Long run average total cost curve

WEBVTT
Kind: captions
Language: en

00:00:00.200 --> 00:00:01.610
- [Narrator] We've talked about the idea

00:00:01.610 --> 00:00:05.740
of average total cost in
several videos so far,

00:00:05.740 --> 00:00:08.510
where it was the sum of
your average variable cost

00:00:08.510 --> 00:00:10.960
and your average fixed cost.

00:00:10.960 --> 00:00:13.780
But when we're talking about
fixed costs, by definition,

00:00:13.780 --> 00:00:16.370
that means we're talking
about things in the short run.

00:00:16.370 --> 00:00:20.840
Remember, the short run is
defined as the amount of time

00:00:20.840 --> 00:00:25.140
over which at least one
of your inputs is fixed.

00:00:25.140 --> 00:00:27.410
But if we talk about longer term,

00:00:27.410 --> 00:00:29.440
so let's say you're running a factory,

00:00:29.440 --> 00:00:31.370
and, in the short run,
the short run would be

00:00:31.370 --> 00:00:33.310
how long it takes to build another factory

00:00:33.310 --> 00:00:36.350
or how long it takes to close
down or sell another factory.

00:00:36.350 --> 00:00:37.300
But in the long run,

00:00:37.300 --> 00:00:41.200
you can always add more
factories or shut down factories.

00:00:41.200 --> 00:00:44.380
So in the long run,
everything is variable.

00:00:44.380 --> 00:00:45.690
So what we're gonna do in this video

00:00:45.690 --> 00:00:48.310
is think about how the average total cost

00:00:48.310 --> 00:00:50.160
that we've studied in previous videos,

00:00:50.160 --> 00:00:52.570
which were actually short-run
average total costs,

00:00:52.570 --> 00:00:57.490
how those relate to the
long-run average total cost.

00:00:57.490 --> 00:00:59.920
So let's imagine that we are trying

00:00:59.920 --> 00:01:02.400
to open up a food truck business.

00:01:02.400 --> 00:01:05.050
And let's say that each food truck,

00:01:05.050 --> 00:01:08.460
so each food truck, and let's
say we're going to sell tacos,

00:01:08.460 --> 00:01:10.450
so these are taco food trucks.

00:01:10.450 --> 00:01:13.980
And so each food truck can optimally,

00:01:13.980 --> 00:01:16.393
optimally, I'll just write it like that,

00:01:18.307 --> 00:01:21.670
serve 100 tacos

00:01:21.670 --> 00:01:23.840
per day.

00:01:23.840 --> 00:01:25.870
And we haven't started our business yet,

00:01:25.870 --> 00:01:28.790
but we have to decide how
many food trucks to buy.

00:01:28.790 --> 00:01:32.550
And we do some market research,
and we feel pretty confident

00:01:32.550 --> 00:01:36.510
that we are going to be able
to sell 200 tacos per day.

00:01:36.510 --> 00:01:38.660
So we're going to target,

00:01:38.660 --> 00:01:42.550
target 200 tacos,

00:01:42.550 --> 00:01:45.090
tacos per day.

00:01:45.090 --> 00:01:46.470
Now, in this world,

00:01:46.470 --> 00:01:50.020
what you would want to do
is optimize your fixed cost

00:01:50.020 --> 00:01:53.720
to minimize your average total cost

00:01:53.720 --> 00:01:55.680
for 200 tacos per day.

00:01:55.680 --> 00:01:57.800
Remember, your fixed cost
is essentially going to be,

00:01:57.800 --> 00:01:59.090
let's say it's just your food truck,

00:01:59.090 --> 00:02:01.320
and then you're going
to have a variable cost.

00:02:01.320 --> 00:02:04.130
It might be the staff
that's making the tacos.

00:02:04.130 --> 00:02:07.540
It might be the supplies for
the tacos, things like that.

00:02:07.540 --> 00:02:11.290
And so you might have an
average total cost curve

00:02:11.290 --> 00:02:13.610
that looks like this.

00:02:13.610 --> 00:02:15.603
So let me make some axes here.

00:02:16.520 --> 00:02:21.120
So this is going to be
quantity of tacos per day,

00:02:21.120 --> 00:02:22.210
quantity

00:02:23.550 --> 00:02:25.990
of tacos.

00:02:25.990 --> 00:02:28.810
This is going to be per day.

00:02:28.810 --> 00:02:31.570
And then in the vertical axis,

00:02:31.570 --> 00:02:33.990
this is going to be cost per taco,

00:02:33.990 --> 00:02:37.740
cost per taco.

00:02:37.740 --> 00:02:41.450
And let's say since you're
optimizing for 200 tacos today,

00:02:41.450 --> 00:02:44.730
you want to minimize your cost
per taco, 200 tacos per day,

00:02:44.730 --> 00:02:47.310
that happens with two food trucks.

00:02:47.310 --> 00:02:50.170
So if we're at 200 tacos per day,

00:02:50.170 --> 00:02:53.270
let me put it right over
there, 200 tacos per day,

00:02:53.270 --> 00:02:56.100
we get to a cost per taco,

00:02:56.100 --> 00:02:59.380
average total cost per taco.

00:02:59.380 --> 00:03:01.830
Let's say that is 50 cents.

00:03:01.830 --> 00:03:04.210
So that is 50 cents right over there.

00:03:04.210 --> 00:03:07.400
But the actual number of sales,

00:03:07.400 --> 00:03:09.090
the actual number of
tacos that you might have

00:03:09.090 --> 00:03:11.770
to produce in a given
day, might vary from that,

00:03:11.770 --> 00:03:15.010
and that will actually help construct your

00:03:15.010 --> 00:03:17.660
average total cost curve.

00:03:17.660 --> 00:03:19.660
And so your average total cost curve

00:03:19.660 --> 00:03:21.970
might look something like this.

00:03:21.970 --> 00:03:23.840
It might look,

00:03:23.840 --> 00:03:26.350
might look something like this.

00:03:26.350 --> 00:03:28.390
We've seen curves like this in the past,

00:03:28.390 --> 00:03:31.370
and we would have call this
our average total cost.

00:03:31.370 --> 00:03:33.510
But now because we're differentiating

00:03:33.510 --> 00:03:36.040
between our short run and long run,

00:03:36.040 --> 00:03:37.060
let's make this very clear.

00:03:37.060 --> 00:03:40.400
This is our short-run average total cost,

00:03:40.400 --> 00:03:43.590
and this is a situation where we have two

00:03:43.590 --> 00:03:46.660
of our food trucks per day,

00:03:46.660 --> 00:03:48.360
two food trucks.

00:03:48.360 --> 00:03:52.510
Now, what if instead of 200 tacos per day,

00:03:52.510 --> 00:03:55.350
it ends up that we only have
to produce 100 tacos per day

00:03:55.350 --> 00:03:58.220
because that's how many
people are demanding?

00:03:58.220 --> 00:04:00.880
So let's say this is 100 right over here.

00:04:00.880 --> 00:04:03.900
Well, if we keep the number
of trucks we have constant,

00:04:03.900 --> 00:04:06.200
so we don't change our fixed cost,

00:04:06.200 --> 00:04:09.650
well, then our cost per
taco is going to be higher.

00:04:09.650 --> 00:04:12.810
Let's say that this right over here is,

00:04:12.810 --> 00:04:14.970
let's say this is 70 cents,

00:04:14.970 --> 00:04:16.940
70 cents

00:04:16.940 --> 00:04:18.640
per taco.

00:04:18.640 --> 00:04:20.440
And then there's the other scenario.

00:04:20.440 --> 00:04:22.980
Let's say that our tacos
sell better than expected.

00:04:22.980 --> 00:04:27.700
Let's say that we need to somehow
produce 300 tacos per day.

00:04:27.700 --> 00:04:29.520
Well, if we can't change our fixed cost,

00:04:29.520 --> 00:04:32.090
which is, by definition,
what the short run is,

00:04:32.090 --> 00:04:35.400
well, then we might be
at, say, this point.

00:04:35.400 --> 00:04:37.280
It looks like it would be about,

00:04:37.280 --> 00:04:39.840
let's just call that 80 cents,

00:04:39.840 --> 00:04:41.840
80 cents

00:04:41.840 --> 00:04:46.060
per taco as our short-run
average total cost.

00:04:46.060 --> 00:04:49.420
Now, in either of these
situations, let's say that

00:04:49.420 --> 00:04:52.260
we have the more pessimistic
scenario actually happens,

00:04:52.260 --> 00:04:56.150
that there's only demand
for 100 tacos per day.

00:04:56.150 --> 00:04:58.870
Well, in that world, the
rational thing would be,

00:04:58.870 --> 00:05:01.290
hey, let's sell one of those trucks.

00:05:01.290 --> 00:05:05.250
We're only at 50% utilization
at 100 tacos per day.

00:05:05.250 --> 00:05:07.280
Let's sell one of those trucks

00:05:07.280 --> 00:05:09.720
to lower our average total cost.

00:05:09.720 --> 00:05:13.260
And so in the long run, you
can adjust your fixed cost,

00:05:13.260 --> 00:05:16.610
so with one truck, with a
curve that looks like this.

00:05:16.610 --> 00:05:18.270
So at 100,

00:05:18.270 --> 00:05:20.960
at 100 tacos per day,

00:05:20.960 --> 00:05:24.320
our costs are 60 cents

00:05:24.320 --> 00:05:25.193
per taco.

00:05:26.570 --> 00:05:29.910
And the curve might look something like,

00:05:29.910 --> 00:05:31.970
something like this.

00:05:31.970 --> 00:05:34.330
So if things were to get
even worse than that,

00:05:34.330 --> 00:05:35.410
our cost would go up.

00:05:35.410 --> 00:05:38.430
And if for some reason the
market were to actually go back

00:05:38.430 --> 00:05:40.120
to what we expected or even beyond,

00:05:40.120 --> 00:05:41.820
then our cost would go even higher.

00:05:41.820 --> 00:05:44.720
So this cost curve, which
is based on one truck,

00:05:44.720 --> 00:05:49.460
so let me call this our
short-run average total cost,

00:05:49.460 --> 00:05:51.970
and this is for one truck,

00:05:51.970 --> 00:05:56.110
this would be suboptimal if
we actually do have 200 sold,

00:05:56.110 --> 00:05:57.740
200 units being produced a day

00:05:57.740 --> 00:05:59.930
or 300 units produced per day.

00:05:59.930 --> 00:06:03.990
But it is optimal for 100 units per day.

00:06:03.990 --> 00:06:05.880
Now, things could go the other way.

00:06:05.880 --> 00:06:07.500
Well, you might start
with those two trucks

00:06:07.500 --> 00:06:11.930
that are optimal for 200 units
per day, 200 tacos per day.

00:06:11.930 --> 00:06:13.040
But you're in the world

00:06:13.040 --> 00:06:15.400
where people want to
buy 300 tacos per day,

00:06:15.400 --> 00:06:19.150
and 300 tacos with two
trucks is not optimal.

00:06:19.150 --> 00:06:21.810
So in the long run, you
order another truck,

00:06:21.810 --> 00:06:23.920
and maybe it takes a couple
of months for it to show up

00:06:23.920 --> 00:06:25.340
and be outfitted and whatever.

00:06:25.340 --> 00:06:27.220
But once you get that third truck,

00:06:27.220 --> 00:06:31.190
now you can optimally
serve 300 tacos per day.

00:06:31.190 --> 00:06:34.470
And so you might be in this situation.

00:06:34.470 --> 00:06:36.620
So at,

00:06:36.620 --> 00:06:38.270
if you get another truck,

00:06:38.270 --> 00:06:41.930
you could have another short-run
average total cost curve

00:06:41.930 --> 00:06:45.450
that looks something like
this right over here.

00:06:45.450 --> 00:06:49.310
So this is our short-run
average total cost curve,

00:06:49.310 --> 00:06:52.620
and so this is when we have three trucks.

00:06:52.620 --> 00:06:54.540
And remember, the short run is

00:06:54.540 --> 00:06:57.630
when at least one of your inputs is fixed.

00:06:57.630 --> 00:06:59.470
And in this one, for the simplified model,

00:06:59.470 --> 00:07:01.600
we're assuming that input is the truck,

00:07:01.600 --> 00:07:05.210
that everything else
is a variable expense.

00:07:05.210 --> 00:07:06.630
Now, when you look at this,

00:07:06.630 --> 00:07:11.500
it helps us think about a
long-run average total cost.

00:07:11.500 --> 00:07:12.820
What would that be?

00:07:12.820 --> 00:07:14.330
Well, in the long run,

00:07:14.330 --> 00:07:16.580
we can change the number
of trucks we have.

00:07:16.580 --> 00:07:17.720
And if we can, in the long run,

00:07:17.720 --> 00:07:19.640
we can change the number
of trucks we have,

00:07:19.640 --> 00:07:23.420
we would always be picking
the optimal number of trucks

00:07:23.420 --> 00:07:25.280
for the quantity we're producing.

00:07:25.280 --> 00:07:27.670
So in the long run, we would
want to be at that point.

00:07:27.670 --> 00:07:30.200
So if there's only 100 that
we need to produce a day,

00:07:30.200 --> 00:07:31.660
we would only use one truck.

