Taxes and perfectly inelastic demand발음듣기
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Taxes and perfectly inelastic demand
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It's what's needed by Diabetes in order to maintain their blood sugar level so for them, you can almost imagine they need this just to survive.발음듣기
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So they're willing, no matter what the price, they're essentially willing to take the insulin that they need to take.발음듣기
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So, for example, even if the price of insulin were a dollar, if the doctors in this town say collectively all the diabetics need 3,000 vials a year, they will take 3,000 vials a year.발음듣기
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So, in this case, at least in a reasonable price range, the demand curve for insulin is vertical.발음듣기
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Obviously, if we went up to prices like $9 million per vial, then all of a sudden, some of the diabetics just won't be able to afford it, and all of a sudden, the curve wouldn't be able to be vertical anymore.발음듣기
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No matter how much you push or pull on the brick within reason, at least with my level of strength, you're not going to be able to deform the brick.발음듣기
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That's the opposite of a rubber band, which is very elastic, or you can think about the definition of elasticity, the one that we've been using, elasticity is equal to percent, change in quantity over percent, change in price.발음듣기
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Over here, no matter how much we change price within reason, at least in this range of price along this curve, people are still going to demand a quantity of 3,000 vials per year.발음듣기
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So if you have ... this is supply, so if you have no taxes, no regulation of this market, based on the way I've drawn it right over here, the equilibrium price lands us right around $75.발음듣기
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I did a little research before this video, it actually turns out that is about the market price for a vial of insulin.발음듣기
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The equilibrium quantity, because that is the exact quantity that people need is 3,000 vials.발음듣기
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A slightly interesting thing to think about in this situation where you have perfectly inelastic demand, is what is the producer's surplus and the consumer's surplus?발음듣기
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The producer's surplus is how much more money they're getting relative to their, you can view them as their opportunity cost or their incremental marginal cost, and here we will [unintelligible] multiple times, this is the producer's surplus right over here.발음듣기
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Consumer surplus is how much more marginal benefit people are getting than what they are paying.발음듣기
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One way to think about it is that these diabetics get, you could almost say close to infinite marginal benefit from that insulin.발음듣기
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It's not necessarily saying that this is like a great deal for the diabetics, it's really just saying that their benefit is something that they need to survive.발음듣기
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If this was just slightly more elastic, so if we were to get, maybe to a slightly more real world scenario.발음듣기
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In a real world, if things got a little bit more expensive, there might be a few diabetics who would all of a sudden try to lower their dose or something like that.발음듣기
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You could imagine if I kept taking this up and up and up, and at some point, it actually would bound the area, but it would, so maybe it goes up here.발음듣기
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Maybe if this was like $2 million up here, then the demand would go down dramatically, but it would be bounded.발음듣기
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Now with that out of the way, let's think about what happens if some misguided politician decides to tax insulin.발음듣기
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Obviously a very bad idea, and nothing that I would ever advocate, but let's think about who would bear the burden?발음듣기
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I think you could probably guess who would bear the burden if you had to put a tax, but we'll actually see it.발음듣기
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I'm just making it, instead of a percentage, I'm just doing it as a fixed amount so that we get kind of a fixed shift in terms of the perceived supply price.발음듣기
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For the very first vial, the producer needs $60, but then you add the tax there, it's going to be $70.발음듣기
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For 1,000 vials, it looks like it's going to be I don't know, 60 something ... you add the tax, it's going to move up to here.발음듣기
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For 3,000 vials, the producers need around $75, $76, you add $10 to it, it gets to $85, $86 like that.발음듣기
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What you get is this new curve, you could use the price from the consumer's point of view, or you could view it as the supply plus tax curve.발음듣기
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Well, you can imagine people, even though the prices are higher, people still have to get exactly 3,000 vials per year.발음듣기
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The producers are still going to have the exact same producer surplus, so all of that tax revenue came directly out of the consumer surplus.발음듣기
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Another interesting thing to note here is, because we had this perfectly inelastic demand, that even when you raise the price, it didn't lower the quantity demanded that we actually don't have a dead weight loss here because this was perfectly inelastic.발음듣기
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We're actually having the same quantity produced so you have a transfer of surplus from essentially the diabetics to the government in this situation,발음듣기
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but you don't have any lost surplus here because there's no lost area, I guess you could say, between where the supply curve and the demand curves intersect.발음듣기
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