Applications Using Elasticity
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0:00 - 0:03♪ (music) ♪
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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
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0:26 - 0:28at some other real world
applications of elasticity. -
0:28 - 0:29Let's get started.
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0:34 - 0:36[Tyler] Okay, 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 - 1:14being put into captivity
-
1:14 - 1:16every period --
every year, in this case. -
1:16 - 1:17Now...
-
1:18 - 1:20what does the redemption program do?
-
1:21 - 1:24Well, what the redemption
program does is it increases -
1:24 - 1:25the demand for slaves.
-
1:26 - 1:27So the demand for slaves
-
1:27 - 1:31now shifts out --
twists out -- to this red curve. -
1:31 - 1:35And this is the demand
from the potential slave owners -
1:35 - 1:37plus the demand from the redeemers.
-
1:37 - 1:40So, this is the total
demand for slaves. -
1:40 - 1:43And with that new
increased total demand, -
1:43 - 1:46what we see
is the equilibrium is at point B -
1:47 - 1:51with a price of slaves
of $50 per slave. -
1:51 - 1:57Now -- that increased price
of slaves is a good thing -
1:57 - 1:58from the point of view
of the program -
1:58 - 2:01because it's precisely
that higher price -
2:01 - 2:04which is going to discourage
the potential slave owners -
2:04 - 2:07from buying slaves.
-
2:07 - 2:11It's that higher price
which prices them out of the market. -
2:11 - 2:12What the redeemers
are really doing is they're making -
2:12 - 2:15slaves too expensive
for potential slave owners to buy. -
2:18 - 2:19So the potential slave owners
-
2:19 - 2:23start off at a price of $15
buying 1,000 slaves. -
2:23 - 2:26At the higher price of $50,
-
2:26 - 2:31the potential slave owners
only buy 200 slaves. -
2:31 - 2:33So, 200 slaves end up
being held in captivity -
2:33 - 2:36after the redemption
program -- per year -- -
2:36 - 2:40compared to 1,000
before the redemption program. -
2:41 - 2:43So, what the redemption program does
-
2:43 - 2:46is it ends up freeing 800 slaves.
-
2:46 - 2:48And in this situation
-
2:48 - 2:51where the supply curve
is perfectly inelastic, -
2:51 - 2:53the program works quite well --
-
2:53 - 2:58in the sense that every freed slave
-
2:59 - 3:01would have been a slave
-
3:01 - 3:06had it not been
for the redemption program. -
3:06 - 3:09That is --
of these 800 freed slaves -- -
3:09 - 3:10all of them
would have been held in captivity -
3:10 - 3:12were it not
for the redemption program. -
3:12 - 3:16And what we're going
to see in a minute, -
3:16 - 3:21is that when the supply curve
is more elastic, that's not the case. -
3:21 - 3:24When the supply curve is more elastic,
-
3:24 - 3:27the redemption program itself
can increase the number of people -
3:27 - 3:32who are enslaved
at least for a period of time. -
3:32 - 3:33So let's take a look
now at the case -
3:33 - 3:35where the supply curve
is more elastic. -
3:35 - 3:36So now, we're basically
going to repeat the analysis -
3:36 - 3:38but with a more elastic supply curve.
-
3:38 - 3:41So here's our demand curve --
just the same as we had it before. -
3:41 - 3:43Here's our more
elastic supply curve. -
3:43 - 3:44Notice that I've drawn the curves
-
3:44 - 3:46so that the equilibrium is exactly
the same as it was before -- -
3:46 - 3:48that is, at point A.
-
3:50 - 3:51The price of slaves
is $15 per slave -
3:51 - 3:54and there are 1,000 people
-
3:54 - 3:57who are enslaved
in our initial equilibrium -- -
3:57 - 4:01again -- exactly as we had before.
-
4:01 - 4:04Now what does
the redemption program do? -
4:05 - 4:10It increases the demand for slaves.
-
4:10 - 4:12At the new higher demand --
okay, we’re at point B -- -
4:12 - 4:15is our new equilibrium.
-
4:15 - 4:16At point B,
-
4:16 - 4:18notice that the price
of slaves is $30 per slave. -
4:18 - 4:19Not $50 per slave --
-
4:19 - 4:21the price has not gone
up as much as it did before. -
4:21 - 4:24Why not?
