Market equilibrium

WEBVTT
Kind: captions
Language: en

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So, let's say we are in the apple market.

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What I want to do in
this video is think about

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both demand and supply for the apples at

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different prices.

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Let's draw ourselves a little graph here.

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We already know this right over here,

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the vertical axis is the price axis, and

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this we're going to
say is price per pound.

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The horizontal axis this is the quantity.

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The quantity of apples.

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Let's put some tick marks here.

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Let's say that's $1 a pound, $2 a pound,

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$3 a pound, $4 a pound, and $5, and

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let's say this is
thousands of pounds produce

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and we have to set a period.

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Let's say this is for the
next week, and so this is

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1000 pounds, 2000, 3000, 4000, and 5000.

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Now, let's think about
both the supply and the

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demand curves for this
market, or potential

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supply and demand curves.

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First I will do the demand.
If the price of apples were

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really high, and I encourage you to always

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think about this when
you are about to draw

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your demand and supply
curves. If the price

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of apples were really
high, what would happen

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to consumers? Well, they
wouldn't demand much.

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The quantity demanded would be low.

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If the price were high, maybe the quantity

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demanded is like 500 apples.

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And once again I am
being very careful to say

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the quantity demanded is 500 apples.

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I'm not saying the demand is 500 apples.

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The demand is the entire relationship.

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The actual specific quantity, we call that

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the quantity demanded.

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The price of $5 of quantity demanded would

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be about 500. Maybe at a
price of $1, the quantity

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demanded would be maybe 4000 pounds.

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Our demand curve might
look something like this.

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Might look something like that.

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Let me draw it a little bit less bumpy.

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So, our demand curve might
look something like that.

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I can label it. That is our demand curve.

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I'll think about our supply curve.

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Well, there some price
below which we aren't

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even willing to produce apples.

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Let's say that's like 50 cents.

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So at 50 cents that's where
were even just willing

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to start producing apples.

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Let's say if apples ...
if the price of apple got

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to a dollar where the
quantity we've be willing

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to supply is about a 1000 pounds, and

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it just keeps increasing
as the price increases.

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So this is the supply curve, and

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when I talk about we, I'm talking about

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all the suppliers in this market.

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We could be doing this
for a specific supplier.

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We could be doing this
for a specific market.

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We could be doing for
the global apple market.

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However, you want to view it, but for the

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sake of this video let's
just assume its like

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our little town that is fairly
isolated and all of that.

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Let's think about what happens
in different scenarios.

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What happens if the
suppliers of the apples

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going into that week for their
own planning purposes ...

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They just think for whatever
reason, that they're only going

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to be able to sell the
apples at $1 per pound.

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Given the supply curve, they
only supply 1000 pounds.

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This is what the suppliers plan for,

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and this is where they
set the price point at $1.

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One dollar per pound. Now, what's going to

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happen in that scenario?
Well in that scenario

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they supplied 1000. The quantity
supplied is 1000 pounds.

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Let me write this down.
So, I'll do it in pink

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for this scenario. So,
this scenario the quantity

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supplied is 1000 pounds.

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What is the quantity
demanded? Quantity demanded.

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This is all the scenario where
the price ... the price or the

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initial price that the
growers or producers set

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was $1 per pound. One dollar per pound.

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Well the quantity demanded
at $1 per pound is

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4000 pounds of apples.
4000 pound of apples.

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What do we have here?

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Well, here we have a shortage.

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We have a shortage of 3000
apples at that price point.

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At a dollar, a lot more people
are going to want to buy apples,

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and the producers just didn't ... I guess

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they didn't figure that out right.

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They didn't produce enough apples.

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Now what will naturally start happening?

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If you have the shortage
... you have all these

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people who want to buy apples, and you

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only have so many apples there,

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what might happen in the
next period in the next week?

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Well, first of all,
those apples that are out

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there they might get bid up,
so, the prices start going

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to start going up. The
prices are going to start

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going up. People are
going to start bidding up

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the apples. They want them so badly.

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Their going to start bidding them up,

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and as they start getting
bid up, the producers

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are going to say, "Wow!
There's so many people

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are running out of apples.
We also need to increase

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the quantity produce."

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The quantity will also go
up. The price will go up.

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If you look at from the
suppliers point of view.

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The price will go up, and
the quantity will go up.

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They will move along this line there.

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So maybe in the next period
there's less of a shortage,

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or they move away from
that shortage situation.

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If the price and quantity
increase a little bit,

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so maybe the price goes
to $2, and the quantity

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goes to ... I don't know,
this looks like about

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1900 ... 1900 pounds,
now all of a sudden you

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have less of a shortage. I
think you see that I'm getting

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to an interesting point over here.

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I won't go there just
yet. I won't go there

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just yet. Let's think
about another situation.

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Let's think about after this happens.

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Price and quantity increases
so much that essentially

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overshoots this interesting
point right over here.

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So in the next week the
suppliers they'll say,

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"Wow! People want our
apples so badly, let's set

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the price really high at
$3, and at $3 we're really

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excited about producing apples."

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So, we the suppliers
are going to produce ...

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let me do this in a
color I haven't used yet.

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We the suppliers are going
to produce at $3 a pound.

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We are hoping to sell
3000 pounds of apples.

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This is where, maybe, they
adjust to the next week.

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What's going to happen
there at a price of $3.

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That's the scenario right
over here. The price of $3.

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So, the price is now $3 per pound.

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Well, now the quantity supplied
is going to be 3000 pounds.

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I could write 3000 pounds.

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What is the quantity demanded?

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The quantity demanded is now much lower.

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The price is high now,
because the consumers

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might want to go buy other things, or they

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can't afford an apple,
or whatever it might be.

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Now the quantity
demanded, now that's looks

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like about 1300. 1300 pounds.

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What situation do we have now?

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Well, now we have a much
bigger supply then ... or

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the quantity supply is
much bigger than the

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quantity demanded. Now we face a surplus.

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So, now we have a surplus.

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Let me draw that line
there. I want to make it

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clear this is all the same scenario.

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We now have a surplus of ... what is this?

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700 will get us to 2000.
We have a surplus of 1700

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pounds of apples. Now what happens in a

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surplus situation? Well,
apples won't stay good

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forever, so maybe the
producers get a little

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desperate. They start selling.

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They start reducing the price,
maybe to start attracting

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some consumers. They
start reducing the price.

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When they start seeing that
the prices are going down,

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and you have this glut of
apples, there're all going bad

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and not getting sold, the
quantity is also going to

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start going down.
They'll produce fewer and

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fewer apples, so we'll move
here along the supply curve.

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As you decrease the price, what's going to

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happen to the demand curve?

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Well the demand is going to go up.

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Over here the prices was too high, so it's

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natural for the sellers
to lower the price.

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When you lower the price it
also reduces the quantity.

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We go this way.

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When you lower the price
it increases demand.

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You go that way.

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If the price from the get-go were too low,

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then you have this huge
shortage, things get

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bid up. The prices go
up. As the price goes

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up, the suppliers want to produce more.

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They move up the curve.
As the price goes up

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then the people will demand less.

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You see that's it's all
converging on a point

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right over here where
the two lines intersect.

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Let me do that in a ... its all
converging right over there.

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That's the price at which the
quantity supplied will equal

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the quantity demanded. We
call this, which looks like

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for this scenario, maybe about $2.15.

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Let me just write it there $2.15.

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We call that the equilibrium price.

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Equilibrium price is $2.15 a pound.

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It's the price at which
the quantity supplied

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is equal to the quantity demanded.

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This quantity supplied
is equal to the quantity

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demanded. That's the equilibrium quantity.

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That right over here looks like it's right

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about ... I don't know ... 2200 pounds.

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2200 pounds.

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Assuming that nothing
else changes, this is a

00:10:03.322 --> 00:10:06.733
good scenario for both
the consumers and the

00:10:06.733 --> 00:10:09.250
producers. They keep producing 2200.

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They charge this price,
and everything's happy.

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All the apples get sold
and none of them go bad.


Factors affecting supply

WEBVTT
Kind: captions
Language: en

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In the last video, we introduced
ourselves to the law of supply.

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And it was a fairly
common sense idea

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that if we hold all else equal,
that if the price of something

00:00:09.370 --> 00:00:12.270
goes up, there's more
incentive for more producers

00:00:12.270 --> 00:00:15.250
to produce it or a given
producer to produce more of it.

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And we saw that.

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As the price goes up, we
moved along the supply curve,

00:00:19.840 --> 00:00:22.084
and the quantity
produced went up.

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Now what I want to talk about in
this video is all of the things

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we held equal in the last video.

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And the first of these, I'll
call this the price of inputs,

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or another way to think about
it is the cost of production.

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So if the price of inputs,
maybe the price of labor,

00:00:39.446 --> 00:00:41.320
the people who would
have to pick the grapes,

00:00:41.320 --> 00:00:43.310
or our fuel that we
need to transport

00:00:43.310 --> 00:00:46.180
the grapes, or the land,
if any of that increased,

00:00:46.180 --> 00:00:49.220
that at a given price point,
we would make less money.

00:00:49.220 --> 00:00:51.470
There's less incentive
for us to do it,

00:00:51.470 --> 00:00:54.680
especially if this is
true only for grapes.

00:00:54.680 --> 00:00:56.550
Maybe we'll say,
OK, if it's now more

00:00:56.550 --> 00:00:58.250
expensive to get
grape seeds, maybe

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I'll start planting
something else,

00:01:00.060 --> 00:01:03.560
because I'm not getting as
much profit per pound of grape.

00:01:03.560 --> 00:01:06.960
So if the price of my inputs,
or if the price of my cost--

00:01:06.960 --> 00:01:11.760
or if the size of my costs goes
up, at any given price point,

00:01:11.760 --> 00:01:13.820
I'd want to produce less.

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So if my price of inputs go
up, my supply, the supply,

00:01:19.980 --> 00:01:22.020
would go down.

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So if this becomes,
at this price point,

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I'd make less money,
so I would produce less

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or maybe I would
produce other things.

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So the whole supply curve
would shift to the left.

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And also even the
minimum price I

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would need to supply
any of it would also

00:01:40.890 --> 00:01:42.779
go up, when you shift
the curve to the left,

00:01:42.779 --> 00:01:44.320
because now all of
a sudden, it costs

00:01:44.320 --> 00:01:47.390
me more to produce
even that first unit.

00:01:47.390 --> 00:01:49.910
And likewise, if my
price of my inputs

00:01:49.910 --> 00:01:53.160
went down, now all of a sudden
at any given price point,

00:01:53.160 --> 00:01:55.190
producing grapes would
become more profitable

00:01:55.190 --> 00:01:57.810
and I would have more incentive
to maybe produce grapes

00:01:57.810 --> 00:02:01.070
relative to other things
and use more land for grapes

00:02:01.070 --> 00:02:02.280
than other things.

00:02:02.280 --> 00:02:06.490
And then you would have the
whole curve shift to the right.

00:02:06.490 --> 00:02:11.290
Now let's think
about related goods.

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So what happens with the
price of related goods.

00:02:14.680 --> 00:02:17.359
And we have to put our-- when we
think about this, we don't want

00:02:17.359 --> 00:02:19.150
to think of it from a
demand point of view,

00:02:19.150 --> 00:02:20.608
because we're
talking about supply.

00:02:20.608 --> 00:02:23.310
You want to think about it from
the producer's point of view.

00:02:23.310 --> 00:02:25.170
So when we think about
related goods here,

00:02:25.170 --> 00:02:27.950
we want to think about
substitutes for production.

00:02:27.950 --> 00:02:30.286
So maybe I'm a farmer--
and I know very little bit

00:02:30.286 --> 00:02:32.660
about farming, so I don't even
know if this is possible--

00:02:32.660 --> 00:02:35.230
but maybe on my land, I'm
saying, well, some of my land

00:02:35.230 --> 00:02:37.200
is going to be for
grapes and some of it

00:02:37.200 --> 00:02:39.650
is going to be for blueberries.

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And so what would happen if
the price of a related good,

00:02:43.720 --> 00:02:46.130
in particular blueberries,
what would happen

00:02:46.130 --> 00:02:49.190
if the price of
blueberries went up?

00:02:49.190 --> 00:02:52.100
Well, if the price of
blueberries went up,

00:02:52.100 --> 00:02:55.130
then I would say, wow, maybe I
can do better with blueberries.

00:02:55.130 --> 00:02:57.010
And I would allocate
more of my land

00:02:57.010 --> 00:02:59.300
to blueberries than to grapes.

