Perfect and imperfect competition

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Language: en

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- [Instructor] In this video,

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we're going to give an overview
of the types of markets

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that you might encounter
in an economics class.

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And we're going to get
a little bit precise

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with our language 'cause you'll hear words

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like perfect competition or monopoly

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or oligopoly a lot in economics

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and frankly, even in your broader life.

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Now before we even go into those terms,

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I will differentiate
between what's sometimes

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referred to as a product market.

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And other markets that are
referred to as resource.

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Resource markets.

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Now product market is a market

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where the output of that market,

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what the market is producing
or what it's buying and selling

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it is something that people will consume

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and it doesn't just have
to be physical product

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it could also be some type of a service.

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So examples of product markets,

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it could be the market for shirts,

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it could be cars or it
could even be a service.

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It could be tax preparation,
tax preparation.

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These would all be product markets

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because it's something
that people would consume.

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I would call this
consumer tax preparation,

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not business tax preparations.

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So this is consumer tax preparation.

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Now based on my clarification,

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you might guess what a
resource market is all about.

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These are markets for the
inputs into other products.

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Or into the production
of other even resources.

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So, these would be your famous

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inputs of or factors of production.

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It could be, for example,
the market of labor.

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It could be something like farm land.

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Where farm land is used
to produce something else.

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It could be the market for capital goods.

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Maybe robots for factories.

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But either way, whether we're
talking about product markets

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or resource markets, we can
think about them in broad terms

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based on how many players
there are in the market

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and how differentiated the
players are in the market

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and how much control
they have over the price

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and how are the barriers to entry.

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Let's set up a spectrum here
to explore that a little bit.

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So I will set up a spectrum.

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Now the extreme end of the
spectrum right over here,

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when you only have one player,

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one player in the market.

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In the market, or actually
let me just say one firm.

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Because player's not really
clear on what I'm talking about

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whether I'm talking
about a buyer or seller.

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One firm in market.

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And let's say, many buyers.

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Many buyers.

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You are probably familiar
with what we call this market

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or what we would call this firm.

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It has a monopoly!

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It has a monopoly name for a famous game

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because the whole point of that game

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is to try to be that last firm standing.

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The firm that owns all of the real estate.

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Now what are the situations
that would describe a monopoly?

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Well, a monopoly is a situation
where you have very high,

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one could argue insurmountable
barriers to entry,

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so very high.

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High barriers,

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barriers to entry.

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And monopolies can
sometimes be controversial

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but they're not necessarily illegal.

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In fact, in many countries, a monopoly

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can be granted to a
firm through things like

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the intellectual property
or through patents,

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for example a drug company
if it discovers a cure

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for a drug or something
to maintain a drug,

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well they might be granted
a monopoly for that pill

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for some period of time and
the government does that

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so that they can recoup
their investment in all of

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the R&D that they actually produced.

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What often is illegal
in a lot of countries,

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is if firm misuses its monopoly power.

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But anyway, now let's
go to the other extreme.

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Let's imagine a situation where instead of

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high barriers to entry,
there is no barriers.

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No barriers

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to entry.

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Now let's say that there
is no differentiation.

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And you have many players.

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So many, or let me write many firms.

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I keep wanting to say players,

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but that doesn't make it that clear.

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And actually let me say
many firms and many buyers.

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And many buyers.

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Now this is a state that we'll often study

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in our economics class, we'll
call it perfect competition.

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Perfect

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competition.

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In a perfect competition world,

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the firms are essentially
have to be price takers.

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They take whatever the market price is

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and we have used that assumption
in a lot of situations.

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In a monopoly, on the other side,

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they could be the price setters.

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They're the only player in that market.

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Now, in general when anything
is described as perfect

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it's usually theoretical and
so is perfect competition.

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There's no markets that I can think of

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that are perfectly perfect,

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but I can think of ones that are close.

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For say, some agricultural commodities.

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So say the sugar market.

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So the market for sugar might be

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pretty close to perfect competition.

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There could be many firms, those

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would be the farmers, the suppliers.

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It would be many buyers
obviously who want sugar.

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There would be some barriers to entry.

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You'd need to know how to grow sugar,

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you would need suitable
land for growing sugar.

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But there's a lot of
farmers who might be able

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to swap out either sugar cane or beet,

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which is where most sugar comes from.

