Rent Control and Deadweight Loss

WEBVTT
Kind: captions
Language: en

00:00:27.150 --> 00:00:31.859
so this is 1 million Square feet 2 million Square feet 3 million square feet and so on and

00:00:31.960 --> 00:00:36.390
Like we've done in the last few videos when we've been talking about consumer and producer surplus

00:00:36.610 --> 00:00:39.479
I want to view the demand curve right over here

00:00:39.480 --> 00:00:41.520
I want to view that as a marginal

00:00:42.010 --> 00:00:47.219
Benefit curve, so for this first the very first view square feet right here

00:00:47.219 --> 00:00:54.149
How much benefit is it for the renters the consumers well It's a huge benefit for them. It's worth over $4 per square foot

00:00:54.149 --> 00:00:55.770
That's not necessarily what they're going to pay for it

00:00:55.770 --> 00:01:00.809
but that's what it's worth to them, and I'm going to view these the supply curve as a

00:01:01.989 --> 00:01:09.719
Marginal cost curve or the opportunity cost for producing that extra incremental unit so right down here when we have very few square feet

00:01:10.000 --> 00:01:13.589
[maybe] the land is cheap or all the cheapest land is available

00:01:13.600 --> 00:01:18.479
you just start or the land that's most suitable for building and so the cost the

00:01:18.670 --> 00:01:22.769
Opportunity cost for the suppliers of that those first few square feet are very low

00:01:22.770 --> 00:01:26.610
And so it makes sense that they will supply it because they'll produce it their cost of producing

00:01:26.610 --> 00:01:34.349
It is very low the benefit to the consumers is very high so if the price if the price is anywhere between these two things

00:01:34.630 --> 00:01:40.710
The consumer will get some surplus of the prices let's say there that this consumer will get some surplus and the producer

00:01:40.960 --> 00:01:43.619
Will get some surplus right over there?

00:01:43.619 --> 00:01:49.109
And so the market as a whole will be getting a ton of surplus depending on how it is divided now

00:01:49.110 --> 00:01:51.959
We haven't talked about where that price is just yet although

00:01:51.960 --> 00:01:53.960
I think you see where this is going, [so]

00:01:53.979 --> 00:02:01.258
[the] Producers will keep producing more [and] more units as long as the marginal benefit [is] higher than the marginal cost there is this

00:02:01.630 --> 00:02:08.160
Surplus there that can be divvied up between the consumers and and the suppliers depending on where the price is

00:02:08.500 --> 00:02:13.259
Marginal benefit higher than Marginal cost marginal benefit higher than marginal cost [all] the way up to that point

00:02:13.530 --> 00:02:19.050
All the way until [we] get to all the way until we get to three million square feet per month

00:02:19.390 --> 00:02:23.069
After that, it doesn't make [sense] if so, there's some builder that says hey

00:02:23.069 --> 00:02:26.039
Let me add some more square feet to the market. This is what it cost them

00:02:26.040 --> 00:02:30.780
It's going to cost them over three dollars like well people aren't [even] going to get three dollars of benefit from those

00:02:30.970 --> 00:02:32.760
Incremental square feet so no one's going to get it

00:02:32.760 --> 00:02:34.760
So there's no reason [for] anyone to build

00:02:35.080 --> 00:02:41.279
Beyond that point and so that's why this ends up being the equilibrium quantity and the price at which that happens

00:02:41.680 --> 00:02:43.050
the price at which that happens

00:02:43.050 --> 00:02:48.239
[and] I rigged this so we get nice clean numbers is three dollars per square foot per month

00:02:48.489 --> 00:02:55.259
Now three dollars per square foot per month is a pretty pricey rent if you have a thousand square foot apartment a thousand square foot

00:02:55.260 --> 00:02:57.260
That's my old apartment. That's like a two-bedroom two-bath

00:02:57.730 --> 00:03:02.640
Apartment, that's Roughly a three thousand dollars a month for that apartment. So that's pretty pricey

00:03:02.640 --> 00:03:07.649
this is the type of rent that you would see in someplace like San Francisco and let's say that the

00:03:09.190 --> 00:03:13.589
[Mayor] does not like this is this is unaffordable people aren't able to live in our city

00:03:13.590 --> 00:03:17.820
And so they they they institute rent control?

00:03:19.239 --> 00:03:25.619
Rent control, which is essentially a price ceiling they say that the rent per square foot cannot be above a certain amount?

00:03:25.690 --> 00:03:30.419
That's not normally how rent control is instituted, but just for the sake of our model

00:03:30.420 --> 00:03:35.190
Let's view it that way normally they [say] you can't increase rent beyond a certain amount, but let's say that they say rent control

00:03:35.190 --> 00:03:41.910
they essentially put a price ceiling on what rent can be charged, so [they] put a price ceiling a

00:03:42.519 --> 00:03:46.199
price ceiling or a rent ceiling a price ceiling at

00:03:46.720 --> 00:03:48.720
[$2] per square foot per month

00:03:49.269 --> 00:03:51.269
[$2] per square foot

00:03:51.880 --> 00:03:53.470
Square foot

00:03:53.470 --> 00:03:55.030
per month

00:03:55.030 --> 00:04:01.380
So let's [think] about what's going to happen and also let's think about what's happening to the total surplus the producer and the consumer surplus

00:04:01.780 --> 00:04:05.009
So before well actually before we even think about the rent control

00:04:05.010 --> 00:04:08.399
Let's think about what the total surplus is you had the consumer surplus?

00:04:08.890 --> 00:04:15.390
So if this is the price right over here you had a consumer surplus of this area right over here

00:04:15.430 --> 00:04:18.120
[and] I don't know if this if this right over here

00:04:18.120 --> 00:04:21.149
Let's call this four and [a] half if this is four point five

00:04:21.430 --> 00:04:24.930
Then this side of the triangle right over here is going to be one point five

00:04:25.510 --> 00:04:29.379
That is one point five and this right over here is three million?

00:04:30.050 --> 00:04:33.040
[three] times 1.5 is four point five

00:04:33.590 --> 00:04:35.210
four point five

00:04:35.210 --> 00:04:40.359
Million and then we divide by [two] that if you just multiply these year the area of the whole rectangle you divide by two

00:04:41.030 --> 00:04:44.859
You get two point two five million is [that] right?

00:04:44.860 --> 00:04:49.030
Yes 1.5, or times one half of three that gives you two point two five million

00:04:49.790 --> 00:04:51.790
million Dollars

00:04:51.919 --> 00:04:56.829
So in the equilibrium if you just let the [market] be before the rent control and this

00:04:56.960 --> 00:05:02.139
Equilibrium price and equilibrium quantity the consumer surplus is two point two five million dollars

00:05:02.139 --> 00:05:06.939
That's how much more benefit the consumers are getting collectively versus what they have to pay [for]

00:05:07.370 --> 00:05:11.260
Living in that living in those houses and then the producer surplus

00:05:11.660 --> 00:05:17.739
The producer Surplus is this entire area right over here, and if we assume let's say that this right [over] here

00:05:17.750 --> 00:05:21.369
And it doesn't look [like] it, but to make the math easy let's say that that is

00:05:21.979 --> 00:05:23.210
$0.50

00:05:23.210 --> 00:05:27.940
Let's say that is [$0.50] so this whole side right [over] here is going to be two dollars [fifty]

00:05:28.400 --> 00:05:34.329
So this is going to be two point five right over here this length right over here is still three so it's going to be

00:05:34.330 --> 00:05:37.150
two point five times three times 1/2

00:05:37.490 --> 00:05:39.729
two point five times three would give you the area of the whole rectangle

00:05:39.800 --> 00:05:45.370
You have to multiply by half to get the area of that triangle, so two times [three] so let me just write this down

00:05:45.590 --> 00:05:47.829
So it's two point five times

00:05:47.900 --> 00:05:54.220
Three is that is seven point five 25 times 3 is 75 and then 75

00:05:54.919 --> 00:05:56.919
75 divided by two

00:05:57.530 --> 00:06:03.459
75 divided by two gets you what it's Thirty Seven Thirty seven point five

00:06:03.460 --> 00:06:09.910
So this is going to be three point seven three point seven five so this the producer surplus is

00:06:10.460 --> 00:06:12.460
3.7

00:06:12.710 --> 00:06:16.359
3.75 and since this is in Millions. It's three point Seven five million

00:06:16.910 --> 00:06:20.049
dollars and so that's the total value that the

00:06:20.150 --> 00:06:27.459
producers are getting above and beyond their costs of production and so the total surplus the total benefit that the market as a whole if

00:06:27.460 --> 00:06:28.520
you add the

00:06:28.520 --> 00:06:30.880
Consumers and the [producers] is [2.25]

00:06:31.280 --> 00:06:37.750
Plus three point seven five so that gets us to what that gets us [to] six million dollars of total surplus

00:06:38.300 --> 00:06:42.700
So there are six million dollars six million total

00:06:43.550 --> 00:06:51.190
total surplus, so that's good because it's we're at an efficient price efficient clear equilibrium price and

00:06:52.370 --> 00:06:58.419
Production we're able to produce all this total surplus now. Let's go back to the rent control situation. We're instituting

00:06:59.210 --> 00:07:02.139
Instituting a price ceiling of [$2] per square foot

00:07:02.600 --> 00:07:08.229
So the price is by government mandate being set at $2 per square foot

00:07:09.080 --> 00:07:14.830
$2 per square foot right over there now if the price is set for $2 per square foot

00:07:14.830 --> 00:07:19.690
What is the quantity going to be how much rent is going to supply if they can only get $2 per square foot?

00:07:19.690 --> 00:07:21.190
Maybe some of the landlord's say you know

00:07:21.190 --> 00:07:23.380
I'll just break [down] this wall and expand my [own] apartment

00:07:23.380 --> 00:07:28.029
Or I'm not going to rent these out as much or maybe people who are renting out spare bedrooms say oh

00:07:28.030 --> 00:07:30.309
I'm not going to rent out those pair of bedrooms anymore

00:07:30.310 --> 00:07:35.109
I'm just going [to] keep them as a guestroom [so] the total quantity goes down the total quantity

00:07:35.330 --> 00:07:38.199
Goes down to 2 million Square feet a month now

00:07:38.200 --> 00:07:41.590
this is an interesting situation because it 2 million square feet a month at

00:07:41.840 --> 00:07:46.090
2 million Square feet of month the Marginal Benefit the Marginal Benefit is

00:07:46.190 --> 00:07:49.809
much higher than the marginal cost the marginal benefit of an extra unit is

00:07:50.390 --> 00:07:53.410
over $3 [the] marginal cost of an extra unit is

00:07:54.080 --> 00:07:59.650
Right around $2 so in a in an open market and efficient market in an unfettered market people say well

00:07:59.650 --> 00:08:04.480
I'll just build more [units] because people are going to get benefit from them and we can have a price in between and we'll both

00:08:04.480 --> 00:08:09.039
Be able to experience some surplus, but now you won't even though. There's this benefit

00:08:09.040 --> 00:08:13.509
That's in excess of $3 because the price can't be higher than $2

00:08:13.510 --> 00:08:16.270
There's no incentive for any of these people to either

00:08:16.730 --> 00:08:20.019
build more units or maybe offer the units that they have off

00:08:20.150 --> 00:08:25.120
Up for sale and actually maybe we shouldn't talk about building this more long run, but even the units that are there

00:08:25.120 --> 00:08:28.870
I won't want to rent my [guestroom] out because I'm like oh, it's [too] much of [that]. You know

00:08:28.870 --> 00:08:33.910
I'm not going to get my I'm not going to get my marginal cost my marginal cost here is

00:08:34.160 --> 00:08:39.160
Over $2 and all I'm allowed [to] get is $2 so I don't want to offer that extra unit

00:08:39.650 --> 00:08:41.450
So what happens in this situation?

00:08:41.450 --> 00:08:46.239
when the price is set right over here when the price is said right over here, the

00:08:46.430 --> 00:08:52.479
Consumers who happen to be able to rent at this price? Who are able to get these first two million square feet per month?

00:08:52.480 --> 00:08:54.480
they get an even larger [for]

00:08:54.610 --> 00:09:01.000
Those those at least for those two million square feet [their] consumer surplus is this thing right over here is

00:09:01.250 --> 00:09:04.119
This thing right [over] there and the producer surplus

00:09:05.000 --> 00:09:08.799
Unambiguously shrinks the producer surplus is this stuff right over here?