00:02:59.300 --> 00:03:02.240
And so once again, the
price of related goods--

00:03:02.240 --> 00:03:04.450
well, it depends
which related goods--

00:03:04.450 --> 00:03:08.410
but if the price of
productive substitutes--

00:03:08.410 --> 00:03:11.740
so price of other
things I could produce,

00:03:11.740 --> 00:03:16.750
other things I can produce.

00:03:16.750 --> 00:03:22.270
If the price of other things
I can produce goes up,

00:03:22.270 --> 00:03:26.770
then my supply of grapes,
once again, would go down.

00:03:26.770 --> 00:03:29.595
And the important thing is, is
in any of these circumstances--

00:03:29.595 --> 00:03:30.970
literally, just
think it through.

00:03:30.970 --> 00:03:32.678
Do not just look at
what I'm writing here

00:03:32.678 --> 00:03:35.800
and just try to memorize it
in some way, shape, or form.

00:03:35.800 --> 00:03:38.260
This is really just a way
to think about things.

00:03:38.260 --> 00:03:41.312
Hey, obviously, if I
can make more money off

00:03:41.312 --> 00:03:42.770
of blueberries now
all of a sudden,

00:03:42.770 --> 00:03:44.311
I'm going to allocate
more of my land

00:03:44.311 --> 00:03:45.970
to blueberries than to grapes.

00:03:45.970 --> 00:03:48.820
Supply of grapes will go down.

00:03:48.820 --> 00:03:50.980
Now, let's think
about what happens

00:03:50.980 --> 00:03:52.865
with the number of suppliers.

00:03:55.830 --> 00:03:58.790
And this one is
pretty common sense.

00:03:58.790 --> 00:04:01.160
The more people
they are supplying,

00:04:01.160 --> 00:04:03.330
the higher the supply would be.

00:04:03.330 --> 00:04:06.277
So if the number of
suppliers goes up-- and now

00:04:06.277 --> 00:04:08.110
you wouldn't imagine--
this is a curve maybe

00:04:08.110 --> 00:04:09.745
for the aggregate supply.

00:04:09.745 --> 00:04:12.030
So if the number of
suppliers goes up,

00:04:12.030 --> 00:04:15.760
then the aggregate supply would
go up at any given price point.

00:04:15.760 --> 00:04:18.029
If the number of
suppliers were to go down,

00:04:18.029 --> 00:04:20.420
then the aggregate
supply would go down

00:04:20.420 --> 00:04:22.120
at any given price point.

00:04:22.120 --> 00:04:24.310
So this one, hopefully,
is somewhat obvious.

00:04:24.310 --> 00:04:27.770
Then we could think about
things like technology.

00:04:27.770 --> 00:04:29.950
And so this is
just maybe, there's

00:04:29.950 --> 00:04:32.120
some innovation,
some new type of seed

00:04:32.120 --> 00:04:35.370
that with the same amount of
work, the same amount of land,

00:04:35.370 --> 00:04:37.430
can produce that
many more grapes.

00:04:37.430 --> 00:04:42.130
So if we have technological
improvements--

00:04:42.130 --> 00:04:45.030
I'm assuming we're not going to
go into some type of dark ages.

00:04:45.030 --> 00:04:46.880
If we have technological
improvements,

00:04:46.880 --> 00:04:54.040
then that will also
make the supply go up.

00:04:54.040 --> 00:04:55.540
You can also think
of it as it might

00:04:55.540 --> 00:04:56.710
make it cheaper to produce.

00:04:56.710 --> 00:04:58.210
So it's kind of the
same thing here.

00:04:58.210 --> 00:05:00.270
The price of inputs
might go down.

00:05:00.270 --> 00:05:02.036
So that would make
your supply go up.

00:05:02.036 --> 00:05:03.410
Or you could just
say, hey, look,

00:05:03.410 --> 00:05:05.080
there's just going to be
more grapes popping off

00:05:05.080 --> 00:05:07.000
of these new types
of vines that we got,

00:05:07.000 --> 00:05:09.772
so we're just going to
produce more grapes.

00:05:09.772 --> 00:05:11.230
And then the last
one, I'll cover--

00:05:11.230 --> 00:05:13.820
and it's a little bit strange
in the grape analogy--

00:05:13.820 --> 00:05:16.860
is the expected future prices.

00:05:16.860 --> 00:05:24.280
So the expected future
prices, price expectations.

00:05:24.280 --> 00:05:25.950
Now let's go away
from the grapes,

00:05:25.950 --> 00:05:29.410
because grapes, they're
perishable goods, they go bad.

00:05:29.410 --> 00:05:33.130
It's not like you can save
goods to use them later.

00:05:33.130 --> 00:05:35.600
But if, let's say, you
are an oil producer.

00:05:35.600 --> 00:05:38.800
And oil is something you can
store and you can use it later.

00:05:41.420 --> 00:05:45.010
If you expected oil prices
to be neutral today, and then

00:05:45.010 --> 00:05:47.070
tomorrow, all of
a sudden, you are

00:05:47.070 --> 00:05:51.210
sure that oil prices are going
to go up in the future-- you're

00:05:51.210 --> 00:05:52.870
sure that a year
from now, oil prices

00:05:52.870 --> 00:05:55.720
are just going to go through the
roof-- what's your incentive?

00:05:55.720 --> 00:05:57.440
Well, you should
hoard all of your oil.

00:05:57.440 --> 00:06:00.550
Do not sell it today and wait
to sell it in the future,

00:06:00.550 --> 00:06:02.480
if you're sure that's
what's going to happen.

00:06:05.860 --> 00:06:08.450
If there's a change in
expected future prices--

00:06:08.450 --> 00:06:14.170
so if you go from neutral to
expecting prices go up-- prices

00:06:14.170 --> 00:06:17.801
go up in the future, then you're
going to hoard your goods.

00:06:17.801 --> 00:06:20.300
You can't hoard grapes, because
the grapes will just go bad.

00:06:20.300 --> 00:06:21.350
You might be able
to, I don't know,

00:06:21.350 --> 00:06:22.930
turn them into
wine or something.

00:06:22.930 --> 00:06:25.590
But if we're talking
about something like oil,

00:06:25.590 --> 00:06:27.210
you would say, hey,
why should I pump

00:06:27.210 --> 00:06:29.320
all of the fixed amount
of oil in the ground

00:06:29.320 --> 00:06:32.790
today to sell at
today's lower prices?

00:06:32.790 --> 00:06:35.480
I'm going to lower
the supply today,

00:06:35.480 --> 00:06:37.280
so I can sell it in the future.

00:06:37.280 --> 00:06:39.610
So if the expected
future prices go

00:06:39.610 --> 00:06:44.520
from neutral to you
expect future prices to go

00:06:44.520 --> 00:06:47.420
up dramatically,
then current supply--

00:06:47.420 --> 00:06:49.100
and that's, I'm just
going to emphasize

00:06:49.100 --> 00:06:53.680
by writing the word current--
current supply will go down.

00:06:53.680 --> 00:06:57.272
So you can hoard it to
sell it in the future.


Law of supply

WEBVTT
Kind: captions
Language: en

00:00:00.500 --> 00:00:02.500
We've talked a lot about demand.

00:00:02.500 --> 00:00:05.130
So now let's talk
about supply, and we'll

00:00:05.130 --> 00:00:06.455
use grapes as this example.

00:00:06.455 --> 00:00:09.490
We'll pretend to be grape
farmers of some sort.

00:00:09.490 --> 00:00:11.410
So I will start by
introducing you--

00:00:11.410 --> 00:00:13.850
and maybe I'll do it in purple
in honor of the grapes--

00:00:13.850 --> 00:00:19.140
to the law of supply, which
like the law of demand,

00:00:19.140 --> 00:00:20.730
makes a lot of intuitive sense.

00:00:20.730 --> 00:00:23.324
If we hold all else equal--
in the next few videos,

00:00:23.324 --> 00:00:24.740
we'll talk about
what happens when

00:00:24.740 --> 00:00:26.448
we change some of
those things that we're

00:00:26.448 --> 00:00:28.920
going to hold equal right
now-- but if you hold all else

00:00:28.920 --> 00:00:31.360
equal and the only
thing that you're doing

00:00:31.360 --> 00:00:34.750
is you're changing price,
then the law of supply

00:00:34.750 --> 00:00:37.740
says that if the price
goes up-- I'll just say p

00:00:37.740 --> 00:00:40.260
for price-- if
the price goes up,

00:00:40.260 --> 00:00:42.110
then the supply-- now,
let me be careful--

00:00:42.110 --> 00:00:49.050
the quantity supplied goes up.

00:00:49.050 --> 00:00:52.040
And then you can imagine,
if the price goes down,

00:00:52.040 --> 00:00:56.900
the quantity supplied goes down.

00:00:56.900 --> 00:00:58.700
And you might
already notice that I

00:00:58.700 --> 00:01:02.540
was careful to say
quantity supplied.

00:01:02.540 --> 00:01:05.230
And it's just like
we saw with demand.

00:01:05.230 --> 00:01:07.900
When we talk about
demand going up or down,

00:01:07.900 --> 00:01:11.410
we're talking about the entire
price-quantity relationship

00:01:11.410 --> 00:01:12.520
shifting.

00:01:12.520 --> 00:01:15.790
When we talk about a
particular quantity demanded,

00:01:15.790 --> 00:01:17.039
we say quantity demanded.

00:01:17.039 --> 00:01:18.080
We don't just say demand.

00:01:18.080 --> 00:01:19.820
This is the exact
same thing for supply.

00:01:19.820 --> 00:01:21.778
When we're talking about
a particular quantity,

00:01:21.778 --> 00:01:23.540
we'll be careful
to say quantity.

00:01:23.540 --> 00:01:25.320
If we talk about
supply increasing,

00:01:25.320 --> 00:01:28.970
we're talking about the entire
relationship shifting either up

00:01:28.970 --> 00:01:30.340
or down.

00:01:30.340 --> 00:01:31.770
So let's just make
sure that this

00:01:31.770 --> 00:01:33.180
makes intuitive sense for us.

00:01:33.180 --> 00:01:35.300
And I think it probably does.

00:01:35.300 --> 00:01:37.330
Let's think about
ourselves as grape farmers.

00:01:37.330 --> 00:01:41.620
And I'll make a little supply
schedule right over here.

00:01:41.620 --> 00:01:46.420
So Grape Supply Schedule, which
is really just a table showing

00:01:46.420 --> 00:01:48.690
the relationship
between, all else

00:01:48.690 --> 00:01:52.310
equal, the price and
the quantity supplied.

00:01:52.310 --> 00:01:54.900
So let's label some
scenarios over here,

00:01:54.900 --> 00:01:56.950
just like we did with
the demand schedule.

00:01:56.950 --> 00:01:59.810
Scenarios.

00:01:59.810 --> 00:02:03.300
And then let's put
our Price over here.

00:02:03.300 --> 00:02:07.960
This will be in price per pound,
the per pound price of grapes.

00:02:07.960 --> 00:02:11.290
And then this is the quantity
produced over the time period.

00:02:11.290 --> 00:02:14.620
And whenever we do any of these
supply or demand schedules,

00:02:14.620 --> 00:02:16.560
we're talking over a
particular time period.

00:02:16.560 --> 00:02:18.840
It could be per day,
it could be per month,

00:02:18.840 --> 00:02:20.130
it could be per year.

00:02:20.130 --> 00:02:22.870
But that's the only way
to make some sense of, OK,

00:02:22.870 --> 00:02:24.430
what is the quantity
per day going

00:02:24.430 --> 00:02:25.930
to be produced if
that's the price?

00:02:25.930 --> 00:02:27.560
So if we didn't say
per day, we don't

00:02:27.560 --> 00:02:30.940
know what we're
really talking about.

00:02:30.940 --> 00:02:32.070
Quantity Supplied.

00:02:36.650 --> 00:02:41.800
And so let's just
say Scenario A,

00:02:41.800 --> 00:02:46.830
if the price per pound
of grapes is $0.50--

00:02:46.830 --> 00:02:48.800
if it's $0.50 per
pound-- actually,

00:02:48.800 --> 00:02:53.160
let me just do round numbers,
but you get the idea.

00:02:53.160 --> 00:02:56.820
If the price per pound is
$1, let's just say for us,

00:02:56.820 --> 00:02:59.710
we consider that to be
a relatively low price.

00:02:59.710 --> 00:03:04.340
And so we'll only kind
of do the easiest land,

00:03:04.340 --> 00:03:07.420
our most fertile land, where
it's easy to produce grapes.

00:03:07.420 --> 00:03:09.689
And maybe the fertile--
and cheap land.

