Oligopolies, duopolies, collusion, and cartels

WEBVTT
Kind: captions
Language: en

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What I want to do
in this video is

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get a better understanding
of oligopolies.

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And we'll be talking
about it, oligopolies.

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We'll be talking about
it more in future videos.

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And as we've already
talked about,

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this part of oligopolies,
the oligo-- and I

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know I'm completely
mispronouncing

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it-- comes from the
Greek word for few.

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And the poly comes from
the Greek word for sellers.

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And I don't want
to confuse anyone

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because the prefix poly,
like in terms of polynomial

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or polymath, when
it's a prefix poly

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often means or it
does mean many.

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But in this context, this
comes from the Greek.

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And once again, I know I'm
mispronouncing it, poll-e-in,

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I think, or polein, which
actually comes from seller.

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So this means few sellers.

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And what's interesting
about oligopolies

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are that they can sometimes
act much more like monopolies

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if they coordinate.

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Or they can still, even if
there are few sellers, even

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two sellers, they can compete
fiercely and look much closer

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to perfect competition.

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So an example is
if they-- so let's

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say there are these
few competitors.

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And let's say they
coordinate with each other.

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They say, hey, look, we're going
to be-- because there's a few

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of, enough of them, that they
can coordinate-- they say, hey,

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look.

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Why don't we restrict quantity
so that we can raise price?

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And then we're
essentially maximizing

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our collective economic profit.

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So they are agreeing
to coordinate.

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And this is illegal, within
the context of most countries.

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Most companies are not allowed
to do this in most countries.

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But when this is
going on, this kind

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of coordination between the
players in an oligopoly, this

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is called collusion.

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Or we were saying that
they are colluding.

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And if they have a formal
agreement to collude,

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we call these players right over
here, we call them a cartel.

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And they're approaching,
their behavior,

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is much closer to a monopoly.

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They're essentially
trying, at least,

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to act together like a monopoly.

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And at the most famous of
all of the cartels is OPEC.

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You sometimes hear
about the drug cartel.

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I'm not an expert there.

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I guess, that's
implying that there's

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some form of coordination there,
some form of price setting,

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some form of
quantity restriction.

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But the most famous,
and maybe the one

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with the largest
impact, is OPEC.

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And OPEC stands for Organization
of Petroleum Exporting

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Countries.

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And it's a group of 12 countries
that collectively control 79%--

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this is as of 2012-- that
collectively control 79%

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of the world's oil reserves.

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So oil reserves
are the actual oil

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that's in the ground or the oil
that we know is in the ground.

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Obviously there's other oil
that we don't know where it is,

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but it's in the ground.

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But this is 79% of
the oil that we're

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aware of that is in the ground.

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And they control about 44%
of the production, of oil

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production, of current
oil production.

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So in a given month, 44%
of all the oil in the world

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is coming from these
OPEC countries.

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And they're predominately
countries in the Middle East,

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but they now include
countries that

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are outside of the Middle East.

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And they have a
formal agreement where

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they try to restrict
output so that they

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can get the price to whatever
price they want it to be.

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So they are at least
attempting to act somewhat

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like a monopoly.

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They don't control all
of the oil reserves.

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They don't control all
of the oil production.

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But by coordinating it they
can act like a bigger player

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than they are individually.

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But what we'll see
in future videos

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is that even though it
is good, collectively,

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for them to do this-- for
them to coordinate it this way

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and it can't be
illegal, because they're

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all countries coordinating
with each other.

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So no one can say,
hey, what you're

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doing is illegal because
they are essentially

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acting outside of any
one country's laws.

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But what we'll see
in the future is

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that there's a huge incentive
for any one of these 12

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countries to break the
agreement secretly.

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To say, OK, I'm going to
restrict quantity just

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like all the rest of you
guys but then secretly keep

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producing more and getting
that higher price that

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is being achieved because
everyone else is restricted.

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So it's actually very hard, even
if you have formal agreement,

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to maintain discipline
within a cartel.

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Now that was an example
of trying to coordinate,

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trying to be collude, trying
to become more like a monopoly.

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There are many, many
cases of oligopolies,

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at least as far as I know,
that are fiercely, fiercely

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competitive.

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Probably the most famous
of them are Coke and Pepsi.

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So this would, I guess, fall
under the sugar water market.

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They both take
water, and they place

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a lot of sugar in
that water, and then

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they spend millions,
or maybe even

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billions in some
circumstances, on marketing

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to make you convinced
that somehow

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that sugar in that water will
make you cool, or trendy,

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or you'll have more friends,
or you'll be better looking,

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or whatever else.

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But they are
fiercely competitive.

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These-- they could
coordinate and say, hey,

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let's raise the price of
12 ounces of sugar water

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to $1 or $5, and if you
do it, I'll do it as well.

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But they don't.

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They compete fiercely on price.

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They compete fiercely
on marketing.

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And that's actually where
they really, really, compete.

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And this is actually a
special case of an oligopoly

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where you only have two
players, two major players.

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And this you would
call a duopoly.

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Other examples of
duopoly, you could

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imagine Boeing and Airbus.

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If you fly on a commercial
aircraft, especially

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a new commercial
aircraft, and especially

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a large commercial
aircraft, it is

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going to be either a Boeing
aircraft or an Airbus aircraft.

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Boeing is the US manufacturer.

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Airbus is the
European manufacturer.

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And although Boeing
is always complaining

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that Airbus is getting support
from the European Union,

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and Airbus is always complaining
that Boeing is getting support

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from the US, they do compete
quite fiercely on price.

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They're both wining and dining
countries and airlines that

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are looking to buy new
planes, or whatever.

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Other examples of
oligopolies that

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are more competitive, especially
more competitive than something

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like OPEC-- you have
something like the airlines.

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Just going with that airplane
theme, you have the airlines.

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In fact, I gave
airlines as an example

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of an industry that
seems to behave

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in a kind of perfectly
competitive way.

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A seat, an economy class
seat on most airlines

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is fairly undifferentiated.

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There's a lot of very good
price information in the airline

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industry, better than in
almost every industry.

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But you do have not
too many competitors.

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They're all aware of each other.

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They all know each
other's prices.

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To some degree, they're
looking at each other's prices

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to figure out what their
own prices should be.

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It's not like they have a
million competitors out there

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and they can't keep
track of everyone.

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So airlines, they're
not a duopoly-- so

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let me make a line here.

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Airlines are not a duopoly
but they are definitely

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an example of an oligopoly
where the market is

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approaching perfect competition.

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And there's others.

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You could have something like
the credit card networks.

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You have Visa, MasterCard,
and American Express.

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And really these first
two are the dominant ones.

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But once again, very few players
and they are not coordinating,

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or at least we don't know
they're coordinating.

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And so they are competing.

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But there have been
cases of companies,

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especially in oligopolies,
where all of a sudden someone

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does find out that there's some
type of a back room deal where

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they say, hey, why don't
we coordinate and not raise

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our production?

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Or we keep our prices
high and both of us

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kind of hold that discipline?

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And that's where
the governments have

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to get involved, and
regulate, and make

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sure that between
parties that there really

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isn't this type of thing.

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Because from most
governments' point of view,

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they want to push the
parties out there as

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close to perfect
competition as possible.

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And we've seen, the closer you
get to perfect competition,

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the further away you get from
being a monopoly, the more

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efficient production you have.

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The larger total
surplus you have,

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and the more of that total
surplus goes to the consumers.


Oligopolies and monopolistic competition

WEBVTT
Kind: captions
Language: en

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We've spoken a lot
about monopolies.

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And we've spoken a lot
about perfect competition.

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And we kind of view
them as polar opposites.

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Over here you have
exactly one player.

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Here you have many players.

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In a monopoly, you get to set
the price and the quantity.

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Here, you have to
be a price taker.

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In a monopoly, there's
huge barriers to entry.

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In perfect competition,
there's no barriers to entry.

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What I want to think about
in this video is, are there

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other situations
or especially are

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their terms for other
situations that are in between?

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And to think about that, I'm
going to draw a spectrum.

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I'm going to do a two
dimensional spectrum.

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I could probably think
of more variables

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where there's nuance
between these terms,

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but these are the two big ones.

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So in one dimension,
I'm going to think

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about the number of
competitors there are.

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So this is the number
of competitors.

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And obviously a monopoly
is one competitor.

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Perfect competition, you've
got a bunch of competitors.

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So I'll put one right over here
and a bunch of competitors.

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If this was 0, then
there wouldn't even

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be a market to speak of.

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No one is doing is
participating there.

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In this axis, in
the vertical axis,

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I want to think about
how differentiated

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the competitors
in the market are.

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How different are their
products or their brands?

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Differentiation in the market.

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And this is low
differentiation and this

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is high differentiation.

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So let's think of a
bunch of industries

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and think about
where they sit here.

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And then I'll introduce
you to two new words, other

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than just a monopoly
or perfect competition.

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So let's just say that
we live in a world

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where there's 50 producers of
screws and all of those screws

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are completely identical.

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And so if one producers
charges even a penny more,

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no one's going to want to
go to them because they

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can get the exact
same thing from one

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of the other of
the many producers.

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So that would be a case right
over here, low differentiation.

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All the screws are the same and
there's a bunch of competitors.

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So that's about as perfect
as perfect competition

00:02:08.419 --> 00:02:09.949
can get in the real world.

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So bunch of identical
screw manufacturers.

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I'm not sure if the
actual screw market

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has a bunch of
competitors, but let's just

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assume if it did then you
would be sitting right over

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here, pretty close in the
world of perfect competition.

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In the other spectrum, you
imagine your utilities.

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In most places in, especially
the US, but probably the world,

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there's only one utility.

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There's only one entity that's
managing the power lines.

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A lot of times,
because of that, it's

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actually run by the government.

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But in most of the US it's
a regulated private company.

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And so here you have one player.

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And you could debate whether
it's low differentiation or so

00:02:51.490 --> 00:02:53.500
high differentiation that
it's the only player,

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but let's just stick
it right over there,

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low differentiation.

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This right over here
might be a utility.

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And that's about as
close to a monopoly,

00:03:03.050 --> 00:03:04.680
or that actually is a monopoly.

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They are the only
player there, mono.

00:03:07.620 --> 00:03:10.550
Mono comes from one,
poly comes from seller.

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One seller, that
would be a utility.

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Now there are things
that are in between.

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So for example, if you
thought about your,

00:03:18.600 --> 00:03:21.520
let's say that the telephone
providers in your area--

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there normally are a few people
who can provide phone service,

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especially with the age
of internet telephony, now

00:03:26.590 --> 00:03:28.970
the cable companies are starting
to provide phone service

00:03:28.970 --> 00:03:30.640
and the telephone
companies are starting

00:03:30.640 --> 00:03:32.930
to provide internet
and cable service.

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So we could think
of that market.

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So let's put this
market right over here.

00:03:36.690 --> 00:03:39.760
So the number of competitors is
low, so it's going to be here.

00:03:39.760 --> 00:03:41.852
And they are somewhat
differentiated.

00:03:41.852 --> 00:03:43.560
They might give you
a different cable box

00:03:43.560 --> 00:03:46.310
or might offer you slightly
different levels of bandwidth,

00:03:46.310 --> 00:03:47.410
or whatever else.

00:03:47.410 --> 00:03:49.570
So they're somewhat
differentiated right over here.

00:03:49.570 --> 00:04:02.010
So I'll call that the cable,
internet, telephone providers

00:04:02.010 --> 00:04:03.460
right over there.

00:04:03.460 --> 00:04:06.910
Then you could think
of markets where

00:04:06.910 --> 00:04:08.890
there is a bunch of competitors.