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With soy bean or vice versa.

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So they can change which crops they plant

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and generally speaking, there's
not much differentiation

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whether you get sugar
from one farm or another.

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So sugar would be pretty
close to perfect competition

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and it is the case for a lot
of agricultural commodities

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that they do have to be price takers.

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There is just a market price
that the individual farmer

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is gonna say, oh actually I
wanna charge a little bit more

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for that sugar because
they won't be able to.

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They're just going to have to take

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whatever the price is in the market.

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Now as you can imagine,
there is a lot of other

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types of markets that are
in between these extremes.

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Closer to a monopoly and
similar to a monopoly

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in a lot of ways is a
situation where you have

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only a handful of firms and
that's referred to oligopoly.

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And this is a situation where
you still have high barriers.

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So high barriers to entry.

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You might have a handful of firms,

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so a few firms and you
still have many buyers.

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Examples of oligopolies, this could be

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things like the aircraft industry.

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Air craft.

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Where there's huge barriers of entry.

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You need to deploy a lot of
capital billions of dollars.

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You might have to get government approval

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and so that's why,
especially for large aircraft

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you only have a few
firms that can produce,

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like Boeing or Airbus,
those really large aircraft.

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Even in certain cases, automobiles,

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sometimes computer manufacturers,

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things that have very
high barriers to entry.

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If we go a little bit
further to the left, you get

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a situation that's known as
monopolistic competition.

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Monopolistic, that's
fun to say, competition.

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And this you could view
as right in between,

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depending on what you're thinking about.

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This is a situation where
there's low barriers to entry,

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low

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low barriers to entry.

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There's many firms.

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Many firms.

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But you do have differentiation.

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You do have differentiation
so you can tell

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the product of one firm for another.

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And I can think of many,
in fact most industries

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I can think of fall roughly
in the monopolistic area.

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Although we've just mention
some oligopolies and monopolies.

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But examples of monopolistic competition,

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I can imagine to be things like,

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cereal, breakfast cereals
and the breakfast cereal

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industry, there is many firms.

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There's generally low barriers.

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There's some barriers
but they're pretty low

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if you want to start a cereal company

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a lot of folks might be able to do it.

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But there is some differentiation.

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Some people say hey our
cereal is more delicious

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and it's sweeter while others say

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our cereal is more nutritious
and they build a brand

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and they do marketing, etc, etc.

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And because there is some differentiation,

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there's a little bit more ability
for the individual players

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unlike in perfect competition
there's a little bit

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more ability for them
to dictate their price.

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They might say, hey
we're a premium product,

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people think we're healthier so we might

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be able to charge a little bit more.

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You can almost imagine that
they have their own unique

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demand curve because of
that differentiation.

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You can imagine the market in
something like, well shirts.

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That's another example.

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Where a lot of folks can produce shirts,

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but some people might be able
to differentiate themselves.

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They're more stylish,
there's better quality,

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they advertise, they build a brand.

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And so once again, that would
be monopolistic competition.

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So anyway, the big picture here

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is really just for you to get
familiar with these words.

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What do they mean?

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And then what context or
what will they imply about

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the differentiation or
the number of firms?

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And actually before I leave,
I'll throw out one other word

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that you'll hear a little bit less

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than what I just talked
about and it sounds

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like monopoly but it is monopsony.

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And I'm gonna do this
in a unique color here.

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Let me see, I haven't done
anything in this salmon yet.

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Monopsony.

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Which you won't hear
it as much as monopoly.

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And it's really the opposite situation.

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Instead of one supplier and many buyers,

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a monopsony is one big
buyer and many suppliers.

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So for example, if you
have one big box store

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in a small town, and so they're

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the only employer in that town

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they might have monopsony
in the labor market,

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where they're the only people who can hire

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and there's a lot of people
who are looking for jobs.

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But we can talk more about
that in other videos.


Shutting down or exiting industry based on price

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Kind: captions
Language: en

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- [Instructor] We've spent several videos

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already talking about
graphs like you see here.

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This is the graph for a particular firm,

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maybe it's making donuts
so in the donut industry,

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and we can see how the marginal cost

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relates to the average variable
cost and average total cost.