00:03:09.689 --> 00:03:11.980
So no one else wants to use
that land for other things.

00:03:11.980 --> 00:03:13.810
It's only good for
growing grapes.

00:03:13.810 --> 00:03:18.360
And so we will provide--
so this is price per pound.

00:03:22.190 --> 00:03:24.570
And in that situation,
we can produce

00:03:24.570 --> 00:03:26.762
1,000 pounds in this year.

00:03:26.762 --> 00:03:28.220
And I've never been
a grape farmer,

00:03:28.220 --> 00:03:30.470
so I actually don't know if
that's a reasonable amount

00:03:30.470 --> 00:03:33.470
or not, but I'll just go
with it, 1,000 pounds.

00:03:33.470 --> 00:03:35.410
Now, let's take
Scenario B. Let's

00:03:35.410 --> 00:03:38.070
say the price goes up to $2.

00:03:38.070 --> 00:03:39.600
Well now, not only
would we produce

00:03:39.600 --> 00:03:41.950
what we were producing
before, but we might now

00:03:41.950 --> 00:03:44.810
want to maybe buy
some more land, land

00:03:44.810 --> 00:03:47.770
that might have had other
uses, land that's maybe not

00:03:47.770 --> 00:03:49.410
as productive for grapes.

00:03:49.410 --> 00:03:52.070
But we would, because now
we can get more for grapes.

00:03:52.070 --> 00:04:02.660
And so maybe now we are willing
to produce 2,000 pounds.

00:04:02.660 --> 00:04:03.580
And we can keep going.

00:04:03.580 --> 00:04:06.300
The same dynamics
keep happening.

00:04:06.300 --> 00:04:12.220
So let's say the price-- if
the price were $3 per pound,

00:04:12.220 --> 00:04:14.590
now we do want to produce more.

00:04:14.590 --> 00:04:18.010
Maybe we're even willing to work
a little harder or plant things

00:04:18.010 --> 00:04:21.209
closer to each
other, or maybe I'll

00:04:21.209 --> 00:04:24.530
get even more land involved
than I would have otherwise used

00:04:24.530 --> 00:04:25.800
for other crops.

00:04:25.800 --> 00:04:30.400
And so then I'm going
to produce 2,500 pounds.

00:04:30.400 --> 00:04:33.300
And I'll do one more scenario.

00:04:33.300 --> 00:04:36.820
Let's say Scenario D, the
price goes to $4 a pound.

00:04:36.820 --> 00:04:40.320
Same dynamic, I will stop
planting other crops,

00:04:40.320 --> 00:04:43.670
use them now for grapes, because
grape prices are so high.

00:04:43.670 --> 00:04:50.330
And so I will
produce 2,750 pounds.

00:04:50.330 --> 00:04:52.970
And so we can draw
a supply curve

00:04:52.970 --> 00:04:57.030
just like we have
drawn demand curves.

00:04:57.030 --> 00:04:59.920
And it's the same
exact convention,

00:04:59.920 --> 00:05:02.860
which I'm not a fan of, putting
price on the vertical axis.

00:05:02.860 --> 00:05:05.780
Because as you see, we
tend to talk about price

00:05:05.780 --> 00:05:07.080
as the independent variable.

00:05:07.080 --> 00:05:08.510
We don't always talk
about it that way.

00:05:08.510 --> 00:05:10.040
And in most of math
and science, you

00:05:10.040 --> 00:05:12.540
put the independent variable
on the horizontal axis.

00:05:12.540 --> 00:05:14.330
But the convention
in economics is

00:05:14.330 --> 00:05:16.400
to put it on the vertical axis.

00:05:16.400 --> 00:05:17.960
So price on the vertical axis.

00:05:17.960 --> 00:05:19.635
So then this is really
Price per pound.

00:05:22.860 --> 00:05:25.630
And then in the
horizontal axis, Quantity

00:05:25.630 --> 00:05:28.510
Produced, or-- let
me just write it.

00:05:28.510 --> 00:05:33.381
Quantity Produced, I'll
say in the next year.

00:05:33.381 --> 00:05:35.380
We're assuming all of
this is for the next year,

00:05:35.380 --> 00:05:38.160
so next year.

00:05:38.160 --> 00:05:40.510
And it's in thousands
of pounds, so I'll

00:05:40.510 --> 00:05:45.310
put it in thousands of pounds.

00:05:45.310 --> 00:05:47.260
And so let's see, we go
all the way from 1,000

00:05:47.260 --> 00:05:48.520
to close to 3,000.

00:05:48.520 --> 00:05:52.750
So let's say this
is 1,000, that's

00:05:52.750 --> 00:05:56.380
1 for 1,000, that's
2,000, and that is 3,000.

00:05:56.380 --> 00:05:58.310
And then the price goes
all the way up to 4.

00:05:58.310 --> 00:06:03.630
So it's 1, 2, 3, and then 4.

00:06:03.630 --> 00:06:05.760
So we can just
plot these points.

00:06:05.760 --> 00:06:09.140
These are specific points
on the supply curve.

00:06:09.140 --> 00:06:15.720
So at $1, we would supply 1,000
pounds, at $1, 1,000 pounds.

00:06:15.720 --> 00:06:17.470
That's Scenario A.

00:06:17.470 --> 00:06:21.940
At $2, we would supply
2,000 pounds, $2,

00:06:21.940 --> 00:06:23.610
we'd supply 2,000 pounds.

00:06:23.610 --> 00:06:31.180
That's scenario B. At $3, we'd
supply 2,500 pounds, $3-- oh,

00:06:31.180 --> 00:06:31.690
sorry.

00:06:31.690 --> 00:06:35.360
Now, when we look up-- See, now
notice, I get my axes confused.

00:06:35.360 --> 00:06:36.700
This is Price.

00:06:36.700 --> 00:06:39.040
This isn't, when we
talk about it this way,

00:06:39.040 --> 00:06:41.260
that we're viewing the
thing that's changing.

00:06:41.260 --> 00:06:43.470
Although, you don't always
have to do it that way.

00:06:43.470 --> 00:06:46.940
So at one $1, 1,000
pounds. $1, 1,000 pounds.

00:06:46.940 --> 00:06:50.740
$2, 2,000 pounds.
$2, 2,000 pounds.

00:06:50.740 --> 00:06:54.272
$3-- this isn't $3, this is $3.

00:06:54.272 --> 00:06:57.210
$3, 2,500 pounds.

00:06:57.210 --> 00:06:59.290
So right about there.

00:06:59.290 --> 00:07:00.900
That's about 2,500.

00:07:00.900 --> 00:07:02.750
But I want to do it
in that blue color,

00:07:02.750 --> 00:07:04.550
so we don't get confused.

00:07:04.550 --> 00:07:08.030
So $3, 2,500 pounds.

00:07:08.030 --> 00:07:09.290
That's about right.

00:07:09.290 --> 00:07:10.910
So this is Scenario C.

00:07:10.910 --> 00:07:14.080
And then Scenario
D, at $4-- actually,

00:07:14.080 --> 00:07:15.820
let me be a little
bit clearer with that,

00:07:15.820 --> 00:07:17.120
because we're getting close.

00:07:17.120 --> 00:07:21.980
So this is 2,500 pounds,
gets us right over here.

00:07:21.980 --> 00:07:28.860
This is Scenario C. And then
Scenario D at $4, 2,750.

00:07:28.860 --> 00:07:31.920
So 2,750 is like
right over there.

00:07:31.920 --> 00:07:33.130
So that is $4.

00:07:33.130 --> 00:07:34.940
That is Scenario D.

00:07:34.940 --> 00:07:37.010
And if we connect
them, they should all

00:07:37.010 --> 00:07:41.160
be on our supply curve.

00:07:41.160 --> 00:07:47.670
So they will all be-- it will
look something like that.

00:07:47.670 --> 00:07:50.790
And there's some
minimum price we

00:07:50.790 --> 00:07:52.480
would need to supply
some grapes at all.

00:07:52.480 --> 00:07:53.980
We wouldn't give
them away for free.

00:07:53.980 --> 00:07:56.750
So maybe that's something--
that minimum price is over here,

00:07:56.750 --> 00:07:59.250
that just even gets
started producing grapes.

00:07:59.250 --> 00:08:01.850
So this right over here
is what our supply curve

00:08:01.850 --> 00:08:02.630
would look like.

00:08:02.630 --> 00:08:04.900
Now remember, the only
thing we're varying here

00:08:04.900 --> 00:08:06.460
is the price.

00:08:06.460 --> 00:08:09.060
So if the price were to
change, all else equal,

00:08:09.060 --> 00:08:11.785
we would move along
this curve here.

00:08:11.785 --> 00:08:13.160
Now, in the next
few videos, I'll

00:08:13.160 --> 00:08:16.100
talk about all those other
things we've been holding equal

00:08:16.100 --> 00:08:19.980
and what they would do at any
given price point to this curve

00:08:19.980 --> 00:08:23.139
or, in general, what they
would do to the curve.


Normal and inferior goods

WEBVTT
Kind: captions
Language: en

00:00:00.095 --> 00:00:01.372
What I want to do in this video

00:00:01.372 --> 00:00:02.566
is think about the demand curve

00:00:02.566 --> 00:00:04.164
for two different products.

00:00:04.164 --> 00:00:05.880
So this is some laptop

00:00:05.880 --> 00:00:06.878
that's on the market.

00:00:06.878 --> 00:00:08.370
And this, let's just say,

00:00:08.370 --> 00:00:09.371
is the cheapest car

00:00:09.371 --> 00:00:10.656
that happens to be on the market

00:00:10.660 --> 00:00:12.583
this is actually a picture of a 1985

00:00:12.583 --> 00:00:15.302
assuming this is the cheapest car on the market.

00:00:15.302 --> 00:00:17.817
So let's just think about

00:00:17.817 --> 00:00:20.287
their hypothetical demand curves right now

00:00:20.287 --> 00:00:23.002
So once again, on the vertical axis,

00:00:23.002 --> 00:00:24.671
we're going to put price,

00:00:24.671 --> 00:00:25.417
and on the horizontal axis,

00:00:25.417 --> 00:00:29.545
we put quantity,

00:00:29.545 --> 00:00:30.949
and then over here

00:00:30.949 --> 00:00:32.635
let me do it for the same thing

00:00:32.635 --> 00:00:36.160
So this is price,

00:00:36.160 --> 00:00:37.995
and this right over here is quantity.

00:00:37.995 --> 00:00:42.314
And both of them satisfy the law of demand

00:00:42.314 --> 00:00:44.815
if the price is really high

00:00:44.815 --> 00:00:48.210
the quantity demanded is going to be really low for the laptop

00:00:48.210 --> 00:00:50.128
and so it might be right over there

00:00:50.128 --> 00:00:51.578
and if the price is low

00:00:51.578 --> 00:00:53.588
the quantity demanded is going to increase.

00:00:53.588 --> 00:00:57.426
So, the demand curve might look something like that.

00:00:57.426 --> 00:00:59.301
And it doesn't have to be a curve,

00:00:59.301 --> 00:01:00.814
or doesn't have to be a line,

00:01:00.814 --> 00:01:02.364
it could be a curve or anything like that.

00:01:02.364 --> 00:01:09.762
So that is the current demand for the laptop

00:01:09.762 --> 00:01:10.839
All else equal,

00:01:10.839 --> 00:01:13.158
so we're not talking about shifting any of those other factors

00:01:13.158 --> 00:01:15.758
that we've been talking about in the last few videos.

00:01:15.758 --> 00:01:18.154
Now we can draw a similar demand curve

00:01:18.154 --> 00:01:20.205
for this very cheap automobile.

00:01:20.205 --> 00:01:22.116
If the price is high,

00:01:22.116 --> 00:01:24.283
very few people are going to want to buy it,

00:01:24.283 --> 00:01:26.451
and I'm not going to specify what the price is,

00:01:26.451 --> 00:01:27.583
but this is a general idea

00:01:27.583 --> 00:01:28.956
if the price is higher,

00:01:28.956 --> 00:01:30.317
fewer people are going to want to buy it

00:01:30.317 --> 00:01:31.782
If the price is lower,

00:01:31.782 --> 00:01:33.025
more people are going to want to buy it

00:01:33.025 --> 00:01:36.195
So this demand curve will also have the same shape

00:01:36.195 --> 00:01:38.024
from the top left to the bottom right

00:01:38.024 --> 00:01:40.895
it satisfies the law of demand.

00:01:40.895 --> 00:01:46.037
So once again, that is the current demand.

