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Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at

Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at www.antonydavies.org. The Game Select what price to charge . Lower price  sell more units . Higher price  sell fewer units. Price per unit x Units sold. The Game

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Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at

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  1. Conventional Wisdom versus The Data October 29, 2011 copies of this presentation can be found at www.antonydavies.org

  2. The Game Select what price to charge. Lower price  sell more units. Higher price  sell fewer units.

  3. Price per unit x Units sold The Game Goal: Make the most profit possible. Profit = Revenue – Cost $1 x Units sold

  4. Example Suppose you charge $3 per unit. How many units will you sell? 90 What is your revenue? ($3) (90) = $270 What is your cost? ($1) (90) = $90 What is your profit? $270 – $90 = $180

  5. Example Suppose you charge $15 per unit. How many units will you sell? 30 What is your revenue? ($15) (30) = $450 What is your cost? ($1) (30) = $30 What is your profit? $450 – $30 = $420

  6. Example Suppose you charge $3 per unit. Profit = $180 Of these, $15 is the better price to charge. Suppose you charge $15 per unit. Profit = $420

  7. Round 1 Choose the price you will charge for your product. Every unit you sell costs you $1 to produce. Profit = Price x Units Sold – $1 x Units Sold

  8. Round 1

  9. Round 2: Tax the Consumers In this round, consumers will pay an additional$4 per unit tax. You choose a price. The consumers pay that price per unit to you plus they pay another $4 per unit to the government.

  10. Round 2 In this round, consumers will pay an additional$4 per unit tax. You charge $3. If you charge $3, how many units will consumers buy? 70 What is your revenue? Consumers pay $3 + $4 = $7. ($3) (70) = $210 What is your cost? ($1) (70) = $70 Consumers buy 70 units. What is your profit? $210 – $70 = $140

  11. Round 2 Choose the price you will charge for your product. The consumer pays your price plus another $4 to the government. Every unit you sell costs you $1 to produce. Profit = Price x Units Sold – $1 x Units Sold

  12. Round 2: Tax the Consumers

  13. Round 3: Tax the Firms In this round, firms will pay a $4 per unit tax for every unit they sell. The price consumers pay is the price you charge.

  14. Round 3 In this round, firms will pay a $4 per unit tax. Your cost per unit is now $1 (for the unit) plus another $4 (for the tax). If you charge $3, how many units will consumers buy? 90 What is your revenue? ($3) (90) = $270 What is your cost? ($1 + $4) (90) = $450 What is your profit? $270 – $450 = –$180

  15. Round 3 Choose the price you will charge for your product. Every unit you sell costs you $1 to produce. In addition, you pay the government $4 for each unit you produce. Profit = Price x Units Sold – $5 x Units Sold

  16. Round 3: Tax the Firms

  17. Results In round 3, the government taxed the firms $4. Won’t firms just pass the tax on to consumers?

  18. Results Retail price up by $2 Consumers pay $2 more Firms receive $2 less End result: Firms pay $2 of the tax, and consumers pay $2 of the tax.

  19. Results In round 2, the government taxed the consumers $4. Won’t consumers be forced to pay the full $4 tax?

  20. Results Retail price down by $2 Consumers pay $2 more Firms receive $2 less End result: Firms pay $2 of the tax, and consumers pay $2 of the tax.

  21. Results Lesson #1: The government has no control over who ultimately pays a tax. (even when the firm is a monopoly)

  22. Results When there was no tax, consumers bought 50 units. A $4 per unit tax should generate $4 x 50 = $200 in tax revenue.

  23. Results Instead of raising $200 in tax revenue, the government only raises $160.

  24. Results Lesson #2: The government determines the tax rate, not the tax revenue. (regardless of whom it taxes)

  25. Lesson #1: The government has no control over who ultimately pays a tax. Lesson #2: The government determines the tax rate, not the tax revenue.

  26. Conventional Wisdom #1 The government is financially sound.

  27. Data sources: US Department of the Treasury, CIA World Factbook

  28. Data sources: US Department of the Treasury, CIA World Factbook

  29. Data sources: US Department of the Treasury, CIA World Factbook

  30. Data sources: US Department of the Treasury, CIA World Factbook

  31. Data sources: US Department of the Treasury, CIA World Factbook

  32. Data sources: US Department of the Treasury, CIA World Factbook

  33. Data sources: US Department of the Treasury, CIA World Factbook

  34. Data sources: US Department of the Treasury, CIA World Factbook

  35. Data sources: US Department of the Treasury, CIA World Factbook

  36. Millions, Billions, Trillions (blah, blah, blah)

  37. $100

  38. $10,000 A stack of $100 bills, ½ inch high.

  39. $1 million 100 packets of $10,000.

  40. $100 million $100 million fits on a standard pallet.

  41. $1 billion

  42. $1 trillion About twice the amount of money the U.S. government spends on interest on the national debt in one year.

  43. $14 trillion The value of all goods and services produced in the United States in one year. Also, the U.S. national debt (as of 2010).

  44. $65 trillion Total Federal debt and obligations (as of 2010).

  45. Conventional Wisdom #2 The government has a debt problem.

  46. The Federal government collects about $2.3 trillion in taxes per year (all tax revenues combined). The average U.S. household earns about $50,000 per year. Data source: Bureau of Economic Analysis

  47. $2.3 trillion $50,000

  48. Federal tax revenues = $2.3 trillion Federal spending = $3.8 trillion Federal debt = $14.6 trillion Income = $50,000 Spending = $84,000 Debt = $330,000

  49. Deficit Deficit Deficit Deficit Debt 50

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