00:09:08.899 --> 00:09:15.189
But you see that the total surplus is now smaller than the total surplus was when we had an unfettered market

00:09:15.190 --> 00:09:20.140
We no longer are able to access this part right over here of the surplus

00:09:20.329 --> 00:09:27.549
So this right over [here] you could view this as lost lost benefit to society benefit above the cost

00:09:27.550 --> 00:09:35.469
This is lost surplus, and we call this in economic terms. We call this right over here the deadweight loss the deadweight

00:09:36.230 --> 00:09:37.220
weight Loss

00:09:37.220 --> 00:09:42.339
this is benefit to the market that could have gone to either the consumers or the

00:09:42.649 --> 00:09:48.129
Producers that somehow was taken away from this market because this market was made less efficient by [this]

00:09:48.440 --> 00:09:52.570
Artificial price ceiling right over here, and you [can] measure the Deadweight Loss once again

00:09:52.570 --> 00:09:59.589
It's only it's the area of this triangle right over here, [and] so if you say if you say this right over here

00:09:59.589 --> 00:10:05.049
So this this length right over here is clearly [just] [1] that's [1] and if we say that this height

00:10:05.540 --> 00:10:10.120
This height right over here. It looks like it is this is about [1] and [1/2]

00:10:10.640 --> 00:10:12.260
This is about 1 and 1/2

00:10:12.260 --> 00:10:18.699
Then the area of this triangle this white triangle right over here the deadweight loss let me write over here the deadweight loss is going

00:10:18.699 --> 00:10:23.109
To be equal to 1 times 1.5 times 1.5

00:10:23.930 --> 00:10:27.909
Times 1/2 right 1 point 1 Time 1 times 1.5

00:10:27.910 --> 00:10:33.490
Is double the area of the triangle you multiply times 1/2 to get the area so that becomes 1/2 times?

00:10:34.610 --> 00:10:40.719
1.5, which is 0.75 so that gives us a [dead] [lot], but it's point 7 5 million so it's

00:10:43.100 --> 00:10:45.399
[750,000] dollars, [so] this area right over here

00:10:47.420 --> 00:10:52.420
$750,000 which is lost to the market so now the total surplus is going to be

00:10:53.120 --> 00:11:00.640
750,000 dollars less than the 6 million dollars so because of that rent control it'll now go down to five hundred

00:11:00.769 --> 00:11:03.219
Five point two five million, I took

00:11:04.069 --> 00:11:10.368
750,000 out of this so it might have benefited the renters who happened to who are able to get apartments?

00:11:10.369 --> 00:11:15.349
[it] won't be a benefit the renters who now that they're not going to be able find an apartment it

00:11:15.720 --> 00:11:18.679
unambiguously reduced the Producer Surplus and

00:11:19.079 --> 00:11:25.339
It reduced the total surplus the total amount of benefit that the market as a whole was getting


Producer surplus

WEBVTT
Kind: captions
Language: en

00:00:00.747 --> 00:00:02.864
We have now talked a lot about the demand curve

00:00:02.864 --> 00:00:04.842
and the consumer surplus;

00:00:04.842 --> 00:00:06.048
now let's look at the other side.

00:00:06.048 --> 00:00:08.911
Let's think about the supply curve

00:00:08.911 --> 00:00:10.511
and you could imagine that there might be

00:00:10.511 --> 00:00:13.025
something called the producer surplus.

00:00:13.025 --> 00:00:15.513
So let's say that this is price axis,

00:00:15.513 --> 00:00:17.823
this is the quantity axis

00:00:17.823 --> 00:00:23.741
and let's say that we are running some type of a berry farm

00:00:23.741 --> 00:00:26.492
and this is our supply curve.

00:00:26.492 --> 00:00:34.010
That is the supply curve and this is our demand curve.

00:00:34.010 --> 00:00:36.790
So that is the demand

00:00:36.790 --> 00:00:39.380
and just like what we did to the supply curve,

00:00:39.380 --> 00:00:41.510
for the demand curve, now instead of thinking of a price and

00:00:41.510 --> 00:00:44.279
think about how much quantity would be supplied,

00:00:44.279 --> 00:00:47.060
let's think about a given quantity and think about what price

00:00:47.060 --> 00:00:49.294
would it have to be in order for the producers to produce

00:00:49.294 --> 00:00:52.082
that quantity.

00:00:52.082 --> 00:00:53.673
And let's say that this quantity right over here, this is

00:00:53.673 --> 00:00:58.005
in thousands of pounds of berries, thousands of pounds.

00:00:58.005 --> 00:01:02.081
So this is 1 thousand pounds, 2 thousand pounds, 3 thousand

00:01:02.081 --> 00:01:06.478
pounds, 4 thousand pounds, and 5 thousand pounds.

00:01:06.478 --> 00:01:10.276
And let's say this price right over here is 1 dollar per pound,

00:01:10.276 --> 00:01:16.148
$2, $3, $4, maybe I could make it more even,

00:01:16.148 --> 00:01:22.977
so this is $3, this is $4, this is $5 per pound.

00:01:22.977 --> 00:01:27.897
Let me write this all in per pound.

00:01:27.897 --> 00:01:32.382
So let's say that we want the suppliers to produce

00:01:32.382 --> 00:01:39.062
1 thousand pounds of berries, so this is we want them to

00:01:39.062 --> 00:01:40.531
produce 1 thousand pounds of berries,

00:01:40.531 --> 00:01:42.857
What does the price have to be for them to produce

00:01:42.857 --> 00:01:47.908
1 thousand pounds of berries. Well think of it from the suppliers

00:01:47.908 --> 00:01:50.878
from the berry farmers' point of view.  If they are going

00:01:50.878 --> 00:01:53.362
to produce 1 thousand pounds of berries. in order for them

00:01:53.362 --> 00:01:56.142
to produce it, in order to convince them produce it,

00:01:56.142 --> 00:01:59.913
they have to get at minimum as much as they would get

00:01:59.913 --> 00:02:04.395
using the same resources to produce something else.

00:02:04.395 --> 00:02:08.307
So if they could get a dollar per pound or equivalent in dollars

00:02:08.307 --> 00:02:10.975
of a dollar per pound for those first thousand pounds,

00:02:10.975 --> 00:02:14.177
so about a thousand dollars. If they could get that by using their

00:02:14.177 --> 00:02:19.465
land for an apple orchard or using it to graze  or maybe renting

00:02:19.465 --> 00:02:22.676
out the land to someone else, that's the minimum you would

00:02:22.676 --> 00:02:23.978
have to pay them. Because if you pay them less than that

00:02:23.978 --> 00:02:27.916
they would go do the other thing. They would go and rent

00:02:27.916 --> 00:02:31.252
their land out or they will allow their land for grazing.

00:02:31.252 --> 00:02:34.353
So you would have to pay them the opportunity cost

00:02:34.353 --> 00:02:37.867
for them to produce a thousand pounds. So the opportunity

00:02:37.867 --> 00:02:41.502
cost for them to producing a thousand pounds would be right

00:02:41.502 --> 00:02:44.820
over there. And this is on average first thousand pounds

00:02:44.820 --> 00:02:47.421
you could also think that the very first pound, the opportunity

00:02:47.421 --> 00:02:51.000
cost would be right over there, and the next pound would be right

00:02:51.000 --> 00:02:53.507
after that. The five hundred pound would be there,

00:02:53.507 --> 00:02:56.071
the thousand pound would right be there. or you could say

00:02:56.071 --> 00:03:00.424
the first thousand pound on average would be right over there.

00:03:00.424 --> 00:03:03.333
Now let's say that we wanted them to produce another

00:03:03.333 --> 00:03:06.916
thousand pounds. So we want the market or this entire farm

00:03:06.916 --> 00:03:10.137
to produce or maybe it's multiple farms to produce a total

00:03:10.137 --> 00:03:12.607
of two thousand pounds. What would we have to do?

00:03:12.607 --> 00:03:17.233
Well, same exact thing. We kind of assuming the market

00:03:17.233 --> 00:03:20.699
is already producing that first thousand pounds. So now we

00:03:20.699 --> 00:03:21.199
would have to think about what are they giving up to

00:03:21.199 --> 00:03:25.634
produce that next thousand pounds. And now we would

00:03:25.634 --> 00:03:28.196
assume that for that first thousand pounds, they would have

00:03:28.196 --> 00:03:32.344
used the land and the inputs that are most suitable

00:03:32.344 --> 00:03:39.080
so this is the most suitable resources. So we are talking

00:03:39.080 --> 00:03:41.576
about the labour that really knows how to grow berries.

00:03:41.576 --> 00:03:44.478
The land where the berries are the best grown and maybe

00:03:44.478 --> 00:03:46.907
they are really close to transportation networks so it's much

00:03:46.907 --> 00:03:50.216
cheaper to produce and ship from there. But now if we want

00:03:50.216 --> 00:03:52.796
another two thousand pounds of berries at this time period

00:03:52.796 --> 00:03:58.244
and maybe this per year if we want another thousand pounds.

00:03:58.244 --> 00:04:01.428
They are now going to less suitable resources,

00:04:01.428 --> 00:04:04.499
maybe the land is slightly further away from the transportation resources,

00:04:04.499 --> 00:04:06.697
they are now going to have labours that are slightly less

00:04:06.697 --> 00:04:09.813
efficient, they are going have to take land away from that.

00:04:09.813 --> 00:04:12.701
might have been slightly more suitable for other things.

00:04:12.701 --> 00:04:16.213
So now the opportunity cost for these growers for the next thousand pounds

00:04:16.213 --> 00:04:18.645
is going to be slightly higher.

00:04:18.645 --> 00:04:21.435
So their opportunity cost is going to be like that on average

00:04:21.435 --> 00:04:27.076
for the next thousand pounds. You could that the opportunity cost for the one thousand pounds will be right over there

00:04:27.076 --> 00:04:29.712
for the two thousand pounds would be right over there. But

00:04:29.712 --> 00:04:34.208
on average for the two thousand pounds, this is their opportunity cost

00:04:34.208 --> 00:04:37.908
now, same thing, the next thousand pounds after that If we

00:04:37.908 --> 00:04:41.482
want to get the market, if we want the whole supply be three thousand pounds

00:04:41.482 --> 00:04:44.064
they would have to produce, they would have to get that

00:04:44.064 --> 00:04:47.948
their opportunity across that incremental thousand pounds

00:04:47.948 --> 00:04:50.698
that opportunity cost of that incremental thousand pounds.

00:04:50.698 --> 00:04:55.360
So view it as this way, the supply curve no longer and it is

00:04:55.360 --> 00:04:57.929
the same exact curve, before we used to say, oh if we want

00:04:57.929 --> 00:05:02.299
how much would people produce if the price were 3 dollars.

00:05:02.299 --> 00:05:05.247
Oh they produce 3 thousand pounds, now we are looking at

00:05:05.247 --> 00:05:08.683
the other way, we are saying if we want the suppliers to

00:05:08.683 --> 00:05:12.462
produce 3 thousand pounds, what would the price actually

00:05:12.462 --> 00:05:16.599
have to be. Now with that out of the way, now we can think

00:05:16.599 --> 00:05:19.858
about the supply curve is really a opportunity cost curve

00:05:19.858 --> 00:05:23.514
for the suppliers. And let's say that this is supply and the

00:05:23.514 --> 00:05:26.742
demand, and then this would be the actual price which

00:05:26.742 --> 00:05:29.397
supply equals demand right over there so let's

00:05:29.397 --> 00:05:32.448
just say that is the market price. So what's going on

00:05:32.448 --> 00:05:35.201
over here, all of the suppliers, so this is the price

00:05:35.201 --> 00:05:37.065
here let's just for making the math simple, let's just say

00:05:37.065 --> 00:05:41.114
that price here is 4 dollars and the quantity demanded

00:05:41.114 --> 00:05:44.745
and the quantity supplied here is 4 thousand pounds. What's going on

00:05:44.745 --> 00:05:48.333
here, the very first 4 thousandth pound produced by the

00:05:48.333 --> 00:05:50.714
suppliers, the opportunity cost for them to produce it

00:05:50.714 --> 00:05:52.326
would be 4 dollars. We are gonna get exactly 4 dollars for it

00:05:52.326 --> 00:05:58.915
so they are right on the fence. but for the first three

00:05:58.915 --> 00:06:04.029
thousand 999 pounds, the opportunity cost of producing it

00:06:04.029 --> 00:06:08.063
was lower than the price to get it, so in this situation

00:06:08.063 --> 00:06:12.416
the producers are getting more, for the first 3999 pounds.

00:06:12.416 --> 00:06:16.798
They are getting more for their berries than their opportunity

00:06:16.798 --> 00:06:18.561
cost and just like we talked about, the consumer surplus,

00:06:18.561 --> 00:06:25.428
this is the producer surplus. So, for example, for the first thousand pounds right here,

00:06:25.428 --> 00:06:29.934
the producers, their opportunity cost was a little over a dollar a pound

00:06:29.934 --> 00:06:32.408
but they are getting 4 dollars a pound for it.

00:06:32.408 --> 00:06:35.162
For the next thousand pounds, the opportunity cost is approaching

00:06:35.162 --> 00:06:38.967
2 dollars per pound, like a $1.75, just eyeballing it.

00:06:38.967 --> 00:06:41.531
Once again, they are getting 4 dollars a pound for it

00:06:41.531 --> 00:06:44.198
so they are getting this surplus, so if you think about

00:06:44.198 --> 00:06:48.381
the entire market, the producers as a whole, they are getting this entire

00:06:48.381 --> 00:06:52.696
area, this entire area represents the excess value that they are getting above and beyond

00:06:52.696 --> 00:06:57.764
their opportunity cost, and we call this right over here the

00:06:57.764 --> 00:07:03.903
producer surplus, the producer surplus. And we are assuming

00:07:03.903 --> 00:07:07.384
or we will assume a linear supply curve

00:07:07.384 --> 00:07:09.259
right over here.  This is just a triangle, the area of

00:07:09.259 --> 00:07:15.949
a triangle. This length right on this side is just 4-1,

00:07:15.949 --> 00:07:19.646
it's just 3, 3 dollars per pound

00:07:19.646 --> 00:07:24.213
and then this length right over here is 4 thousand

00:07:24.213 --> 00:07:27.049
pounds, 4 thousand pounds. So to find the producer surplus,

00:07:27.049 --> 00:07:28.831
we are just finding the area of this region.