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We go into some depth several videos ago,

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but we see that trend, that marginal cost,

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can trend down initially
because as quantity increases

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each incremental unit could benefit

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from things like specialization.

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And then the marginal cost,
the cost of each incremental

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unit as a function of quantity could go up

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because of things like coordination costs.

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And then we've also seen
how that relates to average

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variable costs, that while
marginal cost is below average

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variable cost, every incremental
unit is going to bring

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down the average variable
cost, but then when marginal

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cost crosses average variable cost,

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well now every incremental
unit is going to bring up

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the average variable cost.

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And the same thing happens once it crosses

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the average total cost.

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And of course the difference between,

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for any given quantity,
between the average total cost

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and the average variable cost,

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that is the average fixed cost.

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Now with that out of the way,
we're going to think about

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how this firm would react under
different market conditions.

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We're going to assume that
it's in a very competitive

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or we could say a perfectly
competitive market

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and so it is a price-taker.

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And so let's first imagine
what would be a positive

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scenario for this firm.

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Let's imagine the price up
here, so let's call this P

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sub-one and in a previous
video, we already said

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it would be rational for
a profit-maximizing firm

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to produce at a quantity
where the marginal cost

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and the marginal revenue is meet.

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And if we're talking about
a competitive market,

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then this price right over
here is not going to be

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a function of the firm's
quantity, so that's why

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it's horizontal, and it
would be the same thing

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as the marginal revenue.

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So in this situation at P
sub-one, the firm would produce

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Q sub-one, and this is a
good situation for the firm

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because the price that
it's getting is higher

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than its average total cost
and so there is going to be

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a nice amount of profit for this firm.

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The profit is going to be
the price minus the average

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total cost at that quantity
times the actual quantity

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so because P one is greater
than the average total cost,

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we have a situation where
the firm is profitable,

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firm is profitable, it would
want to stay in the market

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but because you have a
profitable firm in this market

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and you're likely to have
many profitable firms

00:02:40.100 --> 00:02:43.103
in that market, it will
probably attract entrants.

00:02:46.270 --> 00:02:49.780
Other people might say, hey,
I wanna make just as much

00:02:49.780 --> 00:02:51.750
money as this donut
company right over here,

00:02:51.750 --> 00:02:54.120
than this firm, and so you'll
probably have more and more

00:02:54.120 --> 00:02:56.380
entrants into the market,
which will probably

00:02:56.380 --> 00:02:58.380
reduce the prices.

00:02:58.380 --> 00:03:01.370
Now they could reduce
the prices until you get

00:03:01.370 --> 00:03:05.610
to a price that looks something like this.

00:03:05.610 --> 00:03:08.510
So I will call that P sub-two.

00:03:08.510 --> 00:03:11.150
Now, a profit-maximizing
firm in this world

00:03:11.150 --> 00:03:14.210
would keep producing
until the marginal cost

00:03:14.210 --> 00:03:15.950
is equal to the marginal
revenue, which in this case

00:03:15.950 --> 00:03:19.640
is the price, and this would
be, my lines aren't completely

00:03:19.640 --> 00:03:23.770
straight there but you get
the idea, so that's Q sub-two.

00:03:23.770 --> 00:03:28.700
Now in this situation, P
sub-two is equal to the average

00:03:28.700 --> 00:03:31.720
total cost, so the firm is break-even.

00:03:31.720 --> 00:03:34.230
It's not running at a loss or a profit.

00:03:34.230 --> 00:03:38.060
So it is break-even and so
here the firm is neutral

00:03:38.060 --> 00:03:41.090
about whether in the long-run,
it stays in the market

00:03:41.090 --> 00:03:44.700
or it exits the market,
but you're no longer

00:03:44.700 --> 00:03:49.230
likely attracting entrants,
so no longer attracting,

00:03:50.800 --> 00:03:53.653
attracting entrants.

00:03:55.110 --> 00:03:58.304
But it does make sense for
the firm to keep operating

00:03:58.304 --> 00:04:01.040
at this situation even in the long run

00:04:01.040 --> 00:04:03.730
because it is at least break-even.

00:04:03.730 --> 00:04:06.310
Now let's imagine another scenario,

00:04:06.310 --> 00:04:10.000
let's imagine this price level.

