Applications Using Elasticity
-
0:00 - 0:03♪ (music) ♪
-
0:09 - 0:10[Alex] In the last video,
-
0:10 - 0:13Tyler introduced
the topic of slave redemption -
0:13 - 0:17and how elasticity can help us
to understand its consequences. -
0:17 - 0:20In this video,
we'll dive deeper into this problem -
0:20 - 0:24and show how to analyze it using
supply, demand, and elasticity. -
0:24 - 0:26We'll also look at some other real world
-
0:26 - 0:28applications of elasticity.
-
0:28 - 0:29Let's get started.
-
0:34 - 0:36Okay, let's begin our analysis.
-
0:36 - 0:38We'll put the price of slaves
on the vertical axis, -
0:38 - 0:40the quantity on the horizontal axis.
-
0:40 - 0:45And this is the demand for slaves
from potential slave owners. -
0:45 - 0:48So, this is the demand --
if you like -- from the bad guys. -
0:48 - 0:51It often helps in these situations
to begin with a polar case. -
0:51 - 0:54So let's assume to start
with that the supply of slaves -
0:54 - 0:58is perfectly inelastic --
that is, it doesn't respond at all. -
0:58 - 1:02Quantity supplied of slaves
does not respond to the price. -
1:02 - 1:06Given these assumptions,
the equilibrium is found at point A -
1:06 - 1:09with a price of slaves
of $15 per slave -
1:09 - 1:12and with 1,000 people being enslaved,
-
1:12 - 1:13being put into captivity
-
1:13 - 1:16every period --
every year, in this case. -
1:16 - 1:21Now, what does
the redemption program do? -
1:21 - 1:22Well, what the redemption program
-
1:22 - 1:25does is it increases
the demand for slaves. -
1:26 - 1:27So the demand for slaves
-
1:27 - 1:30now shifts out,
twists out, to this red curve -
1:30 - 1:32and this is the demand
from the potential slave owners -
1:32 - 1:37plus the demand from the redeemers.
-
1:38 - 1:43So, this is the total
demand for slaves. -
1:43 - 1:46And with that new
increased total demand, -
1:46 - 1:49what we see
is the equilibrium is at point B -
1:49 - 1:52with a price of slaves
of $50 per slave. -
1:52 - 1:57Now, that increased price of slaves
is a good thing from the point of view -
1:57 - 2:04of the program
because it's precisely that higher price -
2:04 - 2:07which is going to discourage
-
2:07 - 2:10the potential slave owners
from buying slaves. -
2:10 - 2:14It's that higher price which prices them
out of the market. What the redeemers are
really doing is they're making slaves too -
2:14 - 2:20expensive for potential slave owners to
buy. So the potential slave owners start -
2:20 - 2:26off at a price of $15 buying 1,000
slaves. At the higher price of $50, the -
2:26 - 2:33potential slave owners only buy 200
slaves. So 200 slaves end up being held in -
2:33 - 2:39captivity after the redemption program per
year compared to 1,000 before the -
2:39 - 2:45redemption program. So what the redemption
program does is it ends up freeing 800 -
2:45 - 2:51slaves. And in this situation where the
supply curve is perfectly inelastic, the -
2:51 - 3:01program works quite well in the sense that
every freed slave would have been a slave -
3:01 - 3:06had it not been for the redemption
program. That is, of these 800 freed -
3:06 - 3:12slaves, all of them would have been held
in captivity were it not for the -
3:12 - 3:16redemption program. And what we're going
to see in a minute is that when the supply -
3:16 - 3:21curve is more elastic, that's not the
case. When the supply curve is more -
3:21 - 3:26elastic, the redemption program itself can
increase the number of people who are -
3:27 - 3:32enslaved at least for a period of time. So
let's take a look now at the case where -
3:32 - 3:36the supply curve is more elastic. So now
we're basically going to repeat the -
3:36 - 3:41analysis but with a more elastic supply
curve. So here's our demand curve just the -
3:41 - 3:45same as we had it before. Here's our more
elastic supply curve. Notice that I've -
3:46 - 3:50drawn the curves so that the equilibrium
is exactly the same as it was before, that -
3:50 - 3:57is at point A. The price of slaves is $15
per slave and there are 1,000 people -
3:57 - 4:01who are enslaved in our initial
equilibrium, again exactly as we had -
4:01 - 4:04before.