00:07:28.831 --> 00:07:31.543
So, let me write this, the producer surplus

00:07:31.543 --> 00:07:34.598
here is going to be, I will use the same color,

00:07:34.598 --> 00:07:38.197
3 times,  I want to do it with pink,

00:07:38.197 --> 00:07:45.515
3 times the 4 thousand, and that would give us

00:07:45.515 --> 00:07:48.044
the area of this entire rectangle, so we have to divide it

00:07:48.044 --> 00:07:51.878
by 2.  That's just finding the area of the triangle,

00:07:51.878 --> 00:07:55.647
so times one half, dividing by 2.  And so this gives us one

00:07:55.647 --> 00:08:01.166
half times 4 thousand is 2 thousand times 3 is 6 thousand.

00:08:01.166 --> 00:08:03.750
And you could look at the unit, it's 6 thousand

00:08:03.750 --> 00:08:09.100
or 3 dollars per pound times thousand of pounds per week

00:08:09.100 --> 00:08:14.548
so we end up with, so the, we end up with 6 thousand dollars

00:08:14.548 --> 99:59:59.999
of producers' surplus per week.


Total consumer surplus as area

WEBVTT
Kind: captions
Language: en

00:00:00.560 --> 00:00:02.400
Let's say you run
an orange stand.

00:00:02.400 --> 00:00:04.320
And this right here,
you could view this

00:00:04.320 --> 00:00:06.320
as either the demand curve
for your orange stand

00:00:06.320 --> 00:00:08.780
or your marginal benefit
curve, or really you

00:00:08.780 --> 00:00:10.510
could call it the
willingness to pay,

00:00:10.510 --> 00:00:12.790
the first 100 pounds of oranges.

00:00:12.790 --> 00:00:16.360
Or that very 100th
pound, someone

00:00:16.360 --> 00:00:18.420
would be willing to
pay $3 per pound.

00:00:18.420 --> 00:00:21.230
But then the 101st pound would
be a little bit less than that.

00:00:21.230 --> 00:00:22.605
So that's the
willingness to pay,

00:00:22.605 --> 00:00:25.290
or the marginal benefit
of that incremental pound.

00:00:25.290 --> 00:00:29.900
But let's say you decide
to set the price at $2,

00:00:29.900 --> 00:00:36.312
and you are able to sell
300 oranges in that week.

00:00:36.312 --> 00:00:37.770
What I want to
think about is, what

00:00:37.770 --> 00:00:43.589
is the total consumer surplus
that your consumers got?

00:00:43.589 --> 00:00:45.380
And the way to think
about consumer surplus

00:00:45.380 --> 00:00:48.720
is, how much benefit did they
get above and beyond what

00:00:48.720 --> 00:00:49.790
they paid?

00:00:49.790 --> 00:00:51.840
So for example, the
person who bought--

00:00:51.840 --> 00:00:54.460
let's just think about
the exact 100th pound.

00:00:54.460 --> 00:00:57.660
The 100th pound, they paid $2.

00:00:57.660 --> 00:01:00.930
They paid $2, but their
benefit looks like it was,

00:01:00.930 --> 00:01:05.800
I don't know, $3.30.

00:01:05.800 --> 00:01:07.290
But they only paid $2.

00:01:07.290 --> 00:01:10.930
So their benefit on that
one pound, their benefit,

00:01:10.930 --> 00:01:13.370
or I should say their
consumer surplus,

00:01:13.370 --> 00:01:15.890
is going to be
$3.30 minus a $2.30.

00:01:15.890 --> 00:01:19.920
So that person who bought that
100th-- not all the 100 pounds,

00:01:19.920 --> 00:01:24.900
just that 100th pound-- got a
consumer surplus of $3.30 minus

00:01:24.900 --> 00:01:31.070
$2, which is a $1.30
consumer surplus.

00:01:31.070 --> 00:01:34.360
So if you wanted to figure out
the entire consumer surplus,

00:01:34.360 --> 00:01:36.970
well, you just have to do
it for all of the pounds.

00:01:36.970 --> 00:01:40.170
So that was 100th pound.

00:01:40.170 --> 00:01:42.120
So essentially,
you could view this

00:01:42.120 --> 00:01:44.492
as the area of this little
thing right over here.

00:01:44.492 --> 00:01:46.200
And let me zoom in,
just to make sure you

00:01:46.200 --> 00:01:48.150
understand what's going on.

00:01:48.150 --> 00:01:51.160
That thing that I just
drew, if we zoom in,

00:01:51.160 --> 00:01:53.240
will look something like this.

00:01:53.240 --> 00:01:54.495
It was one pound wide.

00:02:00.380 --> 00:02:05.320
And this right over here was $2.

00:02:05.320 --> 00:02:09.750
And then we had our marginal
benefit curve, or our demand

00:02:09.750 --> 00:02:13.440
curve, sloping down like that.

00:02:13.440 --> 00:02:16.710
And this point right
over here was $3.30.

00:02:16.710 --> 00:02:19.090
And so to figure out the
consumer surplus for that pound

00:02:19.090 --> 00:02:23.620
we said, OK, for that pound
they were willing to pay $3.30.

00:02:23.620 --> 00:02:25.450
The benefit to them was $3.30.

00:02:25.450 --> 00:02:27.220
But they only had to pay $2.

00:02:27.220 --> 00:02:31.950
So the height of this
right over here was $1.30.

00:02:31.950 --> 00:02:35.950
And so the consumer surplus
is $1.30 per pound times one

00:02:35.950 --> 00:02:38.230
pound.

00:02:38.230 --> 00:02:42.780
And so that's where we got
the $1.30 consumer surplus.

00:02:42.780 --> 00:02:45.640
Now, we could do that for
every one of the pounds.

00:02:45.640 --> 00:02:48.010
So we could do that
for the 101st pound.

00:02:48.010 --> 00:02:49.310
Let me get a different color.

00:02:49.310 --> 00:02:52.260
The 101st pound, we
would do it like that.

00:02:52.260 --> 00:02:54.780
Then the 102nd pound, we
would do it like that.

00:02:54.780 --> 00:02:56.550
103rd pound like that.

00:02:56.550 --> 00:02:59.119
We'd do it for the
99th pound like that.

00:02:59.119 --> 00:03:00.660
And so you could
imagine if we wanted

00:03:00.660 --> 00:03:03.161
to find the total consumer
surplus, what are we doing?

00:03:03.161 --> 00:03:04.660
Well, we're essentially
just finding

00:03:04.660 --> 00:03:07.830
the area between
our demand curve

00:03:07.830 --> 00:03:11.410
and this line where the
price is equal to 2.

00:03:11.410 --> 00:03:13.590
So we're just going
to sum up this area.

00:03:13.590 --> 00:03:15.170
And if you're familiar
with calculus,

00:03:15.170 --> 00:03:17.290
you might know that
you can actually

00:03:17.290 --> 00:03:21.550
make these things
arbitrarily small.

00:03:21.550 --> 00:03:26.370
You don't have to take a
one pound wide rectangle.

00:03:26.370 --> 00:03:27.960
You get a half a
pound wide rectangle,

00:03:27.960 --> 00:03:29.310
or a quarter pound
wide rectangle.

00:03:29.310 --> 00:03:30.960
Then you'll just
have more rectangles.

00:03:30.960 --> 00:03:34.040
It doesn't matter so much if
you have a linear demand curve,

00:03:34.040 --> 00:03:36.255
but if you had a
non-linear demand curve

00:03:36.255 --> 00:03:37.130
then it would matter.

00:03:37.130 --> 00:03:40.172
You'd want to get smaller and
smaller and smaller, or thinner

00:03:40.172 --> 00:03:41.630
and thinner and
thinner rectangles,

00:03:41.630 --> 00:03:43.910
so you could get better
and better approximations

00:03:43.910 --> 00:03:46.310
for the consumer surplus.

00:03:46.310 --> 00:03:48.850
But needless to say, what
you're really doing-- especially

00:03:48.850 --> 00:03:52.160
if you get unbelievably
thin rectangles,

00:03:52.160 --> 00:03:54.550
and you have an unbelievably
high number of them-- you're

00:03:54.550 --> 00:03:58.550
really just estimating the
area under the demand curve

00:03:58.550 --> 00:04:03.430
and above the price equals $2.

00:04:03.430 --> 00:04:05.760
And so if you want to know
this consumer surplus--

00:04:05.760 --> 00:04:07.250
and I really want you to
understand why this was.

00:04:07.250 --> 00:04:09.041
I mean, just think
about it for each pound.

00:04:09.041 --> 00:04:10.940
It was just how much
more value that pound,

00:04:10.940 --> 00:04:13.190
whoever bought that pound,
how much more value do they

00:04:13.190 --> 00:04:14.970
get relative to what they paid.

00:04:14.970 --> 00:04:18.019
And we're just summing that
up across all of the pounds.

00:04:18.019 --> 00:04:20.310
So to really figure out
the total consumer surplus,

00:04:20.310 --> 00:04:23.220
we just have to find this
area of this blue area.

00:04:23.220 --> 00:04:26.990
And that's just finding
the area of a triangle.

00:04:26.990 --> 00:04:30.960
So this right over here,
you have a base of 300.

00:04:30.960 --> 00:04:35.410
This length right over
here is 300 pounds.

00:04:35.410 --> 00:04:39.330
And then our height over here.

00:04:39.330 --> 00:04:41.970
And we can just use this
as the area of a triangle,

00:04:41.970 --> 00:04:44.981
because this is a simple
linear demand curve.

00:04:44.981 --> 00:04:47.230
We would actually have to
use a little bit of calculus

00:04:47.230 --> 00:04:49.100
if this was a non-linear curve.

00:04:49.100 --> 00:04:52.860
But the height here is 2.

00:04:52.860 --> 00:04:58.440
So our area, the area between
the demand curve and our price

00:04:58.440 --> 00:05:04.120
equals 2, is equal to 1/2
times base times height.

00:05:04.120 --> 00:05:12.700
1/2 times the base, which is 300
pounds, times the height, which

00:05:12.700 --> 00:05:15.005
is $2 per pound.

00:05:22.310 --> 00:05:23.670
The pounds cancel out.

00:05:23.670 --> 00:05:28.620
1/2 times 2 is 1,
times 300 is 300.

00:05:28.620 --> 00:05:31.140
So we get 300.

00:05:31.140 --> 00:05:34.420
And all we're left
with is dollars.

00:05:34.420 --> 00:05:38.000
So the total consumer
surplus in this case is $300.

00:05:38.000 --> 00:05:40.960
And it really is just the
area between the demand curve

00:05:40.960 --> 00:05:45.440
and this price equals 2
line right over there.


Consumer surplus introduction

WEBVTT
Kind: captions
Language: en

00:00:00.640 --> 00:00:02.810
In the last video, we
saw how you can actually

00:00:02.810 --> 00:00:08.440
view a demand curve as actually
a marginal benefit curve.

00:00:08.440 --> 00:00:10.580
That for any given the
quantity of the good you're

00:00:10.580 --> 00:00:12.384
selling, that that
point on the curve

00:00:12.384 --> 00:00:14.050
is actually showing
the marginal benefit

00:00:14.050 --> 00:00:15.570
for that incremental unit.

00:00:15.570 --> 00:00:18.067
So this is a marginal
benefit for that first unit.

00:00:18.067 --> 00:00:20.150
This is the marginal benefit
for that second unit.

00:00:20.150 --> 00:00:21.800
And there's multiple ways
that you could view this,

00:00:21.800 --> 00:00:24.280
assuming that we're talking
about this new car here.

00:00:24.280 --> 00:00:26.470
Maybe if you're going
to only sell one unit,

00:00:26.470 --> 00:00:29.250
someone really wants it really
bad, the benefit for them,

00:00:29.250 --> 00:00:31.430
the marginal benefit for
that first unit for them,

00:00:31.430 --> 00:00:33.370
is going to be $60,000.

00:00:33.370 --> 00:00:35.892
Now, let's say if you
want to sell two units,

00:00:35.892 --> 00:00:38.100
that second unit might be
bought by that same person.

00:00:38.100 --> 00:00:39.800
And they might say, well,
I already have one car.

00:00:39.800 --> 00:00:42.050
The benefit of getting that
second one's only $50,000.

00:00:42.050 --> 00:00:43.880
That's the point at
which I am neutral.

00:00:43.880 --> 00:00:47.910
That's the point at which I'm
right on the fence of willing

00:00:47.910 --> 00:00:48.660
to buy that car.

00:00:48.660 --> 00:00:50.610
Or it might be another person,
another person who's just not

00:00:50.610 --> 00:00:52.526
as enamored as the first
person, who says, OK,

00:00:52.526 --> 00:00:54.510
for $50,000 I do like that car.