00:07:31.660 --> 00:07:33.200
If there's 200 produced a day,

00:07:33.200 --> 00:07:35.180
we would use two trucks
and be at that point.

00:07:35.180 --> 00:07:36.470
If we need to produce 300,

00:07:36.470 --> 00:07:38.890
we would have three trucks
and be on that point.

00:07:38.890 --> 00:07:43.400
And so your long-run
average total cost curve

00:07:43.400 --> 00:07:45.010
would be connecting these dots,

00:07:45.010 --> 00:07:46.910
and so it would look something,

00:07:46.910 --> 00:07:49.380
it would look something like this.

00:07:49.380 --> 00:07:50.880
And some of you might be thinking, well,

00:07:50.880 --> 00:07:52.760
but this situation right over here is

00:07:52.760 --> 00:07:54.410
where you have 1 1/2 trucks.

00:07:54.410 --> 00:07:55.660
What's the deal with that?

00:07:55.660 --> 00:07:56.610
But in the long run,

00:07:56.610 --> 00:07:58.850
you might be able to
get a custom truck size

00:07:58.850 --> 00:08:02.434
that is 1 1/2 times as
big as your typical truck

00:08:02.434 --> 00:08:05.370
or 2 1/2 times as big
as your typical truck.

00:08:05.370 --> 00:08:06.710
But the big takeaway here is

00:08:06.710 --> 00:08:10.280
that your long-run
average total cost curve

00:08:10.280 --> 00:08:14.640
you can view as the envelope
of all of the minimum points

00:08:14.640 --> 00:08:19.360
of all of your various short-run
average total cost curve.

00:08:19.360 --> 00:08:22.110
Because at any given,
for any given quantity,

00:08:22.110 --> 00:08:25.170
you want to optimize your fixed cost,

00:08:25.170 --> 00:08:26.610
which puts you at the minimum point

00:08:26.610 --> 00:08:30.533
of one of these short-run
average total cost curves.


How costs change when fixed and variable costs change

WEBVTT
Kind: captions
Language: en

00:00:00.720 --> 00:00:01.940
- [Instructor] In the last few videos,

00:00:01.940 --> 00:00:04.370
we were studying our watch factory,

00:00:04.370 --> 00:00:05.950
ABC Watch Factory.

00:00:05.950 --> 00:00:08.490
And based on some data, knowing what our

00:00:08.490 --> 00:00:10.520
fixed costs are, our labor units,

00:00:10.520 --> 00:00:12.570
our variable costs, our total costs,

00:00:12.570 --> 00:00:14.943
and then our total
output, and that would be

00:00:14.943 --> 00:00:17.020
for for different amounts of labor,

00:00:17.020 --> 00:00:19.810
we were able to calculate
marginal product of labor,

00:00:19.810 --> 00:00:22.360
marginal costs, average variable cost,

00:00:22.360 --> 00:00:25.810
average fixed cost,
and average total cost.

00:00:25.810 --> 00:00:28.380
What we're gonna do in
this video is start to

00:00:28.380 --> 00:00:31.900
explore how these various calculations

00:00:31.900 --> 00:00:34.560
will change, and
eventually, how these curves

00:00:34.560 --> 00:00:39.560
will change based on changes
in cost and productivity.

00:00:39.700 --> 00:00:44.610
So let's say our rent has
gone up by $2000 a month,

00:00:44.610 --> 00:00:46.830
and we have to pay that extra rent

00:00:46.830 --> 00:00:49.470
regardless of what our output is.

00:00:49.470 --> 00:00:53.540
So what is that going to do
to marginal product of labor,

00:00:53.540 --> 00:00:55.490
marginal costs, average variable cost,

00:00:55.490 --> 00:00:57.930
average fixed cost,
and average total cost?

00:00:57.930 --> 00:00:59.930
Pause this video and think about what's

00:00:59.930 --> 00:01:02.550
going to happen before
we actually model it

00:01:02.550 --> 00:01:05.700
in this spreadsheet by
raising our fixed costs,

00:01:05.700 --> 00:01:08.030
our monthly fixed costs.

00:01:08.030 --> 00:01:10.930
So we are going to go from $5000 a month

00:01:10.930 --> 00:01:15.110
of fixed costs to $7000
a month of fixed costs.

00:01:15.110 --> 00:01:19.310
So it's gonna be $7000,
but we're not done yet.

00:01:19.310 --> 00:01:23.260
We want to scroll all the way down.

00:01:23.260 --> 00:01:26.980
And so, what changed
from what I had before?

00:01:26.980 --> 00:01:28.950
Well if you were paying close attention,

00:01:28.950 --> 00:01:31.070
your marginal product
of labor hasn't changed,

00:01:31.070 --> 00:01:33.180
your marginal cost hasn't changed,

00:01:33.180 --> 00:01:35.670
your average variable cost hasn't changed,

00:01:35.670 --> 00:01:39.650
your average fixed and
average total cost did change.

00:01:39.650 --> 00:01:42.510
And that should, hopefully,
make intuitive sense.

00:01:42.510 --> 00:01:44.690
If you look at the
formulas for these things,

00:01:44.690 --> 00:01:47.850
for example, the marginal
product of labor,

00:01:47.850 --> 00:01:51.480
you would see that it
involves total output

00:01:51.480 --> 00:01:52.430
and the labor units.

00:01:52.430 --> 00:01:54.290
It doesn't involve the fixed costs at all.

00:01:54.290 --> 00:01:56.450
So if the fixed costs
change, you wouldn't expect

00:01:56.450 --> 00:01:59.290
our marginal product of labor to change.

00:01:59.290 --> 00:02:01.500
When you look at marginal costs,

00:02:01.500 --> 00:02:03.500
you are involving total costs.

00:02:03.500 --> 00:02:05.460
And you say hey, isn't fixed costs

00:02:05.460 --> 00:02:07.430
part of total costs?

00:02:07.430 --> 00:02:10.330
But remember, fixed cost is, the $7000

00:02:10.330 --> 00:02:13.100
is part of the $13000, and it's part of

00:02:13.100 --> 00:02:15.570
this $9000 right over here.

00:02:15.570 --> 00:02:19.390
So when you take the
$13000 minus the $9000,

00:02:19.390 --> 00:02:21.230
which we do in the
numerator right over here,

00:02:21.230 --> 00:02:23.130
we're doing our change in total costs

00:02:23.130 --> 00:02:24.900
over our change in output,

00:02:24.900 --> 00:02:27.900
those two $7000 cancel out.

00:02:27.900 --> 00:02:31.510
The fixed costs cancel out,
and so your marginal costs

00:02:31.510 --> 00:02:34.453
is not dependent on your fixed costs.

00:02:35.290 --> 00:02:38.550
Similarly, your variable
costs is separate,

00:02:38.550 --> 00:02:41.200
you can view in a lot of
ways, from your fixed costs.

00:02:41.200 --> 00:02:43.210
So your average variable
costs aren't going to be

00:02:43.210 --> 00:02:44.450
affected by fixed costs.

00:02:44.450 --> 00:02:46.010
And, of course, you would expect your

00:02:46.010 --> 00:02:48.220
average fixed costs to change,

00:02:48.220 --> 00:02:50.770
because that is directly derived

00:02:50.770 --> 00:02:53.710
from your fixed costs and your output.

00:02:53.710 --> 00:02:56.306
And then, average total
costs are also derived

00:02:56.306 --> 00:02:57.730
from total costs.

00:02:57.730 --> 00:02:59.760
It's not a change between total cost,

00:02:59.760 --> 00:03:02.940
and that total cost has
the fixed cost in it.

00:03:02.940 --> 00:03:04.540
So you might be asking yourself,

00:03:04.540 --> 00:03:07.655
well what would change your
marginal product of labor,

00:03:07.655 --> 00:03:09.896
your marginal costs, your
average variable cost,

00:03:09.896 --> 00:03:11.672
or your average total cost?

00:03:11.672 --> 00:03:15.950
Well, think about a change
in labor productivity.

00:03:15.950 --> 00:03:20.950
Let's say that each person,
there's some magical

00:03:20.950 --> 00:03:23.790
new device, or new
process, that allows them

00:03:23.790 --> 00:03:25.750
to be a little bit more productive?

00:03:25.750 --> 00:03:29.240
Well then one person,
instead of producing 10,

00:03:29.240 --> 00:03:32.690
let's say they now produce 11.

00:03:32.690 --> 00:03:35.210
And let's say two people
now, instead of 25,

00:03:35.210 --> 00:03:37.660
can now producer 27.

00:03:37.660 --> 00:03:40.420
Let's say three people, instead of 45,

00:03:40.420 --> 00:03:43.180
can now produce 47.

00:03:43.180 --> 00:03:46.830
And now four people, and
I'm making these numbers up,

00:03:46.830 --> 00:03:49.620
they can no produce 59.

00:03:49.620 --> 00:03:53.210
Lemme say this is 66.

00:03:53.210 --> 00:03:57.000
And then let's say that this is 72.

00:03:57.000 --> 00:03:58.890
And so notice, that did change

00:03:58.890 --> 00:04:00.840
our marginal product of labor.

00:04:00.840 --> 00:04:02.470
And once again, marginal product of labor

00:04:02.470 --> 00:04:04.870
is based on the difference
in total output,

00:04:04.870 --> 00:04:08.240
as we have a difference
in our labor units.

00:04:08.240 --> 00:04:10.210
And that change in productivity,

00:04:10.210 --> 00:04:11.330
it might be more pronounced.

00:04:11.330 --> 00:04:13.220
In the way I just happened
to pick the numbers,

00:04:13.220 --> 00:04:15.730
it was more pronounced
when you have fewer people,

00:04:15.730 --> 00:04:17.810
and then it got more diminished as you had

00:04:17.810 --> 00:04:19.230
more and more people.

00:04:19.230 --> 00:04:21.680
But when you had that
change in productivity,

00:04:21.680 --> 00:04:24.020
you might have noticed that that changed

00:04:24.020 --> 00:04:26.340
our marginal cost, and that changed

00:04:26.340 --> 00:04:28.070
our average variable cost.

00:04:28.070 --> 00:04:30.300
Because, once again, your marginal cost,

00:04:30.300 --> 00:04:32.530
if we look at it right over here,

00:04:32.530 --> 00:04:33.960
it is calculated by looking at your

00:04:33.960 --> 00:04:37.200
change in total cost,
divided by your change

00:04:37.200 --> 00:04:38.500
in total output.

00:04:38.500 --> 00:04:41.260
And when we had this
productivity improvement,

00:04:41.260 --> 00:04:44.250
our change in total output improved.

00:04:44.250 --> 00:04:45.700
Now there could be a
situation where you have

00:04:45.700 --> 00:04:48.960
a productivity improvement, but the change

00:04:48.960 --> 00:04:51.520
in total output from
one person to the next,

00:04:51.520 --> 00:04:52.450
might not change.

00:04:52.450 --> 00:04:55.290
So it's not always going to change either

00:04:55.290 --> 00:04:57.500
the marginal product of
labor or the marginal cost.

00:04:57.500 --> 00:04:59.510
But changes in productivity will often

00:04:59.510 --> 00:05:01.590
change those two things.

00:05:01.590 --> 00:05:02.970
And similarly, if you look at

00:05:02.970 --> 00:05:06.320
your average variable
cost, it is based on your

00:05:06.320 --> 00:05:08.010
variable costs and your output.

00:05:08.010 --> 00:05:09.830
When you have this
productivity improvement,

00:05:09.830 --> 00:05:12.410
that's going to improve your output

00:05:12.410 --> 00:05:15.200
for any given amount of variable cost.

00:05:15.200 --> 00:05:17.320
And so, that's going to have an affect

00:05:17.320 --> 00:05:19.040
on your average variable cost.

00:05:19.040 --> 00:05:21.650
And then your average
total cost is, of course,

00:05:21.650 --> 00:05:25.400
based in part on your total variable cost,

00:05:25.400 --> 00:05:28.240
which is driven by that
productivity improvement.

00:05:28.240 --> 00:05:31.610
Similarly, you could have
changes in variable cost.

00:05:31.610 --> 00:05:33.720
Let's say all of the people who work

00:05:33.720 --> 00:05:35.960
at your factory have
gotten together and say

00:05:35.960 --> 00:05:36.793
we want a raise.

00:05:36.793 --> 00:05:38.920
And you give in, and you give a raise,

00:05:38.920 --> 00:05:41.250
well now, instead of $2000 per worker,

00:05:41.250 --> 00:05:43.570
it's going to cost $2200 per worker.

00:05:43.570 --> 00:05:46.370
You gave a 10% raise per month.

00:05:46.370 --> 00:05:48.570
And so let me get that all the way down.

00:05:48.570 --> 00:05:50.370
And notice, the things that you would have

00:05:50.370 --> 00:05:52.170
expected to change did change.

00:05:52.170 --> 00:05:54.130
Your marginal product
of labor didn't change,

00:05:54.130 --> 00:05:57.340
because marginal product of
labor is not driven by cost.

00:05:57.340 --> 00:06:00.080
It only looks at the labor
units and the total output.

00:06:00.080 --> 00:06:02.280
But your marginal cost did change,

00:06:02.280 --> 00:06:04.260
even though our output for every

00:06:04.260 --> 00:06:06.380
incremental person did not change,

00:06:06.380 --> 00:06:09.030
because the underlying
cost of the people changed.