Now what does the redemption program do? -
4:05 - 4:10It increases the demand for slaves. At the
new higher demand, ok we’re at point B, is -
4:10 - 4:18our new equilibrium. At point B, notice
that the price of slaves is $30 per slave. -
4:18 - 4:24Not $50 per slave - the price has not gone
up as much as it did before. Why not? -
4:24 - 4:29Well, the price hasn't gone up as much as
it did before because now the higher price -
4:29 - 4:36induces a greater quantity supplied. So
now what the redeemers have done by -
4:36 - 4:42increasing the demand for slaves, they've
increased the incentive of the slave -
4:42 - 4:48traders to go out and capture more slaves.
And indeed before the slave traders were -
4:48 - 4:54capturing 1,000 people per period,
now they're capturing 2,200 people per -
4:54 - 4:58period. So there's been an increase of
people who are enslaved, who are put into -
4:58 - 5:08slavery of 1,200. The program still works
in the following sense. The quantity of -
5:08 - 5:13slaves demanded by the potential slave
owners does fall, not as much as before -
5:13 - 5:19because the price isn't driven up as high,
but the price rises from $15 to $30 and -
5:19 - 5:25that reduces the quantity of slaves
demanded by the potential slave owners to -
5:25 - 5:32600. So the program is still successful in
the sense that before the program begins -
5:32 - 5:381,000 people are held in captivity.
After the program, only 600 people are -
5:38 - 5:46held in captivity, so 400 people are freed.
However, those 400 net freed come at a -
5:46 - 5:55high price because now 1,200 additional
people are put into slavery, at least for -
5:55 - 6:02some period of time. A bunch of them are
then bought up but 1,200 of the 1,600 -
6:02 - 6:07people who are redeemed would not have
been slaves had it not been for the -
6:07 - 6:10redemption program.
So the redemption program ends up in a -
6:11 - 6:17sense freeing more people - the number of
people freed on the books is 1,600. But -
6:17 - 6:261,200 of those wouldn't have been slaves
had it not been for the redemption program -
6:26 - 6:31itself driving up the price of slaves and
the incentive to capture more slaves. So -
6:32 - 6:39on net, only 400 people are actually
freed. So the program is less successful -
6:39 - 6:46when the supply curve is more elastic
really for two reasons. First, the number -
6:46 - 6:52of people who are freed on net goes down -
we don't get as big a drop in the quantity -
6:52 - 6:57of slaves demanded because the price
doesn't go up as much. The second reason, -
6:57 - 7:03however, is that in order to get that net
freed, we've actually created more slaves, -
7:03 - 7:08we've actually created more people who are
captured. So at the end of the day, 400 -
7:08 - 7:14people are still freed. On net, fewer
people end up being slaves at the end of -
7:15 - 7:21the day, but to get there at the beginning
of the day, we've got a lot more people who -
7:21 - 7:28are enslaved, who were taken by the slave
traders. So this makes it very difficult. -
7:28 - 7:33The more elastic the supply curve is, the
less successful the program can be and the -
7:33 - 7:38more of these terrible, terrible trade-
offs that there are. And if we remember -
7:38 - 7:43some of the facts about elasticity in
particular, remember supply curves get -
7:43 - 7:48more elastic in the long run, well that's
exactly what we saw in the case in the -
7:48 - 7:54Sudan. At the beginning, the redemption
program increased the price of slaves a -
7:54 - 8:00lot, but as the supply curve became more
elastic over time, the price of slaves -
8:01 - 8:05began to fall back down again. It was not
increased by as much. -
8:05 - 8:12And thus this redemption program became
less successful over time. So this is a -
8:13 - 8:18very tricky issue. It's a very
controversial issue. Did the groups like -
8:18 - 8:21Christian Solidarity International - were
they on net helpful? There are these -
8:22 - 8:27terrible trade-offs. Economics can't
answer this question, but it can at least -
8:27 - 8:35point to the supply response and what that