00:04:08.890 --> 00:04:10.760
There's a bunch of
competitors, but they

00:04:10.760 --> 00:04:12.620
are somewhat differentiated.

00:04:12.620 --> 00:04:15.090
And I could think
of fine dining.

00:04:15.090 --> 00:04:17.820
So let's say-- so here,
there's a bunch of restaurants

00:04:17.820 --> 00:04:21.320
in any place that sells nice
food, that they really define

00:04:21.320 --> 00:04:23.980
themselves by the quality of
the food that they produce.

00:04:23.980 --> 00:04:25.740
So they're highly
differentiated.

00:04:25.740 --> 00:04:27.210
Each restaurant is unique.

00:04:27.210 --> 00:04:30.170
The chefs have specialties
and all the rest.

00:04:30.170 --> 00:04:32.960
But there's a bunch of them.

00:04:32.960 --> 00:04:38.790
So right over here I
will put fine dining.

00:04:38.790 --> 00:04:42.270
You could also imagine
name brand clothing.

00:04:42.270 --> 00:04:44.000
There they're very
differentiated,

00:04:44.000 --> 00:04:45.700
certain designers,
certain materials,

00:04:45.700 --> 00:04:47.000
all of those type of things.

00:04:47.000 --> 00:04:48.760
But there's a bunch of them.

00:04:48.760 --> 00:04:51.925
So name brand clothing.

00:04:54.850 --> 00:04:57.010
It's not quite
perfect competition.

00:04:57.010 --> 00:04:58.110
It's very competitive.

00:04:58.110 --> 00:04:59.780
There's a bunch
of players there.

00:04:59.780 --> 00:05:01.670
But they're not selling
the same product.

00:05:01.670 --> 00:05:03.940
They are very, very
differentiated.

00:05:03.940 --> 00:05:06.430
To some degree, you almost
feel like even though there's

00:05:06.430 --> 00:05:10.090
all this competition they have
a monopoly on their own product.

00:05:10.090 --> 00:05:13.840
Another one could be-- you could
imagine something like high end

00:05:13.840 --> 00:05:19.130
laptops, or high end
computers, or nice computers.

00:05:19.130 --> 00:05:21.340
Or maybe I'll just say,
computers in general.

00:05:24.580 --> 00:05:27.620
Some people might want
to go for an Apple.

00:05:27.620 --> 00:05:29.350
That's what they've
associated with.

00:05:29.350 --> 00:05:31.680
And some people might
want to go for a Sony.

00:05:31.680 --> 00:05:33.790
So maybe I'll put branded
computers up here.

00:05:41.120 --> 00:05:44.220
But then you could also have
something like the unbranded PC

00:05:44.220 --> 00:05:44.720
market.

00:05:44.720 --> 00:05:46.370
And that might be
something closer to here,

00:05:46.370 --> 00:05:48.370
where you might have these
random manufacturers.

00:05:48.370 --> 00:05:50.717
You don't even care, some
manufacturer from overseas.

00:05:50.717 --> 00:05:51.550
You don't even care.

00:05:51.550 --> 00:05:53.760
But they're saying, they're
using the same processor,

00:05:53.760 --> 00:05:54.580
the same memory chip.

00:05:54.580 --> 00:05:56.288
They're saying, using
all the same thing.

00:05:56.288 --> 00:05:57.899
So they're much
less differentiated.

00:05:57.899 --> 00:05:59.690
So this might be right
over here unbranded.

00:06:02.329 --> 00:06:04.870
And that tends to happen with
the personal computer industry.

00:06:04.870 --> 00:06:06.800
They're just like, well, they're
using the same Intel chip.

00:06:06.800 --> 00:06:08.070
They're using the same memory.

00:06:08.070 --> 00:06:10.680
They're all running
Windows, whatever else.

00:06:10.680 --> 00:06:12.650
There's not a lot of
difference between them.

00:06:12.650 --> 00:06:14.360
So those actually
start getting closer

00:06:14.360 --> 00:06:16.300
to this perfect competition.

00:06:16.300 --> 00:06:19.640
So the whole reason that I've
introduced these ideas to you

00:06:19.640 --> 00:06:23.289
is that there are names
for these things that

00:06:23.289 --> 00:06:25.330
aren't quite perfect
competition, because they're

00:06:25.330 --> 00:06:26.332
highly differentiated.

00:06:26.332 --> 00:06:28.040
And there are names
for these things that

00:06:28.040 --> 00:06:31.910
aren't quite monopolies, because
they have a few providers.

00:06:31.910 --> 00:06:35.340
These right over here-- so we
could put other things around

00:06:35.340 --> 00:06:37.250
here, so I'll circle
this general area.

00:06:37.250 --> 00:06:38.660
We would call these oligopolies.

00:06:42.820 --> 00:06:46.800
And oli, this comes from
this part right over here.

00:06:46.800 --> 00:06:49.790
And I'm not an expert in
Greek but this comes from few.

00:06:49.790 --> 00:06:51.810
And obviously the
poly, once again,

00:06:51.810 --> 00:06:55.580
just as with monopolies,
comes from sellers.

00:06:55.580 --> 00:06:56.752
So this means few sellers.

00:06:56.752 --> 00:06:58.460
And oligopolies, and
we're going to study

00:06:58.460 --> 00:07:01.410
this in much more detail,
they're not quite monopolies.

00:07:01.410 --> 00:07:03.470
They can't set the
price and the quantity.

00:07:03.470 --> 00:07:06.040
And they can kind of--
depending on the oligopoly,

00:07:06.040 --> 00:07:07.810
depending on the
market, they might

00:07:07.810 --> 00:07:09.640
start acting more
like a monopoly.

00:07:09.640 --> 00:07:12.330
The players could
coordinate with each other

00:07:12.330 --> 00:07:14.410
to their mutual
benefit, or they might

00:07:14.410 --> 00:07:16.020
become fiercely
competitive, even

00:07:16.020 --> 00:07:17.780
if there's only a few providers.

00:07:17.780 --> 00:07:20.974
So oligopolies can kind
of, in their personality

00:07:20.974 --> 00:07:23.390
characteristics, they can
either look more like monopolies

00:07:23.390 --> 00:07:26.850
or they can look like kind of
very competitive industries.

00:07:26.850 --> 00:07:28.900
And these things up
here, where these

00:07:28.900 --> 00:07:32.570
are quite competitive
industries,

00:07:32.570 --> 00:07:34.290
but they are highly
differentiated--

00:07:34.290 --> 00:07:36.380
to some degree, you can
say that, for example,

00:07:36.380 --> 00:07:39.700
in branded computers Apple has
a monopoly on selling Apple

00:07:39.700 --> 00:07:40.330
computers.

00:07:40.330 --> 00:07:42.580
It doesn't have a
monopoly on computers.

00:07:42.580 --> 00:07:44.150
Obviously there's
many, many people

00:07:44.150 --> 00:07:45.940
who could provide computers.

00:07:45.940 --> 00:07:47.060
But they have a brand.

00:07:47.060 --> 00:07:49.710
If someone wants
an Apple Computer,

00:07:49.710 --> 00:07:50.715
you have to go to Apple.

00:07:50.715 --> 00:07:53.370
It's almost-- it's a
self-evident statement.

00:07:53.370 --> 00:07:56.460
But it's highly
differentiated, highly branded.

00:07:56.460 --> 00:07:59.940
And so they have a
monopoly on their product

00:07:59.940 --> 00:08:02.840
but there are many, many,
many, other competitors

00:08:02.840 --> 00:08:04.700
who are out there that
won't let them just

00:08:04.700 --> 00:08:06.720
set price because they
can offer products

00:08:06.720 --> 00:08:08.640
that serve the same
purpose but they're

00:08:08.640 --> 00:08:10.340
differentiated in some way.

00:08:10.340 --> 00:08:12.530
And so these
players up over here

00:08:12.530 --> 00:08:14.990
we would call these,
or these markets,

00:08:14.990 --> 00:08:20.775
these are monopolistic
competition.

00:08:23.650 --> 00:08:27.480
And when you first hear that, it
sounds-- because the first word

00:08:27.480 --> 00:08:30.660
you here is monopolistic--
but this is more,

00:08:30.660 --> 00:08:33.090
at least in my mind, closer
to perfect competition

00:08:33.090 --> 00:08:34.200
than it is to a monopoly.

00:08:34.200 --> 00:08:36.741
Because this is a-- or at least
the way I view it in my mind,

00:08:36.741 --> 00:08:40.140
monopoly is completely
uncompetitive.

00:08:40.140 --> 00:08:41.960
While this is still
highly competitive,

00:08:41.960 --> 00:08:44.550
it's still not quite
as highly competitive

00:08:44.550 --> 00:08:45.900
as perfect competition.

00:08:45.900 --> 00:08:46.570
But it's close.

00:08:46.570 --> 00:08:49.120
You have a monopoly
in just your product

00:08:49.120 --> 00:08:52.500
but there are other not too
different similar products--

00:08:52.500 --> 00:08:56.140
there are other products on
the market whose prices affect

00:08:56.140 --> 00:08:56.830
your price.

00:08:56.830 --> 00:08:59.530
Or there are other
alternatives, I should say,

00:08:59.530 --> 00:09:03.560
in the market that will
affect people's demand

00:09:03.560 --> 00:09:05.570
for your product.

00:09:05.570 --> 00:09:09.170
And the best giveaway between
a monopolistic competitor

00:09:09.170 --> 00:09:11.340
and a perfect
competition is that there

00:09:11.340 --> 00:09:14.220
is some differentiation
with the products over here.

00:09:14.220 --> 00:09:16.260
There is some maybe
branding here.

00:09:16.260 --> 00:09:18.400
There's maybe some
quality difference

00:09:18.400 --> 00:09:20.192
between the products.


Optional calculus proof to show that MR has twice slope of demand

WEBVTT
Kind: captions
Language: en

00:00:00.404 --> 00:00:01.931
For those of you who are curious

00:00:01.931 --> 00:00:03.996
and have a little bit of
a background in calculus,

00:00:03.996 --> 00:00:05.633
I thought I would do a very optional and

00:00:05.633 --> 00:00:07.471
when I say it's optional,
you don't have to

00:00:07.471 --> 00:00:09.310
understand this in order
to progress with the

00:00:09.310 --> 00:00:12.383
economics playlist, but
a very optional proof

00:00:12.383 --> 00:00:14.136
showing you that in general,

00:00:14.136 --> 00:00:17.689
the slope of the marginal
revenue curve for a monopolist is

00:00:17.689 --> 00:00:20.272
twice the slope of the demand curve,

00:00:20.272 --> 00:00:21.871
assuming that the demand curve is a line.

00:00:21.871 --> 00:00:25.270
So if the demand curve looks
like that, this is price.

00:00:25.270 --> 00:00:28.755
This is quantity. That is
demand right over there.

00:00:28.755 --> 00:00:30.737
I'm going to show that
the marginal revenue curve

00:00:30.737 --> 00:00:33.936
has twice the slope. It
is twice as steep as this.

00:00:33.936 --> 00:00:36.070
It's really twice the negative slope.

00:00:36.070 --> 00:00:39.069
So let me just write price
as a function of quantity.

00:00:39.069 --> 00:00:41.737
We know we get price.

00:00:41.737 --> 00:00:44.120
Since this is a line, we
can essentially write it in

00:00:44.120 --> 00:00:46.471
our traditional slope y-intercept form.

00:00:46.471 --> 00:00:48.604
In algebra class, you would write

00:00:48.604 --> 00:00:49.995
if this was y and this was x,

00:00:49.995 --> 00:00:53.312
you would write y = mx+b

00:00:53.312 --> 00:00:56.154
where m is the slope and
b is the y-intercept.