00:06:09.030 --> 00:06:10.750
Similarly, the average variable cost,

00:06:10.750 --> 00:06:12.490
you would of course expect it to change,

00:06:12.490 --> 00:06:15.470
'cause our variable
costs all went up by 10%.

00:06:15.470 --> 00:06:16.870
Your average fixed cost isn't going to

00:06:16.870 --> 00:06:18.900
be affected, 'cause we changed

00:06:18.900 --> 00:06:20.320
the variable cost, not the fixed.

00:06:20.320 --> 00:06:22.840
And the total costs were,
of course, affected,

00:06:22.840 --> 00:06:25.373
because the average
variable cost were affected.


Graphical impact of cost changes on marginal and average costs

WEBVTT
Kind: captions
Language: en

00:00:00.160 --> 00:00:01.070
- [Instructor] In the last video,

00:00:01.070 --> 00:00:03.810
we numerically studied how changes in

00:00:03.810 --> 00:00:06.390
productivity or cost might affect

00:00:06.390 --> 00:00:08.790
your marginal cost, your
average variable cost,

00:00:08.790 --> 00:00:12.020
your average fixed cost,
or your average total cost.

00:00:12.020 --> 00:00:15.050
In this video, we're gonna
think about it visually.

00:00:15.050 --> 00:00:18.240
So, we constructed these curves several

00:00:18.240 --> 00:00:22.180
videos ago to visualize
how average fixed cost

00:00:22.180 --> 00:00:23.450
trends over time.

00:00:23.450 --> 00:00:25.790
As you take that fixed
cost and you spread it

00:00:25.790 --> 00:00:27.170
over more, and more, and more units,

00:00:27.170 --> 00:00:30.090
you see that that just
asymptotes toward zero

00:00:30.090 --> 00:00:31.850
as you get more and more units.

00:00:31.850 --> 00:00:34.050
You see your marginal cost curve,

00:00:34.050 --> 00:00:35.030
and this is something that you'll

00:00:35.030 --> 00:00:36.550
typically see in a lot of textbooks.

00:00:36.550 --> 00:00:37.600
It's kind of u-shaped.

00:00:37.600 --> 00:00:40.100
And we talked about where it intersects

00:00:40.100 --> 00:00:41.710
the average variable cost.

00:00:41.710 --> 00:00:43.120
That's where the average variable cost

00:00:43.120 --> 00:00:44.930
goes from trending down to trending up.

00:00:44.930 --> 00:00:46.290
So it hits that minimum point,

00:00:46.290 --> 00:00:49.280
and the same thing happens
at average total cost.

00:00:49.280 --> 00:00:51.960
It hits the bottom of that
u of average total cost.

00:00:51.960 --> 00:00:55.090
It goes from trending down to trending up.

00:00:55.090 --> 00:00:58.200
And then over time, this
difference that you see

00:00:58.200 --> 00:01:01.450
between your average total cost

00:01:01.450 --> 00:01:03.810
and your average variable
cost, that difference

00:01:03.810 --> 00:01:06.860
right over there, that is
your average fixed cost.

00:01:06.860 --> 00:01:08.930
And so, since your average fixed cost are

00:01:08.930 --> 00:01:11.070
asymptoting downwards, you see that this

00:01:11.070 --> 00:01:13.100
difference between average total cost

00:01:13.100 --> 00:01:16.040
and average variable cost
gets less and less over time,

00:01:16.040 --> 00:01:18.120
that they are going to, over time,

00:01:18.120 --> 00:01:20.250
converge to each other as your average

00:01:20.250 --> 00:01:22.460
fixed costs gets closer, and closer,

00:01:22.460 --> 00:01:24.470
and closer to zero.

00:01:24.470 --> 00:01:26.170
But now let's think about how these curves

00:01:26.170 --> 00:01:27.930
might be impacted if you have changes

00:01:27.930 --> 00:01:30.270
in productivity or cost.

00:01:30.270 --> 00:01:33.320
So let's start with a
change in your fixed costs.

00:01:33.320 --> 00:01:35.310
Let's say your rent goes up.

00:01:35.310 --> 00:01:36.330
What would happen then?

00:01:36.330 --> 00:01:37.540
Pause this video and think about

00:01:37.540 --> 00:01:39.640
what would happen visually.

00:01:39.640 --> 00:01:42.700
Well then your average
fixed cost would shift up,

00:01:42.700 --> 00:01:44.920
and it might look something like this.

00:01:44.920 --> 00:01:47.520
Your average fixed cost might
look something like this.

00:01:47.520 --> 00:01:49.970
And then, which of these other curves

00:01:49.970 --> 00:01:52.820
also have fixed costs embedded in it?

00:01:52.820 --> 00:01:55.570
Well, your average total
cost is a combination

00:01:55.570 --> 00:01:56.930
of your average variable cost and

00:01:56.930 --> 00:01:58.400
your average fixed cost.

00:01:58.400 --> 00:02:00.810
So the amount that your
average fixed cost went up

00:02:00.810 --> 00:02:03.210
for any quantity, your
average total cost would

00:02:03.210 --> 00:02:05.750
also go up that amount for that quantity.

00:02:05.750 --> 00:02:07.940
So it would look something like this.

00:02:07.940 --> 00:02:09.600
It would look something like this.

00:02:09.600 --> 00:02:11.050
And once again, just as before,

00:02:11.050 --> 00:02:13.680
it will trend downwards
until you intersect

00:02:13.680 --> 00:02:15.160
with your marginal cost curve.

00:02:15.160 --> 00:02:17.420
And then it'll start trending upwards.

00:02:17.420 --> 00:02:19.940
So a change in your fixed costs,

00:02:19.940 --> 00:02:21.150
either upwards or downwards,

00:02:21.150 --> 00:02:22.790
would affect your average fixed cost

00:02:22.790 --> 00:02:25.850
and would affect your average total cost.

00:02:25.850 --> 00:02:27.180
The reason why it doesn't affect

00:02:27.180 --> 00:02:28.360
your average variable cost is because

00:02:28.360 --> 00:02:29.560
your average variable cost are taking out

00:02:29.560 --> 00:02:30.550
out your fixed costs.

00:02:30.550 --> 00:02:32.070
They're just thinking
about the variable costs.

00:02:32.070 --> 00:02:34.020
And your marginal costs are thinking about

00:02:34.020 --> 00:02:37.560
a difference in costs
between two different

00:02:37.560 --> 00:02:38.860
states of output.

00:02:38.860 --> 00:02:40.900
And the fixed costs
are in either of those,

00:02:40.900 --> 00:02:42.813
so they will cancel out.

00:02:43.660 --> 00:02:45.190
What would be a change
in your variable costs?

00:02:45.190 --> 00:02:48.420
Let's say you have to give
everyone a pay increase.

00:02:48.420 --> 00:02:51.400
Well then your variable costs will go up.

00:02:51.400 --> 00:02:53.180
And your variable costs might look like

00:02:53.180 --> 00:02:54.460
something like this.

00:02:54.460 --> 00:02:56.280
They will just shift up.

00:02:56.280 --> 00:02:58.350
And once again, they will trend downwards

00:02:58.350 --> 00:03:00.740
until you intersect with
your marginal cost curve,

00:03:00.740 --> 00:03:04.030
and then you will trend upwards.

00:03:04.030 --> 00:03:06.740
Now, a change in your variable costs

00:03:06.740 --> 00:03:09.660
will also affect your marginal costs.

00:03:09.660 --> 00:03:12.530
Because as you produce more output,

00:03:12.530 --> 00:03:15.210
well then you are likely to incur

00:03:15.210 --> 00:03:17.360
more incremental costs.

00:03:17.360 --> 00:03:18.457
So then your marginal costs,

00:03:18.457 --> 00:03:20.880
and I know this is getting very messy,

00:03:20.880 --> 00:03:23.540
might start looking something like,

00:03:23.540 --> 00:03:25.890
might look something like that.

00:03:25.890 --> 00:03:29.440
So, big picture, changes in productivity

00:03:29.440 --> 00:03:32.500
would likely affect your
average variable cost,

00:03:32.500 --> 00:03:35.240
likely affect your marginal cost,

00:03:35.240 --> 00:03:36.730
and of course, average variable cost

00:03:36.730 --> 00:03:38.650
feeds into average total
cost, so that would be

00:03:38.650 --> 00:03:39.970
impacted as well.

00:03:39.970 --> 00:03:41.820
But changes in just your fixed cost

00:03:41.820 --> 00:03:44.150
would affect your average fixed cost curve

00:03:44.150 --> 00:03:45.963
and your average total cost.


Marginal cost, average variable cost, and average total cost

WEBVTT
Kind: captions
Language: en

00:00:00.170 --> 00:00:03.210
- [Instructor] Let's say
that we run ABC Watch Factory

00:00:03.210 --> 00:00:07.200
and we want to understand the
economics of our business.

00:00:07.200 --> 00:00:08.510
So, what we have in this table

00:00:08.510 --> 00:00:10.320
is some data that we've already been able

00:00:10.320 --> 00:00:14.840
to estimate or measure based
on how our business is running

00:00:14.840 --> 00:00:16.270
and then we're gonna be able to figure out

00:00:16.270 --> 00:00:18.279
some other things based on this data.

00:00:18.279 --> 00:00:20.720
This first column is fixed costs,

00:00:20.720 --> 00:00:22.600
our monthly fixed costs,

00:00:22.600 --> 00:00:24.650
so these are the things
that we can't really change

00:00:24.650 --> 00:00:26.980
in the short run regardless
of how many people we hire

00:00:26.980 --> 00:00:28.920
or how many units we produce,

00:00:28.920 --> 00:00:31.970
so that might be the
rent on our facilities

00:00:31.970 --> 00:00:34.460
or the cost of renting the equipment

00:00:34.460 --> 00:00:37.470
and so, for us that's $5,000 a month.

00:00:37.470 --> 00:00:39.200
Then you have your labor units

00:00:39.200 --> 00:00:41.890
and for the sake for this model,

00:00:41.890 --> 00:00:45.650
we'll say that a labor unit
is a full-time employee

00:00:45.650 --> 00:00:48.230
who's at the factory
working every working day

00:00:48.230 --> 00:00:50.190
in a month and so, you can see,

00:00:50.190 --> 00:00:54.330
we can go from one
person working full time

00:00:54.330 --> 00:00:55.450
every working day in a month,

00:00:55.450 --> 00:00:57.460
all the way up to six.

00:00:57.460 --> 00:00:59.070
Now, this is the variable cost

00:00:59.070 --> 00:01:00.991
and for simplicity, this is mainly driven

00:01:00.991 --> 00:01:04.030
by the labor units and
a real-world example

00:01:04.030 --> 00:01:05.660
would be driven by the labor units,

00:01:05.660 --> 00:01:08.650
it would be driven by how
much material we're using

00:01:08.650 --> 00:01:09.910
to produce the watches

00:01:09.910 --> 00:01:12.710
but we have our variable
cost right over here.

00:01:12.710 --> 00:01:13.980
And then we have our total cost

00:01:13.980 --> 00:01:17.610
which is just simply the fixed
costs plus the variable cost

00:01:17.610 --> 00:01:20.080
for any given level of labor units

00:01:20.080 --> 00:01:23.280
and then we know how many
watches we can produce in a month

00:01:23.280 --> 00:01:25.860
based on our number of labor units

00:01:25.860 --> 00:01:27.710
or you could view it as
based on our total costs

00:01:27.710 --> 00:01:30.600
or based on our fixed and variable cost.

00:01:30.600 --> 00:01:31.920
Now, what we have here are other things

00:01:31.920 --> 00:01:32.900
that we would wanna look at.

00:01:32.900 --> 00:01:36.860
If we really wanna understand
how our factory works.

00:01:36.860 --> 00:01:39.020
So, this is the marginal product of labor,

00:01:39.020 --> 00:01:42.140
MPL for short, then you
have your marginal cost,

00:01:42.140 --> 00:01:44.270
then you have your average variable cost,

00:01:44.270 --> 00:01:46.130
then you have your average fixed costs

00:01:46.130 --> 00:01:48.210
and then you have your
average total costs,

00:01:48.210 --> 00:01:50.070
so like always, pause this video

00:01:50.070 --> 00:01:52.470
and try to fill what these values would be

00:01:52.470 --> 00:01:55.430
for even one row of this table

00:01:55.430 --> 00:01:56.880
and then I'll do it with you.

00:01:57.790 --> 00:01:58.623
Now let's do it together.

00:01:58.623 --> 00:02:00.310
Let's start with marginal
product of labor.

00:02:00.310 --> 00:02:02.110
Let's remind ourselves what that is.

00:02:02.110 --> 00:02:06.051
That says for every
incremental labor unit,

00:02:06.051 --> 00:02:09.550
how much more are we able to produce?

00:02:09.550 --> 00:02:11.470
And so, we'd have to
start at the second one

00:02:11.470 --> 00:02:14.460
'cause we have to think about
it incremental labor unit.

00:02:14.460 --> 00:02:17.660
So, as we go from one to labor units,

00:02:17.660 --> 00:02:22.080
we were able to go from
10 to 25 total output,

00:02:22.080 --> 00:02:24.300
so we were able to
produce 15 more watches.