00:00:54.510 --> 00:00:57.932
And then for the third, the
third person there, once again,

00:00:57.932 --> 00:00:59.640
they're not as enamored
as the first two,

00:00:59.640 --> 00:01:02.320
they would be willing
to buy it for $40,000.

00:01:02.320 --> 00:01:04.709
And what we saw is
at some point you

00:01:04.709 --> 00:01:07.340
could say, look, let's say that
we decide that the price ends

00:01:07.340 --> 00:01:13.290
up being-- for whatever
reason-- $30,000.

00:01:13.290 --> 00:01:15.441
And so when the
price is $30,000--

00:01:15.441 --> 00:01:17.940
and this is kind of viewing it
in the traditional notion of,

00:01:17.940 --> 00:01:19.921
at a price, what quantity
were you selling it.

00:01:19.921 --> 00:01:22.170
But when you think about
that reality, what's actually

00:01:22.170 --> 00:01:25.000
happening is that this fourth
person is right on the fence.

00:01:25.000 --> 00:01:27.940
Their marginal benefit
is exactly $30,000.

00:01:27.940 --> 00:01:29.500
So in their mind,
they're saying,

00:01:29.500 --> 00:01:32.256
I am giving away $30,000.

00:01:32.256 --> 00:01:34.670
And in exchange for that
I'm getting something

00:01:34.670 --> 00:01:36.430
that is worth $30,000.

00:01:36.430 --> 00:01:37.975
So it's kind of
like, hey, will you

00:01:37.975 --> 00:01:39.850
be willing to trade this
dollar for a dollar?

00:01:39.850 --> 00:01:42.500
Well, you probably would be
kind of on the fence about that.

00:01:42.500 --> 00:01:44.250
You're very close
to going either way.

00:01:44.250 --> 00:01:45.800
You feel like it's a good
deal if you could get it

00:01:45.800 --> 00:01:47.070
for maybe a penny less.

00:01:47.070 --> 00:01:50.286
It's a bad deal if you're
getting it for a penny more.

00:01:50.286 --> 00:01:51.660
So right on the
fence, but you're

00:01:51.660 --> 00:01:54.100
going to just barely
get this fourth person

00:01:54.100 --> 00:01:57.040
to transact at this price.

00:01:57.040 --> 00:01:58.467
But what we hinted
at is if you do

00:01:58.467 --> 00:02:00.550
have one price for everybody--
in the future we'll

00:02:00.550 --> 00:02:02.980
talk about not having
one price for everybody--

00:02:02.980 --> 00:02:05.100
but if you did have
one price for everyone,

00:02:05.100 --> 00:02:07.770
these first units
were kind of sold

00:02:07.770 --> 00:02:09.889
below where they
could have been sold.

00:02:09.889 --> 00:02:13.030
They were sold below
their marginal benefit.

00:02:13.030 --> 00:02:15.040
So remember, we're
viewing this same demand

00:02:15.040 --> 00:02:17.650
curve we're now viewing as
a marginal benefit curve.

00:02:17.650 --> 00:02:20.390
So this first unit
right over here,

00:02:20.390 --> 00:02:22.960
it could have been
sold at $60,000.

00:02:22.960 --> 00:02:26.270
But now, we're selling
it for $30,000.

00:02:26.270 --> 00:02:30.110
So this right over
here, this was $30,000.

00:02:30.110 --> 00:02:32.210
I'll just write 30 for $30,000.

00:02:32.210 --> 00:02:37.270
The marginal benefit is $30,000
higher than the actual price.

00:02:37.270 --> 00:02:38.820
The marginal benefit
of that unit,

00:02:38.820 --> 00:02:40.880
the benefit that the
market got out of it

00:02:40.880 --> 00:02:43.880
is $30,000 higher
than the price.

00:02:43.880 --> 00:02:46.320
The marginal benefit
for the second unit

00:02:46.320 --> 00:02:51.090
is $20,000 higher than the
price at which the product is

00:02:51.090 --> 00:02:52.150
being sold.

00:02:52.150 --> 00:02:56.280
The marginal benefit
for this third unit,

00:02:56.280 --> 00:03:01.120
assuming this is
$40,000, is $10,000.

00:03:01.120 --> 00:03:02.790
Or another way to
think about it is,

00:03:02.790 --> 00:03:07.290
the consumer surplus for
this first unit was $30,000.

00:03:07.290 --> 00:03:12.030
The consumer's got $30,000 more
in benefit, marginal benefit

00:03:12.030 --> 00:03:14.010
for them and value
for themselves,

00:03:14.010 --> 00:03:15.400
than they had to pay for it.

00:03:15.400 --> 00:03:18.410
Here, the consumer
surplus was $20,000.

00:03:18.410 --> 00:03:20.970
The consumer got
$20,000 more in value

00:03:20.970 --> 00:03:23.900
than that second consumer
was willing to pay for it.

00:03:23.900 --> 00:03:25.390
And here is $10,000.

00:03:25.390 --> 00:03:27.800
And then this fourth
consumer is neutral.

00:03:27.800 --> 00:03:30.865
The marginal benefit is
what they paid for it.

00:03:30.865 --> 00:03:32.240
And so when you
think about this,

00:03:32.240 --> 00:03:36.272
you can say, well, what's the
total consumer surplus here?

00:03:36.272 --> 00:03:37.230
Let me write this down.

00:03:37.230 --> 00:03:42.640
What is the total
consumer surplus?

00:03:42.640 --> 00:03:44.140
And another way of
thinking about it

00:03:44.140 --> 00:03:47.140
is, what is the total
excess of marginal benefit

00:03:47.140 --> 00:03:49.010
above and beyond the price paid?

00:03:49.010 --> 00:03:51.190
So how much surplus
marginal benefit

00:03:51.190 --> 00:03:53.980
did they get, if you
take out the price paid?

00:03:53.980 --> 00:03:56.000
And over here, the
total consumer surplus

00:03:56.000 --> 00:03:59.120
is going to be the $30,000
for that first unit,

00:03:59.120 --> 00:04:01.860
plus the $20,000 for
that second unit,

00:04:01.860 --> 00:04:08.100
plus the $10,000
for that third unit.

00:04:08.100 --> 00:04:09.790
And so the total
consumer surplus

00:04:09.790 --> 00:04:13.720
in this scenario when we
sold four units at $30,000

00:04:13.720 --> 00:04:15.720
is-- And we're assuming
we're selling cars here.

00:04:15.720 --> 00:04:17.219
So we can't sell
parts of cars here.

00:04:17.219 --> 00:04:18.500
We can't sell 1.1 cars.

00:04:18.500 --> 00:04:20.250
I guess if we're talking about
averages, maybe we could.

00:04:20.250 --> 00:04:22.750
But let's just say we're selling
just whole numbers of cars

00:04:22.750 --> 00:04:23.270
here.

00:04:23.270 --> 00:04:26.700
The total consumer surplus in
this situation was 30 plus 20

00:04:26.700 --> 00:04:29.787
plus 10, which is $60,000.

00:04:29.787 --> 00:04:30.870
Everything's in thousands.

00:04:30.870 --> 00:04:32.080
So this is $60,000.

00:04:32.080 --> 00:04:34.320
So in this scenario,
in that week,

00:04:34.320 --> 00:04:40.220
the consumers would get $60,000
more in benefit for them,

00:04:40.220 --> 00:04:43.250
in perceived benefit for
them, than what they actually

00:04:43.250 --> 00:04:45.000
had to pay for it.

00:04:45.000 --> 00:04:46.760
And if you think about
it, it's a little

00:04:46.760 --> 00:04:50.180
unideal for the seller, because
they were selling something

00:04:50.180 --> 00:04:52.630
at a lower price than maybe
what they could have gotten

00:04:52.630 --> 00:04:54.665
from at least these
first few consumers here.

00:04:54.665 --> 00:04:57.040
And that was because they,
just really based on the model

00:04:57.040 --> 00:05:01.480
that we have here, they
just had to set one price.


Demand Curve as Marginal Benefit Curve

WEBVTT
Kind: captions
Language: en

00:00:00.602 --> 00:00:02.535
Voiceover: In all of our conversations

00:00:02.535 --> 00:00:04.012
about demand curves so far,

00:00:04.012 --> 00:00:05.832
I've been generally talking about

00:00:05.832 --> 00:00:08.395
price driving quantities.

00:00:08.395 --> 00:00:10.267
So for example, we've been saying,

00:00:10.267 --> 00:00:12.936
using say this demand curve right here

00:00:12.936 --> 00:00:14.607
for a new car in terms of how many

00:00:14.607 --> 00:00:16.562
would be sold per day,

00:00:16.562 --> 00:00:18.422
we would say things like,

00:00:18.422 --> 00:00:21.342
"Well look, if we price
it at $60,000 per car,"

00:00:21.342 --> 00:00:22.671
this is in thousands of dollars.

00:00:22.671 --> 00:00:25.548
"If we price it at $60,000 per car,

00:00:25.548 --> 00:00:28.150
"we are going to sell one car.

00:00:28.150 --> 00:00:30.541
"If we price it at $50,000 a car,

00:00:30.541 --> 00:00:32.871
"we are going to sell two cars."

00:00:32.871 --> 00:00:34.711
The way that I've been talking about

00:00:34.711 --> 00:00:36.497
it is given a price,

00:00:36.497 --> 00:00:38.898
how many are we actually going to sell?

00:00:38.898 --> 00:00:40.390
What I want to do in this video

00:00:40.390 --> 00:00:42.084
is think about it the other way around.

00:00:42.084 --> 00:00:44.113
We're going to look at the
exact same demand curve,

00:00:44.113 --> 00:00:46.486
the exact same relationship
between price and quantity,

00:00:46.486 --> 00:00:47.967
but we're going to conceptualize

00:00:47.967 --> 00:00:50.049
it in our heads in a
slightly different way.

00:00:50.049 --> 00:00:51.655
We're going to think about it in terms

00:00:51.655 --> 00:00:55.805
of quantity driving price.

00:00:55.805 --> 00:00:57.055
To think of it that way,

00:00:57.055 --> 00:00:58.563
imagine that we are the producers

00:00:58.563 --> 00:01:01.403
of this given model of a new car.

00:01:01.403 --> 00:01:03.219
We go the other way.

00:01:03.219 --> 00:01:04.744
We don't say, "How many will we sell

00:01:04.744 --> 00:01:06.266
"at a price of $60,000?"

00:01:06.266 --> 00:01:08.398
Or, "How much will we sell
at a price of $50,000?"

00:01:08.398 --> 00:01:09.808
We'll go from the point of view

00:01:09.808 --> 00:01:12.000
of what if we only produce one car a week?

00:01:12.000 --> 00:01:14.001
If we only produced one car a week,

00:01:14.001 --> 00:01:16.545
how much could we get for that car?

00:01:16.545 --> 00:01:18.943
Let's say somehow you're
able to figure that out.

00:01:18.943 --> 00:01:20.363
You're able to read people's minds

00:01:20.363 --> 00:01:22.030
or you have some type of a market study.

00:01:22.030 --> 00:01:23.601
When you ask that question you're like,

00:01:23.601 --> 00:01:26.977
"Look if you only allowed
one car to be sold each week,

00:01:26.977 --> 00:01:29.639
"you determine that in that week there

00:01:29.639 --> 00:01:31.614
"is going to be somebody,

00:01:31.614 --> 00:01:32.920
"somebody's going to think that it's worth

00:01:32.920 --> 00:01:35.488
"$60,000 to buy that car."

00:01:35.488 --> 00:01:37.489
That person, they're willingness to pay,

00:01:37.489 --> 00:01:42.620
that person is going to be
willing to trade $60,000.

00:01:42.620 --> 00:01:45.030
They're going to be willing to forego

00:01:45.030 --> 00:01:47.031
what else they could have bought

00:01:47.031 --> 00:01:50.271
for that $60,000 and
instead they want that car.

00:01:50.271 --> 00:01:53.494
Then you would plot that
point right over there.

00:01:53.494 --> 00:01:56.619
If you only had one unit, you
could sell it for $60,000.

00:01:56.619 --> 00:02:00.274
Now let's go, let's keeping
asking ourselves for more units.

00:02:00.274 --> 00:02:02.408
Let's say, what if we
wanted to sell two units?

00:02:02.408 --> 00:02:04.912
Well, if you wanted to sell two units,

00:02:04.912 --> 00:02:09.668
you could definitely sell
one unit for $60,000,

00:02:09.668 --> 00:02:11.741
assuming that you could
get that first person,

00:02:11.741 --> 00:02:14.153
but that second person,

00:02:14.153 --> 00:02:15.532
this might have been the person that

00:02:15.532 --> 00:02:17.236
just wants a car so
badly it just resonated

00:02:17.236 --> 00:02:19.002
with them in some way.

00:02:19.002 --> 00:02:20.563
For that second unit,

00:02:20.563 --> 00:02:22.382
the second person who is
going to need to buy your car,

00:02:22.382 --> 00:02:25.079
might not be as excited about it.

00:02:25.079 --> 00:02:29.082
That second person will only be willing

00:02:29.082 --> 00:02:31.666
to forego $50,000.

00:02:31.666 --> 00:02:34.002
That second person would
be willing to forego 50.

