Changing equilibria from trade

WEBVTT
Kind: captions
Language: en

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- [Instructor] In this video,
we're going to think about

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how trade can alter the equilibrium

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price and quantity in a given market.

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So what we see here, as we like to do,

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are very simplified examples of markets

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in various economies.

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So first, we have country A,

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and let's say it's the market for widgets.

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And we're going to assume that country A

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is not trading with anyone else.

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So it is an autarky, a very
fancy word, which just means

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that this country is
operating independently.

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It's operating in isolation.

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And so you can see the demand curve

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in this market in orange,

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and we can see the supply curve.

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And you can see,

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when this country is
operating in isolation,

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this market for widgets
has an equilibrium price.

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It looks like it's a little bit under $4.

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I'll just assume that the
price is in dollars per widget.

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And the equilibrium quantity

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looks like it's about a
little under four units

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per whatever time period we're looking at.

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Fair enough.

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Now let's look at country B,

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and let's assume that they are
also operating independently.

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It's an autarky in this market.

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And so here, we can see a different

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demand curve than what we saw in country A

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and a different supply curve.

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And notice they have a different

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equilibrium price and quantity.

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So here, the equilibrium price

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seems to be a little bit over $1,

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and the equilibrium quantity
seems to actually be

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not that different than what
we saw in the first country.

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Although, in many situations,
it could be very different.

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Now let's imagine what would happen

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if they opened up their
economies to each other.

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Well, then you would essentially

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horizontally add these two demand curves,

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and you would horizontally
add these two supply curves

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to come up with a new supply curve

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and a new demand curve. This
is a little bit of a review

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of what we've seen in other videos.

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But notice, at a price of five,

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in total, no one's demanding anything,

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no quantity of these widgets.

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And then at a price of zero,

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country A, the market
there is demanding 15,

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and country B is demanding five.

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So in aggregate, they're demanding 20.

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And similarly, you can
see that with supply,

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that at a price of five,

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country A will supply five.

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And at a price of five,
country B will supply 15.

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And so together, they will
supply 20 units per time period.

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And so we can view this right over here

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as our supply and demand curves

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for the combined markets
because now they're trading.

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We are not in an autarky anymore.

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And notice what has happened.

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Our equilibrium price is now someplace

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in between these two equilibrium prices.

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So it looks like it's
a little bit under $3.

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And our equilibrium quantity,

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our equilibrium quantity is
a little bit under 10 units.

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And so you might notice

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some interesting things
that are happening.

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What would happen from a,

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someone in country A's point of view,

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the people who are the buyers,

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the people who are demanding this widget?

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Well, now, instead of
having to pay almost four,

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they're paying someplace
in between two and three.

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This is the new equilibrium price

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if they were to open up their economy.

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And so what you have is, is that this,

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this amount would be produced by,

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in theory, by the domestic manufacturers,

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so the first, let's call that 2 1/2 units.

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And then the remainder,

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where are they going to
get those units from?

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Well, those are going to be imports.

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And let's look at the
equilibrium price on country B,

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and country B was really
the lower cost producer.

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And so country B, now we have a,

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let's put it a little bit over 2.5,

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so let's put it right over there.

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And so now you have a
situation where the suppliers

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in country B are going
to be producing a lot,

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a lot more than they were before.

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And only this amount is coming
from their domestic demand.

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And then all of this
amount right over here,

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that is being exported.

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And if we're assuming
that the world economy

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is only made up of country A and country B

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or that they're only
trading with each other,

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these exports become country A's

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imports right over there.

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And so proponents of free
trade will say, hey, look,

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the overall consumer surplus is larger

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than the combined consumer
surpluses that we had before.

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Before, you had this consumer
surplus in country A.

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And country B,

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it was all of this.

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But still, this entire area is larger

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than these two combined.

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And you could do it
mathematically if you like,

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calculate the area of these triangles.

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And if you look at the producer surplus,

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you'll see a similar story.

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The total producer surplus of
the combined economies now,

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this is going to be larger
than this producer surplus

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plus this producer surplus.

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Now, some,

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there will not always be winners in this.

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The winners here are the
demanders in country A.

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Because instead of this
little, small consumer surplus

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that they had before, now
they have this much larger

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consumer surplus right over there.

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And then the other winners are
the suppliers in country B.

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'Cause instead of this producer surplus

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that they had before,

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they now have this producer surplus.

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But the losers in this situation

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are the suppliers in country A

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who now have a much
lower producer surplus.

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So their triangle has shrunk
to that right over there.

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And then the other
losers in this situation

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are the consumers in country B

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who now have to pay a
higher equilibrium price.

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And so their consumer surplus
is only this small triangle,

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when before it was this whole thing.

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So anyway, the big takeaway here is,

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is that if you go from autarky
to opening up economies,

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it can affect what the equilibrium

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prices and quantities are going to be.

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And oftentimes or usually,
it's going to increase

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your total consumer and producer surplus.

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Although, there will be some winners,

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and there will be some losers.


Price elasticity of supply determinants

WEBVTT
Kind: captions
Language: en

00:00:00.130 --> 00:00:02.170
- [Instructor] In several
videos we have talked already

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about the price elasticity of supply.

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In this video, we're going
to dig a little bit deeper,

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and we're going to think about

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what factors might make a supply curve,

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or supply schedule, or portions of it,

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to be more elastic or inelastic.

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So we'll think about the
determinants of the price

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elasticity of supply.

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And to help us think about that,

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I've drawn two different supply curves.

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And so, remember, price
elasticity is thinking about

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how sensitive is the quantity,
or the price elasticity

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of supply, we're thinking about

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how sensitive is a percent
change in quantity supplied

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to a percent change in price.

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So, for example, if we were to go from

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this price, to this price,
it's a pretty significant

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percent change in price.

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It looks like about a 50% change in price.

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But if we look at this supply curve,

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where it's getting pretty vertical,

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it's not quite vertical yet,
but it's getting pretty steep,

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our percent change in quantity
is going from here to here,

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so it's not as dramatic.

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So these parts of the curve
that are relatively steep,

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as they're approaching
more and more vertical,

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we would consider those to
be relatively inelastic.

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If you had a perfectly vertical,
or portions of this curve

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that were perfectly
vertical, at those portions

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you would say that you
have perfect inelasticity.

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And then, if on the other
hand, in this example,

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if we were to change our price from say,

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this to this, that's a relatively small

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percent change in price,
but notice it could result

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in a fairly large percent
change in quantity supplied,

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we're going from this to this.

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So, when we are more
horizontal, or the flatter our

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supply curve is, that would be,
we're talking about relative

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elasticity, or we are
much more elastic here

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than we are there.

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So, elastic.

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And if you were perfectly horizontal,

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then you would have a perfectly elastic

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part of our supply curve,
or our supply schedule.

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Now what would cause, what
are the factors that would

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make us get more
inelastic, or more elastic?

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Well let's think about a situation,

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let's say we are in this world.

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Let's say we are in the
world, starting at this price,

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where this is our quantity.

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Imagine that the factories
that produce whatever good

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we're talking about here, they're already

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at full production.

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And to make more production
would take a lot of time,

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or there might not even be the resources

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to have more production.

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Maybe the people who make the factories

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are doing other things right now.

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Maybe you have other
resources, other inputs,

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into your production that
there's just not more of.

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Maybe oil, as much oil in
the world is being produced,

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and that's an input into our production.

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And so in that world,
even if the price is,

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even if the price goes dramatically up,

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people might want to
produce a lot more quantity,

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but they just can't, they
don't have more factories,

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or they don't more inputs to produce them.

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So, the quantity might go up a little bit,

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they might run the factory,
they might run the factories

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in overtime, or the people who
are trained to do that skill,

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and maybe there just
aren't a lot more people

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who can do that skill,
they're working overtime,

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but they can't produce a lot more.

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And so, a couple of
things that we can glean

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from that example is, this
inelasticity of supply

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tends to happen in the short run,

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when in the short run, you're
not gonna be able to build

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a new factory in the short run.

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You're going to be able
to find more sources of

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let's say oil in the short run.

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You're not going to be able
to train a lot more people

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to produce a lot more, in the short run.

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So if we're talking about a supply curve

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that's describing more of
a short run time frame,

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then it tends to be more inelastic,

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and then the other
thing is, and we already

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talked about this is, there's
not available resources,

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or not a lot of available
resources, not a lot

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of available,

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available resources.

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Once again, your factory's
operating full-out.

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You've hired everyone who
can produce that thing

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you're producing, or some natural resource

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that you need as an
input, to make this good,

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well, the world is already
producing as much as they could.

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Well, let's then go to
the other situation.

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What would cause elasticity?

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Well, this could be a world where

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in the long run, it might be
easier to get more resources.

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In the long run, you can
build more factories.

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You can find and hire
and train more people.

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So, the longer run that
we are talking about,

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that tends to lead to a
more elastic supply curve,

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in the longer run, and
then another notion here,

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is that you aren't capacity constrained,

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or maybe I should say,
aren't resource constrained.

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Aren't resource

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constrained.

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So, maybe our factories are
running nowhere near capacity.

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So even a small increase
of price, where it's like,

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"Hey, I'm gonna just make my factories run

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"a little bit more."

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Or there might be a lot of
people who can help produce

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who have the skills to
do, to produce that good,

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so as the price goes
up, more and more people

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are going to start producing that good.

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Or it might be using
resources where there's

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no shortage of it.

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Where, as the price even
goes up incrementally,

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people will just use more
and more of that resource

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to provide more and more of that good.


Introduction to price elasticity of supply

WEBVTT
Kind: captions
Language: en

00:00:00.560 --> 00:00:02.000
- [Instructor] We've done many videos

00:00:02.000 --> 00:00:04.580
on the price elasticity of demand,

00:00:04.580 --> 00:00:09.030
now we're going to focus on
the price elasticity of supply.

00:00:09.030 --> 00:00:11.840
And it's a very similar
idea, it's just being applied

00:00:11.840 --> 00:00:15.100
to supply now, it's a
measure of how sensitive

00:00:15.100 --> 00:00:20.100
our quantity supplied is to
percent changes in price.