00:02:24.300 --> 00:02:26.030
I could just type in 15

00:02:26.030 --> 00:02:27.740
but it's even better
to do it with a formula

00:02:27.740 --> 00:02:31.260
so I can just scroll it
down the rest of the rows.

00:02:31.260 --> 00:02:32.410
So, in this formula,

00:02:32.410 --> 00:02:34.947
I wanna find the difference
in my total output,

00:02:34.947 --> 00:02:39.947
so 25, that cell minus this cell,

00:02:40.060 --> 00:02:40.900
that that's saying hey look,

00:02:40.900 --> 00:02:43.440
I was able to grow 15 output

00:02:43.440 --> 00:02:45.730
or increase my output by 15

00:02:45.730 --> 00:02:50.730
when I increase labor by two minus one.

00:02:52.750 --> 00:02:56.440
And then I got my marginal
product of labor is 15

00:02:56.440 --> 00:02:59.030
when I went from one employee to two

00:02:59.030 --> 00:03:00.410
and then I can just figure that out

00:03:00.410 --> 00:03:03.100
for the other rows, that's the
value of using a spreadsheet.

00:03:03.100 --> 00:03:04.220
My marginal product of labor

00:03:04.220 --> 00:03:06.340
when I went from two
employees to three employees

00:03:06.340 --> 00:03:10.060
is 20, so that means by
adding that third employee,

00:03:10.060 --> 00:03:12.900
I'm able to produce 20
more watches per month

00:03:12.900 --> 00:03:16.100
and so, you might be noticing
two interesting trends here.

00:03:16.100 --> 00:03:18.830
Initially my marginal
product of labor seems

00:03:18.830 --> 00:03:22.300
to be increasing and then
it seems to be decreasing.

00:03:22.300 --> 00:03:25.070
And that's consistent with
the way a lot of businesses

00:03:25.070 --> 00:03:26.941
or factories work

00:03:26.941 --> 00:03:30.430
which is initially you're
getting the benefits

00:03:30.430 --> 00:03:34.300
of specialization where if you
only have one person working

00:03:34.300 --> 00:03:36.350
in your factory, they
have to do everything,

00:03:36.350 --> 00:03:38.030
they have to polish the glass

00:03:38.030 --> 00:03:41.351
and bring in the boxes
and talk to your suppliers

00:03:41.351 --> 00:03:43.990
and fit the gears on your watches

00:03:43.990 --> 00:03:45.890
and whatever and do the wiring

00:03:45.890 --> 00:03:47.420
while as you add more people,

00:03:47.420 --> 00:03:48.720
they can start to specialize.

00:03:48.720 --> 00:03:51.730
One person can specialize on assembly.

00:03:51.730 --> 00:03:54.600
Another person can specialize
on bringing the boxes in

00:03:54.600 --> 00:03:58.200
and so, initially you have
these benefits of specialization

00:03:58.200 --> 00:04:01.940
and so, people can focus on
just one skill and do it well

00:04:01.940 --> 00:04:04.040
but then you start getting
diminishing returns,

00:04:04.040 --> 00:04:05.870
the office starts getting crowded,

00:04:05.870 --> 00:04:07.890
people are waiting for different supplies,

00:04:07.890 --> 00:04:09.510
they have to get out of each other's way

00:04:09.510 --> 00:04:12.140
and so, then you see this
diminishing return trend

00:04:12.140 --> 00:04:14.770
where the marginal product
of labor starts going down

00:04:14.770 --> 00:04:17.360
for those incremental labor units.

00:04:17.360 --> 00:04:19.270
Next, we'll think about marginal cost

00:04:19.270 --> 00:04:21.720
and as we'll see, the
marginal cost trend's going

00:04:21.720 --> 00:04:24.270
the other direction as the
marginal product of labor.

00:04:24.270 --> 00:04:26.830
So, marginal cost is just for every,

00:04:26.830 --> 00:04:29.800
for a certain increment and output,

00:04:29.800 --> 00:04:32.530
how much is that costing us?

00:04:32.530 --> 00:04:37.530
So, for example, if we are
going from 10 to 25 output,

00:04:38.330 --> 00:04:40.460
for that 15 increment and output,

00:04:40.460 --> 00:04:41.900
how much is that costing us

00:04:41.900 --> 00:04:43.520
and I would say costing us on average

00:04:43.520 --> 00:04:44.600
but I don't want you to get confused,

00:04:44.600 --> 00:04:46.310
we're not talking about
average variable cost

00:04:46.310 --> 00:04:48.740
or average fixed cost
or average total cost

00:04:48.740 --> 00:04:51.210
but that would be, let's see our costs

00:04:51.210 --> 00:04:54.460
went from 7,000 to 11,000,

00:04:54.460 --> 00:04:57.660
so we'll do 11,000 minus 7,000.

00:04:57.660 --> 00:04:59.590
That is our change in cost

00:04:59.590 --> 00:05:03.940
divided by our change in total output.

00:05:03.940 --> 00:05:08.910
So, that's going to be divided
by the 25 minus the 10.

00:05:08.910 --> 00:05:11.170
And we could just scroll this down,

00:05:11.170 --> 00:05:12.660
we'll extend that formula

00:05:12.660 --> 00:05:13.990
and you can see this trend

00:05:13.990 --> 00:05:16.290
that is as the marginal product of labor

00:05:16.290 --> 00:05:19.710
is increasing, your
marginal cost is decreasing

00:05:19.710 --> 00:05:21.290
and it makes sense, in
some ways we're getting

00:05:21.290 --> 00:05:23.860
more efficient through the
specialization and what else

00:05:23.860 --> 00:05:25.760
but then once you have
diminishing returns,

00:05:25.760 --> 00:05:27.370
diminishing marginal returns,

00:05:27.370 --> 00:05:30.690
your marginal cost is going up.

00:05:30.690 --> 00:05:32.890
And now we can do the,
I guess you could say

00:05:32.890 --> 00:05:33.900
the average cost.

00:05:33.900 --> 00:05:36.410
So, first average of variable cost.

00:05:36.410 --> 00:05:38.410
That's just taking your variable cost

00:05:38.410 --> 00:05:42.590
and dividing it by your total output.

00:05:42.590 --> 00:05:46.190
And so, for at least those first 25 units,

00:05:46.190 --> 00:05:48.950
they cost on average or
just the variable component,

00:05:48.950 --> 00:05:51.380
you have to be careful is $240.

00:05:51.380 --> 00:05:53.280
If you talk about the fixed component,

00:05:53.280 --> 00:05:56.180
well, that's just gonna be our fixed cost

00:05:56.180 --> 00:06:00.200
divided by our total units

00:06:00.200 --> 00:06:02.025
and then our average total cost,

00:06:02.025 --> 00:06:04.380
that's gonna be our total cost

00:06:04.380 --> 00:06:07.730
divided by those 25 units

00:06:07.730 --> 00:06:09.930
and so, you can see,
our average total cost

00:06:09.930 --> 00:06:12.780
for those first 25 units is $440

00:06:12.780 --> 00:06:14.010
and then it can be broken up

00:06:14.010 --> 00:06:15.870
between how much of that $440

00:06:15.870 --> 00:06:17.820
is variable versus fixed

00:06:17.820 --> 00:06:20.663
and then we can just
extend these formulas down,

00:06:21.520 --> 00:06:23.260
the magic of spreadsheets

00:06:23.260 --> 00:06:25.410
and what's interesting here

00:06:25.410 --> 00:06:27.840
and it's not gonna be
going to be so obvious

00:06:27.840 --> 00:06:29.690
just looking at this spreadsheet

00:06:29.690 --> 00:06:32.180
is something interesting is happening

00:06:32.180 --> 00:06:35.720
when marginal cost seems to intersect

00:06:35.720 --> 00:06:37.630
either your average variable cost

00:06:37.630 --> 00:06:39.800
or your average total cost

00:06:39.800 --> 00:06:41.850
that at some point you're
average variable cost,

00:06:41.850 --> 00:06:42.770
you see that same trend,

00:06:42.770 --> 00:06:46.530
it's trending down and then
it starts to trend up again.

00:06:46.530 --> 00:06:49.170
Average total cost is trending down

00:06:49.170 --> 00:06:50.540
but then it trends up again

00:06:50.540 --> 00:06:52.590
and as we'll see when we graph it,

00:06:52.590 --> 00:06:55.330
the point at which
marginal cost intersects

00:06:55.330 --> 00:06:57.300
with the average variable cost,

00:06:57.300 --> 00:06:59.570
that's when you have
that change in direction

00:06:59.570 --> 00:07:00.850
of average variable cost

00:07:00.850 --> 00:07:02.817
and then same thing is true

00:07:02.817 --> 00:07:05.210
of when marginal cost intersects
with average total cost.

00:07:05.210 --> 00:07:08.100
That's when you have
that change in direction.

00:07:08.100 --> 00:07:10.500
Average fixed cost just continues

00:07:10.500 --> 00:07:12.140
to go down because those fixed costs

00:07:12.140 --> 00:07:15.200
aren't going up as you
have more and more output,

00:07:15.200 --> 00:07:16.930
so you have those same fixed costs,

00:07:16.930 --> 00:07:20.890
you could view it has spread
amongst more and more output,

00:07:20.890 --> 00:07:24.070
so that's just going to
keep asymptoting downward.

00:07:24.070 --> 00:07:26.030
In the next video, we'll
actually graph that

00:07:26.030 --> 00:07:28.203
and see these trends visually.


Graphs of MC, AVC and ATC

WEBVTT
Kind: captions
Language: en

00:00:00.520 --> 00:00:03.170
- [Instructor] In the previous
video, we began our study

00:00:03.170 --> 00:00:06.880
of ABC Watch Factory and
we tried to understand

00:00:06.880 --> 00:00:09.850
the economics of the
business based on some data

00:00:09.850 --> 00:00:12.290
that we had already collected on our costs

00:00:12.290 --> 00:00:13.870
and how much output we could produce

00:00:13.870 --> 00:00:15.930
based on how many labor units we had.

00:00:15.930 --> 00:00:17.930
And then from that, we calculated things,

00:00:17.930 --> 00:00:19.590
like the marginal product of labor,

00:00:19.590 --> 00:00:22.030
the marginal cost, the
average variable cost,

00:00:22.030 --> 00:00:24.870
the average fixed cost,
and the average total cost.

00:00:24.870 --> 00:00:26.470
What we're going to do in this video

00:00:26.470 --> 00:00:30.760
is take this information,
especially total output

00:00:30.760 --> 00:00:32.570
and all of these things
that we just calculated,

00:00:32.570 --> 00:00:36.160
so that we can better appreciate

00:00:36.160 --> 00:00:38.880
how these various calculations

00:00:38.880 --> 00:00:41.880
and the curves that we can
get from the calculations

00:00:41.880 --> 00:00:46.640
are interrelated, so let me scroll over

00:00:46.640 --> 00:00:51.110
a little bit so we have some space

00:00:51.110 --> 00:00:55.310
and then let me set up a
little coordinate plane here.

00:00:55.310 --> 00:00:59.040
And so what we have on our vertical axis,

00:00:59.040 --> 00:01:02.140
this is our cost, and then down here,

00:01:02.140 --> 00:01:05.063
in our horizontal axis this is our output.

00:01:05.900 --> 00:01:07.460
So, first let's just hand graph it,

00:01:07.460 --> 00:01:09.300
and I encourage you to go
through the exercise yourself.

00:01:09.300 --> 00:01:10.990
It's one thing to watch me do it,

00:01:10.990 --> 00:01:12.940
but when you actually graph something

00:01:12.940 --> 00:01:15.080
you digest the numbers that much better.

00:01:15.080 --> 00:01:18.450
And so, let's start with marginal cost.

00:01:18.450 --> 00:01:22.350
And I'm going to do it
in this blue-green color.

00:01:22.350 --> 00:01:26.010
So let's see, when our total output is 25,

00:01:26.010 --> 00:01:27.810
our marginal cost is 267.

00:01:27.810 --> 00:01:32.810
So, when our out put is 25,
267 would be right about there.

00:01:33.500 --> 00:01:35.130
And we're just trying to get,

00:01:35.130 --> 00:01:37.260
be able to visualize what's going on.

00:01:37.260 --> 00:01:39.970
And then, when our total output is 45,

00:01:39.970 --> 00:01:44.970
our marginal cost is $150.

00:01:44.970 --> 00:01:48.930
So 45 is here and then 150

00:01:48.930 --> 00:01:51.723
is right about there.

00:01:52.600 --> 00:01:55.520
And then when our total output is 58,

00:01:55.520 --> 00:01:58.700
our marginal cost is 231.

00:01:58.700 --> 00:02:01.890
So 58 is right about there,

00:02:01.890 --> 00:02:04.263
and then it's gonna be 231,

00:02:06.170 --> 00:02:09.260
so it's about, right about there.

00:02:09.260 --> 00:02:12.610
And then, when our total output is 65,

00:02:12.610 --> 00:02:15.010
our marginal cost is 429,

00:02:15.010 --> 00:02:17.170
so the 65 is right over there

00:02:17.170 --> 00:02:21.800
and then 429 will get us right about,

00:02:21.800 --> 00:02:24.290
right about there, so you see

00:02:24.290 --> 00:02:27.240
our marginal cost is going up a lot now,

00:02:27.240 --> 00:02:28.690
it might be a little bit lower than that,

00:02:28.690 --> 00:02:30.310
so it's gonna be right over there.