00:00:56.154 --> 00:00:58.602
I'll do something very
similar, but instead of y and x

00:00:58.602 --> 00:01:00.308
we have P and Q.

00:01:00.308 --> 00:01:05.767
So, if P = m x Q where m is the slope

00:01:05.767 --> 00:01:10.320
plus ... plus the P-intercept + b.

00:01:10.320 --> 00:01:12.870
So this right over here is b

00:01:12.870 --> 00:01:15.109
and if you were to ...
If you were to take your,

00:01:15.109 --> 00:01:18.029
If you were to take your change in P,

00:01:18.029 --> 00:01:19.855
if you were to take your change in P

00:01:19.855 --> 00:01:23.870
and divide it by your change
in Q ... your change in Q,

00:01:23.870 --> 00:01:26.283
you would get m. That is your slope,

00:01:26.283 --> 00:01:30.336
change in P / change in Q.

00:01:30.336 --> 00:01:33.337
Now what is going to be our total revenue?

00:01:33.337 --> 00:01:35.338
And this is kind of ... We're
just kind of almost doing

00:01:35.338 --> 00:01:36.957
what we've done in the last few videos,

00:01:36.957 --> 00:01:38.988
but we're doing it in general terms.

00:01:38.988 --> 00:01:40.903
So if this is total revenue,

00:01:40.903 --> 00:01:43.486
total revenue as a function of quantity.

00:01:43.486 --> 00:01:46.070
Well, total revenue is
just price x quantity.

00:01:46.070 --> 00:01:49.069
Total revenue is just price x quantity.

00:01:49.069 --> 00:01:52.070
We've already written ... We've
already written price as a

00:01:52.070 --> 00:01:55.154
function of quantity right over
here, so we could take that

00:01:55.154 --> 00:01:58.737
and substitute it ... and
substitute it in right over there.

00:01:58.737 --> 00:02:03.272
So we get total revenue is equal
to and I'll write it all in blue.

00:02:03.272 --> 00:02:09.569
We have mQ + b and then we're
going to multiply that x Q.

00:02:09.569 --> 00:02:12.336
We're going to multiply that x Q or we get

00:02:12.336 --> 00:02:16.203
total revenue = mQ^2.

00:02:16.203 --> 00:02:20.871
mQ^2 + b x Q

00:02:20.871 --> 00:02:23.177
And this is a parabola and
it's actually going to be a

00:02:23.177 --> 00:02:24.675
downward sloping parabola because

00:02:24.675 --> 00:02:26.080
m is going to be negative.

00:02:26.080 --> 00:02:27.486
This is downward sloping.

00:02:27.486 --> 00:02:30.387
m has a negative slope, so m is negative.

00:02:30.387 --> 00:02:34.336
So we know ... We know
that M < 0 over here.

00:02:34.336 --> 00:02:35.737
That's one of the assumptions we'll make.

00:02:35.737 --> 00:02:40.203
If m < 0, this is going to be
a downward opening parabola.

00:02:40.203 --> 00:02:41.936
Total revenue will look something,

00:02:41.936 --> 00:02:45.320
total revenue will look
something like that.

00:02:45.320 --> 00:02:46.902
That is our total revenue.

00:02:46.902 --> 00:02:50.070
Now, the marginal revenue
as a function of quantity is

00:02:50.070 --> 00:02:52.487
just the derivative and
this is the calculus part.

00:02:52.487 --> 00:02:54.986
It's the slope of the tangent
line at any given point

00:02:54.986 --> 00:02:57.338
and that is what the derivative is.

00:02:57.338 --> 00:03:00.669
It's the slope of the tangent
line at any point as a function

00:03:00.669 --> 00:03:03.238
as a function of quantity.
So you give me a quantity,

00:03:03.238 --> 00:03:06.902
I will tell you what the slope
of the tangent line of the

00:03:06.902 --> 00:03:09.154
total revenue function is at that point.

00:03:09.154 --> 00:03:11.003
So we essentially just have
to take the derivative of this

00:03:11.003 --> 00:03:13.202
with respect to Q.

00:03:13.202 --> 00:03:18.149
So we get D, TR/DQ.

00:03:18.149 --> 00:03:21.736
So how much does total revenue
change with a very, very

00:03:21.736 --> 00:03:25.569
small change in quantity,
infinitely small, infinitesimal

00:03:25.569 --> 00:03:29.152
change in quantity and this
comes straight out of calculus.

00:03:29.152 --> 00:03:33.471
m is a constant. Q^2, the
derivative of Q^2 with respect

00:03:33.471 --> 00:03:38.153
to Q is 2Q. So it's going
to be 2Q x the constant.

00:03:38.153 --> 00:03:42.336
So it's going to be 2m ... 2mQ.

00:03:42.336 --> 00:03:46.604
And then b is a constant.
We're assuming it's given.

00:03:46.604 --> 00:03:47.902
b is a constant.

00:03:47.902 --> 00:03:53.336
The derivative of bQ with respect
to Q is just going to be b.

00:03:53.336 --> 00:03:55.205
It's just going to be b.

00:03:55.205 --> 00:03:58.668
And so right over here, this
is our marginal revenue curve.

00:03:58.668 --> 00:04:00.737
or I should say our marginal line.

00:04:00.737 --> 00:04:03.737
It is 2mQ + b.

00:04:03.737 --> 00:04:08.071
So notice, it has the same
y-intercept as our demand curve

00:04:08.071 --> 00:04:10.806
so definitely starts right over there,

00:04:10.806 --> 00:04:12.669
but it has twice the slope.

00:04:12.669 --> 00:04:14.652
The slope of our demand curve is m.

00:04:14.652 --> 00:04:19.486
The slope of our marginal
revenue curve is 2m, is 2m

00:04:19.486 --> 00:04:22.119
and this is a negative slope, so
this will be twice as negative.

00:04:22.119 --> 00:04:24.153
So it will look something like this.

00:04:24.153 --> 00:04:27.236
It will look something
like this, just like that.

00:04:27.236 --> 00:04:29.070
So no matter what your demand curve is,

00:04:29.070 --> 00:04:32.402
if you assume it's a line like this,

00:04:32.402 --> 00:04:35.869
the marginal revenue curve
will be a line with twice the

00:04:35.869 --> 00:04:38.153
slope and in this case, it's
twice the negative slope which

00:04:38.153 --> 00:04:40.337
is kind of ... what's
going to be generally true.

00:04:40.337 --> 00:04:42.537
Anyway, if you understood that, great.

00:04:42.537 --> 00:04:44.936
You now feel good that this
is always the case for a

00:04:44.936 --> 00:04:46.736
linear demand curve like this.

00:04:46.736 --> 00:04:48.319
If you did not understand it, don't worry.

00:04:48.319 --> 00:04:50.142
You can proceed with
the economics playlist.

00:04:50.142 --> 23:59:59.999
You don't need to know
calculus for this playlist.


Monopolist optimizing price: Dead weight loss

WEBVTT
Kind: captions
Language: en

00:00:00.272 --> 00:00:02.491
Based on what we've done
in the last 2 videos

00:00:02.491 --> 00:00:03.405
we've been able to figure out

00:00:03.405 --> 00:00:05.913
what the marginal revenue curve looks like

00:00:05.913 --> 00:00:07.494
for the monopolist year,

00:00:07.494 --> 00:00:09.536
for the monopolist in the orange market

00:00:09.536 --> 00:00:10.744
and this is what we got.

00:00:10.744 --> 00:00:12.574
Right over here, it
was a line with a slope

00:00:12.574 --> 00:00:17.235
twice as steep as the
slope of the demand curve,

00:00:17.235 --> 00:00:19.269
we'll see that's actually generalizable.

00:00:19.269 --> 00:00:20.866
There's an optional video

00:00:20.866 --> 00:00:22.081
that I'll do very shortly

00:00:22.081 --> 00:00:24.078
where I prove it with a
little bit of calculus.

00:00:24.078 --> 00:00:25.938
It's very important to realize

00:00:25.938 --> 00:00:27.405
that this marginal revenue curve

00:00:27.405 --> 00:00:29.940
looks very different than
the marginal revenue curve

00:00:29.940 --> 00:00:32.407
if we were dealing with
perfect competition.

00:00:32.407 --> 00:00:34.269
If we were dealing with
perfect competition

00:00:34.269 --> 00:00:37.003
there would be some
equilibrium price in the market

00:00:37.003 --> 00:00:38.204
and all of the competitors

00:00:38.204 --> 00:00:40.245
would essentially just
have to take that price.

00:00:40.245 --> 00:00:43.412
Let's say that that equilibrium
price was $3 per pound

00:00:43.412 --> 00:00:46.681
then our marginal revenue
curve would look like this

00:00:46.681 --> 00:00:48.188
if we were not a monopolist,

00:00:48.188 --> 00:00:51.398
if we were one of the
many perfect competitors.

00:00:51.398 --> 00:00:52.768
I guess you could view it that way.

00:00:52.768 --> 00:00:54.735
Because we would just
have to take that price.

00:00:54.735 --> 00:00:56.268
If we wanted to sell 1000 pounds,

00:00:56.268 --> 00:00:59.939
each of those pounds we
would get $3 per pound

00:00:59.939 --> 00:01:01.466
and then if we want to sell 1001,

00:01:01.466 --> 00:01:03.268
we'll just get $3 per
pound for the next one.

00:01:03.268 --> 00:01:04.604
It doesn't change.

00:01:04.604 --> 00:01:06.275
We're just taking that price.

00:01:06.275 --> 00:01:08.602
With the monopolist things do change

00:01:08.602 --> 00:01:12.432
because we are the only
producer in the market.

00:01:12.432 --> 00:01:15.075
The price at which we can get changes

00:01:15.075 --> 00:01:16.203
depending on what we produce

00:01:16.203 --> 00:01:19.102
because we are the entire
supply for the market

00:01:19.102 --> 00:01:20.868
and we have this downward sloping

00:01:20.868 --> 00:01:22.280
marginal revenue curve.

00:01:22.280 --> 00:01:23.808
Now, with that out of the way,

00:01:23.808 --> 00:01:26.434
let's think about what will
be the optimal quantity

00:01:26.434 --> 00:01:30.022
for us to produce if we
wanted to maximize profit?

00:01:30.022 --> 00:01:31.535
If we think in pure economic terms,

00:01:31.535 --> 00:01:33.344
that's what firms try to do.

00:01:33.344 --> 00:01:37.535
They exist to maximise profit.

00:01:37.535 --> 00:01:39.399
To do that, we're going
to have to think about,

00:01:39.399 --> 00:01:41.463
and remember, it's not
to maximize revenue.

00:01:41.463 --> 00:01:43.151
To maximize revenue we would have said,

00:01:43.151 --> 00:01:45.160
"Oh, they should just
produce 3000 pounds."

00:01:45.160 --> 00:01:46.658
It's not about maximizing revenue,

00:01:46.658 --> 00:01:48.410
it's about maximizing profit.

00:01:48.410 --> 00:01:51.329
We have to take the
cost into consideration.

00:01:51.329 --> 00:01:54.034
To do that, we'll have to
draw a marginal cost curve.

00:01:54.034 --> 00:01:55.207
Let's say I did the research.

00:01:55.207 --> 00:01:56.667
Let's say we're the owners of this firm

00:01:56.667 --> 00:01:59.141
and we have a marginal cost curve

00:01:59.141 --> 00:02:01.075
that looks something like this.

00:02:01.075 --> 00:02:04.139
Let's say our marginal
cost curve looks like this.