00:02:34.002 --> 00:02:35.644
So if you wanted to sell two units,

00:02:35.644 --> 00:02:38.005
if you insist on selling two units,

00:02:38.005 --> 00:02:39.668
and if you're assuming you're going

00:02:39.668 --> 00:02:41.080
to give the same price for everyone.

00:02:41.080 --> 00:02:42.332
We'll talk about in the future

00:02:42.332 --> 00:02:43.206
how you might give different prices

00:02:43.206 --> 00:02:44.793
to different people.

00:02:44.793 --> 00:02:47.249
Assuming you want to give
the same price to everyone,

00:02:47.249 --> 00:02:50.070
you're going to have to
sell your car for $50,000.

00:02:50.070 --> 00:02:51.401
Now clearly that first
person is definitely

00:02:51.401 --> 00:02:52.436
going to jump at it.

00:02:52.436 --> 00:02:54.398
They're going to be able
to get the car for more

00:02:54.398 --> 00:02:55.283
than they were willing to pay.

00:02:55.283 --> 00:02:57.558
More than what it was worth to them.

00:02:57.558 --> 00:03:00.068
More than the benefit for them,

00:03:00.068 --> 00:03:01.614
but if you want two people,

00:03:01.614 --> 00:03:03.798
now you're going to have
to set this up for $50,000.

00:03:03.798 --> 00:03:05.135
Now the same logic.

00:03:05.135 --> 00:03:06.931
Now what if we want to sell three cars?

00:03:06.931 --> 00:03:09.295
What if we want to sell three cars a week?

00:03:09.295 --> 00:03:11.675
Well, if we price it at $50,000,

00:03:11.675 --> 00:03:13.464
we'll definitely get those first two,

00:03:13.464 --> 00:03:16.449
but the third person might not jump.

00:03:16.449 --> 00:03:18.616
The third person isn't
going to be as excited

00:03:18.616 --> 00:03:21.498
about it or need it as
much as these first two.

00:03:21.498 --> 00:03:23.392
So you do a market study
or you're able to read

00:03:23.392 --> 00:03:24.798
people's minds.

00:03:24.798 --> 00:03:26.467
You're like, "Look the third person,

00:03:26.467 --> 00:03:28.291
"for the market, the marginal benefit."

00:03:28.291 --> 00:03:30.009
Let me write this word down.

00:03:30.009 --> 00:03:32.081
The marginal benefit.

00:03:32.081 --> 00:03:35.673
The marginal benefit for the next unit,

00:03:35.673 --> 00:03:40.135
the next unit is going to be $40,000.

00:03:40.135 --> 00:03:41.618
To get that next buyer,

00:03:41.618 --> 00:03:42.663
and it could be multiple buyers

00:03:42.663 --> 00:03:43.735
buying each unit or it could be one buyer

00:03:43.735 --> 00:03:45.538
buying all of the units.

00:03:45.538 --> 00:03:47.777
Maybe it's some type of a
car rental company saying,

00:03:47.777 --> 00:03:49.782
"Oh, we don't need to get ... For three

00:03:49.782 --> 00:03:51.933
"of these cars I'm not as
excited about it anymore.

00:03:51.933 --> 00:03:54.204
"My marginal benefit is lower."

00:03:54.204 --> 00:03:56.003
This is really the same marginal benefit

00:03:56.003 --> 00:03:58.991
that we talked about when
we talked about the PPF,

00:03:58.991 --> 00:04:00.599
the Production Possibilities Frontier.

00:04:00.599 --> 00:04:02.900
In that, we talked
about it very explicitly

00:04:02.900 --> 00:04:04.216
in terms of trade off,

00:04:04.216 --> 00:04:05.544
in terms of opportunity cost.

00:04:05.544 --> 00:04:07.534
Here we're measuring the marginal benefit

00:04:07.534 --> 00:04:09.414
in terms of price,

00:04:09.414 --> 00:04:12.163
but price really can be viewed
as a foregone opportunity.

00:04:12.163 --> 00:04:14.555
If you spend $40,000 on this car,

00:04:14.555 --> 00:04:16.551
you're making the decision
not to spend $40,000

00:04:16.551 --> 00:04:18.332
on something else.

00:04:18.332 --> 00:04:20.277
A down payment on a house or a nice boat,

00:04:20.277 --> 00:04:21.960
or whatever else it might be.

00:04:22.007 --> 00:04:23.880
So really what we're doing,

00:04:23.880 --> 00:04:24.968
is at any point in this curve,

00:04:24.968 --> 00:04:26.736
this really is the marginal benefit

00:04:26.736 --> 00:04:28.313
for that next buyer.

00:04:28.313 --> 00:04:30.534
That marginal benefit to the market

00:04:30.534 --> 00:04:35.353
of that next unit of
whatever you are producing.

00:04:35.353 --> 00:04:38.537
This is a very different way of viewing

00:04:38.537 --> 00:04:39.789
the exact same demand curve.

00:04:39.789 --> 00:04:41.685
Before we said, "Okay, if we want to price

00:04:41.685 --> 00:04:44.000
"it at $50,000, how many
are we going to sell?"

00:04:44.000 --> 00:04:46.935
Now we're saying, "If we
want to sell only two units,

00:04:46.935 --> 00:04:48.686
"where can we price it?"

00:04:48.686 --> 00:04:50.761
We can price it at $50,000.

00:04:50.761 --> 00:04:53.004
If we want to go from two to three units,

00:04:53.004 --> 00:04:54.489
we're going to have to price it

00:04:54.489 --> 00:04:57.609
at the marginal benefit of that third unit

00:04:57.609 --> 00:04:59.465
to the market and it could be the marginal

00:04:59.465 --> 00:05:01.272
benefit to that next consumer.

00:05:01.272 --> 00:05:02.744
Convincing that next consumer to say,

00:05:02.744 --> 00:05:04.333
"Hey it is worth it to buy this car.

00:05:04.333 --> 00:05:06.557
"Let's price it at $40,000."

00:05:06.557 --> 00:05:08.664
I'm going to leave you
there in this video,

00:05:08.664 --> 00:05:10.074
but what I'm going to think about

00:05:10.074 --> 00:05:11.836
is depending on where you price it,

00:05:11.836 --> 00:05:14.641
let's say that we decide that we
want to sell four units every week.

00:05:14.641 --> 00:05:16.950
So we say, "Well look, to get that fourth

00:05:16.950 --> 00:05:20.546
"person to buy this car,
we have to price the car

00:05:20.546 --> 00:05:22.809
"at $30,000."

00:05:22.809 --> 00:05:23.971
What we're going to talk about in the next

00:05:23.971 --> 00:05:25.445
video is if you did that,

00:05:25.445 --> 00:05:26.761
if this is where you decide to price it

00:05:26.761 --> 00:05:28.764
so that you can sell four units,

00:05:28.764 --> 00:05:31.077
these other people got really good deals.

00:05:31.077 --> 00:05:33.236
The first unit could
have gone for much more.

00:05:33.236 --> 00:05:34.580
The second unit could have still also

00:05:34.580 --> 00:05:35.951
gone for a good bit,

00:05:35.951 --> 00:05:37.157
not as much as the first unit.

00:05:37.157 --> 00:05:38.521
The third unit could
have gone for a little

00:05:38.521 --> 00:05:39.589
bit less than the second unit,

00:05:39.589 --> 00:05:42.575
but still more than what you
ended up selling things for.

00:05:42.575 --> 00:05:44.692
We're going to talk about this idea

00:05:44.692 --> 00:05:46.534
right over here that some of these

00:05:46.534 --> 00:05:48.864
consumers are getting more for their money

00:05:48.864 --> 00:05:50.233
than what they have to pay,

00:05:50.233 --> 00:05:53.000
or at least in their own minds they are.


Elasticity and strange percent changes

WEBVTT
Kind: captions
Language: en

00:00:00.770 --> 00:00:02.560
Voiceover: In this video
I want to clarify a little

00:00:02.560 --> 00:00:03.743
bit about why we calculate
the percent changes

00:00:03.743 --> 00:00:06.607
when we're thinking about elasticity

00:00:06.607 --> 00:00:07.897
the way that we do.

00:00:07.897 --> 00:00:09.495
So just to remind ourselves,

00:00:09.495 --> 00:00:11.572
a little focus on price
elasticity of demand,

00:00:11.572 --> 00:00:13.314
although we've been exposed to other

00:00:13.314 --> 00:00:15.338
types of elasticities already.

00:00:15.338 --> 00:00:17.079
Just as a review, price
elasticity of demand,

00:00:17.079 --> 00:00:19.546
so the elasticity of demand,

00:00:19.546 --> 00:00:23.614
is defined as the percent
change in quantity

00:00:23.614 --> 00:00:29.114
demanded over the percent change in price.

00:00:29.283 --> 00:00:31.149
So first I'll calculate
it the conventional way,

00:00:31.149 --> 00:00:32.863
the way you would do it in a traditional

00:00:32.863 --> 00:00:34.123
microeconomics class.

00:00:34.123 --> 00:00:36.090
Then I'll calculate it the way

00:00:36.090 --> 00:00:37.739
that you would just based on how you would

00:00:37.739 --> 00:00:39.113
traditionally calculate percentages

00:00:39.113 --> 00:00:41.063
and we'll see why microeconomists

00:00:41.063 --> 00:00:43.245
like to do it the way that they do.

00:00:43.245 --> 00:00:46.496
First we'll talk about the "correct" way.

00:00:46.496 --> 00:00:48.408
I'll put it in quotes because correct

00:00:48.408 --> 00:00:51.039
is by definition really
just by convention.

00:00:51.039 --> 00:00:55.020
But when we first think about
the percent change in quantity,

00:00:55.020 --> 00:00:57.150
percent change in quantity
and we're going to assume,

00:00:57.150 --> 00:00:59.199
we're going to calculate the elasticity

00:00:59.199 --> 00:01:00.935
of demand between point A over here,

00:01:00.935 --> 00:01:05.239
point A and point B over here.

00:01:05.239 --> 00:01:07.417
So what is our percent change in quantity?

00:01:07.417 --> 00:01:10.024
Well, our absolute change in quantity

00:01:10.024 --> 00:01:14.431
going from A to B we have increased by 2.

00:01:14.431 --> 00:01:16.633
So we have increased by 2.

00:01:16.633 --> 00:01:18.050
I'll write it down here.

00:01:18.050 --> 00:01:20.461
This is going to be 2 over and then this

00:01:20.461 --> 00:01:22.558
is kind of the slightly strange thing

00:01:22.558 --> 00:01:24.410
that we do when we
calculate our percentages.

00:01:24.410 --> 00:01:26.141
We don't say 2 over 4.

00:01:26.141 --> 00:01:29.090
We say 2 over the average of 4 and 6.

00:01:29.090 --> 00:01:30.612
It's 2 over the average of our starting

00:01:30.612 --> 00:01:32.535
point and our ending point.

00:01:32.535 --> 00:01:34.604
The average of 4 and 6 is 5.

00:01:34.604 --> 00:01:36.170
So this is going to be ...

00:01:36.170 --> 00:01:38.248
We have a 40% change based on how

00:01:38.248 --> 00:01:40.562
we calculated the percentages

00:01:40.562 --> 00:01:42.615
in our quantity demanded,

00:01:42.615 --> 00:01:46.351
and then let's do our
percent change in price.

00:01:46.351 --> 00:01:48.210
So this is all going to be over

00:01:48.210 --> 00:01:50.138
our percent change in price.

00:01:50.138 --> 00:01:52.508
Our absolute change in
price is negative 1 dollar.

00:01:52.508 --> 00:01:56.038
Negative 1 dollar and
then instead of doing it

00:01:56.038 --> 00:01:58.634
over our starting point over 2,

00:01:58.634 --> 00:02:03.954
we do it over the average
of the 2, over 150.

00:02:03.954 --> 00:02:08.143
Negative 1 over 150 is
negative two-thirds,

00:02:08.143 --> 00:02:14.569
or right about negative
66.7% if we say roughly.

00:02:14.569 --> 00:02:16.564
So this right over here ...

00:02:16.564 --> 00:02:19.063
so based on how we calculated percentages,

00:02:19.063 --> 00:02:20.710
and I want to make it clear,

00:02:20.710 --> 00:02:22.703
this is kind of a strange way,

00:02:22.703 --> 00:02:24.165
when we do it over the midpoint

00:02:24.165 --> 00:02:25.950
of the starting and ending points,

00:02:25.950 --> 00:02:27.544
but we're saying that our percent change

00:02:27.544 --> 00:02:29.687
from A to B in quantity,

00:02:29.687 --> 00:02:31.610
so our percent change in quantity,

00:02:31.610 --> 00:02:33.885
this right over here we
are saying it is 40%,

00:02:34.069 --> 00:02:37.715
and then we are saying that this percent

00:02:37.715 --> 00:02:43.703
change in price right over
here is negative 66.7%.

00:02:43.703 --> 00:02:46.074
Now, the reason why this is valuable,

00:02:46.074 --> 00:02:48.199
and then obviously if you
do the math right here,

00:02:48.199 --> 00:02:50.933
40% over negative 66.7% percent,

00:02:50.933 --> 00:02:52.695
you're going to get some

00:02:52.695 --> 00:02:54.180
let's see you're going to get something.