00:02:30.310 --> 00:02:32.020
And then last but not least,

00:02:32.020 --> 00:02:35.710
when our total output is 70,
our marginal cost is $600.

00:02:35.710 --> 00:02:39.180
So at 70 we get to 600
and I'm eyeballing it,

00:02:39.180 --> 00:02:40.410
that's not exact graph paper,

00:02:40.410 --> 00:02:41.760
but this gives you a sense

00:02:41.760 --> 00:02:45.390
of what the marginal
cost curve looks like.

00:02:45.390 --> 00:02:47.860
And here we've kinda graphed it based on

00:02:47.860 --> 00:02:50.130
where we are in terms of output.

00:02:50.130 --> 00:02:52.900
So, that's our marginal,

00:02:52.900 --> 00:02:55.380
marginal cost curve.

00:02:55.380 --> 00:02:58.220
So I'll just label that marginal cost.

00:02:58.220 --> 00:03:00.360
And now let's see how
that relates to the curves

00:03:00.360 --> 00:03:03.530
for average variable cost
and average total cost.

00:03:03.530 --> 00:03:06.820
So average variable cost
I'll do in this orange color.

00:03:06.820 --> 00:03:09.340
So, at an output of 25,

00:03:09.340 --> 00:03:12.550
our average variable cost is $240.

00:03:12.550 --> 00:03:15.080
So 25, we are going to be

00:03:15.080 --> 00:03:16.603
at $240,

00:03:18.710 --> 00:03:23.483
which is right about, right about there.

00:03:24.480 --> 00:03:28.200
And then when we are at 45 units,

00:03:28.200 --> 00:03:30.700
our average variable cost is 200.

00:03:30.700 --> 00:03:33.330
So at 45, units our average variable cost

00:03:33.330 --> 00:03:35.320
is right over there.

00:03:35.320 --> 00:03:37.890
And then at, we did that one.

00:03:37.890 --> 00:03:41.560
And then at 58 units, it's $207.

00:03:41.560 --> 00:03:46.450
58 units, it is 207,

00:03:46.450 --> 00:03:51.010
so it's going to be right about there.

00:03:51.010 --> 00:03:53.630
And then at, we did this one.

00:03:53.630 --> 00:03:56.175
And at 65 units, it's 231.

00:03:56.175 --> 00:04:00.570
65 is, and then we get to 231

00:04:00.570 --> 00:04:04.240
which is right maybe about there.

00:04:04.240 --> 00:04:06.380
And then, this we did this one,

00:04:06.380 --> 00:04:09.700
and then at 70 units, we're at 257.

00:04:09.700 --> 00:04:14.290
So 70 units, 257 looks
something like this.

00:04:14.290 --> 00:04:17.168
Now, before I actually
draw into this scurve,

00:04:17.168 --> 00:04:18.470
connect the dots, so let's just think

00:04:18.470 --> 00:04:21.020
about how the average variable cost

00:04:21.020 --> 00:04:23.150
relates to the marginal cost.

00:04:23.150 --> 00:04:26.520
When the marginal cost is less than

00:04:26.520 --> 00:04:28.710
the average variable cost,

00:04:28.710 --> 00:04:32.410
well that means that as
we produce more and more,

00:04:32.410 --> 00:04:34.770
our average variable cost should go down,

00:04:34.770 --> 00:04:37.460
and we see that happening
in this early stage.

00:04:37.460 --> 00:04:39.040
I won't go into all the details

00:04:39.040 --> 00:04:40.360
on what's happening
exactly right over there,

00:04:40.360 --> 00:04:42.830
but that early stage, as we see that

00:04:44.057 --> 00:04:46.290
while our marginal cost is less

00:04:46.290 --> 00:04:47.470
than our average variable cost,

00:04:47.470 --> 00:04:51.010
our average variable
cost is trending down.

00:04:51.010 --> 00:04:51.843
And that makes sense.

00:04:51.843 --> 00:04:55.330
Every incremental unit
is a little big cheaper

00:04:55.330 --> 00:04:57.600
to produce, so it brings down the average.

00:04:57.600 --> 00:04:59.250
But as soon as the marginal curve

00:05:01.430 --> 00:05:02.263
crosses the average variable cost

00:05:03.473 --> 00:05:05.270
and the marginal cost,
every incremental unit

00:05:05.270 --> 00:05:06.690
is now more than the average,

00:05:06.690 --> 00:05:08.270
well that should bring up the average.

00:05:08.270 --> 00:05:10.220
And so then the average variable cost

00:05:10.220 --> 00:05:12.080
should start sloping up.

00:05:12.080 --> 00:05:14.790
So, it's good to realize,
one is a rule of thumb

00:05:14.790 --> 00:05:16.770
but even more important to realize why,

00:05:16.770 --> 00:05:18.930
that where the marginal cost curve

00:05:18.930 --> 00:05:22.540
and the average variable
cost curve intersect,

00:05:22.540 --> 00:05:24.850
that that's going to be the point

00:05:24.850 --> 00:05:26.270
at which the average variable cost

00:05:26.270 --> 00:05:29.010
goes from trending down to trending up.

00:05:29.010 --> 00:05:31.190
If you viewed as this very wide U shape,

00:05:31.190 --> 00:05:33.570
that would be the bottom of the U.

00:05:33.570 --> 00:05:35.350
And we can do the same thing thing

00:05:35.350 --> 00:05:37.890
with average total costs.

00:05:37.890 --> 00:05:40.320
Now, they're going to
cross a little bit later

00:05:40.320 --> 00:05:43.470
because the average total costs are higher

00:05:43.470 --> 00:05:46.210
because they're factoring
in the fixed costs as well,

00:05:46.210 --> 00:05:49.370
but you can imagine that
while your marginal costs

00:05:49.370 --> 00:05:52.560
are lower than your average total costs,

00:05:52.560 --> 00:05:54.690
every incremental unit
is going to bring down

00:05:54.690 --> 00:05:56.640
the average total cost, but as soon as

00:05:56.640 --> 00:05:59.220
the marginal cost crosses
the average total cost,

00:05:59.220 --> 00:06:01.210
it's gonna start bringing up the average.

00:06:01.210 --> 00:06:03.870
And we can see that by trying to graph

00:06:03.870 --> 00:06:07.690
average total cost, and I'll
do that in this yellow color.

00:06:07.690 --> 00:06:10.730
So, at 25 units, we're at 440.

00:06:10.730 --> 00:06:13.830
25 units, we're at 440 that makes sense

00:06:13.830 --> 00:06:14.823
'cause we have all that fixed cost

00:06:14.823 --> 00:06:18.330
that we're spreading along
amongst not that many units.

00:06:18.330 --> 00:06:22.090
And then at 45 units, we're at 311.

00:06:22.090 --> 00:06:27.090
45 and we get to 311, might
be right around there.

00:06:27.400 --> 00:06:30.330
Then at 58 units, we're at 293.

00:06:30.330 --> 00:06:34.467
58 units, we are at 293,

00:06:35.960 --> 00:06:39.640
which is right about there.

00:06:39.640 --> 00:06:42.250
And then at 65 units, we're at 308.

00:06:42.250 --> 00:06:45.643
65 units, we are at 308.

00:06:47.330 --> 00:06:51.570
And then at 70 units, we're at 329.

00:06:51.570 --> 00:06:56.370
70 units, we are at 329,

00:06:56.370 --> 00:06:57.770
so it maybe something like this.

00:06:57.770 --> 00:07:01.190
And so this is our average total cost.

00:07:01.190 --> 00:07:03.780
And just as you can imagine,
while your marginal costs,

00:07:03.780 --> 00:07:06.740
every incremental unit, the cost of that,

00:07:06.740 --> 00:07:08.560
is less than your average total cost,

00:07:08.560 --> 00:07:11.480
it'll bring down, when you
do that incremental output,

00:07:11.480 --> 00:07:13.830
it will bring down your
average total costs

00:07:13.830 --> 00:07:16.520
until the point that they cross

00:07:16.520 --> 00:07:20.080
and then, now, after you,
after these two curves cross,

00:07:20.080 --> 00:07:22.430
now every incremental unit is bringing up

00:07:22.430 --> 00:07:26.170
the average cost, 'cause it's
costing more than the average.

00:07:26.170 --> 00:07:28.920
And so, once again, where
these two curves intersect,

00:07:28.920 --> 00:07:30.580
if you view the average total cost curve

00:07:30.580 --> 00:07:31.960
where there's this big wide U,

00:07:31.960 --> 00:07:34.460
it would represent the bottom of the U.

00:07:34.460 --> 00:07:36.310
Now, the last thing that we didn't graph,

00:07:36.310 --> 00:07:38.240
and this is maybe the most intuitive,

00:07:38.240 --> 00:07:40.220
is the average fixed cost.

00:07:40.220 --> 00:07:42.100
And this is just going to asymptote down.

00:07:42.100 --> 00:07:44.460
At 25 units, we're at 200.

00:07:44.460 --> 00:07:47.610
25 units, we are at 200.

00:07:47.610 --> 00:07:49.963
At 45 units, we are at 111.

00:07:50.937 --> 00:07:51.987
45, 111, it's maybe right over there.

00:07:55.414 --> 00:07:57.735
At 58 units we're at 86.

00:07:57.735 --> 00:07:58.818
58 units, 86.

00:08:00.503 --> 00:08:02.586
At 65 units, we're at 77.

00:08:03.643 --> 00:08:04.726
65 units, 77.

00:08:06.831 --> 00:08:09.730
And then at 70 units, we're at 71.

00:08:09.730 --> 00:08:10.990
And so you can see that that

00:08:10.990 --> 00:08:13.620
just gets lower and lower and lower

00:08:13.620 --> 00:08:15.980
over, as you produce more and more output

00:08:15.980 --> 00:08:17.950
because you're able to
spread those fixed costs

00:08:17.950 --> 00:08:19.610
amongst more and more output,

00:08:19.610 --> 00:08:22.870
so that makes sense that
the average fixed costs

00:08:22.870 --> 00:08:26.270
just trends downward like
this the entire time.

00:08:26.270 --> 00:08:28.370
But the big take-aways here is

00:08:28.370 --> 00:08:30.360
not just to understand the rule of thumb

00:08:30.360 --> 00:08:32.030
that where the marginal cost curve

00:08:32.030 --> 00:08:33.690
intersects the average variable cost

00:08:33.690 --> 00:08:35.080
or the average total cost,

00:08:35.080 --> 00:08:37.510
that that's the, you could
view it as the minimum point

00:08:37.510 --> 00:08:38.720
of the average total cost

00:08:38.720 --> 00:08:40.340
or the average variable cost curves,

00:08:40.340 --> 00:08:42.933
but to understand why that is happening.


What is mastery learning?

WEBVTT
Kind: captions
Language: en

00:00:00.980 --> 00:00:02.130
- [Narrator] Have you ever really tried

00:00:02.130 --> 00:00:03.460
to learn something

00:00:03.460 --> 00:00:05.210
and you just couldn't?

00:00:05.210 --> 00:00:09.050
It can make you feel like
you're not so smart, right?

00:00:09.050 --> 00:00:10.950
Well, it's not your fault

00:00:10.950 --> 00:00:12.760
and it's not your teacher's fault,

00:00:12.760 --> 00:00:15.520
it's just our traditional
approach to learning.

00:00:15.520 --> 00:00:18.227
We go through a school
and we accumulate gaps.

00:00:18.227 --> 00:00:20.350
You're a bit shaky on pre-algebra,

00:00:20.350 --> 00:00:22.680
but you move on to algebra anyway.

00:00:22.680 --> 00:00:24.300
By the time you get to calculus,

00:00:24.300 --> 00:00:26.030
you've got lots of gaps.

00:00:26.030 --> 00:00:27.510
If enough gaps build up

00:00:27.510 --> 00:00:29.140
you eventually hit a wall.

00:00:29.140 --> 00:00:31.650
Calculus makes no sense

00:00:31.650 --> 00:00:34.170
and that can be frustrating.

00:00:34.170 --> 00:00:37.640
But what if there were a
different way to learn?

00:00:37.640 --> 00:00:40.200
That's mastery learning.

00:00:40.200 --> 00:00:41.600
Unlike traditional learning

00:00:41.600 --> 00:00:43.530
where all students move in lockstep,

00:00:43.530 --> 00:00:46.580
with mastery learning
you go at your own pace.

00:00:46.580 --> 00:00:47.770
You progress through questions

00:00:47.770 --> 00:00:49.760
at just the right level for you.

00:00:49.760 --> 00:00:51.840
If you get 50% right the first time

00:00:51.840 --> 00:00:53.270
it's not a big deal.

00:00:53.270 --> 00:00:55.540
Try as many times as you need.

00:00:55.540 --> 00:00:57.200
Get feedback as you learn,

00:00:57.200 --> 00:00:58.890
and help when you need it.

00:00:58.890 --> 00:01:00.750
Teachers can track your progress,

00:01:00.750 --> 00:01:02.160
identify any gaps,

00:01:02.160 --> 00:01:04.460
and give you one on one attention.

