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Main content
Current time:0:00Total duration:6:52
AP.MICRO:
POL‑1 (EU)
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POL‑1.A (LO)
,
POL‑1.A.5 (EK)
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POL‑1.A.6 (EK)

Video transcript

let's think about how a tax on a product might affect it if it is if the demand for it is very very very elastic so what I've done here we're gonna think about flags the market for a certain type of flag that's made in China and to think about this flag think about it this way if the price the price right now the equilibrium price between where the supply and the demand intersect the supply curve in the demand curve intersect is right at about $70 per flag so this is a pretty nice flag it's right at $70 per flag and the quantity demanded in thousands per year looks like it's about 25 thousand flags are demanded per year now if the price were to go slightly above that equilibrium price what's going to happen well the price goes slightly above that equilibrium price people can say well I can go by the American flags made in Taiwan or even the ones made in America are made in Mexico are made someplace else at least for when it's out on my you know people will be able to tell the difference from a distance so I'm going to buy one of the substitutes especially for the ones from Taiwan or Mexico or wherever else are identical to the ones made in China so if the price were slightly even slightly higher the quantity demanded would be much much much lower and if the price were even a little bit lower then people say well I'm not gonna buy the Mexican flags or the Taiwanese American flags I'm going to buy the ones that were made in China and then the quantity demanded would be much larger and so what we you have here is a very large very very high elasticity of demand so this right over here this is almost perfectly elastic if it was perfectly elastic it would be completely horizontal so this is almost almost perfectly perfectly elastic elastic demand a very small change in price leads to a huge change in quantity and particular very small percent change in price leads to a huge percent change in quantity so let's say that that some government official decides you know what I they don't like the idea of American being made in China so they decide to tax American flags made in China so what they do is that they place a tax they place the taxes once again onto a fixed dollar tax it could be a percentage and if a percentage then it'll change the supply plus tax curve it'll be it'll the the shift will will be a percentage change instead of a fixed change but the fixed change is a little bit easier to draw so I'll do that so let's say that there is a tax let me do that in a different color let's say that there is a tax placed of $10 $10 per flag $10 actually let's do it even let's do even a smaller amount let's say there's a tax placed of of $1.00 per flag $1.00 per flag I'll make it a little bit larger let's say it's $5 per flag $5 per flag so now what is the supply plus tax curve so the supplier just to make the Flags in China and ship them to the United States and get them to a store here too even to get that first flag done even if it's said in the most efficient way possible you need at least looks like around 50 to 53 dollars now they're going now they're still going to need that plus there's going to be a $5 tax on it so the supply plus tax is going to be that plus $5 so it's gonna be right around there over here yeah add $5 so at any given point we're gonna add $5 to essentially what the consumer would have to see so you would have a curve that looks at something like this you would have a curve that looks something like this so this is that dotted line right over there is our supply is our supply plus tax this right over here was just our supply was just our supply so you're essentially so let's think about what happens here your equilibrium price was at 70 before now our equilibrium price is still our equilibrium price is still pretty much at 70 but our equilibrium quantity has gone down dramatically our equilibrium quantity has gone down too our equilibrium quantity has gone down too I don't know it looks like about 18,000 18,000 Flags per year so who bore who board the bulk of this right over here so let's think about the tax revenue so the tax revenue in this situation is going to be 18,000 times a $5 so this is the $5 right over here that is $5 and then times 18,000 times 18,000 so this right over here is the tax revenue that right over there is a tax revenue actual let me draw it a little bit more carefully so the tax revenue is so it's going to be between this line right over here and five dollars so just like that so that's all the tax revenue and notice it all came out of the producer surplus the original producer surplus the original producer surplus was especially if we assume perfect elasticity the original producer surplus was this green rectangle plus this and plus this now this is going to be this little area right over here is going to be deadweight loss deadweight loss and all of that came from the producers surplus and then all the tax revenue also if you especially if you assume this top line was horizontal also came out of the producer surplus so in this situation where you had almost or we could say if you do have perfect elasticity if you have perfect elasticity of demand for the product the person who's going to bear the brunt of the tax so is going to be the producer the producer surplus is going to be eaten into from the tax bears bears the actually that's I'm done I'm not talking about the animal bears so the producer well the producer gets the burden the producer the producer gets the burden in that situation and this is an interesting thing to think about because when you have almost perfectly elastic demand so almost where if you said perfectly elastic demand a flat a flat demand curve right over here there's there's actually no consumer surplus because the marginal benefit even the incremental marginal or I'm being redundant with words incremental and marginal but the marginal benefit at any point for the consumer for that for that next unit is equal to the price they're paying when you have there's no there's especially if the be especially if the demand curve is perfectly elastic and it's perfectly horizontal there is no area between the demand curve and the price paid so there's actually there isn't any even any consumer surplus to take any to take any of the to take to eat into it all gets eaten out of the out of the producer surplus