00:02:54.180 --> 00:02:55.388
I think it's going to be in the 6s.

00:02:55.388 --> 00:02:56.730
Point 6 something but let's actually get a

00:02:56.730 --> 00:02:59.019
calculator out to calculate it.

00:02:59.019 --> 00:03:04.023
It would be 40 divided by 66.7 gives you,

00:03:04.023 --> 00:03:07.533
it's almost 60 so it's roughly point 60

00:03:07.533 --> 00:03:09.051
if we were to round.

00:03:09.051 --> 00:03:11.812
This is approximately 0.60.

00:03:11.812 --> 00:03:14.401
It was 597 something.

00:03:14.401 --> 00:03:17.173
Actually I'll just leave
it that way at point 60.

00:03:17.173 --> 00:03:19.399
Now, what's cool about this

00:03:19.399 --> 00:03:20.763
or what's useful about this,

00:03:20.763 --> 00:03:23.335
and this is the reason why
we kind of mis-do it is,

00:03:23.335 --> 00:03:25.154
you would get the same answer

00:03:25.154 --> 00:03:26.568
whether you're going from A to B

00:03:26.568 --> 00:03:28.532
or whether you're going from B to A.

00:03:28.532 --> 00:03:32.174
This is the situation where
we're going from A to B,

00:03:32.186 --> 00:03:34.013
but if we were to go from B to A,

00:03:34.013 --> 00:03:37.071
if we were to go from B to
A it's the exact same thing.

00:03:37.071 --> 00:03:40.311
If we go from B to A what
is our change in quantity?

00:03:40.311 --> 00:03:43.220
Our change in quantity is negative 2.

00:03:43.220 --> 00:03:45.772
It would be negative 2 over,

00:03:45.772 --> 00:03:48.149
now you wouldn't do it
over your starting point.

00:03:48.149 --> 00:03:50.170
You do it over the average.

00:03:50.170 --> 00:03:51.868
This is why we will get the same value

00:03:51.868 --> 00:03:54.268
regardless of what direction we go in.

00:03:54.268 --> 00:03:57.277
We get the average of 4
and 6 is going to be 5.

00:03:57.277 --> 00:03:59.207
That's going to be over.

00:03:59.207 --> 00:04:01.604
Now going from B to A what
is our change in price?

00:04:01.604 --> 00:04:04.094
Our change in price is now plus 1.

00:04:04.094 --> 00:04:07.635
It is plus 1 over the
average of our starting

00:04:07.635 --> 00:04:10.384
point and our ending point, over 150.

00:04:10.384 --> 00:04:12.477
Now these are the exact same quantities.

00:04:12.477 --> 00:04:14.412
Both are going to be a negative number.

00:04:14.412 --> 00:04:16.324
Here the negative is on the bottom.

00:04:16.324 --> 00:04:18.150
Here the negative is on top.

00:04:18.150 --> 00:04:20.144
Either way and actually
this was a negative

00:04:20.144 --> 00:04:22.158
point 60 because you have a positive

00:04:22.158 --> 00:04:23.318
divided by a negative.

00:04:23.318 --> 00:04:25.091
This too when you evaluate it,

00:04:25.091 --> 00:04:26.666
is going to turn out to
be the exact same thing.

00:04:26.666 --> 00:04:30.286
It's going to be negative 0.60.

00:04:30.286 --> 00:04:33.004
Now if you calculated percentages
in the traditional way,

00:04:33.004 --> 00:04:35.208
you would not get the same value for the

00:04:35.208 --> 00:04:37.263
price elasticity of demand,

00:04:37.263 --> 00:04:39.666
whether you go from A to B and B to A.

00:04:39.666 --> 00:04:41.792
Just to show that to you,

00:04:41.792 --> 00:04:44.135
I will put this in quotation marks.

00:04:44.135 --> 00:04:46.867
It's not the "wrong"
way to do it in general.

00:04:46.867 --> 00:04:48.800
In fact, this is how you would calculate

00:04:48.800 --> 00:04:50.037
price changes traditionally,

00:04:50.037 --> 00:04:52.004
but it's not how you do it in kind of a

00:04:52.004 --> 00:04:53.739
microeconomic sense.

00:04:53.739 --> 00:04:56.743
If you did the wrong way
... If you said from A to B

00:04:56.743 --> 00:05:05.953
your absolute change in quantity
is plus 2 and your base ...

00:05:05.953 --> 00:05:08.402
Remember this is the way
that it's done outside

00:05:08.402 --> 00:05:09.913
of microeconomics.

00:05:09.913 --> 00:05:14.778
Your base is 4 and then
your change in price,

00:05:14.778 --> 00:05:17.795
you went down 1 and your base,

00:05:17.795 --> 00:05:19.715
you started at A,

00:05:19.715 --> 00:05:22.328
so your base is 2.

00:05:22.328 --> 00:05:24.275
This is the way you do it
outside of economics class.

00:05:24.428 --> 00:05:27.208
This would be equal to

00:05:27.208 --> 00:05:34.843
50% plus 50% over negative 50%,

00:05:34.843 --> 00:05:37.070
over negative 50%.

00:05:37.070 --> 00:05:39.116
You essentially get negative 1.

00:05:39.116 --> 00:05:41.408
Going from A to B using a traditional way

00:05:41.408 --> 00:05:43.133
of calculating percent change.

00:05:43.133 --> 00:05:45.493
What happens if you go from B to A?

00:05:45.493 --> 00:05:48.198
What happens if you go from B to A?

00:05:48.198 --> 00:05:50.744
Now, all of the sudden, your
change in quantity is negative 2.

00:05:50.744 --> 00:05:54.296
Your base is now ...
the starting point is 6.

00:05:54.296 --> 00:05:56.803
Your starting point is 6.

00:05:56.803 --> 00:05:58.632
Then your change in price,

00:05:58.632 --> 00:06:00.735
once again you're increasing in price by 1

00:06:00.735 --> 00:06:02.381
going from B to A,

00:06:02.381 --> 00:06:04.069
so this is plus 1.

00:06:04.069 --> 00:06:06.046
Your base is now 1.

00:06:06.046 --> 00:06:07.824
You will get,

00:06:07.824 --> 00:06:09.898
this is negative 33% roughly,

00:06:09.898 --> 00:06:13.227
that's negative a third, so 33.333,

00:06:13.227 --> 00:06:18.803
it keeps repeating over 100%.

00:06:18.803 --> 00:06:22.716
This will be equal to negative point 33.

00:06:22.716 --> 00:06:24.562
Notice when you calculate percentages

00:06:24.562 --> 00:06:26.028
in the traditional way,

00:06:26.028 --> 00:06:28.080
you get a different answer
whether you're going from

00:06:28.096 --> 00:06:30.843
A to B or whether you're
going from B to A.

00:06:30.843 --> 00:06:33.336
The whole reason why when
we take the percentages,

00:06:33.336 --> 00:06:35.018
we take it over the average of our

00:06:35.018 --> 00:06:36.565
starting and our ending points,

00:06:36.565 --> 00:06:38.623
over the average of our
starting and ending points.

00:06:38.623 --> 00:06:41.222
is so we get the same
value for the elasticity

00:06:41.222 --> 00:06:43.195
of demand along this portion of the curve.

00:06:43.195 --> 00:06:44.964
You can really view it as the average

00:06:44.964 --> 00:06:47.970
elasticity of demand over
this portion of the curve

00:06:47.970 --> 00:06:50.162
and if you calculate it this way,

00:06:50.162 --> 00:06:52.160
it doesn't matter whether you're going

00:06:52.160 --> 00:06:54.000
from A to B or B to A.


Cross elasticity of demand

WEBVTT
Kind: captions
Language: en

00:00:00.670 --> 00:00:03.270
So far, we've been
focused on the elasticity

00:00:03.270 --> 00:00:04.970
of demand for only one good.

00:00:04.970 --> 00:00:06.980
We've thought about how
changes in the price

00:00:06.980 --> 00:00:10.280
of that good affect
changes in its quantity.

00:00:10.280 --> 00:00:14.130
Now what we're going to explore
is how we can go across goods.

00:00:14.130 --> 00:00:16.965
So we're going to talk about
the cross elasticity of demand.

00:00:23.527 --> 00:00:26.110
And there's multiple different
scenarios we could think about,

00:00:26.110 --> 00:00:28.970
but it's really thinking about
how a price change in one good

00:00:28.970 --> 00:00:32.130
might affect the quantity
demanded in another good.

00:00:32.130 --> 00:00:35.550
And to see an example of this,
think about two airlines--

00:00:35.550 --> 00:00:38.640
two competing airlines-- maybe
it's the same exact route going

00:00:38.640 --> 00:00:41.420
at the exact same time, maybe
between New York and London.

00:00:41.420 --> 00:00:45.490
So airline one, right
over here-- airline two,

00:00:45.490 --> 00:00:47.670
very competitive,
price right over here

00:00:47.670 --> 00:00:49.730
is $1,000 for a round trip.

00:00:49.730 --> 00:00:52.210
Quantity demanded
is 200 tickets,

00:00:52.210 --> 00:00:53.520
let's say, in a given week.

00:00:53.520 --> 00:00:58.550
Airline two, price is
$1,000 for the round trip,

00:00:58.550 --> 00:01:03.430
and the quantity demanded
is 200 tickets as well.

00:01:03.430 --> 00:01:05.680
Now let's think about
what will happen.

00:01:05.680 --> 00:01:08.460
What will happen if
airline one raises

00:01:08.460 --> 00:01:16.840
its price from $1,000 to $1,100?

00:01:16.840 --> 00:01:19.490
In fact, we could
even do something

00:01:19.490 --> 00:01:23.740
less dramatic than that,
to $1,050-- so a relatively

00:01:23.740 --> 00:01:25.860
small increase in price.

00:01:25.860 --> 00:01:28.610
And remember, when we think
about the percentage price

00:01:28.610 --> 00:01:32.360
increase, when we're thinking
about elasticities in general,

00:01:32.360 --> 00:01:34.400
we don't just say,
OK, $50 on top

00:01:34.400 --> 00:01:36.950
of $1,000, that's a
5% price increase.

00:01:36.950 --> 00:01:38.870
That's what we would do
in everyday thinking.

00:01:38.870 --> 00:01:41.440
If you said you went
from $1,000 to $1,050,

00:01:41.440 --> 00:01:47.140
you would say that's a $50
increase on a base of $1,000

00:01:47.140 --> 00:01:49.397
or that is a 5% increase.

00:01:49.397 --> 00:01:50.980
But when you think
about elasticities,

00:01:50.980 --> 00:01:53.940
because we want to have the same
percent change between-- if you

00:01:53.940 --> 00:01:56.570
go from $1,000 to $1,050,
or if you go from $1,050

00:01:56.570 --> 00:02:00.310
down to 1,000-- we actually use
the average point as a base.

00:02:00.310 --> 00:02:03.030
So the percent change
in this scenario--

00:02:03.030 --> 00:02:04.690
let me write it right over here.

00:02:04.690 --> 00:02:09.470
So our percent change--
and I'll write it

00:02:09.470 --> 00:02:10.970
in quotes, because
it's a little bit

00:02:10.970 --> 00:02:14.040
different than what you do
in traditional mathematics

00:02:14.040 --> 00:02:15.920
when you think about
percent changes-- is

00:02:15.920 --> 00:02:18.770
you had a 50 change in price.

00:02:18.770 --> 00:02:21.650
Your price went up by
50, and on our base

00:02:21.650 --> 00:02:26.280
we will use 1,025, which is
the average of 1,000 and 1,050.

00:02:26.280 --> 00:02:34.880
And so that gives us a
change of 50 divided by 1,025

00:02:34.880 --> 00:02:40.250
is equal to, let's
say, roughly 4.9%.

00:02:40.250 --> 00:02:45.750
So this is approximately 4.9%,
we'll say, "increase" in price,

00:02:45.750 --> 00:02:47.980
although we're going to put
that increase in quotes,

00:02:47.980 --> 00:02:50.110
because we're using
it on the average.

00:02:50.110 --> 00:02:52.870
And we do that so that if we
said it was 1,050 to 1,000,

00:02:52.870 --> 00:02:56.920
it would still be a 4.9%
decrease using this same idea--

00:02:56.920 --> 00:02:59.420
using the midpoint as the base.

00:02:59.420 --> 00:03:01.770
Now, when that happens--
Everyone today,

00:03:01.770 --> 00:03:03.500
they use these
travel sites where

00:03:03.500 --> 00:03:06.690
you can compare
prices-- If these really

00:03:06.690 --> 00:03:10.010
are the exact same route, going
from the exact same airport

00:03:10.010 --> 00:03:12.310
to the exact same other
airport in London,

00:03:12.310 --> 00:03:15.430
leaving at the exact
same time, everyone

00:03:15.430 --> 00:03:17.180
is going to gravitate
to this one now,

00:03:17.180 --> 00:03:19.960
because it's only $1,000--
even just to save $50.

00:03:19.960 --> 00:03:22.460
Why would they ride
on this airline?

00:03:22.460 --> 00:03:25.580
So this quantity demand
is going to go to 0.

00:03:25.580 --> 00:03:28.610
And this quantity demanded
is going to go to 400.