00:01:04.460 --> 00:01:06.080
Decades of research shows,

00:01:06.080 --> 00:01:08.380
mastery learning works.

00:01:08.380 --> 00:01:11.610
Now you have the tools
to make it possible.

00:01:11.610 --> 00:01:13.803
Are you ready to learn anything?


Give a child a great education. We need your help!

WEBVTT
Kind: captions
Language: en

00:00:01.481 --> 00:00:03.981
(light music)

00:00:06.922 --> 00:00:09.505
(upbeat music)


Total product, marginal product and average product

WEBVTT
Kind: captions
Language: en

00:00:00.170 --> 00:00:01.150
- [Instructor] In previous videos,

00:00:01.150 --> 00:00:04.300
we introduced the idea
of a production function

00:00:04.300 --> 00:00:06.530
that takes in a bunch of inputs.

00:00:06.530 --> 00:00:10.600
Let's call this input one,
input two, input three.

00:00:10.600 --> 00:00:14.180
And that based on how much of
these various inputs you have,

00:00:14.180 --> 00:00:18.560
your production function
can give you your output.

00:00:18.560 --> 00:00:20.960
In this video, we're going to constrain

00:00:20.960 --> 00:00:23.180
all of the inputs but one,

00:00:23.180 --> 00:00:26.200
to really take it down to
how does our output vary

00:00:26.200 --> 00:00:28.580
as a function of one input.

00:00:28.580 --> 00:00:31.160
And as we do that, we're
going be able to understand

00:00:31.160 --> 00:00:33.210
these ideas of total product,

00:00:33.210 --> 00:00:36.070
marginal product, and average product.

00:00:36.070 --> 00:00:37.960
So, to give you a tangible example,

00:00:37.960 --> 00:00:41.880
let's say that we are
running an ice cream factory

00:00:41.880 --> 00:00:46.660
and we care about how much our
ice cream production per day

00:00:46.660 --> 00:00:48.850
varies as a function
of the number of people

00:00:48.850 --> 00:00:50.460
working in the factory.

00:00:50.460 --> 00:00:51.500
So, let me write this down.

00:00:51.500 --> 00:00:53.920
So, per day

00:00:55.150 --> 00:00:56.970
ice cream,

00:00:56.970 --> 00:00:59.433
ice cream production,

00:01:00.590 --> 00:01:02.030
production.

00:01:02.030 --> 00:01:04.780
And so, let me make a table here.

00:01:04.780 --> 00:01:08.410
So, in our first column,

00:01:08.410 --> 00:01:10.840
I am going to put our labor,

00:01:10.840 --> 00:01:12.280
which you could view as the input

00:01:12.280 --> 00:01:15.050
that we're going to see
how does that drive output.

00:01:15.050 --> 00:01:17.093
So, I will put Labor.

00:01:18.530 --> 00:01:20.733
So, you could view this
as workers per day.

00:01:21.690 --> 00:01:23.010
Workers.

00:01:23.010 --> 00:01:26.160
And we're going to see
how our output varies

00:01:26.160 --> 00:01:28.900
whether we have zero
workers, one worker per day,

00:01:28.900 --> 00:01:31.500
two workers per day, or
three workers per day.

00:01:31.500 --> 00:01:33.820
Now, our next column
would just be our output,

00:01:33.820 --> 00:01:35.990
and we'll say that's our total product

00:01:35.990 --> 00:01:37.260
as a function of labor.

00:01:37.260 --> 00:01:39.620
TP standing for total product.

00:01:39.620 --> 00:01:41.740
And let's say that we know,

00:01:41.740 --> 00:01:45.900
if we have zero people working
in our ice cream factory,

00:01:45.900 --> 00:01:48.570
well then, we're going to produce
zero gallons of ice cream,

00:01:48.570 --> 00:01:51.110
and let's just assume that our output

00:01:51.110 --> 00:01:54.430
is in gallons, and it's gallons per day.

00:01:54.430 --> 00:01:57.210
If we have one worker at our factory,

00:01:57.210 --> 00:01:58.120
well then, we're going to be able

00:01:58.120 --> 00:02:00.410
to produce 10 gallons a day.

00:02:00.410 --> 00:02:02.430
If we have two workers in our factory,

00:02:02.430 --> 00:02:04.780
we're going to produce 18 gallons a day.

00:02:04.780 --> 00:02:06.900
And if we have three
workers in our factory,

00:02:06.900 --> 00:02:10.030
let's say we can produce 24 gallons a day.

00:02:10.030 --> 00:02:11.230
Fair enough.

00:02:11.230 --> 00:02:12.910
Now, I'm going to introduce an idea,

00:02:12.910 --> 00:02:15.330
and you've seen this
word marginal, perhaps,

00:02:15.330 --> 00:02:17.020
in other times in your life.

00:02:17.020 --> 00:02:20.680
I'm going to introduce
marginal product of labor.

00:02:20.680 --> 00:02:22.300
And the way to think about marginal,

00:02:22.300 --> 00:02:25.740
that's how much for every
increment of one thing,

00:02:25.740 --> 00:02:27.810
how much more of the
other thing do you get?

00:02:27.810 --> 00:02:30.170
So here, our marginal product of labor

00:02:30.170 --> 00:02:33.580
says, for each incremental unit of labor,

00:02:33.580 --> 00:02:37.754
for each incremental person
working there per day,

00:02:37.754 --> 00:02:41.440
how many more gallons of
ice cream am I producing?

00:02:41.440 --> 00:02:43.950
So, my marginal product of labor,

00:02:43.950 --> 00:02:46.310
when I go from zero to one worker,

00:02:46.310 --> 00:02:51.210
I'm able to produce 10 more
gallons from that first worker.

00:02:51.210 --> 00:02:54.740
Now, what about when I go from
one worker to two workers?

00:02:54.740 --> 00:02:58.570
Well then, I go from 10 to 18 gallons.

00:02:58.570 --> 00:03:00.250
So, that second person

00:03:00.250 --> 00:03:04.620
gets me an incremental
eight gallons per day.

00:03:04.620 --> 00:03:06.810
And then as I go from
two people working there

00:03:06.810 --> 00:03:08.860
to three people working there,

00:03:08.860 --> 00:03:12.760
well, my total product goes up by six.

00:03:12.760 --> 00:03:15.300
So, my marginal product of labor

00:03:15.300 --> 00:03:20.300
for that third worker is going to be six.

00:03:20.980 --> 00:03:22.270
Now, there's something interesting

00:03:22.270 --> 00:03:24.190
that you're immediately seeing here,

00:03:24.190 --> 00:03:25.940
and this is actually pretty typical,

00:03:25.940 --> 00:03:28.100
is that your marginal product of labor

00:03:28.100 --> 00:03:29.920
will oftentimes go down

00:03:29.920 --> 00:03:32.760
the more and more people that you add.

00:03:32.760 --> 00:03:35.040
And you might say, why is that the case?

00:03:35.040 --> 00:03:38.040
Well, they're just not gonna
be quite as productive.

00:03:38.040 --> 00:03:39.900
That second person might be waiting

00:03:39.900 --> 00:03:42.210
while the first person is using the mixer

00:03:42.210 --> 00:03:44.100
and that third person is gonna be waiting

00:03:44.100 --> 00:03:45.950
while the first person
and the second person,

00:03:45.950 --> 00:03:47.630
maybe they're using the
restroom or something

00:03:47.630 --> 00:03:49.030
and the third person has to go.

00:03:49.030 --> 00:03:50.730
And you can imagine,
you add four, five, six,

00:03:50.730 --> 00:03:51.640
at some point, you're not even be able

00:03:51.640 --> 00:03:53.290
to fit people into the factory,

00:03:53.290 --> 00:03:55.290
and so you're going to have

00:03:55.290 --> 00:03:58.580
what's known as a
diminishing marginal return,

00:03:58.580 --> 00:03:59.990
and you see that right over here.

00:03:59.990 --> 00:04:02.470
As you're adding more and more labor,

00:04:02.470 --> 00:04:05.270
your marginal return is
getting smaller and smaller,

00:04:05.270 --> 00:04:08.660
so this is a diminishing marginal return.

00:04:08.660 --> 00:04:10.900
Now, the last concept I'm
going to introduce you to

00:04:10.900 --> 00:04:13.830
in this video is that of average product,

00:04:13.830 --> 00:04:16.450
and this is average product
as a function of labor.

00:04:16.450 --> 00:04:19.890
So, AP for average product.

00:04:19.890 --> 00:04:24.050
And all that is, is our total
product divided by our labor.

00:04:24.050 --> 00:04:26.790
So over here, when we have one worker,

00:04:26.790 --> 00:04:29.430
our total product is 10 gallons,

00:04:29.430 --> 00:04:31.660
and we're going to divide
that by one worker.

00:04:31.660 --> 00:04:34.370
So, our average product per worker

00:04:34.370 --> 00:04:36.290
is going to be 10 gallons.

00:04:36.290 --> 00:04:38.660
Now, when we have two
people working per day

00:04:38.660 --> 00:04:41.150
and we're producing 18 gallons per day,

00:04:41.150 --> 00:04:43.270
our average product as a function of labor

00:04:43.270 --> 00:04:45.280
is gonna be 18 divided by two,

00:04:45.280 --> 00:04:47.210
which is gonna be nine gallons

00:04:47.210 --> 00:04:50.020
per worker per day on average.

00:04:50.020 --> 00:04:51.880
And then in this last situation,

00:04:51.880 --> 00:04:54.900
it's going to be 24 divided by three,

00:04:54.900 --> 00:04:59.900
which is eight gallons per
worker per day on average.

00:05:00.010 --> 00:05:02.490
And you can see this visually as well.

00:05:02.490 --> 00:05:04.550
I can draw this on a curve.

00:05:04.550 --> 00:05:06.170
Let me do that.

00:05:06.170 --> 00:05:10.590
So, if on our horizontal axis,

00:05:10.590 --> 00:05:13.940
I have our labor units,
which is workers per day,

00:05:13.940 --> 00:05:17.950
so one, two, and three.

00:05:17.950 --> 00:05:20.950
So, this is labor right over here.

00:05:20.950 --> 00:05:25.550
In our vertical axis, I'll
have our total output.

00:05:25.550 --> 00:05:27.150
So, total product, I could say.

00:05:27.150 --> 00:05:30.550
So let's say that's 10, 20.

00:05:30.550 --> 00:05:33.240
Let's say that is 30 right over there.

00:05:33.240 --> 00:05:35.510
Well, this first one right over here,

00:05:35.510 --> 00:05:37.630
when we have one person
working in the factory,

00:05:37.630 --> 00:05:40.010
we produce 10 gallons per day.

00:05:40.010 --> 00:05:42.920
And this is total product right over here.

00:05:42.920 --> 00:05:45.360
When we have two people
working in our factory,

00:05:45.360 --> 00:05:47.610
we produce 18 gallons a day.

00:05:47.610 --> 00:05:49.950
So, it's gonna be just like that.

00:05:49.950 --> 00:05:53.870
And notice, the slope has
gone down a little bit.

00:05:53.870 --> 00:05:55.810
We have a certain slope here,

00:05:55.810 --> 00:05:57.550
but it's a little less steep there.

00:05:57.550 --> 00:06:00.800
And that steepness of that
line or of that curve,

00:06:00.800 --> 00:06:03.120
that tells you about the marginal product.

00:06:03.120 --> 00:06:04.380
So, it's a little bit less steep,

00:06:04.380 --> 00:06:07.150
so our marginal product of labor
has gone down a little bit.

00:06:07.150 --> 00:06:09.820
We're having diminishing marginal returns.

00:06:09.820 --> 00:06:12.470
And then last but not least,

00:06:12.470 --> 00:06:15.490
when we have three people
working, we're able to produce 24,

00:06:15.490 --> 00:06:18.800
so three and 24 might be right over there.

00:06:18.800 --> 00:06:21.900
And once again, we can see
our diminishing returns

00:06:21.900 --> 00:06:24.620
gets even a little bit flatter.

00:06:24.620 --> 00:06:28.480
We go from zero to one, we added plus 10,

00:06:28.480 --> 00:06:31.950
and you can see that there in
the marginal product of labor.

00:06:31.950 --> 00:06:36.180
And then as we add one more
person, it goes plus eight.

00:06:36.180 --> 00:06:39.080
And then we add another
person, it guess plus six.

00:06:39.080 --> 00:06:41.850
So in general, if you see total product

00:06:41.850 --> 00:06:42.950
as a function of labor,

00:06:42.950 --> 00:06:44.990
or total output as a function of labor,

00:06:44.990 --> 00:06:47.850
and the curve is getting
less and less and less steep,

00:06:47.850 --> 00:06:50.730
well, that tells you that
your marginal product

00:06:50.730 --> 00:06:52.040
is going lower and lower

00:06:52.040 --> 00:06:54.823
and you're getting
diminishing marginal returns.


Income elasticity of demand

WEBVTT
Kind: captions
Language: en

00:00:00.880 --> 00:00:01.890
- [Instructor] In previous videos,

00:00:01.890 --> 00:00:05.510
we have talked about the
idea of price elasticity,

00:00:05.510 --> 00:00:09.070
and it might have been
price elasticity of demand

00:00:09.070 --> 00:00:12.200
or price elasticity of supply.