00:04:10.000 --> 00:04:12.870
So for whatever reason, the
market price gets to that

00:04:12.870 --> 00:04:15.938
as we've talked about, a
rational firm would be producing

00:04:15.938 --> 00:04:20.420
at Q sub-three, and at P
sub-three right over here,

00:04:20.420 --> 00:04:21.670
there's some interesting things.

00:04:21.670 --> 00:04:26.570
Because P sub-three is less
than your average total cost,

00:04:26.570 --> 00:04:30.640
your firm is running at a loss,
it's running at a loss here.

00:04:30.640 --> 00:04:35.640
So running, so firm, firm not profitable.

00:04:37.520 --> 00:04:39.040
Not profitable.

00:04:39.040 --> 00:04:41.460
Now you might say, well what
is this firm likely to do,

00:04:41.460 --> 00:04:43.160
would it just shut down?

00:04:43.160 --> 00:04:46.070
Well in the short-run,
it would not make sense

00:04:46.070 --> 00:04:49.620
for this firm to shut
down because the price

00:04:49.620 --> 00:04:52.050
that it's getting is still
higher than its average

00:04:52.050 --> 00:04:54.690
variable cost, in the
short-run, the fixed cost,

00:04:54.690 --> 00:04:57.255
they've already been
spent, so you might as well

00:04:57.255 --> 00:05:01.770
get as much incremental profit
on the margin as you can

00:05:01.770 --> 00:05:05.100
and so as long as the price
is higher than the average

00:05:05.100 --> 00:05:07.973
variable cost, well outside
of their fixed cost,

00:05:07.973 --> 00:05:12.970
they're still making some money
to make up those fixed costs

00:05:12.970 --> 00:05:14.900
so you have two things going on.

00:05:14.900 --> 00:05:18.050
So they would stay
operating in the short run,

00:05:18.050 --> 00:05:23.050
stay operating, operating
in the short-run, short-run,

00:05:26.210 --> 00:05:28.450
but what would this
firm do in the long-run?

00:05:28.450 --> 00:05:31.882
Well in the long-run, it
makes no sense to have a,

00:05:31.882 --> 00:05:34.000
to be in a market where
you can't make a profit

00:05:34.000 --> 00:05:38.180
so in the long-run it
will exit, so it will exit

00:05:38.180 --> 00:05:42.360
in the long-run.

00:05:42.360 --> 00:05:45.490
And in general, the terminology
when people are talking

00:05:45.490 --> 00:05:47.700
about, well, do you start
or stop in the short-run,

00:05:47.700 --> 00:05:50.050
they usually talk about,
do you either shut down

00:05:50.050 --> 00:05:52.590
or operate in the short-run,
and then in the long-run,

00:05:52.590 --> 00:05:55.330
where it's like, hey, are you
going to sell your factories

00:05:55.330 --> 00:05:58.740
or somehow dismantle them
or are you going to build

00:05:58.740 --> 00:06:01.610
new factories, that's all
about exiting or entering

00:06:01.610 --> 00:06:02.720
the industry.

00:06:02.720 --> 00:06:05.700
And of course, you have
another even worse scenario

00:06:05.700 --> 00:06:09.090
for this firm, which might be down here,

00:06:09.090 --> 00:06:11.250
where you have price sub-four.

00:06:11.250 --> 00:06:14.550
Here, in theory, this
is where we intersect

00:06:14.550 --> 00:06:17.690
the marginal cost curve, Q sub-four.

00:06:17.690 --> 00:06:19.940
Now here it makes no sense for the company

00:06:19.940 --> 00:06:22.850
to operate at all, so
because P sub-four is less

00:06:22.850 --> 00:06:27.730
than the average total
cost, you would want to exit

00:06:27.730 --> 00:06:30.705
in the long-run, exit in
long-run, exit the market

00:06:30.705 --> 00:06:33.760
but you wouldn't even wait for that long,

00:06:33.760 --> 00:06:36.630
wait to sell your factories,
because P sub-four

00:06:36.630 --> 00:06:38.910
is less than your average variable cost,

00:06:38.910 --> 00:06:43.910
you would also just shut down,
shut down in the short-run.

00:06:47.720 --> 00:06:50.120
So big picture from a
firm's point of view,

00:06:50.120 --> 00:06:53.094
you obviously want to be at
P one where you make a profit

00:06:53.094 --> 00:06:55.760
but you might attract entrants.