00:00:20.130 --> 00:00:24.270
And we will calculate
it as our percent change

00:00:25.340 --> 00:00:30.340
in quantity supplied for a given,

00:00:31.570 --> 00:00:36.060
for a given percent change in price,

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percent change in price.

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Now, to make this a
little bit more tangible,

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let's look at a simple market,

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let's say this is the market
for apples, right over here,

00:00:50.470 --> 00:00:53.510
where our vertical axis is price,

00:00:53.510 --> 00:00:56.060
and this could be thousands
of dollars per ton,

00:00:56.060 --> 00:00:58.440
and then our horizontal
axis is quantities,

00:00:58.440 --> 00:01:00.550
and maybe this is in tons per day.

00:01:00.550 --> 00:01:04.950
And this supply schedule
and this supply curve

00:01:04.950 --> 00:01:07.810
are essentially describing the same data.

00:01:07.810 --> 00:01:11.270
So, let's think about our
price elasticity of supply

00:01:11.270 --> 00:01:15.470
as we go from point A,
point A, to point B.

00:01:15.470 --> 00:01:19.710
Well, on the supply schedule,
point A is this point

00:01:19.710 --> 00:01:22.790
right over here, our price
is four, our quantity is one.

00:01:22.790 --> 00:01:25.890
And point B is right over here.

00:01:25.890 --> 00:01:29.490
So let us calculate
from point A to point B

00:01:29.490 --> 00:01:34.040
our price elasticity of supply.

00:01:34.040 --> 00:01:35.970
So, first of all, what is going to be

00:01:35.970 --> 00:01:38.530
our percent change in price?

00:01:38.530 --> 00:01:40.830
Well, we're going from four to six,

00:01:40.830 --> 00:01:42.850
so it's an increase of two,

00:01:42.850 --> 00:01:45.640
so our percent change in price

00:01:45.640 --> 00:01:49.260
is going to be equal to two,

00:01:49.260 --> 00:01:52.060
is how much we increased
from a base of four,

00:01:52.060 --> 00:01:56.363
times 100% and that of course
is going to be equal to

00:01:56.363 --> 00:01:59.370
a 50% increase in price.

00:01:59.370 --> 00:02:03.950
And then what is going to be
our percent change in quantity?

00:02:03.950 --> 00:02:06.010
Well, we're going from one to two,

00:02:06.010 --> 00:02:08.120
so we're starting at a base of one.

00:02:08.120 --> 00:02:11.560
We are increasing by one,
and then multiply that

00:02:11.560 --> 00:02:16.543
times 100%, that gives us 100%.

00:02:17.640 --> 00:02:21.010
So, when we have a 50% increase in price,

00:02:21.010 --> 00:02:24.190
that resulted going
from point A to point B,

00:02:24.190 --> 00:02:28.500
in a 100% increase in quantity supplied.

00:02:28.500 --> 00:02:32.820
So, 100% divided by 50%,
that is going to give us,

00:02:32.820 --> 00:02:36.310
this is going to be equal to two.

00:02:36.310 --> 00:02:40.640
Now, what if we go from
point B to point C?

00:02:40.640 --> 00:02:43.630
So, this is point C right over here.

00:02:43.630 --> 00:02:45.500
I encourage you, pause this video

00:02:45.500 --> 00:02:49.150
and see if you can calculate
the price elasticity of supply

00:02:49.150 --> 00:02:51.983
when going from point B to point C.

00:02:52.930 --> 00:02:55.593
Well, we're going to do
a similar calculation.

00:02:57.140 --> 00:02:59.820
Our percent change in price.

00:02:59.820 --> 00:03:04.820
We start at a base of six
and we are increasing by two.

00:03:05.020 --> 00:03:08.120
So we're gonna multiply that times 100%.

00:03:08.120 --> 00:03:11.160
So that is approximately,
this is 1/3 times 100%,

00:03:11.160 --> 00:03:13.260
so approximately 33.3%.

00:03:14.240 --> 00:03:18.370
And then what is our percent
change in quantity supplied?

00:03:18.370 --> 00:03:22.870
Well, we are going to
go from two to three.

00:03:22.870 --> 00:03:26.860
So we start at a base of
two, we increase by one.

00:03:26.860 --> 00:03:31.400
So plus one, and multiply times 100%.

00:03:31.400 --> 00:03:33.400
And so that's going to be given,

00:03:33.400 --> 00:03:36.910
it's going to be equal to 50%.

00:03:36.910 --> 00:03:40.930
And so when we have a 1/3 increase,

00:03:40.930 --> 00:03:43.930
or 33.3% increase in our price,

00:03:43.930 --> 00:03:48.030
we have a 50% increase
of our quantity supplied,

00:03:48.030 --> 00:03:52.210
when we go from point B to
point C right over here,

00:03:52.210 --> 00:03:54.160
and then one way to think about it is

00:03:54.160 --> 00:03:58.660
50% divided by 1/3 is the
same thing as 50% times three,

00:03:58.660 --> 00:04:00.870
and so this is going to be equal to,

00:04:00.870 --> 00:04:05.020
this is going to be equal to 1.5.

00:04:05.020 --> 00:04:07.020
So, just as we saw when we calculated

00:04:07.020 --> 00:04:09.250
price elasticity of demand,

00:04:09.250 --> 00:04:11.660
either when you have a linear curve here,

00:04:11.660 --> 00:04:15.300
your price elasticity
of supply can change.

00:04:15.300 --> 00:04:18.130
It is not the same thing as slope.

00:04:18.130 --> 00:04:20.270
Now another thing to
keep in mind is the way

00:04:20.270 --> 00:04:23.630
that I calculated price elasticity
of supply in this video,

00:04:23.630 --> 00:04:25.580
which is arguably the simplest way,

00:04:25.580 --> 00:04:27.380
you would not get the same value

00:04:27.380 --> 00:04:29.980
when you're calculating the
magnitude going from A to B

00:04:29.980 --> 00:04:32.090
than if you went from B to A.

00:04:32.090 --> 00:04:34.250
There are slightly more
advanced techniques,

00:04:34.250 --> 00:04:36.210
the mid-point technique, for example,

00:04:36.210 --> 00:04:37.730
that will give you the same answer

00:04:37.730 --> 00:04:39.530
regardless of which direction you go in,

00:04:39.530 --> 00:04:42.620
but that's beyond the
scope of this first video.

00:04:42.620 --> 00:04:45.100
Now, just as we discussed
in the demand case,

00:04:45.100 --> 00:04:46.620
there are cases that you would consider

00:04:46.620 --> 00:04:49.330
to be more inelastic supply and cases

00:04:49.330 --> 00:04:52.680
where you would consider
to be more elastic supply.

00:04:52.680 --> 00:04:54.830
So, one way to think about it is,

00:04:54.830 --> 00:04:59.830
if the magnitude of your
price elasticity of supply

00:04:59.940 --> 00:05:03.450
is less than one, and of
course this is magnitude

00:05:03.450 --> 00:05:05.830
so it's going to be greater
than or equal to zero,

00:05:05.830 --> 00:05:09.110
well, then you're talking
about inelastic price

00:05:09.110 --> 00:05:11.400
elasticity of supply, inelastic.

00:05:12.370 --> 00:05:15.770
That's a situation in
which our quantity supplied

00:05:15.770 --> 00:05:19.380
is not going to change
so much depending on,

00:05:19.380 --> 00:05:23.780
is not going to be so sensitive
to our change in price.

00:05:23.780 --> 00:05:27.380
Now, if our price elasticity of supply

00:05:27.380 --> 00:05:29.820
is greater than one,
that's generally considered

00:05:29.820 --> 00:05:32.620
to be elastic, for a given
percent change in price,

00:05:32.620 --> 00:05:34.720
you're getting a larger than that percent

00:05:34.720 --> 00:05:36.953
change in quantity supplied.


Determinants of price elasticity of demand

WEBVTT
Kind: captions
Language: en

00:00:00.350 --> 00:00:02.010
- [Instructor] In other
videos we have already started

00:00:02.010 --> 00:00:05.260
talking about the price
elasticity of demand,

00:00:05.260 --> 00:00:06.610
and what we're gonna do in this video

00:00:06.610 --> 00:00:09.330
is think about the
factors that might drive

00:00:09.330 --> 00:00:11.730
the price elasticity of
demand in a given market

00:00:11.730 --> 00:00:14.190
to be more or less elastic.

00:00:14.190 --> 00:00:15.800
So one could say that
we're gonna think about

00:00:15.800 --> 00:00:18.910
the determinants of the
price elasticity of demand.

00:00:18.910 --> 00:00:21.060
Now before we even talk
about those determinants

00:00:21.060 --> 00:00:22.650
or those factors, let's
just give ourselves

00:00:22.650 --> 00:00:25.790
a little bit of a review
of what an elastic

00:00:25.790 --> 00:00:28.320
or an inelastic market might look like.

00:00:28.320 --> 00:00:29.890
So let me draw

00:00:29.890 --> 00:00:32.170
my price

00:00:32.170 --> 00:00:33.730
and quantity axes

00:00:33.730 --> 00:00:36.550
that we are pretty familiar
with at this point.

00:00:36.550 --> 00:00:38.180
So quantity on the horizontal axis,

00:00:38.180 --> 00:00:40.660
price on the vertical axis, and remember,

00:00:40.660 --> 00:00:44.430
price elasticity of
demand is percent change

00:00:44.430 --> 00:00:47.810
in quantity for given
percent change in price.

00:00:47.810 --> 00:00:51.060
So a high elasticity
would say that you have a

00:00:51.060 --> 00:00:53.410
large percent change in quantity

00:00:53.410 --> 00:00:56.760
for a given percent change in price,

00:00:56.760 --> 00:00:59.940
so high elasticity would
look something like this,

00:00:59.940 --> 00:01:02.560
it would be a flatter demand curve.