means in moral terms. Let's look at -
8:35 - 8:40another application. Let's look at another
important question which we can analyze -
8:40 - 8:44using demand and supply. What is the
effect of gun buybacks? Now these -
8:44 - 8:49buybacks are often sponsored by local
governments, the local police, the local -
8:49 - 8:55mayor and so forth. In this buyback which
was held in Oakland, the officials offered -
8:55 - 9:00$250 cash for each working gun, no
questions asked. They then collected the -
9:00 - 9:05guns and they melted them down. The idea
was to get guns off the street. They ended -
9:05 - 9:10up collecting about 500 guns in this
buyback. These buybacks are often held. -
9:10 - 9:14There's been one in Washington, D.C. and
Rochester, New York, and throughout the -
9:14 - 9:19United States. They're fairly common again
at the local level. The question is, can -
9:19 - 9:24these buybacks be effective? And to answer
that we need to make some assumptions or -
9:24 - 9:29we need to know something about demand and
supply. In particular, what assumptions -
9:29 - 9:36would make sense about the elasticity of
supply? Is the supply curve of guns to a -
9:36 - 9:40city like Washington, D.C. or Oakland,
California, is that supply curve going to -
9:41 - 9:49be inelastic or elastic? Bear in mind what
that means. So we're looking at the -
9:49 - 9:57elasticity of supply of guns in a city
like Washington, D.C. or a town. Also bear -
9:57 - 10:02in mind that in the United States as a whole,
there are hundreds of millions of guns, and -
10:02 - 10:08that guns continue to be produced,
manufactured, bought and sold every day. -
10:08 - 10:14So what assumptions would you make about
the local supply curve of guns in a city -
10:14 - 10:21like Washington, D.C.? Think about that.
I'll give you an answer on the next slide. -
10:21 - 10:27The supply of guns to a local region is
going to be very elastic. Remember our -
10:27 - 10:34earlier example of suppose that we have an
increase in demand for gasoline in -
10:34 - 10:38Washington, D.C. - is that going to increase
the price of gasoline in Washington, D.C.? -
10:39 - 10:46The answer is no because just a tiny
increase in price and lots of gasoline -
10:46 - 10:50will come in from Virginia, from Maryland,
from other states in the country. -
10:50 - 10:57Remember, the more local the supply, the
more elastic the supply curve. So an -
10:57 - 11:02increase in the demand for gasoline in
Washington, D.C. - that's not going to -
11:02 - 11:07increase the world price of gasoline. And
it's not even going to increase the price -
11:07 - 11:12of gasoline in Washington, D.C., because if
it did people would start to sell gas in -
11:12 - 11:17Washington, D.C. instead of next door, in
Virginia or Maryland. So the price has -
11:17 - 11:21got to be about the same throughout the
United States. The same thing is true for -
11:21 - 11:27guns. The supply of guns to a local region
like Oakland or Washington, D.C. is going -
11:27 - 11:33to be very elastic. That has surprising
facts. It means that local buybacks won't -
11:34 - 11:39affect the number of guns on the street
nor even their price. Let's take a look at -
11:40 - 11:48the diagram. Here is our demand curve for
guns. Here's our supply curve, which is -
11:48 - 11:53drawn very elastic because it's a local
market. The initial equilibrium is at -
11:53 - 11:57point A at a certain price of guns and a
certain quantity of guns traded each -
11:57 - 12:00period. What the buyback does is
-
12:00 - 12:04it increases the demand for guns,
shifting the equilibrium -
12:04 - 12:08to point B.
So the buyback, they end up buying a lot of -
12:08 - 12:13guns, but all of the guns they end up
buying come from the increase in the -
12:14 - 12:20quantity supplied. Notice that the buyback
doesn't push the price of guns up. Because -
12:20 - 12:25it doesn't push the price of guns up, no
one stops buying a gun. Remember, a -
12:25 - 12:32buyback is going to be effective only if
it makes guns more expensive, only if it -
12:32 - 12:34reduces the quantity demanded of guns.