00:03:28.610 --> 00:03:30.860
And we're not going to think
about the actual capacity

00:03:30.860 --> 00:03:31.984
of the planes and all that.

00:03:31.984 --> 00:03:34.350
We're going to have a
very simple model here.

00:03:34.350 --> 00:03:37.210
So what was the percent
change in quantity for airline

00:03:37.210 --> 00:03:38.860
two right over here?

00:03:38.860 --> 00:03:43.900
Well, once again, our change
in quantity is 200, not 400.

00:03:43.900 --> 00:03:45.380
We went from 200 to 400.

00:03:45.380 --> 00:03:47.410
So we gained 200.

00:03:47.410 --> 00:03:51.330
And our base, we want to use
the average of 200 and 400,

00:03:51.330 --> 00:03:53.010
which is 300.

00:03:53.010 --> 00:03:59.120
And so this is
approximately 67%.

00:03:59.120 --> 00:04:02.700
So we have, all of a
sudden, our cross elasticity

00:04:02.700 --> 00:04:12.110
of demand for airline
two's tickets,

00:04:12.110 --> 00:04:16.910
relative to a1's price.

00:04:16.910 --> 00:04:23.180
And we get the percent
change in the quantity

00:04:23.180 --> 00:04:29.140
demanded for a2's tickets, which
is 67% over the percent change,

00:04:29.140 --> 00:04:33.150
not in a2's price change,
but in a1's price change.

00:04:33.150 --> 00:04:35.160
That's why we call
it cross elasticity.

00:04:35.160 --> 00:04:38.710
We're going from
one good to another.

00:04:38.710 --> 00:04:44.700
So let's just say, for
simplicity, roughly 5%.

00:04:44.700 --> 00:04:45.725
And so you do the math.

00:04:48.470 --> 00:04:56.500
So if you have 67% divided by
5%, you get to roughly 13.4.

00:04:56.500 --> 00:05:00.740
So this is approximately 13.4.

00:05:00.740 --> 00:05:04.430
So you have a very high
cross elasticity of demand.

00:05:04.430 --> 00:05:07.300
In fact, if you even
increase this, maybe by $5,

00:05:07.300 --> 00:05:08.950
you might have had
the same effect.

00:05:08.950 --> 00:05:12.600
And so you would have had
a very large number here.

00:05:12.600 --> 00:05:15.110
And that situation right here,
for this cross elasticity

00:05:15.110 --> 00:05:16.760
of demand-- it's
because these things

00:05:16.760 --> 00:05:18.510
are near perfect substitutes.

00:05:18.510 --> 00:05:20.386
The way that we set up
this problem, we said,

00:05:20.386 --> 00:05:22.218
well, people don't care
which one they take.

00:05:22.218 --> 00:05:24.250
They're just going to
go for the cheapest one.

00:05:24.250 --> 00:05:27.950
And so when you have
near substitutes,

00:05:27.950 --> 00:05:37.070
or nearly perfect
substitutes, for each other,

00:05:37.070 --> 00:05:42.980
like this example right here,
the cross elasticity of demand

00:05:42.980 --> 00:05:46.079
approaches infinity.

00:05:46.079 --> 00:05:47.620
It gets higher and
higher and higher.

00:05:47.620 --> 00:05:50.680
In theory, if these are really,
really, really identical,

00:05:50.680 --> 00:05:53.010
even if you raise this a
penny, people will say, well,

00:05:53.010 --> 00:05:54.093
why would I waste a penny?

00:05:54.093 --> 00:05:55.720
I would just use airline two.

00:05:55.720 --> 00:05:58.590
And so this number would be
even lower right over here.

00:05:58.590 --> 00:06:01.580
And so this thing might
approach infinity.

00:06:01.580 --> 00:06:04.090
And notice this was a positive.

00:06:04.090 --> 00:06:07.115
When we just did regular
price elasticity of demand,

00:06:07.115 --> 00:06:08.990
the only way that you
would increase quantity

00:06:08.990 --> 00:06:13.130
for a traditional goods
was by lowering price.

00:06:13.130 --> 00:06:17.280
But here, we raise price on a
substitute competitive product,

00:06:17.280 --> 00:06:22.090
and we raise the demand
for airline two's

00:06:22.090 --> 00:06:24.870
product, which actually
made a lot of sense.

00:06:24.870 --> 00:06:27.120
So it wasn't a
negative relationship.

00:06:27.120 --> 00:06:29.890
It's actually a positive
value right over here.

00:06:29.890 --> 00:06:31.760
But you could have
things in other--

00:06:31.760 --> 00:06:34.010
you could have that
negative relationship using

00:06:34.010 --> 00:06:35.650
cross elasticity of demand.

00:06:35.650 --> 00:06:38.280
This is an example
of a substitute.

00:06:38.280 --> 00:06:40.370
We could think about the
example of a complement.

00:06:43.070 --> 00:06:50.090
So what if we're
talking about e-books?

00:06:50.090 --> 00:06:52.710
So let's say I have
some type of an e-book,

00:06:52.710 --> 00:06:56.200
and the current quantity
demanded in a given week

00:06:56.200 --> 00:06:58.130
is 1,000.

00:06:58.130 --> 00:07:00.990
And let's say that the price
of an e-reader that you

00:07:00.990 --> 00:07:07.570
would need for my
e-book is $100.

00:07:07.570 --> 00:07:10.080
But let's say that
price of the e-reader

00:07:10.080 --> 00:07:16.900
goes down from $100 to $80.

00:07:16.900 --> 00:07:21.390
So you had a $20
decrease in price.

00:07:21.390 --> 00:07:27.610
Well, what's going to happen to
my e-book, assuming its price

00:07:27.610 --> 00:07:28.840
does not change?

00:07:28.840 --> 00:07:31.840
Well, then the quantity demanded
for my e-book will go up.

00:07:31.840 --> 00:07:34.890
So let's say the quantity
demanded for my e-book goes up

00:07:34.890 --> 00:07:36.600
by 100, because more
people are going

00:07:36.600 --> 00:07:37.790
to be able to afford
this, or they're

00:07:37.790 --> 00:07:39.206
going to have money
left over when

00:07:39.206 --> 00:07:40.925
they buy this to
buy more e-books.

00:07:40.925 --> 00:07:43.300
And so I don't even know what
the price for my e-book is,

00:07:43.300 --> 00:07:46.230
but at a given price point, the
quantity demanded will go up.

00:07:46.230 --> 00:07:48.740
And so this goes to 1,100.

00:07:48.740 --> 00:07:51.280
And so I'll leave it
to you to calculate

00:07:51.280 --> 00:07:54.580
this price elasticity of demand.

00:07:54.580 --> 00:07:57.530
But you will see that you will
actually get a negative value,

00:07:57.530 --> 00:07:59.580
like we're used to
seeing for regular price

00:07:59.580 --> 00:08:01.106
elasticity of demand.

00:08:01.106 --> 00:08:02.730
And when you do
calculate it, remember,

00:08:02.730 --> 00:08:07.230
you want to do your
percent price change

00:08:07.230 --> 00:08:21.022
in e-book quantity over percent
change in e-reader price.

00:08:21.022 --> 00:08:22.730
And the other thing
you have to remember,

00:08:22.730 --> 00:08:24.350
you don't just take
negative 20 over 100.

00:08:24.350 --> 00:08:26.475
You take negative 20 over
the average of these two,

00:08:26.475 --> 00:08:29.332
when you're thinking of it
in the elasticity context.

00:08:29.332 --> 00:08:30.790
So this right over
here-- actually,

00:08:30.790 --> 00:08:32.164
maybe we'll just
work it through.

00:08:32.164 --> 00:08:33.950
Pause it, and try
to do it yourself.

00:08:33.950 --> 00:08:41.809
So this value right over
here is negative 20 over 90--

00:08:41.809 --> 00:08:46.190
the average of those two--
and this value right over here

00:08:46.190 --> 00:08:51.730
is going to be plus 100 over
the average of these two.

00:08:51.730 --> 00:08:55.140
So the average of
those two is 1,050.

00:08:55.140 --> 00:09:03.640
And so this is 100
divided by 1,050,

00:09:03.640 --> 00:09:07.090
which gets you to about 0.95.

00:09:07.090 --> 00:09:10.370
So about 9 and 1/2% change in
quantity demanded for my book.

00:09:10.370 --> 00:09:15.280
And then this
denominator right here

00:09:15.280 --> 00:09:19.710
is negative 20 divided by 90.

00:09:22.320 --> 00:09:25.130
So you get a drop of 22%.

00:09:25.130 --> 00:09:27.560
And so if you divide the
numerator by the denominator,

00:09:27.560 --> 00:09:35.300
you get 0.952 divided
by negative 0.22222--

00:09:35.300 --> 00:09:37.400
I'll just put couple
of 2's there--

00:09:37.400 --> 00:09:40.080
and you get a negative 0.43.

00:09:40.080 --> 00:09:46.670
So this is equal
to negative 0.43.

00:09:46.670 --> 00:09:47.550
And this makes sense.

00:09:47.550 --> 00:09:49.630
If you lower the
price of an e-reader--

00:09:49.630 --> 00:09:53.630
this complement product,
a product that goes along

00:09:53.630 --> 00:09:56.380
with my e-book-- it
increases the demand.

00:09:56.380 --> 00:09:58.940
So just like you get with
price elasticity of demand,

00:09:58.940 --> 00:10:01.970
you get a negative
value over here.

00:10:01.970 --> 00:10:05.100
And what about completely
two unrelated products?

00:10:05.100 --> 00:10:11.020
So let's say that
I have basketballs,

00:10:11.020 --> 00:10:15.380
and the price of basketballs
goes from, let's say,

00:10:15.380 --> 00:10:18.330
$20 to $30.

00:10:18.330 --> 00:10:20.037
What's going to
happen to my e-book?

00:10:20.037 --> 00:10:21.620
Well, my e-book's
not going to change.

00:10:21.620 --> 00:10:23.390
It's going to stay at $1,000.

00:10:23.390 --> 00:10:28.420
So my percent change in the
quantity demanded of my e-book

00:10:28.420 --> 00:10:30.525
is going to be 0
in this example.

00:10:30.525 --> 00:10:31.900
So we're going to
have 0, when we

00:10:31.900 --> 00:10:34.140
want to do this cross
elasticity of demand,

00:10:34.140 --> 00:10:36.530
over my percent
change in basketballs,

00:10:36.530 --> 00:10:39.090
which would be 30 over 25.

00:10:39.090 --> 00:10:45.760
So whatever that
is-- 30 over 25 would

00:10:45.760 --> 00:10:51.340
be 10 over 25-- which
is a 40% increase.

00:10:51.340 --> 00:10:56.430
So that would be 0 over
40%, which equals 0.

00:10:56.430 --> 00:10:58.860
So for unrelated
products, products

00:10:58.860 --> 00:11:00.540
where the price of
change in one of them

00:11:00.540 --> 00:11:03.020
does not affect the quantity
demanded in the other,

00:11:03.020 --> 00:11:04.780
it makes complete
sense that you have

00:11:04.780 --> 00:11:07.819
a 0 cross elasticity of demand.

00:11:07.819 --> 00:11:10.110
If they're complements, you
would have a negative cross

00:11:10.110 --> 00:11:11.074
elasticity of demand.

00:11:11.074 --> 00:11:13.490
And if they're substitutes,
you would have a positive one.

00:11:13.490 --> 00:11:16.270
And the closer the substitutes
they are, the more positive

00:11:16.270 --> 00:11:20.080
your cross elasticity of
demand is going to be.


Elasticity of supply

WEBVTT
Kind: captions
Language: en

00:00:00.499 --> 00:00:04.480
We've been talking a lot
about elasticities of demand,

00:00:04.480 --> 00:00:06.550
so you were probably
wondering, can we

00:00:06.550 --> 00:00:10.170
think about elasticities
of a supply?

00:00:10.170 --> 00:00:13.192
And, as you can imagine, the
answer is, of course we can.

00:00:13.192 --> 00:00:14.650
And it's interesting
to think about

00:00:14.650 --> 00:00:18.390
how does the percent
change in quantity supplied

00:00:18.390 --> 00:00:21.250
relate to percent
change in prices?

00:00:21.250 --> 00:00:23.620
So for example,
let's say we have

00:00:23.620 --> 00:00:25.780
a lemonade stand of some sort.

00:00:25.780 --> 00:00:27.990
So this is price on that axis.

00:00:27.990 --> 00:00:30.430
That is quantity on that axis.

00:00:30.430 --> 00:00:32.259
And let's say that
our supply curve

00:00:32.259 --> 00:00:34.080
looks something like that.

00:00:34.080 --> 00:00:36.250
Obviously, the higher the
price, the more quantity

00:00:36.250 --> 00:00:37.800
we're willing to supply.

00:00:37.800 --> 00:00:45.150
And let's say at a price of
$1, the quantity supplied

00:00:45.150 --> 00:00:46.560
is going to be 10.

00:00:46.560 --> 00:00:51.180
And this is going to
be in gallons per week.

00:00:51.180 --> 00:00:53.230
So the quantity
supplied is going

00:00:53.230 --> 00:00:55.070
to be 10 gallons per week.