00:01:02.560 --> 00:01:04.970
So this might look something like that,

00:01:04.970 --> 00:01:07.360
so I'll write that as high,

00:01:07.360 --> 00:01:09.700
high elasticity

00:01:09.700 --> 00:01:11.380
elasticity.

00:01:11.380 --> 00:01:14.180
And low elasticity would be that your

00:01:14.180 --> 00:01:17.150
percentage in quantity
does not change much

00:01:17.150 --> 00:01:19.560
depending on your percent change in price.

00:01:19.560 --> 00:01:21.950
So low elasticity, the closer and closer

00:01:21.950 --> 00:01:25.100
we get to a vertical curve,
the lower our elasticity,

00:01:25.100 --> 00:01:27.980
so low elasticity would
look something like that.

00:01:27.980 --> 00:01:30.670
A low elasticity demand curve.

00:01:30.670 --> 00:01:31.560
Low

00:01:32.430 --> 00:01:33.870
elasticity.

00:01:33.870 --> 00:01:35.420
Elasticity.

00:01:35.420 --> 00:01:37.280
In other videos we even
think about a perfectly

00:01:37.280 --> 00:01:39.970
inelastic market in
which case you would have

00:01:39.970 --> 00:01:42.030
a vertical demand curve.

00:01:42.030 --> 00:01:43.440
But let's now think about the factors

00:01:43.440 --> 00:01:47.100
that might lead us to be closer
to the high elasticity case

00:01:47.100 --> 00:01:50.150
or closer to the low elasticity case.

00:01:50.150 --> 00:01:54.360
So the factors that economists
will generally point to

00:01:54.360 --> 00:01:57.300
are substitutes, timeframe, income share,

00:01:57.300 --> 00:01:58.730
whether the market we're talking about

00:01:58.730 --> 00:02:00.490
is about a luxury or necessity,

00:02:00.490 --> 00:02:02.890
and the narrowness of a market.

00:02:02.890 --> 00:02:05.570
So let's start with substitutes.

00:02:05.570 --> 00:02:07.540
So let's imagine first a world

00:02:07.540 --> 00:02:09.400
where there are many substitutes

00:02:09.400 --> 00:02:12.520
for the good or service
that we're talking about.

00:02:12.520 --> 00:02:14.273
Many substitutes.

00:02:15.380 --> 00:02:17.790
And we can think of examples in our heads

00:02:17.790 --> 00:02:19.450
for markets of goods or services

00:02:19.450 --> 00:02:21.130
where there are many substitutes,

00:02:21.130 --> 00:02:24.220
let's say it's the market for

00:02:24.220 --> 00:02:26.220
Fuji apples.

00:02:26.220 --> 00:02:28.670
Well, the other substitutes
are the other types

00:02:28.670 --> 00:02:31.540
of apples out there, McIntosh apples and

00:02:31.540 --> 00:02:33.850
Red Delicious apples, and all of those,

00:02:33.850 --> 00:02:36.750
and so for a given
percent change in price,

00:02:36.750 --> 00:02:38.940
would you expect the percent change

00:02:38.940 --> 00:02:43.630
in quantity demanded of Fuji
apples to change dramatically?

00:02:43.630 --> 00:02:45.230
Well if there are many substitutes,

00:02:45.230 --> 00:02:48.080
and only the Fuji apples, say,

00:02:48.080 --> 00:02:50.630
get a lot more expensive,
then people will go

00:02:50.630 --> 00:02:52.350
to the substitutes, they're more likely

00:02:52.350 --> 00:02:55.420
to go the the Red Delicious,
or the McIntosh apples,

00:02:55.420 --> 00:02:57.510
so when you have many substitutes,

00:02:57.510 --> 00:03:01.013
that tends to lead to more elasticity.

00:03:01.950 --> 00:03:03.500
More elasticity.

00:03:03.500 --> 00:03:05.700
People quantity, I guess you could say,

00:03:05.700 --> 00:03:08.010
would be very sensitive to price.

00:03:08.010 --> 00:03:09.680
And you could go the other way around

00:03:09.680 --> 00:03:12.190
if you have few substitutes.

00:03:12.190 --> 00:03:14.763
Few substitutes.

00:03:15.730 --> 00:03:19.160
Well, then, even if the
price changes a little bit,

00:03:19.160 --> 00:03:20.550
or even if it changes a lot, people say

00:03:20.550 --> 00:03:22.690
well I don't know what I
could substitute that with,

00:03:22.690 --> 00:03:25.670
so they might still buy a
reasonably similar quantity,

00:03:25.670 --> 00:03:29.920
so this would be less, less elastic.

00:03:29.920 --> 00:03:31.560
Less elastic.

00:03:31.560 --> 00:03:35.700
Now what about timeframe, how
does that affect elasticity?

00:03:35.700 --> 00:03:39.810
Well, imagine that you
are selling umbrellas

00:03:39.810 --> 00:03:42.740
and it is raining right now.

00:03:42.740 --> 00:03:44.690
So for thinking about a short timeframe,

00:03:44.690 --> 00:03:48.640
while it is raining,
then you could probably

00:03:48.640 --> 00:03:51.520
raise the prices on umbrellas a good bit,

00:03:51.520 --> 00:03:53.400
and assuming you have good foot traffic,

00:03:53.400 --> 00:03:55.040
a lot of people are
probably going to be willing

00:03:55.040 --> 00:03:58.930
to pay that price, and
so in a short timeframe,

00:03:58.930 --> 00:04:00.950
in a short,

00:04:00.950 --> 00:04:02.640
short timeframe,

00:04:02.640 --> 00:04:05.240
things tend to be less elastic.

00:04:05.240 --> 00:04:08.130
Less elastic.

00:04:08.130 --> 00:04:10.440
But over a longer timeframe,

00:04:10.440 --> 00:04:14.290
so longer timeframe, people
might say, hey you're trying to

00:04:14.290 --> 00:04:16.640
really rip me off with those umbrellas

00:04:16.640 --> 00:04:19.450
and take advantage of me,
I can go someplace else

00:04:19.450 --> 00:04:22.750
and find umbrellas, I could
go online or whatever else,

00:04:22.750 --> 00:04:25.880
and so there, people tend to
be more sensitive to price

00:04:25.880 --> 00:04:28.760
on the longer timeframe, they
can find their substitutes,

00:04:28.760 --> 00:04:30.460
going back to the previous determinant,

00:04:30.460 --> 00:04:34.610
and so things tend to be more elastic.

00:04:34.610 --> 00:04:37.583
So once again, you
could view elasticity as

00:04:37.583 --> 00:04:42.070
how sensitive quantity is to price.

00:04:42.070 --> 00:04:44.140
So next, income share.

00:04:44.140 --> 00:04:46.530
So let's first think about something

00:04:46.530 --> 00:04:49.710
that makes up a very small
percentage of your income,

00:04:49.710 --> 00:04:53.410
say bubble gum, and let's
say bubble gum right now

00:04:53.410 --> 00:04:57.160
is 25 cents, and if it
were to go to 50 cents,

00:04:57.160 --> 00:05:00.600
that would likely reduce
the quantity demanded,

00:05:00.600 --> 00:05:02.320
but it might not be so significant

00:05:02.320 --> 00:05:05.090
because going from 25 cents to 50 cents

00:05:05.090 --> 00:05:06.535
isn't gonna make a big difference

00:05:06.535 --> 00:05:08.990
for most people's pocket books.

00:05:08.990 --> 00:05:12.310
So in general, the lower the income share,

00:05:12.310 --> 00:05:15.120
lower share of income,

00:05:15.120 --> 00:05:19.140
the less elastic, the less elastic

00:05:19.140 --> 00:05:21.630
that market is going to be.

00:05:21.630 --> 00:05:25.030
But imagine something that
is a high share of income.

00:05:25.030 --> 00:05:27.290
So let's say we're talking about,

00:05:27.290 --> 00:05:29.583
let me just write here, so high share,

00:05:30.490 --> 00:05:33.520
high share of income,

00:05:33.520 --> 00:05:35.750
so let's say we're talking about

00:05:35.750 --> 00:05:39.520
an automobile, and if
people are already spending

00:05:39.520 --> 00:05:43.110
20% or 30% of their
income on that automobile

00:05:43.110 --> 00:05:44.800
and that automobile were to double,

00:05:44.800 --> 00:05:47.380
the cost of that versus the gum ball drop,

00:05:47.380 --> 00:05:50.450
the bubble gum, well then
people just wouldn't even

00:05:50.450 --> 00:05:52.470
be able to demand the same quantities

00:05:52.470 --> 00:05:54.410
that they were able to
before because their income

00:05:54.410 --> 00:05:56.380
just can't support it,
they have other things

00:05:56.380 --> 00:05:59.540
to spend that money on, that extra money

00:06:00.720 --> 00:06:03.170
because their incomes
just can't support it,

00:06:03.170 --> 00:06:07.000
so they will be highly
sensitive to changes in price.

00:06:07.000 --> 00:06:09.950
So high sensitivity to changes in price,

00:06:09.950 --> 00:06:12.363
more elastic.

00:06:13.330 --> 00:06:16.740
Now what about luxuries
versus necessities?

00:06:16.740 --> 00:06:18.450
Let's start with necessities.

00:06:18.450 --> 00:06:21.540
If this is something
that you absolutely need,

00:06:21.540 --> 00:06:24.520
then even if the price
were to go up a good bit,

00:06:24.520 --> 00:06:26.130
as long as you can still afford it,

00:06:26.130 --> 00:06:28.320
you might still go for that thing.

00:06:28.320 --> 00:06:30.950
So for example, let's say
there's some medicine,

00:06:30.950 --> 00:06:32.690
let's say you're a diabetic
and you need insulin,

00:06:32.690 --> 00:06:34.440
if you don't get insulin,
really bad things

00:06:34.440 --> 00:06:35.840
are going to happen.