-
4:24 - 4:26Well, the price hasn't gone
up as much as it did before -
4:26 - 4:29because now the higher price
induces a greater quantity supplied. -
4:29 - 4:36So now, what the redeemers
have done by increasing -
4:36 - 4:39the demand for slaves,
-
4:39 - 4:40they've increased the incentive
-
4:40 - 4:42of the slave traders to go
out and capture more slaves. -
4:42 - 4:45And indeed, before,
-
4:45 - 4:48the slave traders were capturing
1,000 people per period -- -
4:48 - 4:54now they're capturing
2,200 people per period. -
4:54 - 4:58So there's been
an increase of people -
4:59 - 5:02who are enslaved --
who are put into slavery -- of 1,200. -
5:05 - 5:08The program still works
in the following sense. -
5:08 - 5:10The quantity of slaves
-
5:10 - 5:13demanded by the potential
slave owners does fall, -
5:13 - 5:19not as much as before
-
5:21 - 5:22because the price
isn't driven up as high. -
5:22 - 5:23But the price rises from $15 to $30
-
5:23 - 5:24and that reduces
the quantity of slaves -
5:24 - 5:25demanded by the potential
slave owners to 600. -
5:25 - 5:29So the program
is still successful -
5:29 - 5:32in the sense
that before the program begins, -
5:32 - 5:351,000 people are held in captivity.
-
5:35 - 5:36After the program,
only 600 people are held in captivity, -
5:36 - 5:38so 400 people are freed.
-
5:38 - 5:46However, those 400 net freed
-
5:48 - 5:51come at a high price
-
5:52 - 5:53because now 1,200 additional people
-
5:53 - 5:55are put into slavery --
at least, for some period of time. -
5:55 - 6:02A bunch of them
are then bought up -
6:02 - 6:04but 1,200 of the 1,600 people
-
6:04 - 6:05who are redeemed
would not have been slaves -
6:05 - 6:07had it not been
for the redemption program. -
6:07 - 6:08So the redemption program ends up
-
6:08 - 6:09in a sense, freeing more people --
-
6:09 - 6:11the number of people
freed on the books is 1,600. -
6:11 - 6:17But 1,200 of those
wouldn't have been slaves -
6:23 - 6:26had it not been
for the redemption program itself -
6:29 - 6:30driving up the price of slaves
-
6:30 - 6:32and the incentive
to capture more slaves. -
6:32 - 6:39So, on net, only 400 people
are actually freed. -
6:39 - 6:43So the program is less successful
-
6:43 - 6:44when the supply curve
is more elastic, -
6:44 - 6:46really, for two reasons.
-
6:46 - 6:49First, the number of people
who are freed on net goes down -- -
6:49 - 6:52we don't get as big a drop
in the quantity of slaves demanded -
6:52 - 6:57because the price
doesn't go up as much. -
6:57 - 6:58The second reason, however,
-
6:58 - 7:00is that in order
to get that net freed, -
7:00 - 7:03we've actually created more slaves,
-
7:03 - 7:08we've actually created
more people who are captured. -
7:08 - 7:14So at the end of the day,
400 people are still freed. -
7:15 - 7:18On net, fewer people end up
being slaves at the end of the day, -
7:18 - 7:19but to get there
at the beginning of the day, -
7:19 - 7:22we've got a lot more
people who are enslaved -- -
7:22 - 7:25who were taken
by the slave traders. -
7:25 - 7:28So this makes it very difficult.
-
7:28 - 7:30The more elastic
the supply curve is, -
7:30 - 7:33the less successful
the program can be -
7:33 - 7:38and the more of these terrible,
terrible trade- offs that there are. -
7:38 - 7:40And if we remember some of the facts
-
7:40 - 7:41about elasticity in particular,
-
7:41 - 7:43remember supply curves
get more elastic in the long run -- -
7:43 - 7:48well that's exactly what we saw
in the case in the Sudan. -
7:48 - 7:54At the beginning,
-
7:55 - 7:58the redemption program
increased the price of slaves a lot, -
7:58 - 7:59but as the supply curve
became more elastic over time, -
7:59 - 8:01the price of slaves
began to fall back down again. -
8:01 - 8:05It was not increased by as much.
-
8:05 - 8:12And thus, this redemption program
became less successful over time. -
8:13 - 8:15So, this is a very tricky issue.
-
8:15 - 8:18It's a very controversial issue.
-
8:18 - 8:19Did the groups like Christian
Solidarity International -- -
8:19 - 8:22were they on net helpful?
-
8:22 - 8:24There are these terrible trade-offs.
-
8:24 - 8:25Economics can't answer this question,
-
8:25 - 8:29but it can at least point
to the supply response -
8:29 - 8:32and what that means in moral terms.
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8:32 - 8:35Let's look at another application.
-
8:35 - 8:37Let's look at another
important question -
8:37 - 8:40which we can analyze
using demand and supply. -
8:40 - 8:44What is the effect of gun buybacks?
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8:44 - 8:46Now these buybacks are often
sponsored by local governments, -
8:46 - 8:49the local police,
the local mayor and so forth. -
8:49 - 8:55In this buyback --
which was held in Oakland -- -
8:55 - 8:57the officials offered $250 cash
-
8:57 - 9:00for each working gun,
no questions asked. -
9:00 - 9:05They then collected the guns
and they melted them down. -
9:05 - 9:07The idea was to get
guns off the street. -
9:07 - 9:08They ended up collecting
about 500 guns in this buyback. -
9:08 - 9:10These buybacks are often held.