00:00:55.070 --> 00:01:00.300
And let's say that if
the price goes to $2,

00:01:00.300 --> 00:01:04.000
so when the price goes
to $2, the quantity

00:01:04.000 --> 00:01:11.180
supplied goes to 16
gallons per week.

00:01:11.180 --> 00:01:15.110
So what is the elasticity
of supply roughly

00:01:15.110 --> 00:01:17.440
over this period
right over here?

00:01:17.440 --> 00:01:20.844
So the elasticity of supply.

00:01:20.844 --> 00:01:23.010
And you can imagine how
we're going to calculate it.

00:01:23.010 --> 00:01:30.570
It's going to be the percent
change in quantity supplied

00:01:30.570 --> 00:01:35.190
over our percent
change in price.

00:01:35.190 --> 00:01:38.610
So what is our percent
change in price?

00:01:38.610 --> 00:01:41.520
Well, we went from $1 to $2.

00:01:41.520 --> 00:01:46.660
So this part right over here is
going to be, we went up by $1.

00:01:46.660 --> 00:01:49.190
So we went up by $1 per gallon.

00:01:49.190 --> 00:01:51.290
So it's going to be up by $1.

00:01:51.290 --> 00:01:54.580
And we don't use 1, we don't use
our starting point as our base

00:01:54.580 --> 00:01:57.190
like we would do when we're
traditionally finding a percent

00:01:57.190 --> 00:01:59.481
change, because we want to
have the same present change

00:01:59.481 --> 00:02:01.920
whether we go from 1
to 2 as from 2 to 1.

00:02:01.920 --> 00:02:05.290
So instead, the convention when
we think about elasticities

00:02:05.290 --> 00:02:07.220
is use the midpoint
of these two or use

00:02:07.220 --> 00:02:08.850
the average of these two.

00:02:08.850 --> 00:02:12.750
So 1 plus 2 is 3, 3
divided by 2 is 1.5.

00:02:12.750 --> 00:02:16.490
So it's 1 over $1.50, or
you could say $1.50 is right

00:02:16.490 --> 00:02:18.470
in between these two things.

00:02:18.470 --> 00:02:23.670
And 1 over $1.50, this
is about 67% roughly.

00:02:23.670 --> 00:02:26.120
So this is approximately 67.

00:02:26.120 --> 00:02:29.400
We have approximately
a 67% change in price

00:02:29.400 --> 00:02:31.180
based on how we just calculated.

00:02:31.180 --> 00:02:34.180
Remember, we're using
the midpoint as our base.

00:02:34.180 --> 00:02:42.440
And then our percent change in
quantity supplied, that's this.

00:02:42.440 --> 00:02:44.100
So this right over here.

00:02:44.100 --> 00:02:45.860
We went from 10 to 16.

00:02:45.860 --> 00:02:50.820
So we have plus-6 over a base
of, midpoint between 10 and 16,

00:02:50.820 --> 00:02:51.515
is 13.

00:02:51.515 --> 00:02:54.850
10 plus 16 is 26,
divided by 2 is 13.

00:02:54.850 --> 00:03:00.520
6/13, which is going to
be 40-something percent.

00:03:00.520 --> 00:03:02.020
Get a calculator out.

00:03:02.020 --> 00:03:08.000
So we have 6 divided
by 13 gives us 46%.

00:03:08.000 --> 00:03:12.040
So this right over here is 46%.

00:03:12.040 --> 00:03:14.750
So we have, when we
had, based on the way

00:03:14.750 --> 00:03:19.280
we calculated it, it's
67% increase in price,

00:03:19.280 --> 00:03:24.460
we had a 46% increase
in quantity supplied.

00:03:24.460 --> 00:03:28.794
So this is a 46% increase
in quantity supplied.

00:03:28.794 --> 00:03:30.460
And so we could see
it's going to be 40.

00:03:30.460 --> 00:03:35.530
Our elasticity of supply is
going to be 46% over 67%.

00:03:35.530 --> 00:03:38.800
So it's going to be
something less than 1.

00:03:38.800 --> 00:03:42.520
So that's going to be that
divided by-- it's actually

00:03:42.520 --> 00:03:47.680
0.6666 and it keeps going on
forever-- gets us to 0.69.

00:03:47.680 --> 00:03:51.270
So this gives us an
elasticity of supply of 0.69.

00:03:51.270 --> 00:03:55.310
And maybe I should say
approximately 0.69,

00:03:55.310 --> 00:03:58.820
which tells us that we
get a smaller percent.

00:03:58.820 --> 00:04:00.700
At least at this price
point right over here,

00:04:00.700 --> 00:04:05.490
we get a smaller percent
change in quantity supplied

00:04:05.490 --> 00:04:08.660
than our percent
change in price.

00:04:08.660 --> 00:04:10.240
Now, let's think
about-- like we did

00:04:10.240 --> 00:04:13.290
when we thought about the
elasticities of demand--

00:04:13.290 --> 00:04:15.870
let's think about
different scenarios.

00:04:15.870 --> 00:04:20.019
So let's think about a
scenario that is inelastic,

00:04:20.019 --> 00:04:22.360
that is maybe
perfectly inelastic.

00:04:22.360 --> 00:04:28.900
So let's say that
price and quantity.

00:04:28.900 --> 00:04:32.020
So let's take me for example.

00:04:32.020 --> 00:04:32.800
I make videos.

00:04:32.800 --> 00:04:33.950
I love making videos.

00:04:33.950 --> 00:04:36.240
This is what I want to
spend my days doing.

00:04:36.240 --> 00:04:39.090
And I don't care
how much you pay me

00:04:39.090 --> 00:04:40.770
or how little you pay me.

00:04:40.770 --> 00:04:42.504
I guess if you paid
me enough, maybe

00:04:42.504 --> 00:04:44.670
I'd spend even a little bit
more time making videos.

00:04:44.670 --> 00:04:47.800
But let's just
assume that I don't.

00:04:47.800 --> 00:04:50.750
Whether you pay me a penny
a video or zero per video,

00:04:50.750 --> 00:04:53.800
or whether you pay
me $1,000 per video,

00:04:53.800 --> 00:04:57.516
I'm going to just make the same
number of videos every day.

00:04:57.516 --> 00:05:02.940
So this right over here is
videos per day on average.

00:05:02.940 --> 00:05:05.030
And this is the price per video.

00:05:05.030 --> 00:05:07.270
And let's say no matter
how much you pay me,

00:05:07.270 --> 00:05:10.520
whether you pay me nothing
or you pay me $1,000,

00:05:10.520 --> 00:05:12.940
I am just going to
produce, on average,

00:05:12.940 --> 00:05:15.530
let's just say,
three videos a day.

00:05:15.530 --> 00:05:18.760
So then you have
this right over here.

00:05:18.760 --> 00:05:24.530
You have a perfectly
inelastic supply curve.

00:05:24.530 --> 00:05:32.900
So this is perfectly
inelastic supply curve.

00:05:32.900 --> 00:05:36.710
Now, you could have
the other scenario

00:05:36.710 --> 00:05:38.720
where you are a farmer.

00:05:38.720 --> 00:05:42.181
So let me do price and quantity.

00:05:42.181 --> 00:05:44.430
Now, you have the other
scenario where you're a farmer

00:05:44.430 --> 00:05:48.700
and you can either do crop
A or crop B. Maybe it's

00:05:48.700 --> 00:05:49.600
corn and wheat.

00:05:49.600 --> 00:05:51.715
And you can easily
swap between the two.

00:05:51.715 --> 00:05:53.215
And let's just
assume for simplicity

00:05:53.215 --> 00:05:57.280
it costs you the exact same
to produce one or the other.

00:05:59.890 --> 00:06:03.386
So let's say that the
price of wheat per-- and

00:06:03.386 --> 00:06:05.010
let's say we're using
comparable units.

00:06:05.010 --> 00:06:10.960
So the price of
wheat is, adjusting

00:06:10.960 --> 00:06:13.990
for units and all of
that, let's say it's $10,

00:06:13.990 --> 00:06:16.402
I don't know, per bushel
or something like that.

00:06:16.402 --> 00:06:18.860
We just want to simplify it
for the sake of our model right

00:06:18.860 --> 00:06:19.690
over here.

00:06:19.690 --> 00:06:22.560
But this right over here,
we're thinking about the corn.

00:06:22.560 --> 00:06:23.660
We're thinking about corn.

00:06:29.780 --> 00:06:32.170
Let's say corn is right at $10.

00:06:32.170 --> 00:06:34.610
And right at $10, when
they're both at $10,

00:06:34.610 --> 00:06:38.460
I will produce-- so
let me make this clear.

00:06:38.460 --> 00:06:44.390
So price of corn is $10, and
the quantity of corn-- maybe,

00:06:44.390 --> 00:06:48.130
I don't know, I
produce 2,000 bushels.

00:06:48.130 --> 00:06:49.820
And I know these
prices are way off

00:06:49.820 --> 00:06:53.010
for what the real price per
bushel of corn or wheat is.

00:06:53.010 --> 00:06:54.330
And same thing.

00:06:54.330 --> 00:06:57.630
My quantity for wheat
right here is 2,000.

00:06:57.630 --> 00:07:02.880
Now, if the price of corn were
to go marginally up-- so let

00:07:02.880 --> 00:07:03.470
me put this.

00:07:03.470 --> 00:07:05.330
So this is our graph for corn.

00:07:05.330 --> 00:07:09.910
So this is $10 and this is 2,000
bushels per year or something.

00:07:09.910 --> 00:07:12.470
So let's say that's where
we are right over there.

00:07:12.470 --> 00:07:16.260
Now, if the price for
corn goes marginally up,

00:07:16.260 --> 00:07:22.585
if the price for corn goes
up to even $10.05 per bushel,

00:07:22.585 --> 00:07:24.710
all of a sudden, I'm going
to shift all of my wheat

00:07:24.710 --> 00:07:26.290
production to corn production.

00:07:26.290 --> 00:07:28.040
So this is going to
go to 0, and then this

00:07:28.040 --> 00:07:32.630
is going to go to $4,000.

00:07:32.630 --> 00:07:38.150
So at just $10.05, we're going
to go all the way to $4,000.

00:07:38.150 --> 00:07:40.430
And likewise, if this
price were to go down,

00:07:40.430 --> 00:07:42.899
if this were to go
to, like, $9.95,

00:07:42.899 --> 00:07:44.690
I would shift all of
my production to wheat

00:07:44.690 --> 00:07:46.750
and I wouldn't produce any corn.

00:07:46.750 --> 00:07:50.830
And so there you see
that the demand curve

00:07:50.830 --> 00:07:52.860
is getting very flat.

00:07:52.860 --> 00:07:56.420
And you can see, based on
very, very small percent

00:07:56.420 --> 00:08:00.550
changes in prices, I have
very large percent changes

00:08:00.550 --> 00:08:02.400
in quantity supplied.

00:08:02.400 --> 00:08:13.250
So this right over here is
approaching perfect elasticity.

00:08:13.250 --> 00:08:16.550
Huge changes in quantity
supplied, elasticity,

00:08:16.550 --> 00:08:20.370
for small percent
changes in price.

00:08:20.370 --> 00:08:23.780
Now, the cool thing about
elasticity of supply

00:08:23.780 --> 00:08:26.390
is it's actually much
easier to make a curve that

00:08:26.390 --> 00:08:28.467
has unit elasticity
or even, if you

00:08:28.467 --> 00:08:30.300
want to think about it,
constant elasticity.

00:08:30.300 --> 00:08:32.470
But if you want to
have unit elasticity,

00:08:32.470 --> 00:08:36.200
the easiest curve I can
draw for unit elasticity

00:08:36.200 --> 00:08:37.710
is going to look like this.

00:08:37.710 --> 00:08:40.260
Well, actually, this is the
curve for unit elasticity.

00:08:40.260 --> 00:08:43.390
It will literally be a
curve that looks like that.

00:08:43.390 --> 00:08:45.200
And the reason why
it works in this case

00:08:45.200 --> 00:08:47.150
is because it's upward-sloping.

00:08:47.150 --> 00:08:50.480
As price increases, so
does quantity increase

00:08:50.480 --> 00:08:51.950
for the supply curve.

00:08:51.950 --> 00:08:54.950
So at any point here, the two
are going to be proportional.

00:08:54.950 --> 00:08:58.770
So a given change in quantity
and a given change in price,

00:08:58.770 --> 00:09:01.510
they're going to represent
the same percentages,

00:09:01.510 --> 00:09:05.080
because, as price is increasing,
when you have large price

00:09:05.080 --> 00:09:07.660
or when you have medium price,
you have medium quantity.

00:09:07.660 --> 00:09:12.270
When you have large price,
you have large quantity.

00:09:12.270 --> 00:09:14.770
So these steps are going
to be the same percentage

00:09:14.770 --> 00:09:15.750
of either one of them.

00:09:15.750 --> 00:09:19.060
When you have small prices,
you have small quantities.

00:09:19.060 --> 00:09:24.570
And so it's much easier to
construct a supply curve that

00:09:24.570 --> 00:09:28.380
has unit elasticity than it is
to construct a normal demand

00:09:28.380 --> 00:09:31.390
curve that has unit elasticity.