00:06:35.840 --> 00:06:38.150
If they were to raise the price of insulin

00:06:38.150 --> 00:06:41.760
by 20, 30, 40%, assuming that
you could still afford it,

00:06:41.760 --> 00:06:43.790
you would still buy the same quantity

00:06:43.790 --> 00:06:45.830
because you need that insulin,

00:06:45.830 --> 00:06:49.020
and so if something is a necessity,

00:06:49.020 --> 00:06:52.300
necessity, you're gonna
be less price sensitive,

00:06:52.300 --> 00:06:54.650
the quantity is going to
be less sensitive to price,

00:06:54.650 --> 00:06:57.783
and so you're going to be less elastic,

00:06:59.190 --> 00:07:03.180
but if something's a luxury,
if we're talking about

00:07:03.180 --> 00:07:06.910
you know, gold tiaras,
and the price of gold

00:07:06.910 --> 00:07:09.370
were to go up dramatically, well then

00:07:09.370 --> 00:07:11.530
a lot of people will say, I might not need

00:07:11.530 --> 00:07:13.740
that gold tiara anymore,
it's really not gonna make

00:07:13.740 --> 00:07:15.610
a big difference in my life.

00:07:15.610 --> 00:07:17.810
So, in general, luxuries,

00:07:17.810 --> 00:07:19.640
luxury

00:07:19.640 --> 00:07:24.510
will be associated with more elasticity.

00:07:24.510 --> 00:07:27.450
Now there could be
exceptions, if something isn't

00:07:27.450 --> 00:07:30.030
kind of the ultra luxury category,

00:07:30.030 --> 00:07:32.240
and if maybe the price were to go up,

00:07:32.240 --> 00:07:35.000
maybe the people buying
it, it's a very low share

00:07:35.000 --> 00:07:37.610
of their income, and maybe it's a brand

00:07:37.610 --> 00:07:40.070
that, at least the people buying it

00:07:40.070 --> 00:07:42.220
feel that there's no substitute for it,

00:07:42.220 --> 00:07:45.600
well then maybe it might
not be as sensitive,

00:07:45.600 --> 00:07:48.860
but we're talking about
in broad generalities.

00:07:48.860 --> 00:07:51.150
Now the last factor that
is sometimes talked about

00:07:51.150 --> 00:07:53.130
is the narrowness of the market.

00:07:53.130 --> 00:07:54.670
Now what are we talking about here?

00:07:54.670 --> 00:07:58.510
So, for example, we could
be talking about the market,

00:07:58.510 --> 00:08:01.970
market for apples,

00:08:01.970 --> 00:08:06.970
or you could talk about the
market, market for food.

00:08:07.110 --> 00:08:09.190
Which of these markets,
they're kind of both

00:08:09.190 --> 00:08:11.960
describing food, but
which one is more narrow?

00:08:11.960 --> 00:08:15.290
Yes, apples are a subset of all food.

00:08:15.290 --> 00:08:18.090
And so, if we're talking
about the market for apples,

00:08:18.090 --> 00:08:21.540
the narrower situation, so
if we're talking about the

00:08:21.540 --> 00:08:23.270
narrower,

00:08:23.270 --> 00:08:26.980
narrower market, you tend
to have more substitutes.

00:08:26.980 --> 00:08:28.700
So if the price of apples go up,

00:08:28.700 --> 00:08:30.480
people say well maybe I'm
gonna go buy some pears,

00:08:30.480 --> 00:08:33.220
or bananas, or something
else instead of the apples,

00:08:33.220 --> 00:08:36.530
and so you're gonna be
more, quantity will be more

00:08:36.530 --> 00:08:38.350
sensitive to changes in price,

00:08:38.350 --> 00:08:41.963
and so you're gonna have more elasticity,

00:08:43.260 --> 00:08:45.880
but if you have a broader
definition of your market,

00:08:45.880 --> 00:08:49.050
the market for food, well now the food

00:08:49.050 --> 00:08:51.640
looks a lot more like it's a necessity,

00:08:51.640 --> 00:08:54.390
there are very few substitutes for food,

00:08:54.390 --> 00:08:57.340
if I stop eating food, well I,

00:08:57.340 --> 00:08:59.470
it's not like I can eat, you know,

00:08:59.470 --> 00:09:04.140
change or just live off
of air, or whatever else,

00:09:04.140 --> 00:09:06.610
there's really no substitutes for food,

00:09:06.610 --> 00:09:08.870
it is an absolute necessity.

00:09:08.870 --> 00:09:11.610
So the broader the market definition,

00:09:11.610 --> 00:09:14.730
so the broader the market,
we tend to be dealing

00:09:14.730 --> 00:09:17.510
with a less elastic,

00:09:17.510 --> 00:09:21.553
less price elasticity of demand.


Determinants of elasticity example

WEBVTT
Kind: captions
Language: en

00:00:00.170 --> 00:00:01.457
- [Instructor] We are asked,

00:00:01.457 --> 00:00:03.927
"which of the following describes a good

00:00:03.927 --> 00:00:07.980
"that is likely to have
the most elastic demand?"

00:00:07.980 --> 00:00:09.150
Choose one answer.

00:00:09.150 --> 00:00:11.700
So pause this video and
see if you can answer that.

00:00:12.730 --> 00:00:15.300
All right, so the first
choice right over here,

00:00:15.300 --> 00:00:18.350
they talk about "a luxury
with many substitutes."

00:00:18.350 --> 00:00:19.390
So we already talked about,

00:00:19.390 --> 00:00:20.680
when you're dealing with substitutes,

00:00:20.680 --> 00:00:22.012
if there's a lot of substitutes,

00:00:22.012 --> 00:00:25.770
that makes the quantity demanded
very sensitive to price.

00:00:25.770 --> 00:00:28.060
So this would make it more elastic

00:00:28.060 --> 00:00:29.770
to have many substitutes.

00:00:29.770 --> 00:00:32.120
More elastic.

00:00:32.120 --> 00:00:33.590
And then the fact that it's a luxury.

00:00:33.590 --> 00:00:35.270
It's not something that people need,

00:00:35.270 --> 00:00:36.650
this would also make quantity

00:00:36.650 --> 00:00:38.810
more sensitive to price, generally.

00:00:38.810 --> 00:00:42.110
So we would also say more elastic.

00:00:42.110 --> 00:00:43.840
So this is looking like a good candidate,

00:00:43.840 --> 00:00:46.467
but let's check the other options here.

00:00:46.467 --> 00:00:48.670
"A necessity with few substitutes."

00:00:48.670 --> 00:00:50.130
Well, this is the opposite.

00:00:50.130 --> 00:00:53.350
If it's a necessity, this
would be more inelastic,

00:00:53.350 --> 00:00:55.120
or less elastic.

00:00:55.120 --> 00:00:57.200
Less elastic.

00:00:57.200 --> 00:00:58.497
And few substitutes,

00:00:58.497 --> 00:01:00.760
if you have a change in
price for that thing,

00:01:00.760 --> 00:01:02.350
people say, well, I still
have to buy that thing,

00:01:02.350 --> 00:01:03.783
I can't substitute it with other things.

00:01:03.783 --> 00:01:06.450
This would also be less elastic.

00:01:06.450 --> 00:01:09.130
And remember, we're looking
for the most elastic demand,

00:01:09.130 --> 00:01:11.117
so we can rule this one out.

00:01:11.117 --> 00:01:14.200
"A broadly defined good such as food."

00:01:14.200 --> 00:01:16.010
Well, we just talked about that.

00:01:16.010 --> 00:01:17.800
If we're talking about food,

00:01:17.800 --> 00:01:20.330
and there's a price change in food,

00:01:20.330 --> 00:01:21.804
well, we need food,

00:01:21.804 --> 00:01:25.470
so our quantity demanded
might, would not likely change,

00:01:25.470 --> 00:01:27.100
or our percent change in quantity

00:01:27.100 --> 00:01:29.150
would not likely be that much.

00:01:29.150 --> 00:01:31.630
This would be fairly inelastic.

00:01:31.630 --> 00:01:32.977
Rule that one out.

00:01:32.977 --> 00:01:36.860
"Goods that make up a
small share of the budget."

00:01:36.860 --> 00:01:39.240
Well, this goes back to
that example with bubblegum.

00:01:39.240 --> 00:01:42.300
If bubblegum goes from
25 cents to 30 cents,

00:01:42.300 --> 00:01:44.250
we might not care so much.

00:01:44.250 --> 00:01:48.450
Versus if a car goes
from $25,000 to $30,000.

00:01:48.450 --> 00:01:50.335
So the small things that we might not care

00:01:50.335 --> 00:01:52.550
about price changes so much,

00:01:52.550 --> 00:01:54.450
if we don't care so much
about price changes,

00:01:54.450 --> 00:01:56.400
that would imply less elasticity,

00:01:56.400 --> 00:01:59.557
so that definitely would not
be the most elastic demand.

00:01:59.557 --> 00:02:01.297
"Goods that have to be bought

00:02:01.297 --> 00:02:03.810
"under a short time constraint."

00:02:03.810 --> 00:02:06.400
Well, a good example is that it's raining

00:02:06.400 --> 00:02:08.570
and people need umbrellas right now,

00:02:08.570 --> 00:02:11.010
in, you know, the next five, 10 minutes,

00:02:11.010 --> 00:02:12.710
and there, they wouldn't necessarily

00:02:12.710 --> 00:02:14.700
be so sensitive to price,

00:02:14.700 --> 00:02:18.090
so this is going to be less elastic,

00:02:18.090 --> 00:02:20.250
and so once again, we would rule this out.

00:02:20.250 --> 00:02:22.460
If we had a long time frame,

00:02:22.460 --> 00:02:23.930
well, then people might be able

00:02:23.930 --> 00:02:26.068
to shop around for substitutes

00:02:26.068 --> 00:02:28.930
and then things might get
a little bit more elastic.

00:02:28.930 --> 00:02:31.090
They would be more sensitive to price.

00:02:31.090 --> 00:02:34.683
So we definitely like, in
this scenario, choice A.


Introduction to price elasticity of demand

WEBVTT
Kind: captions
Language: en

00:00:00.120 --> 00:00:03.500
- [Instructor] We are now going
to discuss price elasticity

00:00:03.500 --> 00:00:07.040
of demand, which sounds
like a very fancy concept,

00:00:07.040 --> 00:00:10.090
but really, it's a way
for economists to sense

00:00:10.090 --> 00:00:14.380
how sensitive is quantity
to change in prices.