00:02:04.139 --> 00:02:07.097
It's important to realize,
we are the market.

00:02:07.097 --> 00:02:08.303
We are the only producers here.

00:02:08.303 --> 00:02:10.070
This isn't just our marginal cost curve.

00:02:10.070 --> 00:02:11.884
This is a marginal cost
curve for the market.

00:02:11.884 --> 00:02:13.340
Another way to think about it,

00:02:13.340 --> 00:02:15.271
this is the supply curve for the market.

00:02:15.271 --> 00:02:16.600
It tells you at any given price

00:02:16.600 --> 00:02:18.672
how much the market is willing to supply.

00:02:18.672 --> 00:02:19.735
You could view it as a marginal cost

00:02:19.735 --> 00:02:22.087
or you could view it as a supply curve

00:02:22.087 --> 00:02:23.136
and we've talked about it before.

00:02:23.136 --> 00:02:26.005
You could view a supply curve
as a marginal cost curve.

00:02:26.005 --> 00:02:29.720
If you want the market
to produce 1 extra pound,

00:02:29.720 --> 00:02:32.142
what's the minimum price
you would have to give?

00:02:32.142 --> 00:02:33.736
that is the marginal cost.

00:02:33.736 --> 00:02:35.339
Now, with this out of the way,

00:02:35.339 --> 00:02:37.002
let's think about what you would produce.

00:02:37.002 --> 00:02:40.301
Well, you would definitely
want to produce something

00:02:40.301 --> 00:02:43.551
you definitely start to produce
a few pounds right over here

00:02:43.551 --> 00:02:45.672
because the marginal
revenue you're getting

00:02:45.672 --> 00:02:47.675
is way above your marginal cost.

00:02:47.675 --> 00:02:50.469
Each incremental pound you're
producing right over here,

00:02:50.469 --> 00:02:52.219
you're getting much more revenue,

00:02:52.219 --> 00:02:54.537
you're getting $5 or $6 of revenue

00:02:54.537 --> 00:02:56.469
and it's only costing you
a little over a dollar.

00:02:56.469 --> 00:02:58.138
It's like, "Okay, I'm
going to keep producing.

00:02:58.138 --> 00:02:59.266
"I'm going to keep producing."

00:02:59.266 --> 00:03:00.402
Over here, you're still,

00:03:00.402 --> 00:03:02.387
each incremental unit you're getting,

00:03:02.387 --> 00:03:04.203
you're still getting more revenue

00:03:04.203 --> 00:03:06.139
than the cost of that incremental unit.

00:03:06.139 --> 00:03:08.608
That keeps being true all the way

00:03:08.608 --> 00:03:14.354
until you get to 2000
pounds right over here.

00:03:14.354 --> 00:03:15.854
At this point right over here

00:03:15.854 --> 00:03:18.452
you don't want to produce
an incremental unit

00:03:18.452 --> 00:03:20.044
because if you produce one more unit,

00:03:20.044 --> 00:03:24.363
if you produce that 2001st
pound right over here

00:03:24.363 --> 00:03:26.386
then for that 2001st pound,

00:03:26.386 --> 00:03:28.789
your cost is going to be slightly higher

00:03:28.789 --> 00:03:30.387
than the revenue you get in.

00:03:30.387 --> 00:03:32.785
You will actually take
a slight loss on that.

00:03:32.785 --> 00:03:35.855
Your total profit will start to go down

00:03:35.855 --> 00:03:37.939
and you don't want to
produce less than this

00:03:37.939 --> 00:03:39.523
because you'll be leaving a
little money on the table.

00:03:39.523 --> 00:03:41.657
You'll be leaving that
little incremental pound

00:03:41.657 --> 00:03:43.978
where the total revenue
was just slightly higher,

00:03:43.978 --> 00:03:47.194
or the marginal revenue
on that incremental pound

00:03:47.194 --> 00:03:49.725
was just slightly higher
than your marginal cost

00:03:49.725 --> 00:03:50.746
on that incremental pound.

00:03:50.746 --> 00:03:54.121
You will produce right over there.

00:03:54.121 --> 00:03:56.054
Now, this is interesting

00:03:56.054 --> 00:03:59.716
because this is a different equilibrium,

00:03:59.716 --> 00:04:02.117
or I guess we say this
is a different price

00:04:02.117 --> 00:04:05.451
or this is a different price and quantity

00:04:05.451 --> 00:04:06.529
than we would get

00:04:06.529 --> 00:04:09.055
if we were dealing with
perfect competition.

00:04:09.055 --> 00:04:11.054
If we were dealing with
perfect competition,

00:04:11.054 --> 00:04:13.356
our equilibrium price and quantity

00:04:13.356 --> 00:04:16.187
would be where our supply
and demand curves intersect.

00:04:16.187 --> 00:04:17.860
It would be right over here.

00:04:17.860 --> 00:04:20.325
It would be a price of $3 per pound

00:04:20.325 --> 00:04:22.586
and a quantity of 3000 pounds.

00:04:23.155 --> 00:04:25.089
Now, in order to maximize profit,

00:04:25.089 --> 00:04:28.323
we are intersecting between
the marginal revenue curve

00:04:28.323 --> 00:04:31.669
or our quantity that we want to produce

00:04:31.669 --> 00:04:32.656
as the monopolist

00:04:32.656 --> 00:04:35.260
is the intersection between
our marginal revenue curve

00:04:35.260 --> 00:04:36.588
and our marginal cost curve

00:04:36.588 --> 00:04:37.671
which is right over here.

00:04:37.671 --> 00:04:40.337
So we can see that there
is a dead weight loss.

00:04:40.337 --> 00:04:44.056
There is a dead weight
loss by being a monopoly

00:04:44.056 --> 00:04:45.012
although it's good for us.

00:04:45.012 --> 00:04:46.009
It's good for the monopolist,

00:04:46.009 --> 00:04:48.460
it's not good for a society
at least in this example

00:04:48.460 --> 00:04:50.191
and there's very few where
I can imagine it being good

00:04:50.191 --> 00:04:51.857
but I guess there are a few

00:04:51.857 --> 00:04:54.065
if you're trying to protect
the national industry

00:04:54.065 --> 00:04:55.266
or something like that.

00:04:55.266 --> 00:04:57.403
Over here, this is the quantity

00:04:57.403 --> 00:04:59.428
that we are deciding to produce.

00:04:59.428 --> 00:05:05.089
The consumer surplus is
the area above the price

00:05:05.089 --> 00:05:06.428
and below the demand curve.

00:05:06.428 --> 00:05:10.878
This right over here is
the consumer surplus.

00:05:10.894 --> 00:05:13.078
The producer surplus
is looking pretty good

00:05:13.078 --> 00:05:15.828
and this is essentially what
we're trying to optimize.

00:05:15.828 --> 00:05:18.855
Our producer surplus is this whole area.

00:05:18.855 --> 00:05:21.746
Our producer surplus is this whole area

00:05:21.746 --> 00:05:23.244
right over here.

00:05:23.244 --> 00:05:25.328
Producer surplus right over there.

00:05:25.328 --> 00:05:26.994
But we have a dead weight cost.

00:05:26.994 --> 00:05:29.417
There's a total surplus
that we would have gotten,

00:05:29.417 --> 00:05:31.415
that society would have gotten

00:05:31.415 --> 00:05:35.250
if we were dealing with
perfect competition,

00:05:35.250 --> 00:05:37.592
right over here that's now being lost.

00:05:37.592 --> 00:05:40.457
But as we lose that, we were able to

00:05:40.457 --> 00:05:42.005
increase the producer surplus

00:05:42.005 --> 00:05:43.844
and decrease the consumer surplus.

00:05:43.844 --> 00:05:47.726
Beyond just having this
dead weight loss over here,

00:05:47.726 --> 00:05:50.123
it's also obviously given much more value

00:05:50.123 --> 00:05:51.837
to the producer, to the monopolist

00:05:51.837 --> 00:05:55.837
and given much less value to the consumer.


Monopolist optimizing price: Marginal revenue

WEBVTT
Kind: captions
Language: en

00:00:00.368 --> 00:00:02.387
>>Now that we figured
out the total revenue

00:00:02.387 --> 00:00:04.486
given any quantity,

00:00:04.486 --> 00:00:07.374
and we've also been able to
express it algebraically,

00:00:07.374 --> 00:00:09.935
I want to think about what
the marginal revenue is

00:00:09.935 --> 00:00:12.004
at any one of these points.

00:00:12.004 --> 00:00:13.225
To think about marginal revenue,

00:00:13.225 --> 00:00:14.679
marginal revenue is just how much does our

00:00:14.679 --> 00:00:16.009
total revenue change,

00:00:16.009 --> 00:00:18.977
given some change in our quantity.

00:00:18.977 --> 00:00:20.460
Then later, we can use that

00:00:20.460 --> 00:00:23.335
so that we can optimize the profit

00:00:23.335 --> 00:00:25.081
for our monopoly over here.

00:00:25.281 --> 00:00:27.379
I'm going to try to do
it without calculus.

00:00:27.379 --> 00:00:28.849
It actually would be very straightforward

00:00:28.849 --> 00:00:29.594
to do it with calculus

00:00:29.594 --> 00:00:30.878
because we're essentially
just trying to find

00:00:30.878 --> 00:00:33.353
the slope at any point along this curve,

00:00:33.353 --> 00:00:34.822
but I'll try to do it algebraically

00:00:34.822 --> 00:00:36.322
and maybe it will even
give you a little intuition

00:00:36.322 --> 00:00:39.262
for what we end up doing
eventually in calculus.

00:00:39.339 --> 00:00:40.669
The first thing I want to do

00:00:40.669 --> 00:00:42.004
is essentially find the slope,

00:00:42.004 --> 00:00:43.689
the slope right over here.

00:00:43.689 --> 00:00:46.017
The best way to find the
slope right over here is say

00:00:46.017 --> 00:00:48.983
how much does my total revenue change

00:00:48.983 --> 00:00:51.348
if I have a very small change in quantity?

00:00:51.348 --> 00:00:53.817
If I have a very small change in quantity,

00:00:53.817 --> 00:00:56.831
how much does my total revenue change?

00:00:56.831 --> 00:00:58.523
Let me think about it this way.

00:00:58.523 --> 00:01:00.298
The other ones I will
be able to approximate

00:01:00.298 --> 00:01:02.059
a little bit easier.

00:01:02.059 --> 00:01:03.188
Let's think of it this way.

00:01:03.188 --> 00:01:06.336
If my quantity is 0,

00:01:06.336 --> 00:01:09.106
my total revenue is 0.

00:01:09.106 --> 00:01:10.037
That one's easy.

00:01:10.037 --> 00:01:11.535
If I increase my quantity

00:01:11.535 --> 00:01:13.473
very, very, very, very little,

00:01:13.473 --> 00:01:16.843
so let's just make it 0.001,

00:01:16.843 --> 00:01:18.983
what is going to be my total revenue?

00:01:18.983 --> 00:01:21.027
We could think about it
in terms of this curve

00:01:21.027 --> 00:01:22.003
right over here,

00:01:22.003 --> 00:01:23.863
or we could just use this expression,

00:01:23.863 --> 00:01:26.701
which we derived from
price times quantity,

00:01:26.701 --> 00:01:27.959
and we will get,

00:01:27.959 --> 00:01:30.432
I'll get my calculator out,

00:01:30.987 --> 00:01:33.625
if our quantity is .001,

00:01:33.625 --> 00:01:36.848
our total revenue is
going to be negative ...

00:01:36.848 --> 00:01:38.510
Let me turn the calculator on.