00:01:46.037 --> 00:01:47.247
Now let's think about

00:01:47.247 --> 00:01:50.809
how the demand for each of these goods might change

00:01:50.809 --> 00:01:54.593
depending on changes in income.

00:01:54.593 --> 00:01:57.410
So we're going to focus on the income factor

00:01:57.410 --> 00:02:00.125
the income effect, for this video

00:02:00.125 --> 00:02:02.157
and see how these 2 products might change.

00:02:02.157 --> 00:02:05.340
So let's just assume that

00:02:05.340 --> 00:02:10.154
income in the general population goes up.

00:02:10.154 --> 00:02:12.816
So for something like a laptop, wow,

00:02:12.816 --> 00:02:14.085
if more people are making more money

00:02:14.085 --> 00:02:16.149
especially in real terms

00:02:16.149 --> 00:02:17.989
they have more money to spend well

00:02:17.989 --> 00:02:18.489
for any given price point,

00:02:18.489 --> 00:02:20.973
at any given price point,

00:02:20.973 --> 00:02:25.299
there's going to be a higher quantity

00:02:25.299 --> 00:02:26.075
that's demanded.

00:02:26.075 --> 00:02:26.741
At any given price point,

00:02:26.741 --> 00:02:30.227
higher quantity demanded.

00:02:30.227 --> 00:02:33.389
And so if income goes up for this laptop,

00:02:33.389 --> 00:02:35.947
the demand will increase.

00:02:35.947 --> 00:02:37.401
And the way we show demand increasing

00:02:37.401 --> 00:02:39.933
is the whole curve shifts to the right

00:02:39.980 --> 00:02:43.819
so this right over here demand increased

00:02:43.819 --> 00:02:46.276
demand went up when income went up.

00:02:46.276 --> 00:02:48.266
And this makes complete sense

00:02:48.266 --> 00:02:49.768
and if income were to go down,

00:02:49.768 --> 00:02:51.316
demand would go down

00:02:51.316 --> 00:02:52.787
because people would have less money

00:02:52.787 --> 00:02:54.795
to buy something like a laptop.

00:02:54.795 --> 00:02:56.173
And this is the case for most goods

00:02:56.173 --> 00:02:57.897
we call things like this,

00:02:57.897 --> 00:02:59.580
when income goes up, demand goes up,

00:02:59.580 --> 00:03:01.053
whole curve shifts to the right

00:03:01.053 --> 00:03:02.879
income goes down, demand goes down,

00:03:02.879 --> 00:03:04.299
whole curve shifts to the left

00:03:04.299 --> 00:03:06.504
We call this a normal good.

00:03:06.504 --> 00:03:11.650
So this right over here is a normal good.

00:03:11.650 --> 00:03:12.787
Now let's think about

00:03:12.787 --> 00:03:16.730
what happens with the cheapest car on the market.

00:03:16.730 --> 00:03:18.687
And let's assume we're in a developed country

00:03:18.687 --> 00:03:21.788
where almost everyone has some form of a car.

00:03:21.788 --> 00:03:25.427
Now, what happens when income goes up?

00:03:25.427 --> 00:03:27.673
So people have more money

00:03:27.673 --> 00:03:29.545
but are they going to spend that money

00:03:29.545 --> 00:03:31.766
buying the cheapest car on the market?

00:03:31.766 --> 00:03:35.172
Well, in most cases, if income goes up generally,

00:03:35.172 --> 00:03:36.631
people say, well I have a little bit more money,

00:03:36.631 --> 00:03:39.254
maybe I'll buy a slightly nicer car.

00:03:39.254 --> 00:03:40.876
So, and maybe in particular

00:03:40.876 --> 00:03:42.892
the people who were going to buy this car

00:03:42.892 --> 00:03:44.176
at any given price point

00:03:44.176 --> 00:03:45.661
So this price point,

00:03:45.661 --> 00:03:47.507
the people who were going to buy the car will say

00:03:47.507 --> 00:03:49.738
Wait! I can now afford a better car!

00:03:49.738 --> 00:03:51.131
Why should I you know,

00:03:51.131 --> 00:03:52.181
this is not safe

00:03:52.181 --> 00:03:53.939
maybe or not as safe as the other cars,

00:03:53.939 --> 00:03:56.269
and I want to impress my friends

00:03:56.269 --> 00:03:57.352
from high school and all that,

00:03:57.352 --> 00:04:00.527
so something very strange might happen for this car,

00:04:00.527 --> 00:04:02.195
the demand for this car.

00:04:02.195 --> 00:04:04.493
It actually will decrease

00:04:04.493 --> 00:04:11.330
so the whole curve could shift to the left.

00:04:11.361 --> 00:04:14.338
So income is a very strange thing for this good

00:04:14.338 --> 00:04:16.337
because income increasing maybe people say,

00:04:16.337 --> 00:04:17.355
hey you know what,

00:04:17.355 --> 00:04:18.162
I could trade out of this good

00:04:18.162 --> 00:04:19.246
I could get a good that

00:04:19.246 --> 00:04:23.282
I'd rather have than just getting more of this thing right over here

00:04:23.282 --> 00:04:24.733
Demand went down.

00:04:24.733 --> 00:04:30.804
And goods like this, we call them inferior goods.

00:04:30.819 --> 00:04:32.317
And the general way to think about

00:04:32.317 --> 00:04:33.558
inferior goods are the goods

00:04:33.558 --> 00:04:36.876
that people will want to not own if they had more money

00:04:36.876 --> 00:04:39.687
they would want to buy, I guess, less inferior goods.

00:04:39.687 --> 00:04:41.541
Or another way to think about it is,

00:04:41.541 --> 00:04:45.057
if income were to go down,

00:04:45.057 --> 00:04:46.603
and more people are budget strapped

00:04:46.603 --> 00:04:47.838
and they can't afford

00:04:47.838 --> 00:04:49.692
the Mercedes-Benz or the BMW

00:04:49.692 --> 00:04:51.654
or even the mid-sized sedan anymore,

00:04:51.654 --> 00:04:52.938
so if income were to go down

00:04:52.938 --> 00:04:54.330
and things were getting tighter,

00:04:54.330 --> 00:04:56.269
more people would want this car

00:04:56.269 --> 00:04:57.468
more people would have to trade down to this

00:04:57.468 --> 00:04:59.591
because they're strapped,

00:04:59.591 --> 00:05:00.855
they're tightening their belts

00:05:00.855 --> 00:05:04.072
and so you'll have this strange situation

00:05:04.072 --> 00:05:06.451
where if income goes down,

00:05:06.451 --> 00:05:09.009
demand would go up for this thing

00:05:09.009 --> 00:05:12.198
So income goes down,

00:05:12.198 --> 00:05:13.541
demand goes up.

00:05:13.541 --> 00:05:15.161
Remember, we're talking about demand,

00:05:15.161 --> 00:05:17.172
we're talking about the entire shifting of the curve.

00:05:17.172 --> 00:05:18.818
At any given price point,

00:05:18.818 --> 00:05:21.395
the quantity demanded will go up.

00:05:21.395 --> 00:05:23.850
Because, this is, or we're assuming,

00:05:23.850 --> 00:05:27.207
is the cheapest car on the market.

00:05:27.222 --> 00:05:28.641
So, and likewise,

00:05:28.641 --> 00:05:30.215
if income were to go down for a normal good,

00:05:30.215 --> 00:05:31.297
it'll do what you'll expect,

00:05:31.297 --> 00:05:32.524
demand would go down.

00:05:32.524 --> 00:05:33.644
So this, an inferior good,

00:05:33.644 --> 00:05:35.761
does the opposite of a normal good

00:05:35.761 --> 00:05:40.678
when we're talking about the income effect,

00:05:40.678 --> 00:05:44.272
the inferior good will do the opposite of a normal good

00:05:44.272 --> 00:05:46.280
and that's because people want to trade out of it

00:05:46.280 --> 00:05:47.415
when their income goes up

00:05:47.415 --> 00:05:48.642
or they don't want to buy it

00:05:48.642 --> 00:05:49.961
or they want to buy something nicer.

00:05:49.961 --> 00:05:50.923
And when their income goes down,

00:05:50.923 --> 00:05:51.453
they'll say

00:05:51.453 --> 00:05:52.215
I have to buy this thing,

00:05:52.215 --> 00:05:55.123
so you know, let me just do it.


Changes in income, population, or preferences

WEBVTT
Kind: captions
Language: en

00:00:00.546 --> 00:00:02.670
So we've been going through
all of the other things

00:00:02.670 --> 00:00:05.370
that we were assuming are
held constant in order

00:00:05.370 --> 00:00:08.760
to be moving along
one demand curve.

00:00:08.760 --> 00:00:10.070
And now let's list a few other.

00:00:10.070 --> 00:00:12.260
And before I do any more of
them, let's talk about the ones

00:00:12.260 --> 00:00:13.300
we already talked about.

00:00:13.300 --> 00:00:16.502
So one, we said that one of
the things we held constant--

00:00:16.502 --> 00:00:17.460
let me write this down.

00:00:17.460 --> 00:00:18.440
So held constant.

00:00:22.050 --> 00:00:25.610
One of the things that we
held constant to move along

00:00:25.610 --> 00:00:28.460
one demand curve for the
demand itself to not shift,

00:00:28.460 --> 00:00:31.935
for the curve to not shift,
is price of related goods.

00:00:37.880 --> 00:00:40.880
The other thing we assumed
that's being held constant

00:00:40.880 --> 00:00:43.150
is price expectations
for our good.

00:00:45.657 --> 00:00:48.240
And now we'll list a couple of
them that are fairly intuitive,

00:00:48.240 --> 00:00:49.781
but you'll see in
the next few videos

00:00:49.781 --> 00:00:52.660
that there are often
special cases even to this.

00:00:52.660 --> 00:00:55.010
So the other thing
that we've been holding

00:00:55.010 --> 00:00:59.470
constant to stay on one
demand curve is income.

00:00:59.470 --> 00:01:01.330
And this one is
fairly intuitive.

00:01:01.330 --> 00:01:05.120
What happens if everyone's
income were to increase?

00:01:05.120 --> 00:01:07.849
And in real terms, it
were to actually increase.

00:01:07.849 --> 00:01:10.390
Well then, all of a sudden, they
have more disposable income,

00:01:10.390 --> 00:01:12.880
maybe to spend on
something like e-books.

00:01:12.880 --> 00:01:14.870
And so for any
given price point,

00:01:14.870 --> 00:01:16.210
the demand would increase.

00:01:16.210 --> 00:01:17.840
And so it would
increase the demand.

00:01:17.840 --> 00:01:20.250
And once again, when we talk
about increasing demand,

00:01:20.250 --> 00:01:22.920
we're talking about
shifting the entire curve.

00:01:22.920 --> 00:01:25.970
We're not talking about a
particular quantity of demand.

00:01:25.970 --> 00:01:31.530
So income goes up, then
it increases demand.

00:01:31.530 --> 00:01:32.450
Demand goes up.

00:01:32.450 --> 00:01:34.980
And remember, when we're talking
about when demand goes up,

00:01:34.980 --> 00:01:37.396
we're talking about the whole
curve shifting to the right.

00:01:37.396 --> 00:01:40.130
At any given price
point, we are going

00:01:40.130 --> 00:01:42.540
to have a larger
quantity demanded.

00:01:42.540 --> 00:01:45.560
So the whole curve, this whole
demand schedule would change.

00:01:45.560 --> 00:01:48.007
And likewise if income went
down, demand would go down.

00:01:48.007 --> 00:01:50.340
And we're going to see in a
future video-- it's actually

00:01:50.340 --> 00:01:53.360
quite interesting-- that's
not always the case.

00:01:53.360 --> 00:01:55.520
This is only true
for normal goods.

00:02:00.200 --> 00:02:03.340
And in a future video we'll
see goods called inferior goods

00:02:03.340 --> 00:02:05.520
where this is not
necessarily the case.

00:02:05.520 --> 00:02:09.720
Or by definition for an inferior
good, it would not be the case.

00:02:09.720 --> 00:02:12.240
Now the other ones that
are somewhat intuitive

00:02:12.240 --> 00:02:18.200
are population-- once again,
if population goes up,

00:02:18.200 --> 00:02:20.640
obviously, at any
given price point,

00:02:20.640 --> 00:02:21.850
more people will want it.

00:02:21.850 --> 00:02:23.850
So it would shift the
demand curve to the right,

00:02:23.850 --> 00:02:25.340
or it would increase demand.

00:02:25.340 --> 00:02:27.540
If population were
to go down, it

00:02:27.540 --> 00:02:29.280
would decrease
demand, which means

00:02:29.280 --> 00:02:32.100
shifting the whole
curve to the left.