00:00:14.380 --> 00:00:18.030
And in this video, we're gonna
denote it as a capital E,

00:00:18.030 --> 00:00:22.030
so E, price elasticity of demand.

00:00:22.030 --> 00:00:24.160
And the easy way to think about it is

00:00:24.160 --> 00:00:27.670
it is your percent change
in, I'll use the Greek letter

00:00:27.670 --> 00:00:29.230
delta as shorthand for change in here,

00:00:29.230 --> 00:00:32.610
percent change in quantity over

00:00:32.610 --> 00:00:36.290
your percent change in price.

00:00:36.290 --> 00:00:38.240
And so, you might say,
wait, how does this relate

00:00:38.240 --> 00:00:42.610
to the everyday idea of elasticity?

00:00:42.610 --> 00:00:44.420
Well, imagine two bands.

00:00:44.420 --> 00:00:47.010
So, let's imagine an inelastic band,

00:00:47.010 --> 00:00:51.220
inelastic, right over
here, and let's imagine

00:00:51.220 --> 00:00:54.323
an elastic band right over here.

00:00:55.190 --> 00:00:58.340
So, in an inelastic band, if
we apply some amount of force,

00:00:58.340 --> 00:00:59.940
you're not going to be
able to stretch it much,

00:00:59.940 --> 00:01:02.970
it might stretch a little
bit, while an elastic band,

00:01:02.970 --> 00:01:04.530
if you apply that same amount of force,

00:01:04.530 --> 00:01:07.150
you might be able to
stretch it a lot more.

00:01:07.150 --> 00:01:10.910
And so, the analogy here
is we're not using force,

00:01:10.910 --> 00:01:13.160
but we're saying how much
does quantity stretch

00:01:13.160 --> 00:01:16.410
for a given amount of price change?

00:01:16.410 --> 00:01:19.810
And so, something where
the quantity changes a lot

00:01:19.810 --> 00:01:22.460
for a given price change
would be very elastic.

00:01:22.460 --> 00:01:25.800
So, this, the magnitude
of this will be larger.

00:01:25.800 --> 00:01:29.330
And if the percent change in
quantity doesn't change a lot

00:01:29.330 --> 00:01:31.230
for a our given percent change in price,

00:01:31.230 --> 00:01:33.300
well, then we're dealing with an inelastic

00:01:33.300 --> 00:01:35.750
price elasticity of demand.

00:01:35.750 --> 00:01:37.480
And we'll be able to
internalize these more

00:01:37.480 --> 00:01:39.030
as we work through the numbers.

00:01:39.030 --> 00:01:41.480
And actually, let's do that for this

00:01:41.480 --> 00:01:43.670
demand schedule that we
have right over here,

00:01:43.670 --> 00:01:46.190
and it's visualized as our demand curve.

00:01:46.190 --> 00:01:49.260
In the vertical axis, we
have price of burgers;

00:01:49.260 --> 00:01:51.140
and then in our horizontal axis,

00:01:51.140 --> 00:01:54.730
we have quantity, in
terms of burgers per hour.

00:01:54.730 --> 00:01:57.420
And so, let's just use
this definition of price

00:01:57.420 --> 00:01:59.560
elasticity of demand to calculate it

00:01:59.560 --> 00:02:03.540
across different points
on our demand curve.

00:02:03.540 --> 00:02:05.400
So, I'm gonna make a new column here,

00:02:05.400 --> 00:02:09.820
so price elasticity of demand.

00:02:09.820 --> 00:02:11.430
And the way I'm gonna do it is really

00:02:11.430 --> 00:02:14.290
the simplest method for calculating this.

00:02:14.290 --> 00:02:16.360
In other videos, we can go into more

00:02:16.360 --> 00:02:19.070
in-depth methods, like
the midpoint method.

00:02:19.070 --> 00:02:20.550
And I'll show you the weakness

00:02:20.550 --> 00:02:22.060
in what we're doing right here.

00:02:22.060 --> 00:02:24.470
But for the sake of, say, an AP economics,

00:02:24.470 --> 00:02:27.860
microeconomics course,
this would be sufficient.

00:02:27.860 --> 00:02:31.460
So, let's think about our
price elasticity of demand

00:02:31.460 --> 00:02:35.340
as we go from point A to point B.

00:02:35.340 --> 00:02:38.510
Well, remember, that's just
going to be our percent change

00:02:38.510 --> 00:02:42.770
in quantity over our
percent change in price.

00:02:42.770 --> 00:02:47.620
So, what is our percent
change in quantity?

00:02:47.620 --> 00:02:51.490
Well, we're starting at a quantity of two,

00:02:51.490 --> 00:02:52.840
so I'll put that in our denominator.

00:02:52.840 --> 00:02:57.780
And we're going from two to
four, so we are adding two.

00:02:57.780 --> 00:03:00.470
So, we have two over two, we could

00:03:00.470 --> 00:03:03.100
multiply that times 100% if we like.

00:03:03.100 --> 00:03:07.150
So, this would give us, we
have 100% change in quantity

00:03:07.150 --> 00:03:09.920
over, now what was the corresponding

00:03:09.920 --> 00:03:13.530
change in price, percent change in price?

00:03:13.530 --> 00:03:16.520
So, our corresponding
percent change in price,

00:03:16.520 --> 00:03:21.230
our initial price is nine,
and we go from nine to eight,

00:03:21.230 --> 00:03:23.410
so we're going down by one.

00:03:23.410 --> 00:03:27.580
And then we multiply that times 100%.

00:03:27.580 --> 00:03:31.470
So, this is going to
be about a negative 11%

00:03:31.470 --> 00:03:33.030
change in price.

00:03:33.030 --> 00:03:35.930
And this math is
reasonably straightforward

00:03:35.930 --> 00:03:40.700
because the 100%s cancel
out, this is just a one.

00:03:40.700 --> 00:03:43.420
One over negative 1/9 is just going

00:03:43.420 --> 00:03:46.280
to be equal to negative nine.

00:03:46.280 --> 00:03:51.280
So, you have a negative nine
price elasticity of demand.

00:03:52.010 --> 00:03:53.670
So, before I interpret that more,

00:03:53.670 --> 00:03:55.710
let's look at the price
elasticity of demand

00:03:55.710 --> 00:03:58.010
at other points, or
starting from other points

00:03:58.010 --> 00:04:00.720
to other points on this curve.

00:04:00.720 --> 00:04:02.840
So, let's think about it going from,

00:04:02.840 --> 00:04:05.400
actually let's think about
it going from E to F.

00:04:05.400 --> 00:04:07.160
So, as we go from E to F, we're going

00:04:07.160 --> 00:04:09.770
to do the same exact exercise.

00:04:09.770 --> 00:04:12.130
What is our percent change in quantity?

00:04:12.130 --> 00:04:15.320
Well, our initial quantity is 16.

00:04:15.320 --> 00:04:19.920
And we're going from 16 to 18,
so we have a change of two.

00:04:19.920 --> 00:04:22.550
So, two over 16 times 100%,

00:04:22.550 --> 00:04:24.840
that is our percent change in quantity.

00:04:24.840 --> 00:04:27.733
And what is our percent change in price?

00:04:28.630 --> 00:04:30.823
Well, our initial price is two.

00:04:31.890 --> 00:04:34.170
And we're going from two to one,

00:04:34.170 --> 00:04:39.170
so we have a price change
of negative one times 100%.

00:04:41.060 --> 00:04:44.430
And so, what you see here
is this is 1/8 times 100%,

00:04:44.430 --> 00:04:47.740
this would be 12.5% up here.

00:04:47.740 --> 00:04:52.080
So, this is 12.5% up there, and then this,

00:04:52.080 --> 00:04:55.330
over here, is going to be negative 50%.

00:04:55.330 --> 00:04:59.660
So, when price went down by 50%,

00:04:59.660 --> 00:05:04.660
you had a 12.5% increase in quantity.

00:05:04.920 --> 00:05:09.920
12.5% is 1/4 of 50%, so
this is going to give us

00:05:09.950 --> 00:05:14.950
a price elasticity of
demand of negative 0.25.

00:05:17.180 --> 00:05:19.130
So, there's a couple of interesting things

00:05:19.130 --> 00:05:21.690
that you might already be realizing.

00:05:21.690 --> 00:05:25.350
One is even though our
demand curve right over here

00:05:25.350 --> 00:05:28.210
is a line, it actually
has a constant slope,

00:05:28.210 --> 00:05:31.510
you see that the price
elasticity of demand changes,

00:05:31.510 --> 00:05:34.520
depending on different parts of the curve.

00:05:34.520 --> 00:05:36.340
Now, the reason why this is,

00:05:36.340 --> 00:05:38.420
is really just boils down to math.

00:05:38.420 --> 00:05:40.260
When we're going from A to B,

00:05:40.260 --> 00:05:42.990
our initial prices were relatively high.

00:05:42.990 --> 00:05:46.240
So, even though you had
a price decrease of one,

00:05:46.240 --> 00:05:48.410
it was from an initial price of nine.

00:05:48.410 --> 00:05:51.670
So, your percentage change
in price looked fairly low,

00:05:51.670 --> 00:05:53.670
while your percentage
change in quantity was high

00:05:53.670 --> 00:05:56.920
'cause you're going from
a low quantity of two,

00:05:56.920 --> 00:05:58.210
and you're adding two to it,

00:05:58.210 --> 00:06:00.520
so you had 100% change in quantity.

00:06:00.520 --> 00:06:03.130
When you go to the other end our curve,

00:06:03.130 --> 00:06:05.620
and you go from E to F,
it's the other way around.