-
12:34 - 12:39Since all of the increase in supply
is being generated by -
12:39 - 12:43the buyback itself, the buyback doesn't
increase the price of guns in Washington, -
12:43 - 12:47D.C., therefore it doesn't reduce the
quantity demanded of guns in Washington, -
12:47 - 12:53D.C., therefore no effect on the number of
guns held. Now in particular what's going -
12:53 - 12:59to happen is that if the mayor offers $250
for a gun, people are going to go into -
13:00 - 13:03their closet, they're going to find an old
low-quality gun, a gun they don't really -
13:03 - 13:08want. They're going to turn that in and
maybe a few weeks or a few months later, -
13:08 - 13:13they're going to buy a new gun. Think
about it this way. Imagine for whatever -
13:13 - 13:18odd reason that the government in
Washington, D.C. wanted to reduce the -
13:18 - 13:25number of people wearing sneakers so they
offered a sneaker buyback. For $50 they -
13:25 - 13:31would buy any pair of sneakers - no
questions asked. Well, of course people -
13:31 - 13:34are going to go into their closet, they're
going to find old pairs of sneakers they -
13:34 - 13:37don't really want anymore and they're
going to turn those in. They're going to -
13:37 - 13:42sell, they're going to sell those sneakers
to the government. But is anyone in -
13:43 - 13:48Washington, D.C. going to end up in the
long run going shoeless, even going -
13:48 - 13:53sneaker-less? No. They may turn their
sneakers in, but a few weeks, a few months -
13:53 - 13:57later they're going to be buying a new
pair of sneakers. We haven't changed the -
13:57 - 14:01price of sneakers, therefore we haven't
changed the quantity demanded of sneakers, -
14:02 - 14:05therefore we're going to stay at the
equilibrium. -
14:05 - 14:11Once the buyback is over, we're going to be
at the same equilibrium at point A. So -
14:11 - 14:18local gun buybacks don't work. They're
really in my view a waste of time. This -
14:19 - 14:22doesn't mean that we can't do anything. We
may want to put more police on the street, -
14:23 - 14:27we may want to fight crime in other ways,
but a local gun buyback isn't going to -
14:27 - 14:34work. Another point, a few countries, such
as Australia, that had required buybacks, -
14:34 - 14:39mandatory buybacks, where they ban guns and
then buy them back. Well, since that's, A -
14:39 - 14:44Mandatory, and B for the country as a
whole, that might get guns off the street, -
14:44 - 14:51but here we're talking about a local
buyback. And because of the elasticity of -
14:52 - 14:56supply, it's not going to affect the number
of guns on the local streets nor even -
14:57 - 15:03their price and thus it's going to be, in
my view, completely ineffective. It's -
15:03 - 15:08really quite amazing how a little bit of
economics can go a long way to -
15:08 - 15:14understanding and improving public policy.
Hopefully you see the argument about the -
15:15 - 15:19elasticity of supply of guns and yet we
see these policies being passed all the -
15:19 - 15:24time, these ineffective policies are
actually often put into place. A little -
15:24 - 15:28bit of economics goes a long way to
improving public policy, if only we can -
15:28 - 15:34get the message out. Okay, thanks very
much. See you, uh, next chapter. -
15:36 - 15:41- [Announcer] If you want to test yourself,
click “Practice Questions.” Or, if you're -
15:41 - 15:44ready to move on, just click “Next Video.”
-
15:44 - 15:46♪ (music) ♪
- Title:
- Applications Using Elasticity
- Description:
-
In this video, we take a look at real-world applications of elasticity, using the examples of slave redemption in Sudan and and the effects of gun buyback programs in the U.S.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomics
Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/elasticity-examples-applications#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/taxes-subsidies-definition-tax-wedge
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 15:49
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity | ||
James Graciano edited English subtitles for Applications Using Elasticity |