up.

00:05:15.859 --> 00:05:19.059
In the absolute level,
based on these linear supply

00:05:19.059 --> 00:05:21.790
and demand curves, before there was demand

00:05:21.790 --> 00:05:24.099
for 22 million jobs and that was

00:05:24.099 --> 00:05:26.933
what the quantity demanded
was and that's also

00:05:26.933 --> 00:05:28.682
where the quantity supplied was,

00:05:28.682 --> 00:05:30.599
but now its only 21 million.

00:05:30.599 --> 00:05:32.183
Based on this model, you're going

00:05:32.183 --> 00:05:36.416
to have 1 million fewer jobs.

00:05:38.600 --> 00:05:41.351
When you think about
it in terms of surplus.

00:05:41.351 --> 00:05:45.722
Before the minimum
wage, the entire surplus

00:05:45.722 --> 00:05:48.850
was this entire area over here.

00:05:48.850 --> 00:05:51.850
This entire area that's
below the demand curve

00:05:51.850 --> 00:05:53.786
and above the supply curve.

00:05:53.786 --> 00:05:55.763
This entire area was the total surplus

00:05:55.763 --> 00:05:58.600
and it was being divided
between the consumer surplus

00:05:58.600 --> 00:06:00.385
and the producer surplus.

00:06:00.385 --> 00:06:02.849
This right over here, between the price

00:06:02.849 --> 00:06:05.684
and the supply curve was
the producer surplus.

00:06:05.684 --> 00:06:07.786
The producer surplus, remember
the producers of labor

00:06:07.786 --> 00:06:09.349
are the individual workers.

00:06:09.349 --> 00:06:11.986
This was the benefit above and beyond

00:06:11.986 --> 00:06:14.452
the opportunity cost that
the workers were getting

00:06:14.452 --> 00:06:17.453
was this area right over here
that I'm doing in dark white

00:06:17.453 --> 00:06:20.718
or filled in white and
the consumer surplus

00:06:20.718 --> 00:06:23.715
or the employer surplus here was the value

00:06:23.715 --> 00:06:28.683
that the employers were
getting above and beyond

00:06:28.683 --> 00:06:30.849
the price that they had to pay.

00:06:30.849 --> 00:06:33.515
Now, in this situation of a minimum wage,

00:06:33.515 --> 00:06:37.787
now this is the set price,
this is the quantity of labor

00:06:37.787 --> 00:06:39.349
that is demanded.

00:06:39.349 --> 00:06:42.451
What you lose now, the
surplus that we lose

00:06:42.451 --> 00:06:45.418
is this quantity right over here.

00:06:47.185 --> 00:06:49.719
We could figure out
that area quite easily.

00:06:49.719 --> 00:06:53.785
Let's see, this height right
over here is 1 million hours

00:06:53.785 --> 00:06:58.435
per month, so it's going to be 1 million.

00:06:58.435 --> 00:07:01.183
I'll just write 1, we'll just
remember it's on millions.

00:07:01.183 --> 00:07:09.034
Times this height right over
here, which is $2 per hour.

00:07:09.034 --> 00:07:10.391
Times one half.

00:07:10.391 --> 00:07:12.456
If we just multiply these,
we get this whole rectangle

00:07:12.456 --> 00:07:17.200
for the area of the triangle,
we multiply it times one half.

00:07:17.200 --> 00:07:21.323
That gives us exactly 1 and the units

00:07:21.323 --> 00:07:25.391
are dollars per hour times
millions of hours per month,

00:07:25.391 --> 00:07:27.867
gives us millions of dollars per month.

00:07:27.867 --> 00:07:35.722
It becomes $1 million
per month of surplus,

00:07:35.722 --> 00:07:41.617
of benefit above and
beyond, of total benefit

00:07:41.617 --> 00:07:45.200
that is lost to this market
because of this regulation,

00:07:45.200 --> 00:07:48.325
if you assume all of the
things in this model.

00:07:48.325 --> 00:07:50.323
Just like we talked
about in the last video,

00:07:50.323 --> 00:07:54.224
we have a $1 million per
month dead weight loss.

00:07:56.618 --> 00:07:58.535
Now, not everyone loses here.

00:07:58.535 --> 00:08:04.189
Because the price is set up
over here, for the people

00:08:04.189 --> 00:08:10.323
who are working those first
21 million hours per month,

00:08:10.323 --> 00:08:13.455
their producer surplus has now increased,

00:08:13.455 --> 00:08:15.790
because the space between
what they're getting

00:08:15.790 --> 00:08:18.392
and their opportunity
cost has now increased.

00:08:18.392 --> 00:08:21.453
For those lucky enough
to actually have a job,

00:08:21.453 --> 00:08:25.655
those workers now do
have a higher surplus,

00:08:25.655 --> 00:08:29.456
but for those employers,
which is on the demand side

00:08:29.456 --> 00:08:34.724
right now, who are employing
those first 21 million hours

00:08:34.724 --> 00:08:41.057
of labor, they now have a
smaller consumer surplus

00:08:41.057 --> 00:08:43.789
or demand surplus or
employer surplus right there.

00:08:43.789 --> 00:08:50.389
For the first 21 million units
of labor, it's redistributing

00:08:50.389 --> 00:08:54.187
the pie between the
employers and the workers,

00:08:54.187 --> 00:08:58.094
but then because you are
making the wage higher,

00:08:58.094 --> 00:09:01.176
it's reducing the overall
demand, so there is,

00:09:01.176 --> 00:09:03.854
if you believe this model,
some job destruction

00:09:03.854 --> 00:09:05.467
taking place.