00:06:05.620 --> 00:06:08.070
Your price starting point is low,

00:06:08.070 --> 00:06:10.050
so your percent change in price,

00:06:10.050 --> 00:06:12.610
when you decrease price by one,

00:06:12.610 --> 00:06:15.240
it looks like a fairly large magnitude;

00:06:15.240 --> 00:06:16.920
while your percent change in quantity

00:06:16.920 --> 00:06:19.170
when you go from E to F
because you are already

00:06:19.170 --> 00:06:21.680
at a quantity of 16, adding two to that

00:06:21.680 --> 00:06:23.880
is not that large of a percentage.

00:06:23.880 --> 00:06:25.680
Now, another thing you
might be appreciating

00:06:25.680 --> 00:06:29.250
is if we tried to calculate
the price elasticity of demand

00:06:29.250 --> 00:06:31.710
up here on the curve, and
instead of going from A to B,

00:06:31.710 --> 00:06:34.400
if we went from B to A, we would've gotten

00:06:34.400 --> 00:06:37.370
a different value because
our initial prices

00:06:37.370 --> 00:06:39.150
and quantities would have been different.

00:06:39.150 --> 00:06:42.030
Our initial price, we would've
put an eight right over here,

00:06:42.030 --> 00:06:44.210
and our initial quantity, we
would've put a four over here,

00:06:44.210 --> 00:06:46.150
and we would've gotten a different value.

00:06:46.150 --> 00:06:48.560
And that's one of the
negatives of the technique,

00:06:48.560 --> 00:06:51.060
which is arguably the simplest
technique, that I just used.

00:06:51.060 --> 00:06:53.430
There's other techniques,
like the midpoint technique,

00:06:53.430 --> 00:06:55.360
that can give you a
more consistent result,

00:06:55.360 --> 00:06:57.810
whether you're going
from A to B or B to A,

00:06:57.810 --> 00:06:59.970
but I won't cover it just yet.

00:06:59.970 --> 00:07:03.010
But let's think, now, about
how to interpret this.

00:07:03.010 --> 00:07:04.700
And the best way to
interpret it is to think

00:07:04.700 --> 00:07:09.200
about the absolute value of
the price elasticity of demand.

00:07:09.200 --> 00:07:12.710
So, over here, the absolute value of our

00:07:12.710 --> 00:07:15.910
price elasticity of
demand is equal to nine,

00:07:15.910 --> 00:07:18.620
and then, over here, the absolute value

00:07:18.620 --> 00:07:23.620
of our price elasticity of
demand is equal to 0.25.

00:07:26.480 --> 00:07:30.380
And a general rule of thumb
is if your absolute value

00:07:30.380 --> 00:07:34.810
of your price elasticity
of demand is less than one,

00:07:34.810 --> 00:07:39.153
you are dealing with an
inelastic, inelastic,

00:07:40.190 --> 00:07:42.090
elastic situation;

00:07:42.090 --> 00:07:45.520
and if your price elasticity of demand,

00:07:45.520 --> 00:07:48.010
the absolute value of
it, is greater than one,

00:07:48.010 --> 00:07:51.430
you're dealing with an elastic situation.

00:07:51.430 --> 00:07:52.740
Why does that make sense?

00:07:52.740 --> 00:07:55.430
Well, in this first scenario, it's saying

00:07:55.430 --> 00:07:58.180
for a given percentage change in price,

00:07:58.180 --> 00:08:02.210
you have a smaller percent
change in quantity;

00:08:02.210 --> 00:08:05.820
while here, for a given percent in price,

00:08:05.820 --> 00:08:07.150
you're going to have a larger than that

00:08:07.150 --> 00:08:09.470
percentage change in your quantity.

00:08:09.470 --> 00:08:13.040
So, once again, it goes back
to these rubber band analogies.

00:08:13.040 --> 00:08:14.630
So, when we're going from A to B,

00:08:14.630 --> 00:08:18.460
the absolute value of our
price elasticity of demand

00:08:18.460 --> 00:08:21.040
is definitely larger than one.

00:08:21.040 --> 00:08:22.910
So, economists would consider this

00:08:22.910 --> 00:08:26.550
to be an elastic situation;

00:08:26.550 --> 00:08:28.990
while when we go from point E to point F,

00:08:28.990 --> 00:08:30.630
our price elasticity of demand,

00:08:30.630 --> 00:08:34.430
or the absolute value of it,
is definitely less than one,

00:08:34.430 --> 00:08:39.123
so this going to be an
inelastic situation.


Market demand as the sum of individual demand

WEBVTT
Kind: captions
Language: en

00:00:00.140 --> 00:00:02.160
- [Instructor] In this video,
were going to think about

00:00:02.160 --> 00:00:05.790
the market for apples, but
the more important thing isn't

00:00:05.790 --> 00:00:09.310
the apples, it's to appreciate
that the demand curves

00:00:09.310 --> 00:00:11.480
for a market are really the sum

00:00:11.480 --> 00:00:14.840
of the individual demand
curves for every member

00:00:14.840 --> 00:00:18.020
of that market, and most
markets will have many tens

00:00:18.020 --> 00:00:20.220
or hundreds of thousands of actors in it,

00:00:20.220 --> 00:00:23.100
maybe millions or tens of
millions of actors in it,

00:00:23.100 --> 00:00:24.950
but for the sake of simplifying things,

00:00:24.950 --> 00:00:26.510
we're going to assume
that the apple market

00:00:26.510 --> 00:00:28.350
has only two buyers,

00:00:28.350 --> 00:00:31.210
and we have their demand
curves right over here.

00:00:31.210 --> 00:00:33.180
This is the demand curve for buyer one,

00:00:33.180 --> 00:00:35.950
and this is the demand
curve for buyer two,

00:00:35.950 --> 00:00:38.350
and so if the vertical axis is price,

00:00:38.350 --> 00:00:41.190
and maybe this is price
per pound of apples,

00:00:41.190 --> 00:00:45.108
and quantity, let's just say
that's pounds per time period,

00:00:45.108 --> 00:00:47.000
maybe pounds per week, we can see

00:00:47.000 --> 00:00:49.440
that from buyer one's demand curve

00:00:49.440 --> 00:00:53.400
that at a price of one, two,
three, four, five dollars

00:00:53.400 --> 00:00:55.640
per pound, they don't
wanna buy any pounds.

00:00:55.640 --> 00:00:58.040
At a price of three dollars per pound,

00:00:58.040 --> 00:01:00.400
they're willing to buy one pound per week.

00:01:00.400 --> 00:01:02.818
At a price of one dollar per pound,

00:01:02.818 --> 00:01:04.440
they're willing to buy
two pounds per week.

00:01:04.440 --> 00:01:08.100
We can similarly look at the
demand curve for buyer two,

00:01:08.100 --> 00:01:10.933
and sometimes you'll
see this in table form

00:01:10.933 --> 00:01:13.150
where it's called a demand
schedule, but you can see

00:01:13.150 --> 00:01:15.870
at one, two, three,
four, five, six, seven,

00:01:15.870 --> 00:01:19.300
at seven dollars, buyer two
is not interested in apples

00:01:19.300 --> 00:01:20.550
at seven dollars a pound.

00:01:21.507 --> 00:01:23.400
At five dollars a pound,
they are interested

00:01:23.400 --> 00:01:26.300
in buying two pounds of apples per week.

00:01:26.300 --> 00:01:29.740
At three dollars per pound,
they're interested in buying,

00:01:29.740 --> 00:01:34.540
so let's see this is one,
two, three, four, five pounds

00:01:34.540 --> 00:01:37.440
per week, and at one dollar
per pound, they're interested

00:01:37.440 --> 00:01:41.300
in buying six, seven,
eight pounds per week.

00:01:41.300 --> 00:01:43.760
So based on this data here,
buyer one and buyer two

00:01:43.760 --> 00:01:46.600
are the only individuals in this market.

00:01:46.600 --> 00:01:48.960
Once again, a huge oversimplification.

00:01:48.960 --> 00:01:51.300
What would the market
demand curve look like?

00:01:51.300 --> 00:01:53.650
Pause this video and try
to think that through.

00:01:54.590 --> 00:01:58.440
Well, if we go to the
various prices, so let's see,

00:01:58.440 --> 00:02:01.873
at a price of seven dollars,

00:02:01.873 --> 00:02:06.450
there is not going to be
any interest in any apples.

00:02:06.450 --> 00:02:10.120
So, I could maybe put
that right over there

00:02:10.120 --> 00:02:12.240
at a price of seven dollars,

00:02:12.240 --> 00:02:13.850
but what happens is the prices goes down

00:02:13.850 --> 00:02:17.200
and we could just sample
what happens when we get

00:02:17.200 --> 00:02:18.690
to a price of five dollars?

00:02:18.690 --> 00:02:21.210
Buyer one is still not interested,

00:02:21.210 --> 00:02:24.910
but buyer two is now willing
to buy two pounds per week.

00:02:24.910 --> 00:02:28.850
And so, at a price of five
dollars, the market as a whole

00:02:28.850 --> 00:02:31.730
is willing to buy two
pounds from buyer two

00:02:31.730 --> 00:02:33.750
and zero pounds from buyer one,

00:02:33.750 --> 00:02:36.203
so we'll have a total of two pounds.

00:02:37.061 --> 00:02:38.361
So we're right over there.

00:02:39.331 --> 00:02:40.930
So that is at five dollars per pound.

00:02:40.930 --> 00:02:43.010
The market is willing to,

00:02:43.010 --> 00:02:46.950
is demanding a quantity
of two pounds per week.

00:02:46.950 --> 00:02:49.490
And then let's go to three dollars.

00:02:49.490 --> 00:02:53.270
At three dollars, now, buyer
one would buy one pound

00:02:53.270 --> 00:02:56.910
per week and buyer two would
buy five pounds per week.

00:02:56.910 --> 00:03:00.020
So in total, there would
be six pounds demanded

00:03:00.020 --> 00:03:02.600
or the quantity demanded
would be six pounds.

00:03:02.600 --> 00:03:04.520
So three dollars, the quantity demanded

00:03:04.520 --> 00:03:07.100
is three, four, five, six.

00:03:07.100 --> 00:03:10.490
So that would put us right about there.