00:01:38.510 --> 00:01:44.286
Total revenue is going to be -.001²,

00:01:44.286 --> 00:01:45.201
squared,

00:01:45.201 --> 00:01:46.377
so that's that part,

00:01:46.377 --> 00:01:49.377
plus 6 times .001,

00:01:49.377 --> 00:01:53.855
6 times .001.

00:01:53.855 --> 00:01:55.816
That's going to be our total revenue.

00:01:55.816 --> 00:01:59.722
It's going to be 0.005999.

00:01:59.722 --> 00:02:05.002
It's 0.00599.

00:02:05.002 --> 00:02:06.116
Now we can figure out

00:02:06.116 --> 00:02:07.794
or get a pretty good approximation

00:02:07.794 --> 00:02:10.018
for that marginal revenue
right at that point.

00:02:10.018 --> 00:02:13.792
Our change in quantity is .001,

00:02:13.792 --> 00:02:18.976
so our ΔQ, this right over here is 0.001.

00:02:18.976 --> 00:02:20.536
That's our change in quantity,

00:02:20.536 --> 00:02:25.703
and our change in revenue is 0.00599,

00:02:25.703 --> 00:02:27.711
and so we just have to divide.

00:02:27.711 --> 00:02:31.811
We just have to divide
.005999, that top one,

00:02:31.811 --> 00:02:33.433
our change in total revenue

00:02:33.433 --> 00:02:34.982
divided by our change in quantity,

00:02:34.982 --> 00:02:38.388
divided by .001.

00:02:38.388 --> 00:02:42.416
We get 5.99999.

00:02:42.416 --> 00:02:44.198
If you try it with even smaller numbers,

00:02:44.198 --> 00:02:47.756
if you tried this with .00000001,

00:02:47.756 --> 00:02:49.018
you'll get 5-point,

00:02:49.018 --> 00:02:51.059
and you'll get even more 9s going on.

00:02:51.059 --> 00:02:52.220
The closer that you get,

00:02:52.220 --> 00:02:54.004
the smaller your change in,

00:02:54.004 --> 00:02:56.018
and this is what you
essentially do in calculus.

00:02:56.018 --> 00:02:58.656
You try to find a super
small change right over here.

00:02:58.656 --> 00:03:01.021
This is essentially going to be 6.

00:03:01.021 --> 00:03:02.718
Our marginal revenue at this point

00:03:02.718 --> 00:03:04.556
is essentially going to be 6.

00:03:04.556 --> 00:03:05.608
What I want to do is I'm going to plot

00:03:05.608 --> 00:03:08.551
marginal revenue here on
our demand curve as well

00:03:08.551 --> 00:03:09.712
or on this axis

00:03:09.712 --> 00:03:11.956
where we've already
plotted our demand curve.

00:03:11.956 --> 00:03:14.190
When our quantity is 0,

00:03:14.190 --> 00:03:15.382
our marginal revenue,

00:03:15.382 --> 00:03:17.184
if we just barely increase quantity,

00:03:17.184 --> 00:03:19.511
the incremental total revenue we get

00:03:19.511 --> 00:03:21.131
is going to be 6.

00:03:21.131 --> 00:03:22.646
I'll just plot it.

00:03:22.646 --> 00:03:24.000
I'll just plot it right over there.

00:03:24.000 --> 00:03:25.299
That makes sense.

00:03:25.299 --> 00:03:27.452
The marginal benefit in the market is 6,

00:03:27.452 --> 00:03:28.151
right at that point.

00:03:28.151 --> 00:03:30.454
If we were to just sell
a drop of orange juice

00:03:30.454 --> 00:03:32.577
or I guess we're selling
oranges in this case,

00:03:32.577 --> 00:03:33.415
not juice,

00:03:33.415 --> 00:03:35.740
but if we were to sell
a millionth of a pound

00:03:35.740 --> 00:03:36.947
of oranges,

00:03:36.947 --> 00:03:39.218
we would get the equivalent of roughly

00:03:39.218 --> 00:03:42.380
$6 per pound for that millionth of a pound

00:03:42.380 --> 00:03:43.833
because that's the marginal benefit

00:03:43.833 --> 00:03:47.158
for that very first
incremental chunk of orange

00:03:47.158 --> 00:03:48.087
out there in the market,

00:03:48.087 --> 00:03:50.026
so it makes complete sense.

00:03:50.026 --> 00:03:52.028
Now let's think about the
slope at these other points.

00:03:52.028 --> 00:03:53.312
These, I'm going to approximate.

00:03:53.312 --> 00:03:54.622
I could do it this way,

00:03:54.622 --> 00:03:56.519
but I'll just approximate it.

00:03:56.519 --> 00:03:58.343
I'll just approximate it
by using other points.

00:03:58.343 --> 00:04:00.565
If I want to find the
slope right over here,

00:04:00.565 --> 00:04:02.535
when our quantity is equal to 1,

00:04:02.535 --> 00:04:03.988
the slope would look like,

00:04:03.988 --> 00:04:05.770
the slope would look like that.

00:04:05.770 --> 00:04:07.053
I'm going to approximate it

00:04:07.053 --> 00:04:10.190
by finding the slope
between these two points.

00:04:10.190 --> 00:04:11.706
I am going to approximate it,

00:04:11.706 --> 00:04:12.588
and actually, it's going to be

00:04:12.588 --> 00:04:13.841
a very good approximation.

00:04:13.841 --> 00:04:15.034
I'll do it later with calculus

00:04:15.034 --> 00:04:16.773
to show that it is a
very good approximation.

00:04:16.773 --> 00:04:18.241
But I'm going to
approximate it by the slope

00:04:18.241 --> 00:04:19.738
between these two points.

00:04:19.738 --> 00:04:21.080
Between those two points,

00:04:21.080 --> 00:04:24.107
our change in quantity is 2,

00:04:24.107 --> 00:04:28.350
and our change in total revenue is 8.

00:04:28.350 --> 00:04:30.081
Our change in total revenue is 8.

00:04:30.081 --> 00:04:31.926
When we produced 2,

00:04:31.926 --> 00:04:32.995
or 2,000 pounds,

00:04:32.995 --> 00:04:37.711
our total revenue was $8,000.

00:04:37.711 --> 00:04:39.740
So we have a change in total revenue of 8,

00:04:39.740 --> 00:04:41.317
or 8,000, I guess we could say,

00:04:41.317 --> 00:04:45.008
divided by a change in quantity of 2,000,

00:04:45.008 --> 00:04:47.822
so our marginal revenue at this point

00:04:47.822 --> 00:04:50.888
is 8 divided by 2, or
8,000 divided by 2,000,

00:04:50.888 --> 00:04:53.046
which is $4 per pound.

00:04:53.046 --> 00:04:55.065
When our quantity is 1,

00:04:55.065 --> 00:04:59.209
our marginal revenue is $4 per pound.

00:04:59.209 --> 00:05:02.064
It is $4 per pound, just like that.

00:05:02.064 --> 00:05:04.360
Now, let's think about
the marginal revenue

00:05:04.360 --> 00:05:06.708
when our quantity is 2.

00:05:06.708 --> 00:05:07.761
To do that,

00:05:07.761 --> 00:05:09.986
I'm going to find the slope
between these two points.

00:05:09.986 --> 00:05:12.199
We really want to find
the slope of that line,

00:05:12.199 --> 00:05:14.655
but it looks like the slope
between these two points

00:05:14.655 --> 00:05:16.139
is a pretty good approximation.

00:05:16.139 --> 00:05:17.732
It's actually almost an exact number

00:05:17.732 --> 00:05:19.674
because of the way that
this is just a parabola,

00:05:19.674 --> 00:05:21.364
so we can actually do this.

00:05:21.364 --> 00:05:22.218
But anyway,

00:05:22.218 --> 00:05:23.813
this is fairly straightforward.

00:05:23.813 --> 00:05:24.403
Once again,

00:05:24.403 --> 00:05:26.692
our change in quantity is 2,

00:05:26.692 --> 00:05:29.468
and our change in total revenue,

00:05:29.468 --> 00:05:31.122
our change in total revenue is,

00:05:31.122 --> 00:05:32.375
we're going from 5 to 9,

00:05:32.375 --> 00:05:33.767
which is 4.

00:05:33.767 --> 00:05:36.920
This was 9 right over
here from the last video.

00:05:36.920 --> 00:05:42.049
Or you could say it's $4,000
divided by 2,000 pounds

00:05:42.049 --> 00:05:45.984
gives you $2 per pound.

00:05:45.984 --> 00:05:48.003
Our marginal revenue right over here,

00:05:48.003 --> 00:05:51.050
if we have quantity of 2, is $2 per pound.

00:05:51.050 --> 00:05:51.980
Right at that point,

00:05:51.980 --> 00:05:54.832
for that incremental millionth of an ounce

00:05:54.832 --> 00:05:55.885
that we're going to sell them oranges,

00:05:55.885 --> 00:05:58.992
we're getting the equivalent of $2 a pound

00:05:58.992 --> 00:06:02.042
of increased total
revenue from doing that.

00:06:02.042 --> 00:06:03.741
Let's just do one more point here,

00:06:03.741 --> 00:06:04.979
and I think you'll see why

00:06:04.979 --> 00:06:06.672
I'm only going to do one more point.

00:06:06.672 --> 00:06:08.033
If we try to go up here,

00:06:08.033 --> 00:06:10.633
and we try to figure out
what is the marginal revenue

00:06:10.633 --> 00:06:12.281
or if we essentially say
what is the slope there,

00:06:12.281 --> 00:06:15.681
how much do we get an increase in revenue

00:06:15.681 --> 00:06:18.011
if we just barely increase our quantity,

00:06:18.011 --> 00:06:19.915
and this is actually easier to look at.

00:06:19.915 --> 00:06:21.986
This is a maximum point right over here,

00:06:21.986 --> 00:06:23.958
in the calculus terms.

00:06:23.958 --> 00:06:25.642
The slope up there is 0.

00:06:25.642 --> 00:06:27.708
We can even see that by
approximating the slope

00:06:27.708 --> 00:06:29.730
between the slope
between these two points.

00:06:29.730 --> 00:06:30.845
We have some change in quantity,

00:06:30.845 --> 00:06:32.704
but we have no change in total revenue,

00:06:32.704 --> 00:06:33.788
so right at that point.

00:06:33.788 --> 00:06:34.517
Right over here,

00:06:34.517 --> 00:06:36.002
the slope is barely positive.

00:06:36.002 --> 00:06:37.594
Right at that point,

00:06:37.594 --> 00:06:38.384
the slope is 0,

00:06:38.384 --> 00:06:39.145
and then right past it,

00:06:39.145 --> 00:06:40.800
it becomes barely negative.

00:06:40.800 --> 00:06:41.853
But right at that point,

00:06:41.853 --> 00:06:45.014
our marginal revenue is 0.

00:06:45.014 --> 00:06:46.987
When our quantity is 3,000 pounds,

00:06:46.987 --> 00:06:49.738
our marginal revenue is 0.

00:06:49.738 --> 00:06:50.453
Then after that,

00:06:50.453 --> 00:06:52.123
our marginal revenue gets negative.

00:06:52.123 --> 00:06:52.791
Over here,

00:06:52.791 --> 00:06:54.583
our marginal revenue gets
more and more negative.

00:06:54.583 --> 00:06:55.899
But something very interesting happens.

00:06:55.899 --> 00:06:58.387
When we plot our marginal revenue curve,

00:06:58.387 --> 00:07:00.479
or our line, in this case,

00:07:00.479 --> 00:07:02.032
we are getting a line,

00:07:02.124 --> 00:07:04.186
we are getting a line,

00:07:04.386 --> 00:07:08.423
we are getting a line
that is twice as steep,

00:07:08.423 --> 00:07:11.023
twice as steep as our demand curve.