00:00:12.200 --> 00:00:14.700
But in both situations,
we were talking about

00:00:14.700 --> 00:00:19.700
our percent change in quantity

00:00:20.450 --> 00:00:24.733
over our percent change in price.

00:00:26.710 --> 00:00:29.100
If we're talking about
price elasticity of demand,

00:00:29.100 --> 00:00:31.620
it would be the percent
change in quantity demanded

00:00:31.620 --> 00:00:33.380
over the percent change in price.

00:00:33.380 --> 00:00:36.310
And if we're talking about
price elasticity of supply,

00:00:36.310 --> 00:00:38.610
it would be our percent
change in quantity supplied

00:00:38.610 --> 00:00:40.150
over percent change in price.

00:00:40.150 --> 00:00:42.130
And as we talked about in many videos,

00:00:42.130 --> 00:00:44.090
this is a way of measuring

00:00:44.090 --> 00:00:47.810
how sensitive is quantity
demanded or supplied

00:00:47.810 --> 00:00:50.220
to a change in price.

00:00:50.220 --> 00:00:52.220
What we're going to see
in this video is that

00:00:52.220 --> 00:00:54.950
this is not the only type of elasticity

00:00:54.950 --> 00:00:56.380
that economists will look at.

00:00:56.380 --> 00:00:57.560
There are many types of elasticity,

00:00:57.560 --> 00:00:58.967
where they want to see

00:00:58.967 --> 00:01:01.360
"How sensitive is one thing to another?"

00:01:01.360 --> 00:01:03.480
For example, you could look at the

00:01:03.480 --> 00:01:05.680
percent change,

00:01:05.680 --> 00:01:08.000
percent change

00:01:09.030 --> 00:01:11.420
in labor supply,

00:01:11.420 --> 00:01:14.220
so you could say quantity of labor,

00:01:14.220 --> 00:01:16.540
that would be our labor supply,

00:01:16.540 --> 00:01:21.540
divided by our percent change in wages.

00:01:22.400 --> 00:01:24.360
I'll just write it out, wages.

00:01:24.360 --> 00:01:25.520
And you could view that

00:01:25.520 --> 00:01:27.760
as a percent change in the price of labor.

00:01:27.760 --> 00:01:29.747
You might say, "Hey, this
is just a price elasticity

00:01:29.747 --> 00:01:33.730
"of supply being particular
to the labor market."

00:01:33.730 --> 00:01:34.830
But you can even see things,

00:01:34.830 --> 00:01:36.450
and we'll have a whole video about this,

00:01:36.450 --> 00:01:38.470
probably my next video that I will make,

00:01:38.470 --> 00:01:43.200
where you could have
the percent change in,

00:01:43.200 --> 00:01:46.720
let's say quantity demanded of one good

00:01:46.720 --> 00:01:51.150
divided by, so let me call it good one

00:01:51.150 --> 00:01:55.770
divided by the percent change in price

00:01:55.770 --> 00:01:59.230
of not that good, then we
would have price elasticity,

00:01:59.230 --> 00:02:02.830
but of good two.

00:02:02.830 --> 00:02:04.700
And so this is actually,

00:02:04.700 --> 00:02:07.320
thinking about how good one
is a substitute for the other,

00:02:07.320 --> 00:02:09.700
and we'll go into a lot more depth there.

00:02:09.700 --> 00:02:11.040
But the focus of this video,

00:02:11.040 --> 00:02:13.360
as you can imagine because
it was already written down

00:02:13.360 --> 00:02:16.470
in a clean font right over here

00:02:16.470 --> 00:02:18.890
is Income Elasticity.

00:02:18.890 --> 00:02:20.620
And here, we're gonna think about

00:02:20.620 --> 00:02:23.840
the income elasticity of demand.

00:02:23.840 --> 00:02:26.030
And you could imagine what that would be.

00:02:26.030 --> 00:02:29.100
This is going to be our percent change

00:02:30.600 --> 00:02:33.840
in quantity demanded,

00:02:33.840 --> 00:02:34.913
demanded,

00:02:36.180 --> 00:02:38.840
divided by, instead of thinking about

00:02:38.840 --> 00:02:40.520
the percent change in price

00:02:40.520 --> 00:02:42.140
of that good or the service,

00:02:42.140 --> 00:02:45.720
we're going to think
about the percent change,

00:02:45.720 --> 00:02:47.280
change,

00:02:47.280 --> 00:02:52.280
in income of the people
who might be in the market

00:02:52.900 --> 00:02:54.770
for that good.

00:02:54.770 --> 00:02:57.180
Normally you would expect
that when our percent change

00:02:57.180 --> 00:02:59.890
in income goes up,

00:02:59.890 --> 00:03:02.320
that the same thing would
happen to our percent change

00:03:02.320 --> 00:03:03.850
in quantity demanded.

00:03:03.850 --> 00:03:05.220
For example, let's say we're talking about

00:03:05.220 --> 00:03:06.800
the market for vacations,

00:03:06.800 --> 00:03:10.230
well, as my income, as most
people's incomes go up,

00:03:10.230 --> 00:03:13.230
they might be able to afford
larger or better vacations.

00:03:13.230 --> 00:03:15.900
And that would be a normal good.

00:03:15.900 --> 00:03:18.323
This is a situation of a normal good.

00:03:19.220 --> 00:03:22.290
Normal good, just as
what you would expect.

00:03:22.290 --> 00:03:25.510
But you could actually
have the other way around.

00:03:25.510 --> 00:03:27.310
You could imagine a situation

00:03:27.310 --> 00:03:30.890
where even though you have an increase

00:03:30.890 --> 00:03:34.833
in your percent change in income,

00:03:36.220 --> 00:03:39.080
that does not lead to an
increase in your percent change

00:03:39.080 --> 00:03:40.180
in quantity demanded.

00:03:40.180 --> 00:03:44.390
In fact, it could lead to a
decrease in the percent change

00:03:45.250 --> 00:03:46.990
in quantity demanded.

00:03:46.990 --> 00:03:48.540
Or another way of thinking about it,

00:03:48.540 --> 00:03:51.650
your quantity demanded
could actually go down,

00:03:51.650 --> 00:03:53.680
so you would have a negative,

00:03:53.680 --> 00:03:56.420
a negative percent change right over here.

00:03:56.420 --> 00:03:59.420
Now could you image any
situations like that?

00:03:59.420 --> 00:04:00.870
Well, imagine if we're
talking about the market

00:04:00.870 --> 00:04:03.140
for car mechanic services.

00:04:03.140 --> 00:04:04.870
As people have more income,

00:04:04.870 --> 00:04:05.810
they might be able to afford

00:04:05.810 --> 00:04:07.770
better cars that are more reliable,

00:04:07.770 --> 00:04:09.460
that break down less,

00:04:09.460 --> 00:04:13.010
and then they would have to
go to the car mechanic less.

00:04:13.010 --> 00:04:15.060
And so that situation,

00:04:15.060 --> 00:04:18.400
where our demand would actually go down

00:04:18.400 --> 00:04:19.850
when our income goes up,

00:04:19.850 --> 00:04:21.610
or our percent change will become negative

00:04:21.610 --> 00:04:24.240
when we have a positive
percent change income,

00:04:24.240 --> 00:04:28.390
that would be, that is
known as an inferior good.

00:04:28.390 --> 00:04:31.123
Inferior good.

00:04:32.610 --> 00:04:34.470
There's two big things to take away.

00:04:34.470 --> 00:04:37.410
One, you don't just have to
think about price elasticity

00:04:37.410 --> 00:04:39.370
of supply or demand,

00:04:39.370 --> 00:04:41.690
there are other types of elasticities.

00:04:41.690 --> 00:04:44.690
But just to hit the point
home on income elasticity,

00:04:44.690 --> 00:04:46.823
let's look at a few examples.

00:04:47.660 --> 00:04:48.660
We're told: suppose that

00:04:48.660 --> 00:04:51.610
when people's income increases by 20%,

00:04:51.610 --> 00:04:54.270
they buy 10% less fast food.

00:04:54.270 --> 00:04:58.500
In this situation, what type
of good would fast food be?

00:04:58.500 --> 00:05:00.300
Pause this video and think about it.

00:05:01.410 --> 00:05:03.710
Well, their income is increasing

00:05:03.710 --> 00:05:06.310
but their demand is decreasing.

00:05:06.310 --> 00:05:07.880
That's the situation we just talked about.

00:05:07.880 --> 00:05:10.598
This is an inferior good.

00:05:10.598 --> 00:05:12.970
Inferior good.

00:05:12.970 --> 00:05:16.510
And for kicks, what is
the income elasticity

00:05:16.510 --> 00:05:19.810
of demand right over here, calculate that.

00:05:19.810 --> 00:05:24.760
Just remember, our income
elasticity of demand

00:05:24.760 --> 00:05:28.910
is just going to be our percent change

00:05:30.190 --> 00:05:34.180
in quantity demanded divided by

00:05:34.180 --> 00:05:37.590
our percent change, instead of price,

00:05:37.590 --> 00:05:39.970
we're going to say in income.

00:05:39.970 --> 00:05:43.160
I'll just write percent change of income,

00:05:43.160 --> 00:05:44.760
which is going to be what?

00:05:44.760 --> 00:05:47.000
Well, we know our
percent change in income.

00:05:47.000 --> 00:05:50.960
It went up by 20% in this example,

00:05:50.960 --> 00:05:53.550
and what happened to
our quantity demanded?

00:05:53.550 --> 00:05:57.350
Well, it went down by
10%, so negative 10%.

00:05:57.350 --> 00:06:01.200
And so here you have an
income elasticity of demand

00:06:01.200 --> 00:06:03.603
of negative one half, or negative 0.5.

00:06:04.850 --> 00:06:06.800
Let's do another example.

00:06:06.800 --> 00:06:08.020
Suppose we knew that when

00:06:08.020 --> 00:06:11.210
people's income increased
by 5% in a country,

00:06:11.210 --> 00:06:14.430
the demand for healthcare
increased by 10%.

00:06:14.430 --> 00:06:16.320
What kind of good do people

00:06:16.320 --> 00:06:19.940
consider healthcare: Normal or inferior?

00:06:19.940 --> 00:06:22.520
First, calculate the
income elasticity of demand

00:06:22.520 --> 00:06:25.243
for this example, and then
answer these questions.

00:06:26.150 --> 00:06:27.980
All right, so first

00:06:27.980 --> 00:06:31.440
we are, our income elasticity of demand.

00:06:31.440 --> 00:06:36.440
Let's see, when our
income increases by 5%,

00:06:36.650 --> 00:06:38.880
so we have a 5% increase in income,

00:06:38.880 --> 00:06:42.140
our demand for healthcare
increases by 10%.

00:06:42.140 --> 00:06:44.970
Our demand for healthcare
increases by 10%,

00:06:44.970 --> 00:06:48.390
so we get a positive income
elasticity of demand.

00:06:48.390 --> 00:06:51.610
And so in general, if
this thing is positive,

00:06:51.610 --> 00:06:53.680
you're dealing with a normal good.

00:06:53.680 --> 00:06:55.400
As income goes up,

00:06:55.400 --> 00:07:00.100
then you similarly see
quantity demanded going up.

00:07:00.100 --> 00:07:02.683
This is a normal good.


Introduction to production functions

WEBVTT
Kind: captions
Language: en

00:00:00.530 --> 00:00:02.870
- [Instructor] You will hear
the term production function

00:00:02.870 --> 00:00:04.950
thrown around in economic circles,

00:00:04.950 --> 00:00:06.510
and it might seem a little intimidating

00:00:06.510 --> 00:00:08.350
and a little mathy at first.

00:00:08.350 --> 00:00:11.450
But as you're about to see,
it's a fairly basic idea.

00:00:11.450 --> 00:00:14.430
It's this idea that you could
have these various inputs.

00:00:14.430 --> 00:00:17.800
Let's call this input number one,

00:00:17.800 --> 00:00:20.090
and then you have input number two.

00:00:20.090 --> 00:00:21.430
And you can keep going,

00:00:21.430 --> 00:00:23.490
and then you put them in, their inputs,

00:00:23.490 --> 00:00:25.350
into some type of process.

00:00:25.350 --> 00:00:29.040
And then that function,
let's just call that f,

00:00:29.040 --> 00:00:30.260
that's going to describe

00:00:30.260 --> 00:00:34.600
how much output you can
get given that input.

00:00:34.600 --> 00:00:37.590
We can also describe it a
little bit more mathematically.

00:00:37.590 --> 00:00:39.360
Those of you who remember your Algebra Two

00:00:39.360 --> 00:00:40.810
might recognize this.

00:00:40.810 --> 00:00:42.470
Or we could say the output,

00:00:42.470 --> 00:00:46.690
it's often use the letter
Q in economic circle,

00:00:46.690 --> 00:00:48.860
it's going to be a function,

00:00:48.860 --> 00:00:51.690
it's going to be a function
of the various inputs.

00:00:51.690 --> 00:00:54.450
So I'll put input number one,

00:00:54.450 --> 00:00:57.410
input number two, and you could go,

00:00:57.410 --> 00:00:59.900
you could have as many
inputs as is necessary

00:00:59.900 --> 00:01:01.600
to produce that good.