00:02:32.100 --> 00:02:34.350
And then the last one we'll
talk about-- and remember,

00:02:34.350 --> 00:02:36.475
we're holding all of these
things constant in order

00:02:36.475 --> 00:02:37.610
for demand not to change.

00:02:37.610 --> 00:02:40.710
The last thing is
just preferences.

00:02:40.710 --> 00:02:43.200
We're assuming that people's
tastes and preferences don't

00:02:43.200 --> 00:02:47.020
change while we move along
a specific demand curve.

00:02:47.020 --> 00:02:50.850
If preferences actually change,
then it will change the curve.

00:02:50.850 --> 00:02:56.530
So for example, if all of a
sudden, the author of the book

00:02:56.530 --> 00:03:00.970
is on some very popular talk
show that tells everyone

00:03:00.970 --> 00:03:03.590
that this is the best book
that was ever written,

00:03:03.590 --> 00:03:05.890
then preferences
would go up, and that

00:03:05.890 --> 00:03:07.710
would increase the total demand.

00:03:07.710 --> 00:03:09.910
At any given price
point, more people

00:03:09.910 --> 00:03:11.310
will be willing to buy the book.

00:03:11.310 --> 00:03:13.690
If, on the other hand,
on that same talk show,

00:03:13.690 --> 00:03:17.160
it turns out that they do an
expose on the author having

00:03:17.160 --> 00:03:20.830
this sordid past, and the author
plagiarized the whole book,

00:03:20.830 --> 00:03:22.890
then the demand will go down.

00:03:22.890 --> 00:03:25.950
The entire curve, regardless of
the price point-- at any given

00:03:25.950 --> 00:03:32.650
price point, the quantity
demanded will actually go down.


Comparative advantage and absolute advantage

WEBVTT
Kind: captions
Language: en

00:00:00.000 --> 00:00:01.804
What I want to do in this video is

00:00:01.804 --> 00:00:04.621
make sure we understand the difference between

00:00:04.621 --> 00:00:07.639
"comparative advantage" and "absolute advantage".

00:00:07.639 --> 00:00:09.242
What we saw in the last video is that

00:00:09.242 --> 00:00:11.798
Patty had a comparative advantage in plates

00:00:11.798 --> 00:00:14.095
relative to Charlie because

00:00:14.095 --> 00:00:17.633
her opportunity cost of producing one plate was

00:00:17.633 --> 00:00:21.573
lower than Charlie's opportunity cost of producing a plate.

00:00:21.573 --> 00:00:24.791
Hers was one-third of a cup, his was three cups.

00:00:24.791 --> 00:00:27.609
So, that's why it made sense for her to specialize in plates.

00:00:27.609 --> 00:00:29.512
Charlie on the other hand had

00:00:29.512 --> 00:00:31.784
a comparative advantage in cups;

00:00:31.784 --> 00:00:33.629
his opportunity cost for producing a cup

00:00:33.629 --> 00:00:35.381
was only a third of a plate,

00:00:35.381 --> 00:00:37.640
while Patty's was three plates.

00:00:37.640 --> 00:00:40.335
So that's why he specialized in cups.

00:00:40.335 --> 00:00:43.584
Now, we can't confuse this with absolute advantage.

00:00:43.584 --> 00:00:47.171
Absolute advantage in a given product just means that

00:00:47.171 --> 00:00:49.210
you are more productive

00:00:49.210 --> 00:00:51.572
at that thing given the same inputs.

00:00:51.572 --> 00:00:53.870
And so if I were to just give you this graph,

00:00:53.870 --> 00:00:56.969
and you didn't know how many workers Charlie or Patty had

00:00:56.969 --> 00:00:58.770
and how many inputs they're using to produce

00:00:58.770 --> 00:01:01.310
either thirty cups in a day or thirty plates in a day,

00:01:01.310 --> 00:01:03.436
you actually could not make any statement

00:01:03.436 --> 00:01:05.230
about absolute advantage.

00:01:05.230 --> 00:01:07.547
But if we assume that in all of these scenarios

00:01:07.547 --> 00:01:09.102
they have the same number of inputs,

00:01:09.102 --> 00:01:10.658
so if we think about plates . . .

00:01:10.658 --> 00:01:13.987
If we say they each have one employee,

00:01:13.987 --> 00:01:15.269
maybe it's themselves,

00:01:15.269 --> 00:01:16.602
and given that one input,

00:01:16.602 --> 00:01:18.228
or the same number of inputs,

00:01:18.228 --> 00:01:22.222
Patty is able to produce more plates than Charlie,

00:01:22.222 --> 00:01:24.102
then it is true that Patty would have

00:01:24.102 --> 00:01:25.983
an absolute advantage in plates.

00:01:25.983 --> 00:01:28.079
And if given the same number of inputs,

00:01:28.079 --> 00:01:31.112
Charlie is able to produce more cups than Patty,

00:01:31.112 --> 00:01:34.321
then he would have an absolute advantage in cups.

00:01:34.321 --> 00:01:36.360
But it is not because of that absolute advantage

00:01:36.360 --> 00:01:38.400
that he is specializing in it.

00:01:38.400 --> 00:01:40.000
In fact, we don't even know what their inputs were.

00:01:40.000 --> 00:01:42.400
It might be that he doesn't have an absolute advantage.

00:01:42.400 --> 00:01:44.664
Maybe Charlie needs

00:01:44.664 --> 00:01:46.928
a hundred people to produce his thirty cups,

00:01:46.928 --> 00:01:50.643
while Patty can produce ten cups with one person.

00:01:50.643 --> 00:01:51.807
So in that case,

00:01:51.807 --> 00:01:53.894
actually Patty would have an absolute advantage,

00:01:53.894 --> 00:01:56.587
but it just wouldn't be obvious from this right over here.

00:01:56.587 --> 00:01:58.997
But to make everything clear,

00:01:58.997 --> 00:02:02.300
I want to do a scenario where

00:02:02.300 --> 00:02:05.411
Charlie improved his productivity in some way and

00:02:05.411 --> 00:02:09.524
he actually has the absolute advantage in both products,

00:02:09.544 --> 00:02:10.938
and still show that as long as

00:02:10.938 --> 00:02:13.008
they have different comparative advantages,

00:02:13.008 --> 00:02:16.080
then it still makes sense for them to specialize.

00:02:16.080 --> 00:02:19.900
So let's do another scenario.

00:02:19.900 --> 00:02:23.244
So Charlie has improved dramatically.

00:02:23.244 --> 00:02:26.309
So let's draw our little graph here.

00:02:26.309 --> 00:02:30.646
That's our cups axis, this is still our plates axis.

00:02:30.646 --> 00:02:33.762
Cups and plates . . .

00:02:33.762 --> 00:02:35.771
and let's just put some more markers here...

00:02:35.771 --> 00:02:40.427
ten, twenty, thirty and forty.

00:02:40.427 --> 00:02:47.903
And ten, twenty, thirty and forty, and

00:02:47.903 --> 00:02:50.736
let's still put Patty, let's assume Patty hasn't changed,

00:02:50.736 --> 00:02:55.659
so this is her PPF, so that is Patty's PPF, just like that.

00:02:55.659 --> 00:02:59.328
But let's say that Charlie has improved dramatically.

00:02:59.328 --> 00:03:02.300
And so Charlie's PPF looks like this.

00:03:02.300 --> 00:03:06.933
So this is Charlie's PPF now looks like this.

00:03:06.933 --> 00:03:08.978
So in a given day he can produce

00:03:08.978 --> 00:03:10.077
- and let's just assume

00:03:10.077 --> 00:03:11.761
they're using the same number of inputs-

00:03:11.761 --> 00:03:13.974
so using the same number of inputs in a given day

00:03:13.974 --> 00:03:15.344
he can produce forty cups

00:03:15.344 --> 00:03:16.975
when Patty can only produce ten.

00:03:16.975 --> 00:03:18.972
So he has the absolute advantage in cups.

00:03:18.972 --> 00:03:22.426
Or, in the same given day using the same inputs,

00:03:22.426 --> 00:03:24.246
he could produce forty plates

00:03:24.246 --> 00:03:26.534
while Patty can only produce thirty.

00:03:26.534 --> 00:03:29.022
So now Charlie, all of a sudden,

00:03:29.022 --> 00:03:33.030
has an absolute advantage in both products.

00:03:33.030 --> 00:03:34.947
But we'll see it still makes sense for them to specialize

00:03:34.947 --> 00:03:37.611
because they have different comparative advantages;

00:03:37.611 --> 00:03:39.823
they have different opportunity costs.

00:03:39.823 --> 00:03:41.682
So let's figure this out.

00:03:41.682 --> 00:03:44.195
So we have all the same numbers for Patty -

00:03:44.195 --> 00:03:48.554
actually, let me copy and paste Patty's numbers right here.

00:03:48.554 --> 00:03:50.319
Actually we have access to her numbers right over here

00:03:50.319 --> 00:03:51.991
so I don't have to copy and paste it.

00:03:51.991 --> 00:03:54.667
But let's think of Charlie's new numbers now.

00:03:54.667 --> 00:03:56.952
So this is the PPF for Charlie.

00:03:56.952 --> 00:03:59.237
So this is our new PPF for Charlie.

00:03:59.237 --> 00:04:01.232
Maybe he did some investment or R&D

00:04:01.232 --> 00:04:05.551
to get this new, awesome, productive PPF.

00:04:05.551 --> 00:04:06.920
So he's expanded his PPF.

00:04:06.920 --> 00:04:09.704
So what is his opportunity costs?

00:04:09.704 --> 00:04:16.115
Say he's sitting here - so he's producing 40 cups -

00:04:16.115 --> 00:04:18.551
what would be his opportunity cost of producing 40 plates?

00:04:18.551 --> 00:04:20.779
Well to produce those forty plates,

00:04:20.779 --> 00:04:24.067
he would have to give up those forty cups.

00:04:24.067 --> 00:04:26.995
So his opportunity cost of forty plates

00:04:26.995 --> 00:04:29.708
is equal to forty cups.

00:04:29.708 --> 00:04:31.882
Or you divide both sides by forty:

00:04:31.882 --> 00:04:37.734
his opportunity costs for one plate is equal to one cup.

00:04:37.734 --> 00:04:40.311
And this makes math very easy:

00:04:40.311 --> 00:04:46.330
his opportunity cost for one cup is equal to one plate.

00:04:46.330 --> 00:04:49.841
Now given this new reality - so we've already established

00:04:49.841 --> 00:04:52.296
Charlie has an absolute advantage in both.

00:04:52.296 --> 00:04:54.895
Using the same inputs he can do more of either of them.

00:04:54.895 --> 00:04:55.833
And remember,

00:04:55.833 --> 00:04:57.131
when you're talking about absolute advantage

00:04:57.131 --> 00:04:59.460
you have to think about the amount of inputs you use.

00:04:59.460 --> 00:05:01.333
Who's more productive in that way?

00:05:01.333 --> 00:05:03.989
But let's think about comparative advantage.

00:05:03.989 --> 00:05:05.449
If we think about plates,

00:05:05.449 --> 00:05:07.804
who has a lower opportunity cost for producing a plate?

00:05:07.804 --> 00:05:09.127
Patty hasn't changed.

00:05:09.127 --> 00:05:11.578
Her opportunity cost for producing a plate

00:05:11.578 --> 00:05:13.880
is one-third of a cup.

00:05:13.880 --> 00:05:15.629
Charlie's opportunity cost for producing a plate

00:05:15.629 --> 00:05:20.087
has improved, but it's still worse than Patty's.

00:05:20.087 --> 00:05:22.595
He has to spend one cup to make a plate,

00:05:22.595 --> 00:05:25.892
she only has to give up one-third of a cup to make a plate.

00:05:25.892 --> 00:05:29.747
So Patty still has a comparative advantage in plates.

00:05:29.747 --> 00:05:33.743
And if we look at the opportunity cost in cups,

00:05:33.743 --> 00:05:37.933
the opportunity cost for Charlie to make 1 cup is 1 plate.

00:05:37.933 --> 00:05:43.928
So it's actually a little bit worse than it was before,

00:05:43.928 --> 00:05:46.911
but as we'll see it ends up being a good thing,

00:05:46.911 --> 00:05:48.462
he's just overall more productive.

00:05:48.462 --> 00:05:51.901
But his opportunity cost for one cup,

00:05:51.901 --> 00:05:53.326
he's giving up one plate now,

00:05:53.326 --> 00:05:55.567
when before he was producing one third of a plate.

