Wednesday, October 22, 2008

Elasticity of Supply

Did that subject line, "Elasticity of Supply", and the adjacent equation intimidate you?

It should have! Remember, you are reading the words of a hypereducated multiple-degreed full tenured professor. A person who can demolish any of your "lay" arguments (and your reputation!) with just an iota of my enormous reservoir of brainpower, expertise, and jargon.

So, I invite you to unquestioningly accept this lesson in "elasticity of supply" and use it to reinforce your decision to elect Barack Obama as President.

I will now explain how President Obama's plan to raise taxes is as sound as any law of physics.

Let's use Starbucks as an example of a capitalist entity that is swimming in profits on the backs of labor. Yes, the obvious moral solution is to shutter Starbucks and allow the people to drag the owners into the gutter for merciless beatings.

But we will save moral arguments for another time, and concentrate for now on science.

And the science, as President Obama knows, is to tax Starbucks to spread the wealth. So, let's say that a cup of coffee costs $5, and President Obama decrees (after legislation is passed in The People's Assembly) that a tax on this item should be $4.

What happens next?

A right-wing propagandist would say, "That would raise the price of a cup to $9. And since no one would pay $9 for coffee, Starbucks would go out of business, no one would get any coffee, and no taxes would be raised anyway."

If only!

If only it were that easy to kill Starbucks!

But even the fascist propaganda has a kernel of truth: "No taxes would be paid anyway."

But "no taxes" is the antithesis of a just nation.


Nations are judged by how much the rich pay in taxes. (At least until The Revolution is complete.)

Here is what would really happen when a $4 tax is applied to a $5 cup of coffee: Simply put, the price will remain at $5 -- of which $4 will be returned to the people. And this is because of the elasticity of supply. In common language (for uneducated common people), the "elasticity of supply" refers to how much less (or more) of an item capitalists would be willing to sell if its price declined (or increased). That is, the change in supply divided by the change in price.

In this case, the "Before Obama" profit was $5, and the "After Obama" profit will be $1. So, we need to determine how many fewer cups of coffee Starbucks will be willing to sell if they only received $1 per cup instead of $5 per cup. And the answer is: There would be absolutely no change! How do we know this?

Because the supply elasticity is always zero!

Capitalists and their corporate marketing departments are insensitive to everything, and so will continue to force us to buy things we do not want.

Let's look at the mathematical proof:

A $5 tax is only one penny higher than a $4.99 tax. And does anyone really believe that a difference of one lousy penny would make any difference to anyone? Don't be stupid! Of course not!

And a $4.99 tax is equal to a $4.98 tax. How do we know this? Because we just proved that Starbucks executives will not change their policies based on a difference of just once cent.

Similarly, a $4.98 tax is equal to a $4.97 tax. A $4.97 tax is equal to a $4.96 tax. And continuing, we see that a one-cent tax is equal to no tax at all.

Therefore, a $5 tax has the same effect on supply as no tax at all. The elasticity of supply is zero, and Starbucks will not alter their behavior regardless of how much the taxes are.

So, tax levels have no relation whatsoever to corporate behavior, and President Obama would be justified in taxing the entire $5 of a $5 cup of coffee


Of course, that was just a sample exercise. In practice, this 100% taxation model should not be applied to Starbucks -- but should be applied to Starbucks, physicians, pharmaceutical companies, automobile manufacturers, home builders, etc., etc., etc.

For extra credit, think about the effects of a tax that exceeds 100%. That is, a $6 tax on a $5 purchase. Where would that money come from? Hint: They're called CAPITALists for a reason.

You can now go ahead and feel smart for having read my words, even if you lack the cognition to understand them.

Not a problem, though; you will always be taken care of when you leave the decisions to people who are smarter than you.


This post is dedicated to the memory of my junior-year microeconomics professor, who in defending the minimum wage, correctly observed that "no supermarket will fire their baggers if their wages increase by a few cents." The present-day ubiquity of supermarket baggers is a testimony to this man's penetrating insights. Rest in peace, comrade; I will carry the torch for you.

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