00:07:11.023 --> 00:07:12.583
This is actually generalizable.

00:07:12.583 --> 00:07:15.058
If we have a linear
demand curve like this,

00:07:15.058 --> 00:07:17.021
it can be defined as a line,

00:07:17.021 --> 00:07:19.384
then your marginal revenue curve

00:07:19.384 --> 00:07:20.666
for the monopolist

00:07:20.666 --> 00:07:23.996
will also be a linear
downward-sloping curve

00:07:23.996 --> 00:07:25.372
or downward-sloping line,

00:07:25.372 --> 00:07:27.041
and it will have twice the slope.

00:07:27.041 --> 00:07:29.051
This slope over here was -1.

00:07:29.051 --> 00:07:31.002
This slope over here is -2.

00:07:31.002 --> 00:07:33.976
For every increase in quantity,

00:07:33.976 --> 00:07:35.476
the price goes down by 2;

00:07:35.476 --> 00:07:37.739
increase in quantity,
price goes down by 2;

00:07:37.830 --> 00:07:41.417
increase in quantity,
price goes down by 2.

00:07:41.417 --> 00:07:43.347
This is marginal revenue.

00:07:43.347 --> 00:07:44.708
Let's remind our self,

00:07:44.708 --> 00:07:45.962
we've been doing all of this algebra

00:07:45.962 --> 00:07:47.092
and all of this math here,

00:07:47.092 --> 00:07:49.017
what is marginal revenue telling us?

00:07:49.017 --> 00:07:50.224
This was the demand curve.

00:07:50.224 --> 00:07:51.954
It tells us for any given price

00:07:51.954 --> 00:07:53.254
what quantity is demanded

00:07:53.254 --> 00:07:54.614
or for any given quantity,

00:07:54.614 --> 00:07:56.699
what is the incremental marginal benefit,

00:07:56.699 --> 00:07:57.799
or I guess what's the price

00:07:57.799 --> 00:07:59.696
at which they could sell that quantity.

00:07:59.696 --> 00:08:00.365
From that,

00:08:00.365 --> 00:08:02.168
we were able to figure
out the total revenue

00:08:02.168 --> 00:08:04.017
as a function of quantity,

00:08:04.017 --> 00:08:05.363
and from that total revenue,

00:08:05.363 --> 00:08:06.107
we were able to say,

00:08:06.107 --> 00:08:07.008
well, look,

00:08:07.008 --> 00:08:08.369
if at any of these quantities,

00:08:08.369 --> 00:08:10.877
if we were to increase a little bit more,

00:08:10.877 --> 00:08:13.001
if we were to increase
quantity a little bit more,

00:08:13.001 --> 00:08:16.027
how much is our revenue increasing?

00:08:16.027 --> 00:08:16.541
Obviously,

00:08:16.541 --> 00:08:17.995
we want to keep increasing quantity

00:08:17.995 --> 00:08:20.959
while our revenue is ...

00:08:20.959 --> 00:08:25.429
while the marginal
revenue we get is larger

00:08:25.429 --> 00:08:27.068
than our marginal cost.

00:08:27.068 --> 00:08:29.929
I'll take that up in the next video.


Monopolist optimizing price: Total revenue.

WEBVTT
Kind: captions
Language: en

00:00:00.690 --> 00:00:03.460
What I want to start thinking
about in this video is,

00:00:03.460 --> 00:00:06.290
given that we do have a
monopoly on something,

00:00:06.290 --> 00:00:08.380
and in this example,
in this video,

00:00:08.380 --> 00:00:10.440
we're going to have a
monopoly on oranges.

00:00:10.440 --> 00:00:12.410
Given that we have a
monopoly on oranges

00:00:12.410 --> 00:00:16.360
and a demand curve for
oranges in the market,

00:00:16.360 --> 00:00:18.194
how do we maximize our profit?

00:00:18.194 --> 00:00:19.610
And to answer that
question, we're

00:00:19.610 --> 00:00:21.193
going to think about
our total revenue

00:00:21.193 --> 00:00:23.007
for different quantities.

00:00:23.007 --> 00:00:24.840
And from that we'll get
the marginal revenue

00:00:24.840 --> 00:00:25.980
for different quantities.

00:00:25.980 --> 00:00:28.500
And then we can compare that
to our marginal cost curve.

00:00:28.500 --> 00:00:30.291
And that should give
us a pretty good sense

00:00:30.291 --> 00:00:34.550
of what quantity we should
produce to optimize things.

00:00:34.550 --> 00:00:37.260
So let's just figure
out total revenue first.

00:00:37.260 --> 00:00:39.010
So obviously, if
we produce nothing,

00:00:39.010 --> 00:00:42.930
if we produces 0 quantity,
we'll have nothing to sell.

00:00:42.930 --> 00:00:44.530
Total revenue is
price times quantity.

00:00:44.530 --> 00:00:46.990
Your price is 6 but
your quantity is 0.

00:00:46.990 --> 00:00:51.240
So your total revenue is going
to be 0 if you produce nothing.

00:00:51.240 --> 00:00:53.880
If you produce 1 unit--
and this over here

00:00:53.880 --> 00:00:55.880
is actually 1,000
pounds per day.

00:00:55.880 --> 00:00:58.580
And we'll call a unit
1,000 pounds per day.

00:00:58.580 --> 00:01:00.597
If you produce 1 unit,
then your total revenue

00:01:00.597 --> 00:01:04.019
is 1 unit times $5 per pound.

00:01:04.019 --> 00:01:08.480
So it'll be $5 times, actually
1,000, so it'll be $5,000.

00:01:08.480 --> 00:01:13.260
And you can also view it as
the area right over here.

00:01:13.260 --> 00:01:17.200
You have the height is price
and the width is quantity.

00:01:17.200 --> 00:01:19.000
But we can plot that, 5 times 1.

00:01:19.000 --> 00:01:22.460
If you produce 1 unit,
you're going to get $5,000.

00:01:22.460 --> 00:01:27.550
So this right over here
is in thousands of dollars

00:01:27.550 --> 00:01:29.885
and this right over here
is in thousands of pounds.

00:01:33.169 --> 00:01:35.460
Just to make sure that we're
consistent with this right

00:01:35.460 --> 00:01:36.410
over here.

00:01:36.410 --> 00:01:37.340
Let's keep going.

00:01:37.340 --> 00:01:41.200
So that was this point, or
when we produce 1,000 pounds,

00:01:41.200 --> 00:01:43.165
we get $5,000.

00:01:43.165 --> 00:01:47.260
If we produce 2,000
pounds, now we're

00:01:47.260 --> 00:01:50.790
talking about our price
is going to be $4.

00:01:50.790 --> 00:01:52.840
Or if we could say
our price is $4

00:01:52.840 --> 00:01:55.840
we can sell 2,000 pounds,
given this demand curve.

00:01:55.840 --> 00:01:57.340
And our total revenue
is going to be

00:01:57.340 --> 00:01:59.900
the area of this
rectangle right over here.

00:01:59.900 --> 00:02:02.050
Height is price,
width is quantity.

00:02:02.050 --> 00:02:03.960
4 times 2 is 8.

00:02:03.960 --> 00:02:06.640
So if I produce
2,000 pounds then

00:02:06.640 --> 00:02:10.169
I will get a total
revenue of $8,000.

00:02:10.169 --> 00:02:12.210
So this is 7 and 1/2,
8 is going to put

00:02:12.210 --> 00:02:16.320
us something right about there.

00:02:16.320 --> 00:02:18.070
And then we can keep going.

00:02:18.070 --> 00:02:22.310
If I produce, or if the
price is $3 per pound,

00:02:22.310 --> 00:02:24.650
I can sell 3,000 pounds.

00:02:24.650 --> 00:02:27.690
My total revenue is this
rectangle right over here,

00:02:27.690 --> 00:02:30.630
$3 times 3 is $9,000.

00:02:30.630 --> 00:02:32.920
So if I produce
3,000 pounds, I can

00:02:32.920 --> 00:02:35.260
get a total revenue of $9,000.

00:02:35.260 --> 00:02:37.990
So right about there.

00:02:37.990 --> 00:02:39.680
And let's keep going.

00:02:39.680 --> 00:02:45.980
If I produce, or if the
price, is $2 per pound,

00:02:45.980 --> 00:02:47.660
I can sell 4,000 pounds.

00:02:47.660 --> 00:02:51.830
My total revenue is $2
times 4, which is $8,000.

00:02:51.830 --> 00:02:54.330
So if I produce
4,000 pounds I can

00:02:54.330 --> 00:02:55.976
get a total revenue of $8,000.

00:02:55.976 --> 00:02:59.660
It should be even with that
one right over there, just

00:02:59.660 --> 00:03:00.850
like that.

00:03:00.850 --> 00:03:13.400
And then if the price is $1 per
pound I can sell 5,000 pounds.

00:03:13.400 --> 00:03:17.870
My total revenue is going
to be $1 times 5, or $5,000.

00:03:17.870 --> 00:03:19.880
So it's going to be
even with this here.

00:03:19.880 --> 00:03:24.560
So if I produce 5,000 units
I can get $5,000 of revenue.

00:03:24.560 --> 00:03:27.700
And if the price
is 0, the market

00:03:27.700 --> 00:03:29.752
will demand 6,000 pounds
per day if it's free.

00:03:29.752 --> 00:03:31.960
But I'm not going to generate
any revenue because I'm

00:03:31.960 --> 00:03:33.940
going to be giving
it away for free.

00:03:33.940 --> 00:03:37.700
So I will not be generating
any revenue in this situation.

00:03:37.700 --> 00:03:40.237
So our total revenue curve,
it looks like-- and if you've

00:03:40.237 --> 00:03:41.820
taken algebra you
would recognize this

00:03:41.820 --> 00:03:48.270
as a downward facing
parabola-- our total revenue

00:03:48.270 --> 00:03:51.380
looks like this.

00:03:51.380 --> 00:03:54.540
It's easier for me to draw
a curve with a dotted line.

00:03:54.540 --> 00:03:58.450
Our total revenue looks
something like that.

00:03:58.450 --> 00:04:00.410
And you can even
solve it algebraically

00:04:00.410 --> 00:04:03.360
to show that it is this
downward facing parabola.

00:04:03.360 --> 00:04:07.120
The formula right over
here of the demand curve,

00:04:07.120 --> 00:04:08.500
its y-intercept is 6.

00:04:08.500 --> 00:04:10.970
So if I wanted to write price
as a function of quantity

00:04:10.970 --> 00:04:16.480
we have price is equal
to 6 minus quantity.

00:04:16.480 --> 00:04:18.980
Or if you wanted to write in
the traditional slope intercept

00:04:18.980 --> 00:04:22.750
form, or mx plus b form-- and
if that doesn't make any sense

00:04:22.750 --> 00:04:25.220
you might want to review some
of our algebra playlist--

00:04:25.220 --> 00:04:28.640
you could write it as p is
equal to negative q plus 6.

00:04:28.640 --> 00:04:30.830
Obviously these are
the same exact thing.

00:04:30.830 --> 00:04:36.010
You have a y-intercept of
six and you have a negative 1

00:04:36.010 --> 00:04:37.230
slope.

00:04:37.230 --> 00:04:40.900
If you increase quantity by
1, you decrease price by 1.

00:04:40.900 --> 00:04:43.630
Or another way to think about
it, if you decrease price by 1

00:04:43.630 --> 00:04:45.820
you increase quantity by 1.