00:05:55.567 --> 00:05:57.267
And that's because in the other scenario,

00:05:57.267 --> 00:06:02.301
he was more one-sided, I guess is one way to say it.

00:06:02.301 --> 00:06:04.969
But his opportunity cost for producing a cup

00:06:04.969 --> 00:06:08.324
is still cheaper than Patty's.

00:06:08.324 --> 00:06:11.017
Her opportunity cost of producing a cup is three plates:

00:06:11.017 --> 00:06:12.395
her opportunity cost.

00:06:12.395 --> 00:06:14.188
While his is only one plate.

00:06:14.188 --> 00:06:18.667
So he still has the comparative advantage in cups.

00:06:18.667 --> 00:06:26.966
So Charlie should still specialize in cups . . .

00:06:26.966 --> 00:06:29.455
and Patty should still specialize in plates.

00:06:29.455 --> 00:06:31.932
And to show that they can still get an outcome that

00:06:31.932 --> 00:06:35.052
is beyond even Charlie's Production Possibilities Frontier,

00:06:35.067 --> 00:06:37.062
let's think about how they could trade.

00:06:37.062 --> 00:06:38.896
So Charlie's going to specialize in cups;

00:06:38.896 --> 00:06:42.667
he's going to sit right over there producing forty cups a day.

00:06:42.667 --> 00:06:46.988
And Patty's going to specialize in plates,

00:06:47.003 --> 00:06:48.196
and she's going to sit right there

00:06:48.196 --> 00:06:51.490
- let me use a different color, I don't want to use this color -

00:06:51.490 --> 00:06:54.761
she's going to sit right there and produce thirty plates a day.

00:06:54.761 --> 00:06:57.890
So how could they trade for mutual benefit?

00:06:57.890 --> 00:07:00.112
Well any trade that is -

00:07:00.112 --> 00:07:03.068
assuming that they don't want to have only plates

00:07:03.068 --> 00:07:04.769
or they don't only want to have cups.

00:07:04.769 --> 00:07:06.574
Any trade that is cheaper

00:07:06.574 --> 00:07:09.082
than their opportunity cost will be a good one.

00:07:09.082 --> 00:07:12.565
So for example, Patty is sitting here producing only plates.

00:07:12.565 --> 00:07:18.340
Her opportunity cost for a cup is three plates.

00:07:18.340 --> 00:07:21.263
So she would be willing to trade

00:07:21.263 --> 00:07:23.937
anything less than three plates for a cup,

00:07:23.937 --> 00:07:25.103
assuming that she wants it.

00:07:25.103 --> 00:07:27.000
Because, if she had to make the cups herself,

00:07:27.000 --> 00:07:29.333
she would have to give up three plates.

00:07:29.333 --> 00:07:42.797
So let's say that Patty would be willing to trade one cup

00:07:42.797 --> 00:07:45.501
sorry, one plate -

00:07:45.501 --> 00:07:52.205
actually she'd be willing to trade two plates for one cup.

00:07:52.205 --> 00:07:53.772
She's be willing to trade that,

00:07:53.772 --> 00:07:57.722
because if she had to make the cups herself,

00:07:57.722 --> 00:07:59.887
she'd have to give up three plates for one cup.

00:07:59.887 --> 00:08:02.255
So she's willing to trade two plates for one cup.

00:08:02.255 --> 00:08:04.018
And let's see if Charlie would be willing

00:08:04.018 --> 00:08:05.901
to trade two plates for one cup.

00:08:05.901 --> 00:08:07.615
So he has all of these cups -

00:08:07.615 --> 00:08:10.150
how many cups does he have to give away for a plate?

00:08:10.150 --> 00:08:13.900
Well he has to give away one cup for a plate.

00:08:13.900 --> 00:08:17.162
Now he would have to give away one cup for two plates,

00:08:17.162 --> 00:08:19.400
or he would have to give up half a cup for a plate.

00:08:19.400 --> 00:08:24.795
Either way, this is better than his opportunity cost of

00:08:24.795 --> 00:08:27.165
trying to get that incremental plate.

00:08:27.165 --> 00:08:28.948
So he would be willing to do that too:

00:08:28.948 --> 00:08:30.466
two plates for one cup.

00:08:30.466 --> 00:08:32.906
He'd be willing to do one cup for two plates.

00:08:32.906 --> 00:08:36.279
And to see how that would improve,

00:08:36.279 --> 00:08:38.939
he could have forty cups

00:08:38.939 --> 00:08:42.229
or he could trade one of them away -

00:08:42.229 --> 00:08:43.301
Actually, let's do a scenario

00:08:43.301 --> 00:08:48.658
where he trades ten of the cups away.

00:08:48.658 --> 00:08:51.417
So now he only has twenty cups,

00:08:51.417 --> 00:08:55.561
but for those twenty cups he traded away -

00:08:55.561 --> 00:08:56.873
Actually, that's a bad example

00:08:56.873 --> 00:08:58.610
because Patty won't have enough cups.

00:08:58.610 --> 00:09:02.070
So let's say he trades away ten cups.

00:09:02.070 --> 00:09:07.708
Let's say he trades away ten cups for twenty plates.

00:09:07.708 --> 00:09:19.276
So Charlie trades 10 cups for 20 plates.

00:09:19.276 --> 00:09:22.875
So now he trades ten cups and he gets twenty plates.

00:09:22.875 --> 00:09:26.172
So now he'll end up at this scenario over here,

00:09:26.172 --> 00:09:28.200
which was beyond, which was unattainable,

00:09:28.200 --> 00:09:29.769
when he was working by himself,

00:09:29.769 --> 00:09:32.396
when he didn't specialize and get gains from trade.

00:09:32.396 --> 00:09:34.000
So this is a good scenario for him.

00:09:34.000 --> 00:09:35.656
He's able to get outcomes he otherwise

00:09:35.656 --> 00:09:37.384
would not have been able to get.

00:09:37.384 --> 00:09:38.728
He could, depending on how he trades,

00:09:38.728 --> 00:09:42.774
he could get outcomes, well up to a certain point,

00:09:42.774 --> 00:09:46.513
because Patty only has thirty cups.

00:09:46.513 --> 00:09:51.283
So at best he can take all of Patty's cups.

00:09:51.283 --> 00:09:53.728
So he can get something along that line over there.

00:09:53.728 --> 00:09:55.887
But if we look at the same scenario,

00:09:55.887 --> 00:09:59.045
Patty traded twenty plates for ten cups:

00:09:59.045 --> 00:10:00.649
where does that put her?

00:10:00.649 --> 00:10:03.743
So she traded twenty plates, so she's down ten plates

00:10:03.743 --> 00:10:07.504
but she got ten cups, so that put her right over here.

00:10:07.504 --> 00:10:10.880
Once again, beyond her Production Possibilities Frontier,

00:10:10.880 --> 00:10:12.464
so this would look like

00:10:12.464 --> 00:10:15.649
a pretty good situation for Patty as well.


Comparative advantage specialization and gains from trade

WEBVTT
Kind: captions
Language: en

00:00:00.915 --> 00:00:04.180
Let's now move away from the world of the hunter-gatherer

00:00:04.180 --> 00:00:06.209
and into the dinnerware market.

00:00:06.209 --> 00:00:08.678
So let's say we're going to talk about two products --

00:00:08.678 --> 00:00:11.760
two types of dinnerware.

00:00:11.760 --> 00:00:14.347
We'll have cups on this axis,

00:00:14.347 --> 00:00:17.464
and we will have plates on this axis.

00:00:17.464 --> 00:00:19.518
And let's say we have a producer, Charlie,

00:00:19.518 --> 00:00:21.895
and if he were to focus all of his time on cups,

00:00:21.895 --> 00:00:29.167
he could produce - let me put these [labels]10, 20, 30.

00:00:29.167 --> 00:00:31.337
So if he were to focus all of his time on cups,

00:00:31.337 --> 00:00:33.275
he could produce 30 cups,

00:00:33.275 --> 00:00:36.900
and if he were to focus all of his time on plates,

00:00:36.900 --> 00:00:39.052
he could produce 10 plates.

00:00:39.052 --> 00:00:40.432
And we're going to assume he has

00:00:40.432 --> 00:00:43.318
a linear Production Possibilities Frontier.

00:00:43.318 --> 00:00:47.060
So, this is what his PPF is going to look like.

00:00:47.060 --> 00:00:49.951
We draw a little bit, actually connect the 2 dots,

00:00:49.951 --> 00:00:52.959
so that's.. I want to make it more looking like a line,

00:00:52.959 --> 00:00:54.372
so that's about as good as I can do.

00:00:54.372 --> 00:01:00.222
So that right over there is the PPF for Charlie.

00:01:00.222 --> 00:01:02.062
Now let's think about his opportunity cost.

00:01:02.062 --> 00:01:03.862
And because this is a linear PPF

00:01:03.862 --> 00:01:05.489
his opportunity cost does not change.

00:01:05.489 --> 00:01:07.127
The slope of this line is not changing.

00:01:07.127 --> 00:01:08.878
It's not that bow-shaped curve

00:01:08.878 --> 00:01:10.630
that we saw for the hunter gatherer.

00:01:10.630 --> 00:01:12.727
So it's going to be a fixed opportunity cost

00:01:12.727 --> 00:01:14.251
for one product relative to the other,

00:01:14.251 --> 00:01:18.321
at any point along this production possibilities frontier.

00:01:18.321 --> 00:01:20.236
So let's say we're sitting over here,

00:01:20.236 --> 00:01:21.247
this will just make things simple

00:01:21.247 --> 00:01:22.802
to just think about the end points,

00:01:22.802 --> 00:01:24.427
and he's producing 30 cups,

00:01:24.427 --> 00:01:27.497
what is his opportunity cost of producing 10 plates?

00:01:27.497 --> 00:01:28.843
Well to produce 10 plates,

00:01:28.843 --> 00:01:31.388
he's going to have to give up those 30 cups.

00:01:31.388 --> 00:01:37.264
So his opportunity cost of producing 10 plates,

00:01:37.264 --> 00:01:40.985
is equal to 30 cups.

00:01:40.985 --> 00:01:43.149
Or if you want the opportunity cost for one plate,

00:01:43.149 --> 00:01:45.395
you just divide both sides by 10,

00:01:45.395 --> 00:01:47.996
and so you get the opportunity cost of 1 plate,

00:01:47.996 --> 00:01:54.421
is equal to 3 cups. That's fair enough.

00:01:54.421 --> 00:01:57.970
Now let's think about the same scenario

00:01:57.970 --> 00:02:00.065
or let's think about another producer,

00:02:00.065 --> 00:02:03.238
in this market for dinner ware. Let's call her Patty.

00:02:03.238 --> 00:02:05.355
If Patty focused all of her time on cups

00:02:05.355 --> 00:02:07.227
she could produce 10 cups in a day

00:02:07.227 --> 00:02:09.831
and if she focused all of her time on plates,

00:02:09.831 --> 00:02:12.989
she could produce 30 plates in a day.

00:02:12.989 --> 00:02:14.154
So that is..

00:02:14.154 --> 00:02:17.456
and she also has a linear production possibilities frontier,

00:02:17.456 --> 00:02:25.999
so that right over there is the PPF for Patty.

00:02:25.999 --> 00:02:27.371
And let's think about

00:02:27.402 --> 00:02:29.928
her opportunity cost for producing a plate.

00:02:29.928 --> 00:02:32.514
So the opportunity cost, if she's sitting right over here,

00:02:32.514 --> 00:02:34.347
and she was focused all on cups,

00:02:34.347 --> 00:02:36.044
and if she wanted to produce 30 plates,

00:02:36.044 --> 00:02:37.828
and I'm intentionally using the end points

00:02:37.828 --> 00:02:39.611
to make the math more obvious.

00:02:39.611 --> 00:02:41.730
If she wanted to produce 30 plates

00:02:41.730 --> 00:02:43.807
then she would have to give up 10 cups.

00:02:43.807 --> 00:02:49.155
So her opportunity costs to produce 30 plates

00:02:49.155 --> 00:02:53.148
is equal to 10 cups.

00:02:53.148 --> 00:02:55.319
Or if you divide both sides by 30,

00:02:55.319 --> 00:02:59.118
the opportunity cost of her producing 1 plate,

00:02:59.118 --> 00:03:00.332
in terms of cups,

00:03:00.332 --> 00:03:04.628
is 10 divided by 30, is 1/3, 1/3 of a cup.

00:03:04.628 --> 00:03:06.094
Now this is interesting,

00:03:06.094 --> 00:03:09.143
we can now compare their relative opportunity costs.