00:03:10.490 --> 00:03:13.074
And then last but not
least, and once again,

00:03:13.074 --> 00:03:14.910
I'm just sampling these points
to make the point to you

00:03:14.910 --> 00:03:18.110
that we really would just
add, we would take the sum

00:03:18.110 --> 00:03:20.620
of these curves but we're
kind of stacking them,

00:03:20.620 --> 00:03:23.850
we are stacking them horizontally
as opposed to vertical

00:03:23.850 --> 00:03:27.780
because for any given price,
we're adding up the quantities.

00:03:27.780 --> 00:03:29.840
So let's go to one dollar a pound.

00:03:29.840 --> 00:03:31.420
At one dollar a pound,

00:03:31.420 --> 00:03:33.450
buyer one is willing to buy two pounds,

00:03:33.450 --> 00:03:35.320
and at one dollar a pound, buyer two

00:03:35.320 --> 00:03:36.780
is willing to buy eight pounds.

00:03:36.780 --> 00:03:38.790
You put those together, two plus eight,

00:03:38.790 --> 00:03:40.400
you get to 10 pounds.

00:03:40.400 --> 00:03:45.400
So this was two, three,
four, five, six, seven, eight

00:03:45.560 --> 00:03:47.680
and then nine and ten,
we're going a little bit off

00:03:47.680 --> 00:03:50.280
the screen here, I could
have planned better for it,

00:03:51.872 --> 00:03:55.087
but let me go all the way over
here so I'll extend my axis

00:03:55.087 --> 00:03:57.919
so that's nine and then this
is ten so that at one dollar,

00:03:57.919 --> 00:04:02.200
the market would be willing
to buy ten pounds per week.

00:04:02.200 --> 00:04:06.310
And you could sum at any other
point or any other points

00:04:06.310 --> 00:04:09.550
in between and what you
would do is you would get

00:04:09.550 --> 00:04:12.470
a market demand curve that looks

00:04:12.470 --> 00:04:15.720
a little something like this.

00:04:15.720 --> 00:04:19.520
And you can see, visually,
what has happened here.

00:04:19.520 --> 00:04:23.300
For any price value, we
are summing the quantities

00:04:23.300 --> 00:04:24.900
for all of the buyers in the market.

00:04:24.900 --> 00:04:27.166
Now here, there's only two buyers.

00:04:27.166 --> 00:04:28.915
Now if you were doing this
in the real world, you might

00:04:28.915 --> 00:04:30.600
be dealing with millions
of buyers, but this is just

00:04:30.600 --> 00:04:34.290
to understand how a market or
where a market demand curve

00:04:34.290 --> 00:04:36.023
is actually coming from.


Substitution and income effects and the Law of Demand

WEBVTT
Kind: captions
Language: en

00:00:00.270 --> 00:00:01.950
- [Instructor] In other
videos, we have already talked

00:00:01.950 --> 00:00:04.750
about the law of demand, which tells us,

00:00:04.750 --> 00:00:07.840
and this is probably already
somewhat intuitive for you,

00:00:07.840 --> 00:00:12.670
that if a certain good is
currently at a higher price,

00:00:12.670 --> 00:00:15.640
that the quantity demanded
will be quite low,

00:00:15.640 --> 00:00:18.200
and then as the price were to decrease,

00:00:18.200 --> 00:00:20.980
the quantity demanded would increase.

00:00:20.980 --> 00:00:23.060
So, if you were to graph demand,

00:00:23.060 --> 00:00:25.450
and so this right over
here is our demand curve,

00:00:25.450 --> 00:00:27.290
where price is on our vertical axis

00:00:27.290 --> 00:00:29.070
and quantity is on our horizontal axis,

00:00:29.070 --> 00:00:32.200
which is the standard
convention for most economists,

00:00:32.200 --> 00:00:35.860
you would have a downward
sloping demand curve.

00:00:35.860 --> 00:00:36.910
What we're going to do in this video

00:00:36.910 --> 00:00:39.930
is dig a little bit deeper into why

00:00:39.930 --> 00:00:42.450
we have that downward
sloping demand curve.

00:00:42.450 --> 00:00:43.490
And I know what some
of you all are saying,

00:00:43.490 --> 00:00:45.310
well, it kind of makes common sense.

00:00:45.310 --> 00:00:48.260
As the price goes down,
I would want more of that

00:00:48.260 --> 00:00:50.270
and so so would everyone else.

00:00:50.270 --> 00:00:53.640
But let's dig into why you
would want more of something

00:00:53.640 --> 00:00:55.890
as the price goes down.

00:00:55.890 --> 00:00:59.350
So one category of
reasons why you might want

00:00:59.350 --> 00:01:01.480
more of it as the price goes down,

00:01:01.480 --> 00:01:04.750
economists will call
the substitution effect.

00:01:04.750 --> 00:01:05.783
Substitution,

00:01:08.090 --> 00:01:11.110
substitution effect.

00:01:11.110 --> 00:01:13.060
And this is the idea that if we're

00:01:13.060 --> 00:01:15.960
looking at the price verses
quantity, say, of candy,

00:01:15.960 --> 00:01:19.520
and let's say at first the
price is right over here

00:01:19.520 --> 00:01:24.470
at $4 and at $4 the quantity demanded

00:01:24.470 --> 00:01:29.470
in the market would be,
let's say that is 100 units

00:01:29.790 --> 00:01:32.780
of the candy, maybe it's
100 pounds of the candy.

00:01:32.780 --> 00:01:37.260
That if the price were to
then go to $2 for some reason,

00:01:37.260 --> 00:01:40.960
so, let's say the price is at $2,

00:01:40.960 --> 00:01:43.190
well, then a lot of folks could say,

00:01:43.190 --> 00:01:45.770
gee, that candy is looking a lot better

00:01:45.770 --> 00:01:49.640
relative to other things that
I might buy with my money.

00:01:49.640 --> 00:01:51.530
So, for example, people might be picking

00:01:51.530 --> 00:01:54.820
between candy and fruit
and maybe, at first,

00:01:54.820 --> 00:01:57.210
they were both $4 a pound,
but now all of a sudden

00:01:57.210 --> 00:02:00.530
if the candy is $2 a
pound, or $2 per unit,

00:02:00.530 --> 00:02:03.800
well, then it's looking a lot
better relative to the fruit.

00:02:03.800 --> 00:02:05.740
So, some of that quantity of fruit

00:02:05.740 --> 00:02:07.250
people would have bought, they'll say,

00:02:07.250 --> 00:02:08.990
hey, now candy is a better deal,

00:02:08.990 --> 00:02:11.970
I'm going to substitute
the fruit with candy.

00:02:11.970 --> 00:02:15.590
And so that's why you
have a higher quantity

00:02:15.590 --> 00:02:17.630
of candy demanded, this might maybe

00:02:17.630 --> 00:02:21.640
be now 250 units.

00:02:21.640 --> 00:02:24.900
Another major category
why you would expect this

00:02:24.900 --> 00:02:28.550
downward sloping demand
curve for normal goods,

00:02:28.550 --> 00:02:30.830
and we'll talk about
things like inferior goods

00:02:30.830 --> 00:02:34.200
in future videos, is the income effect.

00:02:34.200 --> 00:02:36.720
Income effect, and in some ways

00:02:36.720 --> 00:02:38.520
this might be the most intuitive.

00:02:38.520 --> 00:02:41.600
Well, if the price went from $4 to $2,

00:02:41.600 --> 00:02:43.250
well the cost of those hundred units

00:02:43.250 --> 00:02:45.980
would not be 1/2 as much,
it would go from $400

00:02:45.980 --> 00:02:49.950
to $200, and so the market
would have an extra $200

00:02:49.950 --> 00:02:54.400
to use to buy things with
and some of that extra $200,

00:02:54.400 --> 00:02:56.450
they'll buy more candy with it,

00:02:56.450 --> 00:02:59.760
and they might also buy
other things with that.

00:02:59.760 --> 00:03:01.610
Now, the last dimension that economists

00:03:01.610 --> 00:03:04.300
will often talk about
for why the law of demand

00:03:04.300 --> 00:03:05.900
is downward sloping like this,

00:03:05.900 --> 00:03:07.960
and we talk about this in other videos,

00:03:07.960 --> 00:03:12.880
is this idea of decreasing, decreasing

00:03:12.880 --> 00:03:16.000
marginal utility, and that's that idea

00:03:16.000 --> 00:03:20.210
that that first, if you're just
that first amount of candy,

00:03:20.210 --> 00:03:21.620
there's gonna be people in the market

00:03:21.620 --> 00:03:23.610
who take a lot of value from it.

00:03:23.610 --> 00:03:25.720
They are just addicted to candy.

00:03:25.720 --> 00:03:28.880
Their bodies are dependent on that candy,

00:03:28.880 --> 00:03:31.200
but as soon as those folks are satiated,

00:03:31.200 --> 00:03:34.410
that next incremental amount,
that next marginal amount,

00:03:34.410 --> 00:03:36.840
the utility might be a little bit lower

00:03:36.840 --> 00:03:39.670
and so, as you have more and more candy,

00:03:39.670 --> 00:03:41.970
the marginal utility goes down,

00:03:41.970 --> 00:03:43.900
and so that's another
way of thinking about

00:03:43.900 --> 00:03:47.403
why we have a downward
sloping demand curve.


Markets and property rights

WEBVTT
Kind: captions
Language: en

00:00:00.790 --> 00:00:02.740
- [Instructor] In other
videos, we have touched on

00:00:02.740 --> 00:00:05.940
the idea of property
rights, but in this video,

00:00:05.940 --> 00:00:07.270
we're going to go a little bit deeper,

00:00:07.270 --> 00:00:09.520
and think about how
property rights connect

00:00:09.520 --> 00:00:12.530
to the notion of a market.

00:00:12.530 --> 00:00:16.350
So, first of all, think about
what a market means to you.

00:00:16.350 --> 00:00:20.070
You have probably heard of
things like the stock market

00:00:20.070 --> 00:00:23.700
or you have probably gone to a supermarket

00:00:23.700 --> 00:00:25.240
to do your groceries.