00:04:45.820 --> 00:04:48.340
So that's why you have
a negative 1 slope.

00:04:48.340 --> 00:04:50.570
So this is price is a
function of quantity.

00:04:50.570 --> 00:04:52.080
What is total revenue?

00:04:52.080 --> 00:04:57.870
Well, total revenue is equal
to price times quantity.

00:04:57.870 --> 00:05:00.460
But we can write price as
a function of quantity.

00:05:00.460 --> 00:05:01.410
We did it just now.

00:05:01.410 --> 00:05:02.930
This is what it is.

00:05:02.930 --> 00:05:06.990
So we can rewrite it, or we
could even write it like this,

00:05:06.990 --> 00:05:09.510
we can rewrite the
price part as-- so this

00:05:09.510 --> 00:05:14.280
is going to be equal to negative
q plus 6 times quantity.

00:05:17.040 --> 00:05:19.784
And this is equal
to total revenue.

00:05:19.784 --> 00:05:21.200
And then if you
multiply this out,

00:05:21.200 --> 00:05:24.070
you get total
revenue is equal to q

00:05:24.070 --> 00:05:30.010
times q is negative q
squared plus 6 plus 6q.

00:05:30.010 --> 00:05:31.920
So you might recognize this.

00:05:31.920 --> 00:05:33.820
This is clearly a quadratic.

00:05:33.820 --> 00:05:38.060
Since you have a negative out
front before the second degree

00:05:38.060 --> 00:05:39.920
term right over here,
before the q squared,

00:05:39.920 --> 00:05:42.120
it is a downward
opening parabola.

00:05:42.120 --> 00:05:44.300
So it makes complete sense.

00:05:44.300 --> 00:05:46.500
Now, I'm going to leave
you there in this video.

00:05:46.500 --> 00:05:48.000
Because I'm trying
to make an effort

00:05:48.000 --> 00:05:50.017
not to make my videos too long.

00:05:50.017 --> 00:05:51.600
But in the next video
what we're going

00:05:51.600 --> 00:05:54.540
to think about is, what
is the marginal revenue we

00:05:54.540 --> 00:05:57.560
get for each of
these quantities?

00:05:57.560 --> 00:06:03.610
And just as a review,
marginal revenue

00:06:03.610 --> 00:06:08.820
is equal to change in
total revenue divided

00:06:08.820 --> 00:06:10.770
by change in quantity.

00:06:10.770 --> 00:06:13.220
Or another way to think about
it, the marginal revenue

00:06:13.220 --> 00:06:17.000
at any one of these
quantities is the slope

00:06:17.000 --> 00:06:18.607
of the line tangent
to that point.

00:06:18.607 --> 00:06:20.690
And you really have to do
a little bit of calculus

00:06:20.690 --> 00:06:23.820
in order to actually calculate
slopes of tangent lines.

00:06:23.820 --> 00:06:26.350
But we'll approximate it
with a little bit of algebra.

00:06:26.350 --> 00:06:28.490
But what we essentially want
to do is figure out the slope.

00:06:28.490 --> 00:06:31.031
So if we wanted to figure out
the marginal revenue when we're

00:06:31.031 --> 00:06:34.080
selling 1,000 pounds--
so exactly how much more

00:06:34.080 --> 00:06:37.510
total revenue do we get if
we just barely increase,

00:06:37.510 --> 00:06:40.420
if we just started selling
another millionth of a pound

00:06:40.420 --> 00:06:42.477
of oranges-- what's
going to happen?

00:06:42.477 --> 00:06:44.060
And so what we do
is we're essentially

00:06:44.060 --> 00:06:47.270
trying to figure out the
slope of the tangent line

00:06:47.270 --> 00:06:49.356
at any point.

00:06:49.356 --> 00:06:50.230
And you can see that.

00:06:50.230 --> 00:06:53.820
Because the change
in total revenue

00:06:53.820 --> 00:07:00.750
is this and change in
quantity is that there.

00:07:00.750 --> 00:07:02.975
So we're trying to find
the instantaneous slope

00:07:02.975 --> 00:07:04.600
at that point, or
you could think of it

00:07:04.600 --> 00:07:07.190
as the slope of
the tangent line.

00:07:07.190 --> 00:07:10.840
And we'll continue doing
that in the next video.


Long term supply curve and economic profit

WEBVTT
Kind: captions
Language: en

00:00:00.434 --> 00:00:01.745
Voiceover: We've now thought a lot about

00:00:01.745 --> 00:00:03.139
the orange juice market,

00:00:03.139 --> 00:00:05.012
at least at a firm-specific level

00:00:05.012 --> 00:00:06.211
within the last few videos.

00:00:06.211 --> 00:00:08.736
We talked about what
our average total costs

00:00:08.736 --> 00:00:10.072
and average variable costs

00:00:10.072 --> 00:00:11.996
and marginal costs are,

00:00:11.996 --> 00:00:15.073
if we are running an orange
juice making business.

00:00:15.073 --> 00:00:16.619
Now let's think about what happens

00:00:16.619 --> 00:00:17.877
at the market level.

00:00:17.877 --> 00:00:18.736
We're going to go back

00:00:18.736 --> 00:00:20.076
to some of what we've
thought about in the past

00:00:20.076 --> 00:00:22.848
in terms of just supply and demand curves.

00:00:22.848 --> 00:00:26.080
This is the orange juice,

00:00:26.851 --> 00:00:28.728
orange juice market,

00:00:29.558 --> 00:00:33.713
and let's just draw some
supply and demand curves

00:00:33.713 --> 00:00:34.375
right over here.

00:00:34.375 --> 00:00:36.098
This is going to be,

00:00:36.528 --> 00:00:38.811
this is going to be the price per gallon,

00:00:38.811 --> 00:00:43.875
price per gallon,

00:00:43.875 --> 00:00:46.514
and let's say that this
right over here is $1.

00:00:46.899 --> 00:00:49.689
This right over here is 50 cents,

00:00:50.042 --> 00:00:52.368
and this is 0,

00:00:53.537 --> 00:00:56.140
and let's say that this is the quantity,

00:00:56.140 --> 00:00:57.736
quantity,

00:00:57.736 --> 00:01:00.336
quantity in gallons per week,

00:01:00.336 --> 00:01:02.139
and gallons per week.

00:01:02.139 --> 00:01:03.479
We're going to talk about the entire

00:01:03.479 --> 00:01:04.378
orange juice market,

00:01:04.378 --> 00:01:06.939
so this is going to be in
millions of gallons per week.

00:01:07.246 --> 00:01:13.418
Millions of gallons per week,

00:01:13.956 --> 00:01:15.740
per week.

00:01:16.109 --> 00:01:24.741
That is, let's say this
is 1, 2, 3, 4, 5, and 6.

00:01:24.741 --> 00:01:26.128
Let's just say, and I'm
going to simplify it

00:01:26.128 --> 00:01:28.348
relative to what we saw in the last video.

00:01:28.348 --> 00:01:30.192
Let's just say that the supply curve

00:01:30.192 --> 00:01:31.923
for the orange juice market,

00:01:31.923 --> 00:01:32.964
and I'll be careful this time.

00:01:32.964 --> 00:01:34.907
This is the near-term supply curve,

00:01:34.907 --> 00:01:36.645
or the short-term supply curve,

00:01:36.645 --> 00:01:37.802
looks like,

00:01:37.802 --> 00:01:39.630
looks something like this.

00:01:39.630 --> 00:01:41.754
that is the supply curve.

00:01:41.754 --> 00:01:43.164
This is the entire market.

00:01:43.164 --> 00:01:44.810
These are all of the
orange juice producers.

00:01:44.810 --> 00:01:47.664
So to get them to produce
even that first gallon,

00:01:47.664 --> 00:01:49.277
it looks like they need about 20 cents

00:01:49.277 --> 00:01:50.372
for that first gallon,

00:01:50.372 --> 00:01:51.737
and then each incremental gallon,

00:01:51.737 --> 00:01:52.973
they need more and more money.

00:01:52.973 --> 00:01:55.212
The marginal cost of
that incremental gallon

00:01:55.212 --> 00:01:56.287
and for the market as a whole

00:01:56.287 --> 00:01:57.794
is going higher and higher and higher.

00:01:57.794 --> 00:01:59.367
They have to get oranges from futher away

00:01:59.367 --> 00:02:01.663
and transport them further and further.

00:02:01.663 --> 00:02:03.687
This right over here is the supply curve,

00:02:03.687 --> 00:02:06.160
or you could view it as the marginal cost,

00:02:06.160 --> 00:02:08.540
marginal cost curve.

00:02:08.540 --> 00:02:11.677
Now let's just draw an
arbitrary demand curve here.

00:02:12.138 --> 00:02:13.170
The demand curve,

00:02:13.170 --> 00:02:15.145
let's say it looks something like this.

00:02:15.805 --> 00:02:17.712
Let's say that's our current demand,

00:02:18.142 --> 00:02:20.524
that is our current demand curve,

00:02:20.524 --> 00:02:22.537
and then what I'm going to add to this

00:02:22.875 --> 00:02:26.380
is I'm going to add the
price at which firms,

00:02:26.380 --> 00:02:28.803
the suppliers of the orange juice make

00:02:28.803 --> 00:02:31.229
are neutral with returns
to economic profit,

00:02:31.229 --> 00:02:34.473
or when economic profit is equal to 0.

00:02:34.473 --> 00:02:35.894
Let's say right over here,

00:02:35.894 --> 00:02:38.221
which happens to be our
current equilibrium price,

00:02:38.667 --> 00:02:40.226
this is the price,

00:02:40.226 --> 00:02:41.975
so 50 cents per gallon,

00:02:41.975 --> 00:02:45.076
this is the price at which
economic profit is 0.

00:02:45.076 --> 00:02:50.999
so I'll just write economic
profit is equal to 0.

00:02:50.999 --> 00:02:51.999
I want to remind you,

00:02:51.999 --> 00:02:53.939
economic profit being 0

00:02:53.939 --> 00:02:56.204
does not mean that the
accounting profit is 0.

00:02:56.204 --> 00:02:58.526
People could be making
money at this price,

00:02:58.526 --> 00:03:00.104
it just says that they're neutral

00:03:00.104 --> 00:03:02.127
whether or not they should
be doing this business.

00:03:02.127 --> 00:03:03.746
That the amount of money
that they're making

00:03:03.746 --> 00:03:06.277
is roughly comparable to
their opportunity cost

00:03:06.277 --> 00:03:09.145
to be doing other things.

00:03:09.145 --> 00:03:11.113
When I say economic profit is 0,

00:03:11.113 --> 00:03:13.028
sometimes that's called the normal profit,

00:03:13.028 --> 00:03:14.686
when economic profit is 0.

00:03:14.686 --> 00:03:16.415
This is the price at
which people are neutral

00:03:16.415 --> 00:03:18.281
between shutting down and starting up

00:03:18.281 --> 00:03:18.841
their business.

00:03:18.841 --> 00:03:20.555
If you have positive economic profit,

00:03:20.555 --> 00:03:21.968
that means that more people

00:03:21.968 --> 00:03:23.345
will want to go into this market

00:03:23.345 --> 00:03:25.130
and if you have negative economic profit,

00:03:25.130 --> 00:03:27.076
that means that people
are going to want to

00:03:27.076 --> 00:03:29.326
essentially use up their fixed expenses,

00:03:29.326 --> 00:03:30.071
their equipment

00:03:30.071 --> 00:03:31.659
and any labor contracts they might have

00:03:31.659 --> 00:03:33.209
and then go out of business.

00:03:33.209 --> 00:03:34.561
This is where,

00:03:34.561 --> 00:03:36.555
this is that point right over there.