00:03:09.143 --> 00:03:10.541
The opportunity cost for Charlie

00:03:10.541 --> 00:03:12.432
to produce a plate is 3 cups,

00:03:12.432 --> 00:03:13.986
the opportunity cost for Patty

00:03:13.986 --> 00:03:16.547
to produce a plate is 1/3 of a cup.

00:03:16.547 --> 00:03:17.805
So for Patty,

00:03:17.805 --> 00:03:19.585
especially when you measure it in terms of cups,

00:03:19.585 --> 00:03:21.995
it is cheaper for her to produce a plate.

00:03:21.995 --> 00:03:23.642
She has a lower opportunity cost

00:03:23.642 --> 00:03:25.903
than Charlie does in producing plates.

00:03:25.903 --> 00:03:29.189
So relative to Charlie, we say, because her opportunity cost

00:03:29.189 --> 00:03:32.688
is lower in producing plates, 1/3 relative to 3,

00:03:32.688 --> 00:03:44.159
we say that Patty has the comparative advantage in plates,

00:03:44.159 --> 00:03:47.817
relative to Charlie.

00:03:47.817 --> 00:03:52.190
And it's not just because she can produce -

00:03:52.190 --> 00:03:54.825
We'll see situations in maybe the next video where

00:03:54.825 --> 00:03:55.915
we'll actually show this.

00:03:55.915 --> 00:03:57.256
It doesn't even have to be the case that

00:03:57.256 --> 00:04:00.421
she can produce more plates in a given day.

00:04:00.421 --> 00:04:02.465
This is not why she has a comparative advantage.

00:04:02.465 --> 00:04:03.964
This is called an absolute advantage,

00:04:03.964 --> 00:04:05.500
and we'll talk about that more.

00:04:05.500 --> 00:04:07.101
She has a comparative advantage

00:04:07.101 --> 00:04:09.937
because her opportunity cost is lower.

00:04:09.937 --> 00:04:11.940
Her opportunity cost for producing a plate

00:04:11.940 --> 00:04:14.313
is lower than it is for Charlie.

00:04:14.313 --> 00:04:16.870
Now let's think about it the other way around.

00:04:16.870 --> 00:04:19.515
Who has a comparative advantage in cups?

00:04:19.515 --> 00:04:25.161
Well, if we divide both sides of this right over here by 3,

00:04:25.161 --> 00:04:28.993
well let's swap both sides,

00:04:28.993 --> 00:04:32.856
so the opportunity costs for Charlie of producing 3 cups,

00:04:32.856 --> 00:04:35.162
is equal to 1 plate.

00:04:35.162 --> 00:04:37.867
Or if you divide both sides by 3,

00:04:37.867 --> 00:04:43.318
opportunity cost of 1 cup is 1/3 of a plate.

00:04:43.318 --> 00:04:46.080
If we go to the situation for Patty,

00:04:46.080 --> 00:04:49.019
let's swap these 2 around,

00:04:49.019 --> 00:04:55.562
the opportunity cost for 10 cups is 30 plates.

00:04:55.562 --> 00:04:57.224
If you divide both sides by 10,

00:04:57.224 --> 00:05:02.502
the opportunity cost of 1 cup is equal to 3 plates.

00:05:02.502 --> 00:05:05.000
And obviously, and we've talked about this before,

00:05:05.000 --> 00:05:06.952
the opportunity cost of 1 incremental unit

00:05:06.952 --> 00:05:10.818
is the same thing as the marginal cost of a cup.

00:05:10.818 --> 00:05:11.816
But anyway,

00:05:11.816 --> 00:05:15.922
who has the lower opportunity cost for producing cups?

00:05:15.922 --> 00:05:19.011
Well, let's see, Charlie can produce a cup,

00:05:19.011 --> 00:05:22.074
or Charlie's opportunity cost for producing an extra cup

00:05:22.074 --> 00:05:25.391
is 1/3 of a plate, and Patty's is 3 plates.

00:05:25.391 --> 00:05:26.653
So Charlie has

00:05:26.653 --> 00:05:30.561
the lower opportunity cost for producing a cup.

00:05:30.561 --> 00:05:33.676
So, it's only 1/3 plate relative to 3 plates.

00:05:33.676 --> 00:05:40.194
So this is where Charlie has the comparative advantage.

00:05:40.194 --> 00:05:41.391
What we're going to see is

00:05:41.391 --> 00:05:43.563
if both of these parties

00:05:43.563 --> 00:05:46.411
specialize in their comparative advantage

00:05:46.411 --> 00:05:50.452
and then trade, they can get outcomes that are beyond

00:05:50.452 --> 00:05:53.996
each of their individual production possibility frontiers.

00:05:53.996 --> 00:05:55.446
So what we can see is, for example,

00:05:55.446 --> 00:05:57.687
they can get an outcome where

00:05:57.687 --> 00:06:01.040
they are each able to get 15 cups and 15 plates,

00:06:01.040 --> 00:06:03.745
which would have been impossible left to their own devices.

00:06:03.745 --> 00:06:05.626
So let's see how they can actually do it.

00:06:05.626 --> 00:06:06.881
So we've said that

00:06:06.881 --> 00:06:09.028
Charlie has a comparative advantage in cups.

00:06:09.028 --> 00:06:11.524
His opportunity cost of producing a cup

00:06:11.524 --> 00:06:14.021
is lower than it is for Patty.

00:06:14.021 --> 00:06:16.610
It's only 1/3 of a plate relative to 3 plates.

00:06:16.610 --> 00:06:21.219
So let's make him specialize in cups. So cup specialties.

00:06:21.219 --> 00:06:23.437
So he's going to specialize in cups, and

00:06:23.437 --> 00:06:29.506
Patty, for the same reason, is going to specialize in plates.

00:06:29.506 --> 00:06:32.183
So Charlie specializing in cups means

00:06:32.183 --> 00:06:34.785
he's going to focus only on cups.

00:06:34.785 --> 00:06:38.848
So he's going to produce 30 cups every day.

00:06:38.848 --> 00:06:41.308
And Patty specializing in plates means

00:06:41.308 --> 00:06:44.638
that she's going to produce 30 plates every day.

00:06:44.638 --> 00:06:47.254
(Let me do this in a different color: magenta).

00:06:47.254 --> 00:06:49.762
She's going to produce 30 plates every day.

00:06:49.812 --> 00:06:52.083
Now imagine, I'm going to make an assumption here,

00:06:52.083 --> 00:06:54.387
but imagine that they both do that but

00:06:54.387 --> 00:06:57.383
they don't each only want to have what they're producing

00:06:57.383 --> 00:06:59.253
they want to have some combination of them,

00:06:59.253 --> 00:07:00.593
so they decide to trade.

00:07:00.593 --> 00:07:02.308
And I'm going to fix the price here.

00:07:02.308 --> 00:07:04.720
We're going to talk more about markets in the future.

00:07:04.720 --> 00:07:13.062
But I assume that they agree to trade at 1 cup for 1 plate.

00:07:13.062 --> 00:07:15.251
And this makes sense for either of them

00:07:15.251 --> 00:07:19.387
because this trading price, or this market price,

00:07:19.387 --> 00:07:21.718
is lower than their opportunity cost.

00:07:21.718 --> 00:07:25.245
So here's Charlie, he's got all of these cups,

00:07:25.245 --> 00:07:28.655
left to his own devices, if he wanted an extra plate

00:07:28.655 --> 00:07:30.808
he would have to spend 3 cups but now

00:07:30.808 --> 00:07:32.838
in the market, with this price over here,

00:07:32.838 --> 00:07:36.105
he only has to spend 1 cup for an extra plate.

00:07:36.105 --> 00:07:39.460
So, this makes sense for him because the market price

00:07:39.460 --> 00:07:41.681
is lower than his opportunity cost.

00:07:41.681 --> 00:07:45.253
So he would definitely rather get a plate in the market

00:07:45.253 --> 00:07:47.717
than have to do it by producing it himself.

00:07:47.717 --> 00:07:48.774
It‘s cheaper this way.

00:07:48.774 --> 00:07:50.317
And the same thing for Patty.

00:07:50.317 --> 00:07:53.099
She has all of these plates, but if she wants a cup,

00:07:53.099 --> 00:07:56.446
left by herself, she would have to spend 3 plates to do it.

00:07:56.446 --> 00:07:58.056
She would have to give up 3 plates.

00:07:58.056 --> 00:07:59.622
But now in the market,

00:07:59.622 --> 00:08:03.588
she would only have to give up 1 plate.

00:08:03.588 --> 00:08:04.775
So this is a good deal,

00:08:04.775 --> 00:08:06.731
this is lower than her opportunity cost.

00:08:06.731 --> 00:08:08.580
So she'll want to transact.

00:08:08.580 --> 00:08:10.678
And so they can do, each of them,

00:08:10.678 --> 00:08:13.585
so for example, Charlie could keep trading cups for plates

00:08:13.585 --> 00:08:17.430
and he could end up anywhere on this line over there.

00:08:17.430 --> 00:08:19.084
And Patty could actually do the same thing:

00:08:19.084 --> 00:08:20.398
she could trade the cups for plates

00:08:20.398 --> 00:08:22.079
and end up someplace over there.

00:08:22.079 --> 00:08:24.140
But obviously where they end up is dependent on

00:08:24.140 --> 00:08:26.246
how much the other one is willing to trade.

00:08:26.246 --> 00:08:27.561
But let's say

00:08:27.561 --> 00:08:29.415
that they both want to get to that 15-15 scenario

00:08:29.415 --> 00:08:33.200
so they can both trade 15 cups to the other person.

00:08:33.200 --> 00:08:35.427
So Charlie could trade 15 cups for 15 plates

00:08:35.427 --> 00:08:38.302
and obviously Patty would be trading 15 plates for 15 cups.

00:08:38.302 --> 00:08:41.619
And they would both be able to get right over there.

00:08:41.619 --> 00:08:43.940
Which is a situation that was unattainable

00:08:43.940 --> 00:08:46.790
left to their own production possibilities.

00:08:46.790 --> 00:08:48.671
So hopefully you found that interesting.

00:08:48.671 --> 00:08:51.745
By specializing they could get these gains of trade.

00:08:51.745 --> 00:08:55.745
They specialize in their comparative advantage.


Economic growth through investment

WEBVTT
Kind: captions
Language: en

00:00:00.564 --> 00:00:01.980
In the last few
videos, we've been

00:00:01.980 --> 00:00:04.120
talking about the
production possibilities

00:00:04.120 --> 00:00:06.290
frontier as a relatively
static thing, something

00:00:06.290 --> 00:00:08.552
that you couldn't change
but you could move along.

00:00:08.552 --> 00:00:10.510
What I want to do in this
video is think about,

00:00:10.510 --> 00:00:13.710
maybe there are ways
to change or expand

00:00:13.710 --> 00:00:16.690
the production
possibilities frontier.

00:00:16.690 --> 00:00:19.720
And to do that let's assume that
our little hunter-gatherer has

00:00:19.720 --> 00:00:21.710
decided to become
a strict carnivore.

00:00:21.710 --> 00:00:24.310
So he's only focused
on rabbits now.

00:00:24.310 --> 00:00:28.070
And his whole happiness in
life is optimizing the number

00:00:28.070 --> 00:00:31.500
of rabbits he can catch
and eat in a given day.

00:00:31.500 --> 00:00:35.650
And so let's-- on
one axis let's draw,

00:00:35.650 --> 00:00:38.750
let's say the number of rabbits
that he can catch in a given

00:00:38.750 --> 00:00:39.550
day.

00:00:39.550 --> 00:00:46.200
Let's say it's 1,
2, 3, 4, 5, 6, 7--

00:00:46.200 --> 00:00:47.660
I could keep going on and on.

00:00:47.660 --> 00:00:51.810
So this right over
here is rabbits

00:00:51.810 --> 00:00:55.910
that he can catch in a
given day, rabbits in a day.

00:00:55.910 --> 00:00:57.920
But remember, he wants
to optimize this.

00:00:57.920 --> 00:01:01.490
He wants to think about how he
can increase his productivity

00:01:01.490 --> 00:01:03.210
in terms of the
number of rabbits.

00:01:03.210 --> 00:01:05.010
And he knows-- we'll
just assume that he

00:01:05.010 --> 00:01:07.005
knows how to build rabbit traps.

00:01:07.005 --> 00:01:09.130
So now we're going to do
a production possibilities

00:01:09.130 --> 00:01:11.270
frontier, not between
rabbits and berries,

00:01:11.270 --> 00:01:16.630
but between rabbits and building
rabbit traps, so rabbit traps.