-
9:10 - 9:11There's been one
in Washington, D.C. -
9:11 - 9:14and Rochester, New York,
and throughout the United States. -
9:14 - 9:19They're fairly common
again at the local level. -
9:19 - 9:24The question is:
can these buybacks be effective? -
9:24 - 9:26And to answer that we need
to make some assumptions -
9:26 - 9:29or we need to know something
about demand and supply. -
9:29 - 9:33In particular,
what assumptions would make sense -
9:33 - 9:36about the elasticity of supply?
-
9:36 - 9:38Is the supply curve of guns
to a city like Washington, D.C. -
9:38 - 9:39or Oakland, California --
-
9:39 - 9:41is that supply curve going
to be inelastic or elastic? -
9:41 - 9:49Bear in mind what that means.
-
9:49 - 9:54So we're looking at the elasticity
of supply of guns in a city -
9:54 - 9:57like Washington, D.C. or a town.
-
9:57 - 10:02Also bear in mind
that in the United States -
10:04 - 10:05as a whole -- there are
hundreds of millions of guns -- -
10:05 - 10:06and that guns continue
to be produced, manufactured, -
10:06 - 10:08bought and sold every day.
-
10:08 - 10:11So what assumptions
-
10:11 - 10:12would you make
about the local supply curve -
10:12 - 10:14of guns in a city
like Washington, D.C.? -
10:14 - 10:18Think about that.
-
10:18 - 10:21I'll give you an answer
on the next slide. -
10:21 - 10:24The supply of guns
-
10:24 - 10:27to a local region
is going to be very elastic. -
10:27 - 10:34Remember our earlier example
of suppose that we have an increase -
10:35 - 10:36in demand for gasoline
in Washington, D.C. -- -
10:36 - 10:39is that going to increase the price
of gasoline in Washington, D.C.? -
10:39 - 10:43The answer is no --
-
10:43 - 10:44because just a tiny
increase in price -
10:44 - 10:46and lots of gasoline
will come in from Virginia, -
10:46 - 10:48from Maryland,
from other states in the country. -
10:50 - 10:57Remember, the more local the supply,
the more elastic the supply curve. -
10:57 - 10:59So an increase in the demand
for gasoline in Washington, D.C. -- -
10:59 - 11:02that's not going to increase
the world price of gasoline. -
11:02 - 11:07And it's not even going to increase
-
11:07 - 11:10the price of gasoline
in Washington, D.C., -
11:10 - 11:13because if it did people
-
11:14 - 11:15would start to sell gas
in Washington, D.C. -
11:15 - 11:17instead of next door,
in Virginia or Maryland. -
11:17 - 11:18So the price has got
to be about the same -
11:18 - 11:21throughout the United States.
-
11:21 - 11:24The same thing is true for guns.
-
11:24 - 11:25The supply of guns
to a local region -
11:25 - 11:27like Oakland or Washington, D.C.
is going to be very elastic. -
11:27 - 11:31That has surprising facts.
-
11:31 - 11:34It means that local buybacks
-
11:34 - 11:37won't affect the number
-
11:37 - 11:40of guns on the street
nor even their price. -
11:40 - 11:48Let's take a look
at the diagram. -
11:48 - 11:50Here is our demand curve for guns.
-
11:50 - 11:51Here's our supply curve,
-
11:51 - 11:53which is drawn very elastic
because it's a local market. -
11:53 - 11:54The initial equilibrium is at point A
-
11:54 - 11:57at a certain price of guns
and a certain quantity of guns -
11:57 - 12:00traded each period.
-
12:00 - 12:04What the buyback does
is it increases the demand for guns, -
12:05 - 12:08shifting the equilibrium to point B.
-
12:08 - 12:13So the buyback, they end up buying a lot of guns, but all of the guns they end up buying come from the increase in the quantity supplied.
-
12:14 - 12:20Notice that the buyback doesn't push the price of guns up.
-
12:20 - 12:25Because it doesn't push the price of guns up, no
one stops buying a gun. -
12:25 - 12:32Remember, a buyback is going to be effective only if
it makes guns more expensive, only if it reduces the quantity demanded of guns. -
12:34 - 12:39Since all of the increase in supply
is being generated by the buyback itself, the buyback doesn't
increase the price of guns in Washington, D.C., therefore it doesn't reduce the quantity demanded of guns in Washington, D.C., therefore no effect on the number of guns held. -
12:53 - 12:59Now in particular what's going to happen is that if the mayor offers $250
for a gun, people are going to go into their closet, they're going to find an old low-quality gun, a gun they don't really want. -
13:03 - 13:08They'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 |