00:03:36.555 --> 00:03:38.848
Now let's think of a couple of scenarios.

00:03:38.848 --> 00:03:41.859
Let's say a research paper comes out

00:03:41.859 --> 00:03:43.377
and in that research paper,

00:03:43.377 --> 00:03:44.169
for whatever reason,

00:03:44.169 --> 00:03:45.405
we don't know if it
was well-done research.

00:03:45.405 --> 00:03:47.325
It says oranges are bad for you,

00:03:47.325 --> 00:03:48.708
for whatever reason.

00:03:48.708 --> 00:03:50.298
When the research paper comes out

00:03:50.298 --> 00:03:51.725
and says oranges are bad for you,

00:03:51.725 --> 00:03:53.144
what happens to demand?

00:03:53.144 --> 00:03:54.205
Well, at any given price,

00:03:54.205 --> 00:03:56.153
demand will go down.

00:03:56.153 --> 00:03:56.980
At any given price,

00:03:56.980 --> 00:03:58.165
demand will go down,

00:03:58.165 --> 00:04:00.155
and the new demand curve might look

00:04:00.155 --> 00:04:01.769
something like this.

00:04:01.769 --> 00:04:03.168
Now, in the near term,

00:04:03.168 --> 00:04:04.944
we have a new equilibrium price,

00:04:04.944 --> 00:04:06.741
and we have a new equilibrium quanitity.

00:04:06.741 --> 00:04:08.552
This was the old equilibrium price,

00:04:08.552 --> 00:04:10.020
the way I set that up,

00:04:10.020 --> 00:04:11.557
it just happened to be the price

00:04:11.557 --> 00:04:13.261
at which economic profit is 0,

00:04:13.261 --> 00:04:15.409
and this was our old equilibrium quantity,

00:04:15.409 --> 00:04:17.541
a little over 3 million gallons a week.

00:04:17.541 --> 00:04:20.164
Now we have a new,
lower equilibrium price.

00:04:20.164 --> 00:04:22.229
We have a new lower equilibrium price.

00:04:22.229 --> 00:04:25.540
I don't know, this looks
about 40 cents per gallon,

00:04:25.540 --> 00:04:28.853
and we have a new lower
equilibrium quantity.

00:04:28.853 --> 00:04:31.040
Now, what happens at this price?

00:04:31.040 --> 00:04:31.950
Obviously in the near term,

00:04:31.950 --> 00:04:33.330
people are willing to produce there

00:04:33.330 --> 00:04:36.140
because that's where
their marginal cost is,

00:04:36.140 --> 00:04:38.030
so, as we saw in multiple videos

00:04:38.030 --> 00:04:40.074
that someone's willing to produce

00:04:40.074 --> 00:04:42.272
when the price is equal
to their marginal cost,

00:04:42.272 --> 00:04:44.187
or they're willing to
produce a quantity up to

00:04:44.187 --> 00:04:46.550
when their marginal cost is equal to

00:04:46.550 --> 00:04:47.676
the marginal revenue,

00:04:47.676 --> 00:04:49.966
or the price that they're going to get.

00:04:49.966 --> 00:04:51.155
But, I just said

00:04:51.155 --> 00:04:52.733
that they need to be
getting 50 cents a gallon

00:04:52.733 --> 00:04:54.732
in order to make an economic profit.

00:04:54.732 --> 00:04:55.671
Now if they get, I don't know,

00:04:55.671 --> 00:04:57.508
this looks like about 40 cents a gallon,

00:04:57.508 --> 00:05:00.118
they're going to be
having an economic loss.

00:05:00.118 --> 00:05:01.853
So no profit.

00:05:02.422 --> 00:05:03.840
No profit there.

00:05:04.208 --> 00:05:05.875
If there's no profit there,

00:05:05.875 --> 00:05:07.905
it really doesn't make
sense for them to continue,

00:05:07.905 --> 00:05:09.603
or at least it doesn't
make sense for all of them

00:05:09.603 --> 00:05:11.687
to continue in that business.

00:05:11.687 --> 00:05:15.183
What's going to happen is that over time,

00:05:15.183 --> 00:05:17.044
it will make sense for
them in the near term

00:05:17.044 --> 00:05:18.534
to produce, to use up,

00:05:18.534 --> 00:05:19.829
they've already put in their cost

00:05:19.829 --> 00:05:20.671
for their equipment

00:05:20.671 --> 00:05:22.959
and maybe labor contracts
and whatever else.

00:05:22.959 --> 00:05:25.535
But over time, when prices are this low,

00:05:25.535 --> 00:05:27.530
as people use up their equipment,

00:05:27.530 --> 00:05:29.689
there's no incentive for
them to buy new equipment.

00:05:29.689 --> 00:05:30.869
As the labor contracts expire,

00:05:30.869 --> 00:05:32.367
there's no incentive for them to renew

00:05:32.367 --> 00:05:33.190
the labor contract.

00:05:33.190 --> 00:05:34.512
As those things expire,

00:05:34.512 --> 00:05:36.677
they're just going to
shut down the business.

00:05:36.677 --> 00:05:38.848
So as they shut down the business,

00:05:38.848 --> 00:05:40.430
as they shut down the business,

00:05:40.430 --> 00:05:41.716
two things will happen.

00:05:41.716 --> 00:05:43.514
Quantity produced in
the market will go down,

00:05:43.514 --> 00:05:45.019
and the price will go up.

00:05:45.019 --> 00:05:48.117
We will essentially move along this curve

00:05:48.117 --> 00:05:49.631
until we get to this point.

00:05:49.631 --> 00:05:50.451
That's the point,

00:05:50.451 --> 00:05:52.875
once the price is at 50
cents a gallon again,

00:05:52.875 --> 00:05:54.205
then people are neutral now.

00:05:54.205 --> 00:05:56.700
They're not going to
shut down their firms.

00:05:56.700 --> 00:06:00.039
We're going to get to
this new equilibrium price

00:06:00.039 --> 00:06:02.935
and equilibrium quantity in the long term,

00:06:02.935 --> 00:06:04.373
in the long term.

00:06:04.373 --> 00:06:06.373
Now let's think of another situation.

00:06:06.373 --> 00:06:07.835
Instead of a newspaper report

00:06:07.835 --> 00:06:09.204
saying that oranges are bad,

00:06:09.204 --> 00:06:10.828
let's say a newspaper report comes out

00:06:10.828 --> 00:06:12.680
saying oranges are very good.

00:06:12.680 --> 00:06:14.151
They make you live longer.

00:06:14.151 --> 00:06:16.113
They are the best thing that you can have.

00:06:16.113 --> 00:06:18.199
Well, then, at any given price,

00:06:18.199 --> 00:06:20.128
you're going to have more demand,

00:06:20.128 --> 00:06:21.690
and so you'd have a demand curve

00:06:21.690 --> 00:06:23.815
that looks something like that.

00:06:24.029 --> 00:06:26.733
Then, you'd have a higher
equilibrium quantity,

00:06:26.733 --> 00:06:29.331
and a higher equilibrium price.

00:06:29.331 --> 00:06:30.929
And, people are going to be making,

00:06:30.929 --> 00:06:32.381
since the price is higher,

00:06:32.381 --> 00:06:35.751
than the price at which
the economic profit is 0,

00:06:35.751 --> 00:06:36.737
people are going to be making

00:06:36.737 --> 00:06:38.583
very positive economic profits,

00:06:38.583 --> 00:06:41.093
which means that there's
a strong incentive,

00:06:41.093 --> 00:06:42.112
that people are neutral between

00:06:42.112 --> 00:06:43.299
shutting down the business

00:06:43.299 --> 00:06:44.535
or starting up the business.

00:06:44.535 --> 00:06:45.410
At that point,

00:06:45.410 --> 00:06:48.378
a lot of people are strongly motivated

00:06:48.378 --> 00:06:49.963
to enter into the business.

00:06:49.963 --> 00:06:51.223
What's going to happen is,

00:06:51.223 --> 00:06:52.529
more and more people are going to

00:06:52.529 --> 00:06:54.100
get more and more equipment,

00:06:54.100 --> 00:06:55.154
hire more and more people,

00:06:55.154 --> 00:06:56.149
and as they do that,

00:06:56.149 --> 00:06:57.858
quantity is going to go up,

00:06:57.858 --> 00:07:00.873
and the price is going to go down.

00:07:00.873 --> 00:07:02.187
And so, over the long term,

00:07:02.187 --> 00:07:04.144
you're going to shift back to this line.

00:07:04.144 --> 00:07:05.731
Once the price gets down to that,

00:07:05.731 --> 00:07:08.039
then there's no reason
for more people to enter.

00:07:08.039 --> 00:07:09.852
They're kind of neutral about it.

00:07:09.852 --> 00:07:12.064
What you see happening
is in the short term,

00:07:12.064 --> 00:07:13.843
you would look at where the demand curve

00:07:13.843 --> 00:07:16.100
intersects with the
short-term supply curve,

00:07:16.100 --> 00:07:17.342
but in the long term,

00:07:17.342 --> 00:07:19.245
you care where it intersects with this

00:07:19.245 --> 00:07:20.736
kind of horizontal line,

00:07:20.736 --> 00:07:24.687
which is the price at
which economic profit is 0.

00:07:24.687 --> 00:07:26.618
That's why you will hear,

00:07:26.618 --> 00:07:27.805
and this is kind of a more precise way

00:07:27.805 --> 00:07:29.383
of thinking about it than we've done

00:07:29.383 --> 00:07:30.533
in the previous videos,

00:07:30.533 --> 00:07:32.740
this horizontal line right over here,

00:07:32.740 --> 00:07:35.183
you could view this as the long run,

00:07:35.183 --> 00:07:37.182
the long run,

00:07:37.182 --> 00:07:39.936
long run supply curve,

00:07:39.936 --> 00:07:41.526
long run supply curve.

00:07:41.526 --> 00:07:43.158
That says look,

00:07:43.158 --> 00:07:45.421
pretty much whatever
we will always produce

00:07:45.421 --> 00:07:46.813
over the long run,

00:07:46.813 --> 00:07:48.638
we will always produce whatever supply

00:07:48.638 --> 00:07:50.070
is kind of necessary,

00:07:50.070 --> 00:07:51.806
given that people are neutral

00:07:51.806 --> 00:07:54.013
when it comes to economic profit.

00:07:54.013 --> 00:07:55.203
You go down here,

00:07:55.203 --> 00:07:57.547
yes, people will try to
use up their fixed costs,

00:07:57.547 --> 00:07:59.686
but once they used up their fixed costs,

00:07:59.686 --> 00:08:01.615
no incentive for them to stay in business,

00:08:01.615 --> 00:08:03.325
then some of them go out of business.

00:08:03.325 --> 00:08:03.945
Price goes up,

00:08:03.945 --> 00:08:04.691
quantity goes down.

00:08:04.691 --> 00:08:07.561
You get back to the long run supply curve,

00:08:07.561 --> 00:08:09.533
where that intersects
with the demand curve,

00:08:09.533 --> 00:08:10.942
or if the opposite happens.

00:08:10.942 --> 00:08:12.039
A lot of economic profit,

00:08:12.039 --> 00:08:13.270
a lot of entrance into the market,

00:08:13.270 --> 00:08:15.363
price goes down, supply goes up.

00:08:15.363 --> 00:08:18.394
You get back to the long run supply curve.

00:08:18.394 --> 00:08:19.195
I guess you could say,

00:08:19.195 --> 00:08:21.196
you could go back to
where the new demand curve

00:08:21.196 --> 00:08:24.668
is intersecting the long run supply curve.