00:01:19.310 --> 00:01:22.250
So maybe he's able
to get twigs together

00:01:22.250 --> 00:01:23.410
and he builds something.

00:01:23.410 --> 00:01:25.920
Puts the twigs together
in a little thing.

00:01:25.920 --> 00:01:28.990
It's a little box that--
maybe he puts a little,

00:01:28.990 --> 00:01:31.620
I don't know some type of
carrot down over there.

00:01:31.620 --> 00:01:34.920
And then if the rabbit comes
then takes the carrot then

00:01:34.920 --> 00:01:37.270
the box falls on the rabbit
or something like that.

00:01:37.270 --> 00:01:41.070
We don't have to go into the
particulars of the actual trap.

00:01:41.070 --> 00:01:45.720
But he can also spends his
time building rabbit traps.

00:01:45.720 --> 00:01:48.990
So let's say, 1 rabbit
trap, 2 rabbit traps,

00:01:48.990 --> 00:01:51.430
and 3 rabbit traps.

00:01:51.430 --> 00:01:54.320
And let's say-- we're going to
hold all other things equal,

00:01:54.320 --> 00:01:55.950
ceteris parabus.

00:01:55.950 --> 00:01:57.680
So we're not worrying
about other things.

00:01:57.680 --> 00:02:00.320
And as we'll see, in most
introductory economics class,

00:02:00.320 --> 00:02:03.060
whenever you do a production
possibilities frontier

00:02:03.060 --> 00:02:04.900
you're only doing it
with two dimensions.

00:02:04.900 --> 00:02:06.820
And so that's why you
have a regular curve.

00:02:06.820 --> 00:02:08.560
You could have one with three
dimensions, where you're

00:02:08.560 --> 00:02:10.509
doing the trade off
between three things.

00:02:10.509 --> 00:02:13.450
But then you would have to
have a three dimensional graph,

00:02:13.450 --> 00:02:15.940
and essentially the production
possibilities frontier

00:02:15.940 --> 00:02:17.220
would be a surface.

00:02:17.220 --> 00:02:19.520
But let's just focus
on this right now.

00:02:19.520 --> 00:02:22.340
Maybe I'll do a surface in
the future, just for fun.

00:02:22.340 --> 00:02:24.300
So these are the rabbit traps.

00:02:24.300 --> 00:02:27.030
And let's say the production
possibilities frontier

00:02:27.030 --> 00:02:30.180
between rabbit traps and rabbits
look something like this.

00:02:30.180 --> 00:02:33.610
He could spend all his
time making rabbit traps,

00:02:33.610 --> 00:02:35.520
but in that case he
won't get any rabbits

00:02:35.520 --> 00:02:36.640
and he'll probably starve.

00:02:36.640 --> 00:02:38.770
And that wouldn't
be a good scenario.

00:02:38.770 --> 00:02:41.540
Or he could spend all of
this time hunting for rabbits

00:02:41.540 --> 00:02:44.840
and he would catch, on
average, 5 rabbits per day.

00:02:44.840 --> 00:02:47.630
But that would leave him no
time to make rabbit traps.

00:02:47.630 --> 00:02:49.910
So this is our
current production

00:02:49.910 --> 00:02:54.770
possibilities-- let
me just draw it.

00:02:54.770 --> 00:02:58.970
This is our current production
possibilities frontier.

00:02:58.970 --> 00:03:03.350
So I'll call this p, production
possibilities frontier.

00:03:03.350 --> 00:03:06.330
And I'll put a little
0 subscript there.

00:03:06.330 --> 00:03:07.810
That's our starting point.

00:03:07.810 --> 00:03:09.875
So he can he can sit
anywhere over here,

00:03:09.875 --> 00:03:12.250
and he would have achieved
productive efficiency anywhere

00:03:12.250 --> 00:03:13.510
on this curve.

00:03:13.510 --> 00:03:18.360
But as we saw, if he just spent
all of his time doing this

00:03:18.360 --> 00:03:20.790
over here, he'll never
get any rabbit traps.

00:03:20.790 --> 00:03:22.170
And so he won't
be able to change

00:03:22.170 --> 00:03:25.140
the productive
possibility frontier.

00:03:25.140 --> 00:03:27.550
But what happens if
instead he decides

00:03:27.550 --> 00:03:29.590
that he does want to
build some rabbit traps?

00:03:29.590 --> 00:03:32.780
So he decreases the number
of rabbits a day to 4

00:03:32.780 --> 00:03:36.780
and that allows him to
make 1 rabbit trap per day.

00:03:36.780 --> 00:03:39.620
So he wants to hang
out in this scenario.

00:03:39.620 --> 00:03:41.400
So every day that
goes by, on average,

00:03:41.400 --> 00:03:42.920
he's going to make 4 rabbits.

00:03:42.920 --> 00:03:45.880
And he's going to
build a rabbit trap.

00:03:45.880 --> 00:03:47.380
So what's going to happen?

00:03:47.380 --> 00:03:50.420
So as we go into, maybe
into the next period,

00:03:50.420 --> 00:03:54.470
he would now have a rabbit
trap after just one day

00:03:54.470 --> 00:03:56.830
that he can use to
help catch rabbits.

00:03:56.830 --> 00:04:00.150
So that will actually change
the production possibilities

00:04:00.150 --> 00:04:01.460
frontier.

00:04:01.460 --> 00:04:03.530
So if he makes
this investment, it

00:04:03.530 --> 00:04:06.620
will actually allow him,
in a given amount of time,

00:04:06.620 --> 00:04:08.880
to actually catch more rabbits.

00:04:08.880 --> 00:04:11.000
So if he does that, the
production possibilities

00:04:11.000 --> 00:04:14.180
frontier-- having a rabbit
trap won't make him that much,

00:04:14.180 --> 00:04:16.890
won't allow him to make
more rabbit traps in a day.

00:04:16.890 --> 00:04:19.630
So the most rabbit traps
he can make in a day

00:04:19.630 --> 00:04:21.339
is still going to be 3.

00:04:21.339 --> 00:04:24.450
But maybe now he can
catch 6 rabbits a day.

00:04:24.450 --> 00:04:30.210
So now it might look
something like that.

00:04:30.210 --> 00:04:32.380
So now he could either
stop making rabbit traps,

00:04:32.380 --> 00:04:35.020
and catch 6 a day just
with that 1 rabbit trap

00:04:35.020 --> 00:04:37.840
he has, or he could
continue that.

00:04:37.840 --> 00:04:39.980
And now actually he can
catch 5 rabbits a day

00:04:39.980 --> 00:04:42.130
and still make 1
rabbit trap a day.

00:04:42.130 --> 00:04:43.600
And maybe he decides to do that.

00:04:43.600 --> 00:04:46.130
But it could be anywhere along
this production possibilities

00:04:46.130 --> 00:04:47.830
frontier.

00:04:47.830 --> 00:04:51.400
Or he could say, hey, I'm happy
eating the 4 rabbits a day.

00:04:51.400 --> 00:04:54.660
I'm going to make 2 rabbit
traps now every day.

00:04:54.660 --> 00:04:57.520
And now after another period
he gets even more productive.

00:04:57.520 --> 00:05:01.900
And so then the production--
so let me call this one,

00:05:01.900 --> 00:05:02.890
this is after one day.

00:05:02.890 --> 00:05:07.130
Production possibilities
frontier after one day,

00:05:07.130 --> 00:05:08.770
and then after two
days, let's say

00:05:08.770 --> 00:05:10.860
he did this scenario
right over here.

00:05:10.860 --> 00:05:12.670
Now he's produce 2 rabbit traps.

00:05:12.670 --> 00:05:15.010
And obviously, maybe I'm
exaggerating how quickly

00:05:15.010 --> 00:05:16.580
his productivity would grow.

00:05:16.580 --> 00:05:19.970
But maybe now the new production
possibilities frontier

00:05:19.970 --> 00:05:22.680
looks something like this.

00:05:22.680 --> 00:05:24.745
He now has 2 rabbit traps.

00:05:24.745 --> 00:05:27.690
Or he has 2 more rabbit
traps, he already had 1.

00:05:27.690 --> 00:05:30.135
So now he has 3 rabbit
traps after two days.

00:05:30.135 --> 00:05:32.260
And so now if he wanted to
devote themselves purely

00:05:32.260 --> 00:05:35.130
to rabbit trapping he
can get 8 rabbits a day.

00:05:35.130 --> 00:05:37.340
Or he could do some
combination in between.

00:05:37.340 --> 00:05:39.850
And actually this curve,
it shouldn't go up at all.

00:05:39.850 --> 00:05:40.720
I don't want to give
you the impression

00:05:40.720 --> 00:05:41.970
that it went up and then down.

00:05:41.970 --> 00:05:44.490
It just goes kind of
straight and does something

00:05:44.490 --> 00:05:45.844
like that right over here.

00:05:45.844 --> 00:05:47.260
So this right over
here, I'll call

00:05:47.260 --> 00:05:51.430
that the production
possibilities frontier 2.

00:05:51.430 --> 00:05:55.300
So what this hunter-gatherer
is doing in this scenario

00:05:55.300 --> 00:05:59.280
right here is, he is
making an investment.

00:05:59.280 --> 00:06:01.540
He is accumulating capital.

00:06:01.540 --> 00:06:04.650
This right over here,
this is capital.

00:06:04.650 --> 00:06:09.887
He is choosing, instead of to
consume all of his resources--

00:06:09.887 --> 00:06:11.220
so there's two things he can do.

00:06:11.220 --> 00:06:14.620
He can either spend all of
his time in pure consumption,

00:06:14.620 --> 00:06:17.120
getting as many rabbits
as possible a day

00:06:17.120 --> 00:06:19.570
and then eating them
all, pure consumption.

00:06:19.570 --> 00:06:22.080
Or he could reduce
his consumption

00:06:22.080 --> 00:06:23.860
and then allocate
some of his resources

00:06:23.860 --> 00:06:25.460
towards and investment.

00:06:25.460 --> 00:06:29.800
So this right over here,
this is an investment.

00:06:29.800 --> 00:06:32.190
It makes him more productive.

00:06:32.190 --> 00:06:34.357
This right over
here is consumption.

00:06:34.357 --> 00:06:35.940
There's some base
level of consumption

00:06:35.940 --> 00:06:38.350
he needs to survive.

00:06:38.350 --> 00:06:40.180
But if he invests,
then it increases

00:06:40.180 --> 00:06:42.740
his overall productive capacity.

00:06:42.740 --> 00:06:44.420
So if you viewed
him as an economy

00:06:44.420 --> 00:06:47.860
by himself, by investing
instead of consuming

00:06:47.860 --> 00:06:49.282
all of his resources,
by investing

00:06:49.282 --> 00:06:50.990
some of his resources--
and in this case,

00:06:50.990 --> 00:06:53.670
his resources are his
time and his expertise--

00:06:53.670 --> 00:06:56.190
by investing some of them
he's able to increase

00:06:56.190 --> 00:06:57.680
his productivity.

00:06:57.680 --> 00:06:59.370
And if you viewed
him as an economy,

00:06:59.370 --> 00:07:05.760
he's experiencing
economic growth.

00:07:05.760 --> 00:07:07.680
And so there's multiple
types of investments.

00:07:07.680 --> 00:07:10.970
And we'll talk about
these in multiple videos.

00:07:10.970 --> 00:07:13.800
In this case, he is doing
capital accumulation.

00:07:13.800 --> 00:07:16.620
He is building tools that
will make him more productive.

00:07:16.620 --> 00:07:20.130
Another type of
investment is essentially

00:07:20.130 --> 00:07:23.110
technological change,
technological improvement,

00:07:23.110 --> 00:07:25.140
which would actually make
his tools even better.

00:07:25.140 --> 00:07:27.800
So we could maybe draw another
production possibilities

00:07:27.800 --> 00:07:30.680
frontier between
making rabbit traps

00:07:30.680 --> 00:07:34.600
and then doing R&D on inventing
new types of rabbit traps.

00:07:34.600 --> 00:07:36.600
And so he could decide
which of those two things

00:07:36.600 --> 00:07:38.270
he wants to decide between.

00:07:38.270 --> 00:07:40.790
But what I wanted you to
just appreciate in this video

00:07:40.790 --> 00:07:42.660
is that the production
possibilities

00:07:42.660 --> 00:07:44.480
frontier can change.

00:07:44.480 --> 00:07:46.580
You can become more
productive if you

00:07:46.580 --> 00:07:50.520
do have investment in R&D
or capital accumulation.

00:07:50.520 --> 00:07:54.600
And in this case, that just
happened to be rabbit traps.