00:00:25.240 --> 00:00:27.791
What's common about these things?

00:00:27.791 --> 00:00:31.060
Well, if we wanna say
as broad of a definition

00:00:31.060 --> 00:00:36.020
of a market, you could
view it as a market forms,

00:00:36.020 --> 00:00:37.610
let me write this down.

00:00:37.610 --> 00:00:40.272
Well, this is an informal definition.

00:00:40.272 --> 00:00:43.210
Forms, when multiple parties,

00:00:43.210 --> 00:00:44.893
multiple parties,

00:00:46.180 --> 00:00:48.063
exchange things of value.

00:00:48.900 --> 00:00:50.500
Exchange

00:00:50.500 --> 00:00:51.340
things

00:00:52.380 --> 00:00:53.213
of

00:00:53.213 --> 00:00:54.046
value.

00:00:54.046 --> 00:00:57.970
And let's see whether our
notions of a market hold up

00:00:57.970 --> 00:00:59.850
or whether this definition
holds up when we think

00:00:59.850 --> 00:01:01.830
about our notions of a market.

00:01:01.830 --> 00:01:05.310
Well in a stock market, you
have a bunch of people together,

00:01:05.310 --> 00:01:09.610
and they are trading stocks,
and usually what happens is,

00:01:09.610 --> 00:01:12.140
let's see if this is a
stock right over here,

00:01:12.140 --> 00:01:14.550
these are all different
shares of the same stock

00:01:14.550 --> 00:01:16.640
or different stocks,
what typically happens

00:01:16.640 --> 00:01:20.390
is if there might be parties
who want to sell this stock

00:01:20.390 --> 00:01:22.850
and then there's other parties
who want to buy this stock

00:01:22.850 --> 00:01:27.132
and then whoever of the
buyers is willing to offer

00:01:27.132 --> 00:01:31.060
the most for that share,
well then that money

00:01:31.060 --> 00:01:33.430
will go to the seller of the
stock and then that stock

00:01:33.430 --> 00:01:36.720
will go to the party that
just paid that amount.

00:01:36.720 --> 00:01:39.800
And so you see that there's an
exchange of things of value.

00:01:39.800 --> 00:01:44.210
At a supermarket, you will see
aisles and aisles of goods.

00:01:44.210 --> 00:01:46.880
This is my drawing of a aisle of goods,

00:01:46.880 --> 00:01:48.730
and there's all sorts
of merchandise on 'em

00:01:48.730 --> 00:01:51.610
and you put 'em in your shopping cart

00:01:51.610 --> 00:01:55.590
and then when you're done,
you go to the checkout,

00:01:55.590 --> 00:01:57.320
this is my little shopping cart here.

00:01:57.320 --> 00:01:59.220
You go to the checkout
and you pay for them.

00:01:59.220 --> 00:02:02.381
So once again, you are
picking which items you want.

00:02:02.381 --> 00:02:05.640
There's a price on them, so
the seller which in this case

00:02:05.640 --> 00:02:08.410
is the supermarket, tells you
what they're willing to take

00:02:08.410 --> 00:02:11.170
for those items and then when
you put them in your cart

00:02:11.170 --> 00:02:13.720
and then take it to the
checkout, that's you agreeing

00:02:13.720 --> 00:02:16.930
to pay those prices and so
you exchange, once again,

00:02:16.930 --> 00:02:19.520
money for those things of value.

00:02:19.520 --> 00:02:22.930
So the money has value
and those groceries,

00:02:22.930 --> 00:02:25.484
whatever you're buying, might have value.

00:02:25.484 --> 00:02:29.513
Now, we tend to believe that
markets are the best way

00:02:29.513 --> 00:02:33.080
of allocating resources
and different markets

00:02:33.080 --> 00:02:34.410
work different ways.

00:02:34.410 --> 00:02:36.040
As you could just see,
the stock market could be

00:02:36.040 --> 00:02:37.950
very different than a supermarket

00:02:37.950 --> 00:02:39.490
and then you could have an auction

00:02:39.490 --> 00:02:40.560
where things are auctioned off.

00:02:40.560 --> 00:02:42.930
That would also be a form of a market

00:02:42.930 --> 00:02:45.390
but the actual mechanics
of how things happen

00:02:45.390 --> 00:02:47.060
would be a little bit different.

00:02:47.060 --> 00:02:50.550
But a key factor that you
need in order for markets

00:02:50.550 --> 00:02:53.640
to function properly is
that you need to have

00:02:53.640 --> 00:02:57.490
a notion of property rights,
and as we've talked about

00:02:57.490 --> 00:03:00.587
in previous videos,
property rights are the idea

00:03:00.587 --> 00:03:03.793
that things can be owned.

00:03:05.060 --> 00:03:07.870
Now what does it mean to own something?

00:03:07.870 --> 00:03:10.310
We almost just take this for granted

00:03:10.310 --> 00:03:12.840
but it's not some law of the universe,

00:03:12.840 --> 00:03:15.120
it's something that we
just assume culturally

00:03:15.120 --> 00:03:17.500
and it's become so embedded
in us that we just say

00:03:17.500 --> 00:03:20.580
of course you can own something
but at the end of the day,

00:03:20.580 --> 00:03:23.860
there's three real properties
to owning something.

00:03:23.860 --> 00:03:25.900
One is the idea

00:03:25.900 --> 00:03:30.730
of a party being able to
exclusively own something.

00:03:30.730 --> 00:03:33.610
So let's say that you own a piece of land

00:03:33.610 --> 00:03:35.710
that you want to farm on.

00:03:35.710 --> 00:03:37.290
Well that means that
you can exclude others

00:03:37.290 --> 00:03:39.930
from using that land and
whatever that land produces.

00:03:39.930 --> 00:03:42.250
It might just be a fun
place for you to run around

00:03:42.250 --> 00:03:45.620
or sunbathe or it might be a
place where you grow some food

00:03:45.620 --> 00:03:49.810
that you have the rights to
the benefits of that thing.

00:03:49.810 --> 00:03:53.436
Now another key dimension
of property rights

00:03:53.436 --> 00:03:57.230
is that those rights
have to be enforceable.

00:03:57.230 --> 00:03:59.010
Enforceable.

00:03:59.010 --> 00:04:00.460
What does that mean?

00:04:00.460 --> 00:04:03.360
Well, if someone obnoxious wants to come

00:04:03.360 --> 00:04:05.790
and sunbathe on your property
that you have enjoyed

00:04:05.790 --> 00:04:08.690
running around and
sunbathing on, you say hey,

00:04:08.690 --> 00:04:10.390
you're infringing on my property rights

00:04:10.390 --> 00:04:11.990
and you should be able to call the police

00:04:11.990 --> 00:04:14.480
or some type of enforcers
to take that person

00:04:14.480 --> 00:04:17.870
off your land if you really
do have property rights

00:04:17.870 --> 00:04:20.170
and if they are truly exclusive.

00:04:20.170 --> 00:04:22.062
Or let's say you have
property rights on your shoes

00:04:22.062 --> 00:04:24.607
and if someone were to steal your shoes,

00:04:24.607 --> 00:04:27.070
you should be able to
call the police and say

00:04:27.070 --> 00:04:29.080
a crime has been committed and the police

00:04:29.080 --> 00:04:30.930
should enforce those property rights.

00:04:31.790 --> 00:04:33.358
They should go and get those shoes back

00:04:33.358 --> 00:04:35.980
and punish that shoe stealer in some way

00:04:35.980 --> 00:04:38.710
and then last but not
least, in order for markets

00:04:38.710 --> 00:04:40.670
to work well, those property rights

00:04:40.670 --> 00:04:43.123
have to be transferrable.

00:04:43.123 --> 00:04:46.550
Remember, a market is
all about transferring

00:04:46.550 --> 00:04:47.810
property rights.

00:04:47.810 --> 00:04:51.110
In the stock market, one party is giving,

00:04:51.110 --> 00:04:54.080
is transferring their
property rights to that money

00:04:54.080 --> 00:04:57.541
to the seller of the stock
in exchange for getting

00:04:57.541 --> 00:05:00.020
the seller of the stocks property rights

00:05:00.020 --> 00:05:01.970
to the actual stocks.

00:05:01.970 --> 00:05:06.000
If this was not transferrable,
then it would actually make

00:05:06.000 --> 00:05:09.730
no sense to have a market as we know it.

00:05:09.730 --> 00:05:11.370
So I'll leave you there.

00:05:11.370 --> 00:05:13.130
These are things in our daily life

00:05:13.130 --> 00:05:14.930
that most of us take for granted

00:05:14.930 --> 00:05:17.340
because we live in a market economy

00:05:17.340 --> 00:05:19.690
and we are used to things like ownership

00:05:19.690 --> 00:05:21.915
but there are definitely
ways of organizing society

00:05:21.915 --> 00:05:25.071
where it's not as based
on markets in terms

00:05:25.071 --> 00:05:29.578
of who gets what and even
today, markets in many sectors

00:05:29.578 --> 00:05:32.857
or in many parts of the
world don't operate as well

00:05:32.857 --> 00:05:36.330
as they could because
some of these dimensions

00:05:36.330 --> 00:05:39.170
of property rights aren't
working as properly

00:05:39.170 --> 00:05:40.140
as they should.

00:05:40.140 --> 00:05:42.680
It might be hard to
transfer property rights

00:05:42.680 --> 00:05:43.890
in certain markets.

00:05:43.890 --> 00:05:46.240
In certain markets, if someone, let's say,

00:05:46.240 --> 00:05:47.870
just takes over a property,

00:05:47.870 --> 00:05:49.450
the government might not be so good

00:05:49.450 --> 00:05:51.260
at enforcing those property rights.

00:05:51.260 --> 00:05:53.170
Or it might be hard to keep one party

00:05:53.170 --> 00:05:56.126
from using something of value that is,

00:05:56.126 --> 00:05:58.879
at least according to the property rights,

00:05:58.879 --> 00:05:59.993
owned by someone else.