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Main content
Current time:0:00Total duration:9:06
AP.MICRO:
POL‑1 (EU)
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POL‑1.A (LO)
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POL‑1.A.2 (EK)
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POL‑1.A.3 (EK)
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POL‑1.A.4 (EK)
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POL‑1.A.5 (EK)

Video transcript

let's look a little bit at the market for hamburgers so this is this is the supply and the demand curve for the for the price and the quantity of hamburgers sold per day and so if we have a completely unfettered market no intervention no taxes nothing like that then we see we have an equilibrium price in an equilibrium quantity the equilibrium price the equilibrium price looks like it's about $3.75 per hamburgers per hamburger the equilibrium quantity looks like it's about a little bit more to me if I draw that line a little bit differently the equilibrium quantity looks like it's about $3 or sorry it's about three and a half million hamburgers per day and we just to review what we've talked about before up here between between the demand below the demand curve and above the price above the use a price equals $3 75 line right over here this is how much value this is how much benefit the consumers are getting above and beyond what they have to pay so that is the consumer surplus consumer surplus and then between this price equals 375 line and the supply curve you have your producer surplus so this is how much more the producers are getting for each hamburger relative to what their opportunity cost of producing that incremental hamburger was so this right over here is the producer surplus producer surplus now let's say and actually these numbers these numbers are quasi realistic the I have a three and a half million hamburgers per day I actually looked it up before this video looks like McDonald's at least based on the information I got sold is a little sells a little bit over four million hamburgers per day in the United States so I didn't clarify with just hamburgers from one vendor or multiple vendors but it's not a crazy number of hamburgers to sell in a fairly large country but for the sake of this it's not necessarily McDonald's hamburgers we was talking about this is the total market for hamburgers in a country we're making the kind of the simplifying assumption that all hamburgers are created equal which we know is not true now the government's in this and this hypothetical civilization says wow a lot of hamburgers are being sold we need we need to we we need more revenue for the government to to do other things or maybe to pay off their debt or whatever they need to do and so they decide to tax hamburgers they want to tax hamburgers and they're going to make it very simple and I'm gonna do a percentage most sales taxes tend to be a percentage of the price but instead they're just gonna do a tax of one dollar per hamburger one dollar per hamburger per hamburger so let's think about what this does to to to to the surplus to the price at which transactions will go on and what people will have to pay versus what they will have to get so at any given point at any given point so if we look at the supply curve right over here when we talked in order to get someone to produce that very first hamburger they have to get at least two dollars for it because that's their opportunity cost they could use those exact same resources that land the labor whatever else to produce something else that has two dollars of value so you have to pay them at least two dollars in order for them to Bruce hamburgers and the more hamburgers you want the suppliers to produce you have to pay them more and more for those incremental hamburgers because they're going to start using resources that might have been better and better for used for other things and that are not as efficiently used for hamburgers you have to pay them more and more and more so this is what the the supply curve that I originally drew right over in magenta is what the suppliers need to see in order to produce a certain quantity if you want them to produce three million hamburgers you have to prop you have to get them you have to pay be willing to pay three dollars per hamburger because that's their opportunity cost of those incremental hamburgers up here now let's think about what happens when you add the tax this is what the suppliers are going to get but or the producers are going to get but when you put a tax the consumers are gonna have to pay a dollar more so it over here in order to produce this much the suppliers are going to have to get are going to have to get three dollars per hamburger but then the consumers are gonna have to pay a dollar more so they're going to have to pay one dollar more in order to get the suppliers to produce two million hamburgers you're gonna have to pay them this much you're gonna have to pay them about 250 but then the consumers are gonna have to pay a dollar more than that so they're gonna have to pay that much in order to get them to produce at all you're gonna have to pay at least two dollars but then if the supplier the producers are getting $2 the consumers are gonna have to pay $1 more for the tax so they have to pay $1 more so one way to think about it is the supply curve from the consumers point of view is going to be shifted $1 more than the supply curve from the producers point of view so it's going to be shifted up $1 so it's going to be look it's gonna look something I could do a better job than that it's gonna look something it's going to look something like that where at every point because this is a fixed dollar it's not a percentage at every point this distance right over here is going to be is going to be $1 so what happens there from the consumers point of view from the consumers point of view what we have is now a new price that they're willing to consume at because now there's this this this reality is not possible anymore this reality there's no way for the consumers to pay 350 and for the producers to see 350 as well and so we get to a new a new I guess equilibrium price and equilibrium quantity now because now since this is from the consumers point of view the point in which they intersect is right over there which is about it's a little bit over $4 per burger and it's a slightly lower quantity it's about let's just say just for round numbers that's about 3 million burgers per day so what happened what happened there well before this whole area was a total surplus below this Green Line was the producer surplus above the Green Line and below this curve right here was a consumer surplus now we've lost part of it we've lost we've lost this part right over here so this is our deadweight loss this is no longer part of the total consumer and producer surplus so that is deadweight loss so the the taxation got us from a an efficient situation where we had that kind of maximum consumer and producer surplus deadweight this is our dead weight loss over here and how much revenue is the government going to get now well if we assume that this is 3 million they're gonna have 3 million burgers they're gonna have 3 million burgers so this is 3 million right over here they're gonna have 3 million burgers x times $1 per burger so let me do it this way so this is so this length right over here it's going to be the area of this rectangle that I'm doing an orange so this length right over here is 3 that length right over there's 3 million and then the height is that dollar the height is the dollar so let me shade it in the height is that dollar right over there so this is going to be one dollar height so the tax revenue that the government is going to get is three million times one dollar three million burgers times $1 which is going to be three million dollars per day three million dollars per day which is interesting because maybe the government official thought they were going to get more because they look at the progression projections they said wait there's going to be three and a half million burgers sold per day so I'm going to get three and a half million dollars but they didn't realize is that they're making the burgers more expensive so there's going to be a lower quantity there's going to be a lower quantity demanded actual the actual clearing quantity or the actual equilibrium quantity now is only going to be three million and the way we see it removed this surplus here from both the consumer surplus and and the producer surplus and and no one's getting that not even the the government's getting that so no one's getting that white part right over there and this orange part right over here is eating into the consumer surplus so now they are paying more they're paying more than their or another way to think about it is the difference between the benefit they're getting the benefit and they're getting and what they're paying at any given point for any given incremental consumer is now less and the producer surplus is less the the excess of what they're getting for each hamburger versus their opportunity cost is now less so the producer surplus has now been shrunken back to this area right over here and these are curves here so we can't just do simple geometry to figure out the area of triangles you would actually have to do a little calculus to figure out the area of these curves and then the consumer surplus has been pushed back to this area above the orange right over here so you see government's for the most part have to do some type of Taxation in order to get a revenue and it could be income tax or it could be a sales tax like this right over here but when they do it it gets us into a non efficient state and it does it does cause some depending on the how these curves are Shay it does cause some deadweight loss some benefit in excess of what had to be paid some of that disappears but it allows at least the government to get revenue depending on whether you think that's a good thing or not