00:01:01.600 --> 00:01:04.020
And these inputs, if you
wanted to categorize them,

00:01:04.020 --> 00:01:06.480
these are the classic
factors of production

00:01:06.480 --> 00:01:08.290
that we would have talked about before.

00:01:08.290 --> 00:01:10.070
These would be,

00:01:10.070 --> 00:01:11.290
these would be your

00:01:11.290 --> 00:01:15.363
land, labor, capital,

00:01:16.340 --> 00:01:18.520
and entrepreneurship.

00:01:18.520 --> 00:01:20.490
And it doesn't have to be all of them,

00:01:20.490 --> 00:01:23.040
but each of these inputs
would likely be factored

00:01:23.040 --> 00:01:25.220
as one of these.

00:01:25.220 --> 00:01:28.650
Now, this might still seem
very abstract and very mathy.

00:01:28.650 --> 00:01:31.305
So to make things very tangible,

00:01:31.305 --> 00:01:34.500
let's give a, well, let's
give a tangible example.

00:01:34.500 --> 00:01:35.730
Let's say that we're trying

00:01:35.730 --> 00:01:39.510
to make a bread toasting operation.

00:01:39.510 --> 00:01:41.490
So what we need to do is we take bread,

00:01:41.490 --> 00:01:42.890
we stick it in a toaster,

00:01:42.890 --> 00:01:45.050
and then once it's toast, we're done.

00:01:45.050 --> 00:01:47.650
And so what are our inputs there?

00:01:47.650 --> 00:01:50.190
Well, you're definitely
going to need some bread,

00:01:50.190 --> 00:01:52.140
so let me draw some bread right over here,

00:01:52.140 --> 00:01:54.410
my best attempt at drawing bread.

00:01:54.410 --> 00:01:57.420
So that right over there, that is bread.

00:01:57.420 --> 00:02:00.020
You could call that input number one.

00:02:00.020 --> 00:02:02.220
Now you're also going to need a toaster,

00:02:02.220 --> 00:02:05.020
at least one toaster, or
toasters I should say.

00:02:05.020 --> 00:02:08.510
And let's say the toasters
that we use for this operation,

00:02:08.510 --> 00:02:12.563
they can toast four
pieces of bread at a time,

00:02:13.610 --> 00:02:15.700
and it takes 10 minutes to do that,

00:02:15.700 --> 00:02:20.690
four slices in 10 minutes.

00:02:21.760 --> 00:02:22.850
Now you might say, well,

00:02:22.850 --> 00:02:25.100
aren't those going to
be all of our inputs?

00:02:25.100 --> 00:02:26.830
But then the obvious question
is that bread isn't just going

00:02:26.830 --> 00:02:29.900
to jump into the toaster on
its own and then jump back out.

00:02:29.900 --> 00:02:31.190
Someone, there's going to be,

00:02:31.190 --> 00:02:35.050
needs to be some labor to
operate this operation.

00:02:35.050 --> 00:02:39.040
So we're going to need
some toaster operators,

00:02:39.040 --> 00:02:42.650
and let's say that they can process,

00:02:42.650 --> 00:02:46.390
they can process one slice per minute,

00:02:46.390 --> 00:02:50.020
one slice per minute.

00:02:50.020 --> 00:02:51.060
I know many of you all are thinking

00:02:51.060 --> 00:02:52.260
that you could do better than that,

00:02:52.260 --> 00:02:53.820
but try to do it all day,

00:02:53.820 --> 00:02:55.970
one slice per minute.

00:02:55.970 --> 00:02:57.080
Now based on this,

00:02:57.080 --> 00:02:59.480
if these are really
all of the three inputs

00:02:59.480 --> 00:03:02.670
into producing the output
toasted piece of bread,

00:03:02.670 --> 00:03:05.550
we could try to construct
a production function here.

00:03:05.550 --> 00:03:06.930
So let's do that.

00:03:06.930 --> 00:03:10.080
So let's say then the output
is going to be the number

00:03:10.985 --> 00:03:13.300
of slices of toasted bread.

00:03:18.960 --> 00:03:20.780
And it's going to be equal to,

00:03:20.780 --> 00:03:22.260
and I'm gonna write this as,

00:03:22.260 --> 00:03:23.900
well, I'm gonna make
our production function

00:03:23.900 --> 00:03:27.590
as being the minimum of several values.

00:03:27.590 --> 00:03:28.790
And what you're going to
see, it's going to be based

00:03:28.790 --> 00:03:30.700
on what's going to be
our rate-limiting factor?

00:03:30.700 --> 00:03:33.270
And I want to get too much in
the weeds with you on this,

00:03:33.270 --> 00:03:34.870
but just to help us understand,

00:03:34.870 --> 00:03:38.040
so it's going to be the minimum of,

00:03:38.040 --> 00:03:42.610
well, the amount of bread
you have, so slices of bread,

00:03:42.610 --> 00:03:47.610
slices of bread.

00:03:47.660 --> 00:03:48.900
And why does that make sense?

00:03:48.900 --> 00:03:50.180
Well, you're only,

00:03:50.180 --> 00:03:52.110
the amount of toasted
bread you can produce

00:03:52.110 --> 00:03:53.977
is always going to be limited

00:03:53.977 --> 00:03:55.760
by the amount of untoasted bread

00:03:55.760 --> 00:03:57.690
that you put into your process.

00:03:57.690 --> 00:04:00.800
If you only have 60 that's
going in per hour here,

00:04:00.800 --> 00:04:02.010
well, then you can only produce

00:04:02.010 --> 00:04:04.200
a maximum of 60 right over here,

00:04:04.200 --> 00:04:06.140
and this is going to be per hour,

00:04:06.140 --> 00:04:08.330
per hour.

00:04:08.330 --> 00:04:13.330
So this is gonna be the
slices of bread per hour.

00:04:13.440 --> 00:04:15.190
Now, our other input,

00:04:15.190 --> 00:04:20.190
how much toast can one
toaster toast in one hour?

00:04:20.700 --> 00:04:22.740
Well, if they do four
slices in 10 minutes,

00:04:22.740 --> 00:04:24.680
we'll multiply that time
six to get to an hour.

00:04:24.680 --> 00:04:27.460
That's gonna be 24 slices per hour.

00:04:27.460 --> 00:04:32.460
So we could do 24 times
the number of toasters,

00:04:32.820 --> 00:04:35.263
times the toasters.

00:04:37.490 --> 00:04:39.393
And then last but not least,

00:04:40.260 --> 00:04:42.520
how much bread or how many slices

00:04:42.520 --> 00:04:45.410
can one person process per hour?

00:04:45.410 --> 00:04:47.550
Well, it's going to be 60 slices per hour.

00:04:47.550 --> 00:04:50.510
So we'll do 60 times,

00:04:50.510 --> 00:04:51.890
times, let's call them workers,

00:04:51.890 --> 00:04:52.840
I was gonna call 'em toasters,

00:04:52.840 --> 00:04:54.740
but we are using that for the equipment,

00:04:54.740 --> 00:04:58.750
times the number of workers.

00:04:58.750 --> 00:05:01.270
And so it's worth, at this point,

00:05:01.270 --> 00:05:04.050
just pause this video and
really process what's going on.

00:05:04.050 --> 00:05:06.613
What are the inputs here,
and what are the outputs?

00:05:07.640 --> 00:05:10.130
Well, the inputs are right over here.

00:05:10.130 --> 00:05:12.950
This is the number of
slices of bread per hour,

00:05:12.950 --> 00:05:15.310
the number of toasters
we have at our disposal,

00:05:15.310 --> 00:05:18.370
the number of workers.

00:05:18.370 --> 00:05:20.120
Toasters you could view as capital.

00:05:20.120 --> 00:05:22.940
Workers you could view as labor.

00:05:22.940 --> 00:05:25.580
And now another interesting
thing to think about,

00:05:25.580 --> 00:05:28.150
and we will talk a lot
about this in economics,

00:05:28.150 --> 00:05:31.920
is what's going on in the
long run and the short run?

00:05:31.920 --> 00:05:33.860
And production functions are useful

00:05:33.860 --> 00:05:36.540
for thinking about the
long run in the short run

00:05:36.540 --> 00:05:40.210
because the short run is defined,

00:05:40.210 --> 00:05:43.550
the short run is defined

00:05:43.550 --> 00:05:46.630
as the situation in which at least one

00:05:46.630 --> 00:05:48.640
of your inputs is fixed.

00:05:48.640 --> 00:05:51.640
Let me write this down, at least,

00:05:51.640 --> 00:05:56.640
at least one input is fixed.

00:05:58.510 --> 00:05:59.500
Now, what does that mean

00:05:59.500 --> 00:06:02.320
in our bread toasting
example right over here?

00:06:02.320 --> 00:06:03.750
Well, let's just say that we can,

00:06:03.750 --> 00:06:05.750
it's very easy to get slices of bread.

00:06:05.750 --> 00:06:09.147
If we have the capacity and
we want to produce more bread,

00:06:09.147 --> 00:06:10.650
the slices of bread are,

00:06:10.650 --> 00:06:12.720
let's say it's just never
our rate-limiting factor.

00:06:12.720 --> 00:06:14.650
So that part isn't fixed.

00:06:14.650 --> 00:06:16.680
But to get a new toaster,

00:06:16.680 --> 00:06:18.170
let's say these are special toasters,

00:06:18.170 --> 00:06:21.010
and you gotta order them
and it takes a month.

00:06:21.010 --> 00:06:21.843
So let's say that there's

00:06:21.843 --> 00:06:23.750
a one-month lead time on this input,

00:06:23.750 --> 00:06:28.053
one month lead time.

00:06:29.560 --> 00:06:31.800
And let's say, for workers,

00:06:31.800 --> 00:06:34.650
there's just not a line of
people ready to toast toast.

00:06:34.650 --> 00:06:36.210
You have to put a job posting out there,

00:06:36.210 --> 00:06:37.890
and you're going to have
to interview people.

00:06:37.890 --> 00:06:42.890
And so let's say that it takes
two weeks to hire someone,

00:06:42.950 --> 00:06:47.950
so two weeks to hire,

00:06:48.600 --> 00:06:50.110
or I guess you could also say two weeks

00:06:50.110 --> 00:06:52.920
to hire or to fire someone if
you want to reduce capacity.

00:06:52.920 --> 00:06:55.420
Let's say it takes one month
to either get a toaster

00:06:55.420 --> 00:06:58.240
or to remove a toaster.

00:06:58.240 --> 00:07:01.300
Well, in that case, the short
run in this situation is

00:07:01.300 --> 00:07:04.650
a time period where at least
one of the inputs is fixed.

00:07:04.650 --> 00:07:05.720
So pause this video, and think about

00:07:05.720 --> 00:07:08.013
what would be the short
run in our situation?

00:07:10.240 --> 00:07:12.380
Well, the short run in our situation,

00:07:12.380 --> 00:07:14.420
the number of toasters
we're going to have is going

00:07:14.420 --> 00:07:17.290
to be fixed for at least a month.

00:07:17.290 --> 00:07:21.130
So our short run, in this
situation, is up to a month,

00:07:21.130 --> 00:07:23.040
so up to,

00:07:23.040 --> 00:07:25.960
up to a month.

00:07:25.960 --> 00:07:27.020
And then the other side of it,

00:07:27.020 --> 00:07:28.723
what would the long run be?

00:07:29.810 --> 00:07:30.920
Well, in the long run,

00:07:30.920 --> 00:07:33.810
by definition none of
your inputs are fixed.

00:07:33.810 --> 00:07:37.070
You can change the number you
have of any of these things.

00:07:37.070 --> 00:07:39.190
So our long run is
going to be greater than

00:07:39.190 --> 00:07:41.490
one month in this example.

00:07:41.490 --> 00:07:42.700
Now, it's really worth noting

00:07:42.700 --> 00:07:44.890
that was just for this example.

00:07:44.890 --> 00:07:47.740
If we were talking about some
type of automobile factory

00:07:47.740 --> 00:07:51.640
and the output is the number
of automobiles produced per day

00:07:51.640 --> 00:07:54.060
or per month and then you
have all these inputs,

00:07:54.060 --> 00:07:56.520
you would have your metal,
you would have your labor,

00:07:56.520 --> 00:07:57.590
and then you would have the equipment

00:07:57.590 --> 00:07:59.320
for the factory itself,

00:07:59.320 --> 00:08:01.100
well, there, the long run,

00:08:01.100 --> 00:08:03.990
it might take another
year or even two years

00:08:03.990 --> 00:08:05.710
or five years to build a factory.

00:08:05.710 --> 00:08:09.500
In that case, the long run
would be the time period

00:08:09.500 --> 00:08:13.730
greater than amount it takes
to build another factory.

00:08:13.730 --> 00:08:18.380
Usually, capital is the
thing that is most fixed

00:08:18.380 --> 00:08:20.120
for the longest period of time,

00:08:20.120 --> 00:08:22.930
and that's why it made it hard
for us to get our toasters.

00:08:22.930 --> 00:08:24.250
So I will leave ya there.

00:08:24.250 --> 00:08:25.510
This is just an introduction

00:08:25.510 --> 00:08:27.590
to the idea of a production function.

00:08:27.590 --> 00:08:29.990
But hopefully with our
bread toasting example,

00:08:29.990 --> 00:08:32.053
it is not so intimidating.