Thread by @iowahawkblog

It has come to my attention that trying to understand economics by reading Twitter is like trying to understand astrophysics by attending Flat Earther Con

in the interest of making this place just a weeee bit less fucking stupid, here's a kindergarten level little thread on how this shit works, from the perspective of Dave's Taco Stand.

At Dave's Taco Stand, we assume a downward sloping demand curve; the more we charge for a taco, the fewer tacos we will sell. If you want a simple math representation,

tacos sold = A + B * (taco price), where B < 0, or

T = A + B*P

Also, the amount of revenue we will generate is the number of tacos we sell multiplied by the taco price:

R = T*P, or R = P(A + BP) = AP + BP^2

but as filthy capitalists, we at Dave's Taco Stand are all about those sweet, sweet taco profits. It costs us something to make each taco, let's call it C. So our total profit is the # of tacos times the difference between taco price and taco cost:

or

Profit = T*(P-C) = (P-C)*(A + BP) = AP - AC + BP^2 - BCP

or Profit = -AC + (A-BC)P + BP^2

whaddaya know, a quadratic equation, and since B<0, a parabola with a single peak.

Now being a filthy profit hoarding Taco baron, I wish to maximize those profits by (1) taking the 1st derivative, setting to 0, and solving for the price that will maximize profits.

1st derivative of profit = (A-BC) + 2*BP = 0

profit max price = P* = (BC-A) / 2B

*to be continued, I have a taco stand issue to attend to rn

OK, I'm back, finally got the grease fire out.

So let's say

A = 100 (my total taco making capacity, if I was giving them away for free)

B = -10 (I will sell 0 tacos if I price them above $10)

C = $2 (it takes me 2 dollars to make a taco).

from the equations my profit maximizing taco price is $6, at which price I will sell 40 tacos, and make $4 dollars on each taco for a profit of $160.

*Don't bitch about my $6 tacos, I include free beans, rice, salsa, and chips with every dinner

Screw that, though! I want my customers to suffer both gastronomically AND economically, so Imma jack that taco price up to $7!

At which price I will sell 30 tacos, make $5 per taco, for a total profit of... $150. WTF?

Blimey this taco price gouging is complicated

Go ahead, plug whatever price you want in there, I'll never make more filthy profit than I do with my $6 taco value meal.

OK, now let's say in light of these crazy $6 tacos, Congress passes the vital American Taco Recovery Act (ATRA), with vouchers to help offset the cost of the tacos.

Hot damn! Now everybody will be demanding more tacos at *any* price, and my new A is 120.

Now my new profit maximizing price is $7, at which price I will sell 50 tacos, make ($7-$2)=$5 on each taco, for a total windfall profit of $250.

Woo hoo! Call the Yacht Store!

Oh wait WTF the cost of making my tacos (C) also went up for some reason, to $2.50 per taco.

Oh well, I guess I'll just max my profits again with a new price of $7.25, at which price I will sell 48 1/2 tacos, for a total per-taco profit of $4.75, and total profit of $230.38.

Oh well, less that $250, but a shit ton more than the dark days before American Taco Act.

But being a humanitarian, I am concerned about taco affordability. Be right back, off to distribute campaign donations to Congress so they will pass the new American Taco Recovery Act II.

*Also please note my money grubbing equations do not include fixed costs (taco stand rent, etc). Because fixed costs are fixed, only impact total (rather than per taco) profit, and have no bearing on optimal taco price.

**Also I just changed the name of Dave's Taco Stand to Dave's Taco Fiesta, because we are always DTF