00:06:55.760 --> 00:06:59.250
At P sub-two, you as a firm
in the long-run are neutral

00:06:59.250 --> 00:07:02.090
versus exiting the market
or entering the market

00:07:02.090 --> 00:07:05.340
or other people entering the
market, you're at breakeven.

00:07:05.340 --> 00:07:10.340
At P sub-three, in the
long-run, you'd wanna exit

00:07:10.350 --> 00:07:13.050
because you're not
profitable if the prices stay

00:07:13.050 --> 00:07:16.340
at P sub-three, your price
is below your average

00:07:16.340 --> 00:07:19.170
total cost at the rational
quantity to produce,

00:07:19.170 --> 00:07:22.110
so in the long-run, you would exit.

00:07:22.110 --> 00:07:26.420
But because P sub-three is
greater than your average

00:07:26.420 --> 00:07:29.270
variable cost at the rational quantity,

00:07:29.270 --> 00:07:32.090
you would stay operating in the short-run

00:07:32.090 --> 00:07:35.040
and then the last scenario
of course is P sub-four

00:07:35.040 --> 00:07:36.840
where the price gets so low
that it just doesn't make

00:07:36.840 --> 00:07:39.103
sense to even operate another moment.


Profit maximization

WEBVTT
Kind: captions
Language: en

00:00:00.200 --> 00:00:01.610
- [Instructor] We've spent several videos

00:00:01.610 --> 00:00:03.820
talking about the costs of a firm.

00:00:03.820 --> 00:00:05.500
And in particular, we've thought about

00:00:05.500 --> 00:00:08.820
how marginal cost is driven by quantity

00:00:08.820 --> 00:00:11.810
and how average total cost
is driven by quantity,

00:00:11.810 --> 00:00:14.590
and we think about other
average costs as well.

00:00:14.590 --> 00:00:17.220
Now, in this video, we're
going to extend that analysis

00:00:17.220 --> 00:00:20.500
by starting to think about profit.

00:00:20.500 --> 00:00:21.890
Now, profit, you are probably

00:00:21.890 --> 00:00:23.830
already familiar with the term.

00:00:23.830 --> 00:00:26.270
But one way to think
about it, very generally,

00:00:26.270 --> 00:00:28.770
it's how much a firm brings in,

00:00:28.770 --> 00:00:30.880
you could consider that its revenue,

00:00:30.880 --> 00:00:33.140
minus its costs,

00:00:33.140 --> 00:00:34.860
minus its costs.

00:00:34.860 --> 00:00:39.860
And a rational firm will
want to maximize its profit.

00:00:40.150 --> 00:00:42.420
And so to understand how a firm

00:00:42.420 --> 00:00:44.460
might go about maximizing its profit

00:00:44.460 --> 00:00:46.780
or what quantity it would need to produce

00:00:46.780 --> 00:00:49.590
to maximize its profit based on this,

00:00:49.590 --> 00:00:51.150
on its cost structure,

00:00:51.150 --> 00:00:55.270
we have to introduce revenue
into this model here.

00:00:55.270 --> 00:00:56.700
And in particular, we are going

00:00:56.700 --> 00:00:59.410
to introduce the idea of marginal revenue.

00:00:59.410 --> 00:01:00.650
And we're going to assume

00:01:00.650 --> 00:01:03.680
that this firm is in a
very competitive market,

00:01:03.680 --> 00:01:05.770
and so it is a price-taker.

00:01:05.770 --> 00:01:08.600
So regardless of how
much this firm produces,

00:01:08.600 --> 00:01:11.690
the incremental revenue per
unit of what it produces,

00:01:11.690 --> 00:01:12.930
maybe this is a doughnut company,

00:01:12.930 --> 00:01:15.350
the incremental amount per doughnut

00:01:15.350 --> 00:01:18.300
is going to stay the same regardless of

00:01:18.300 --> 00:01:21.250
how much this firm in particular produces.

00:01:21.250 --> 00:01:25.330
So let's say that the marginal
revenue in this industry,

00:01:25.330 --> 00:01:28.090
in this market, is right over here.

00:01:28.090 --> 00:01:29.450
So one way to think about it is

00:01:29.450 --> 00:01:32.300
this would be the unit
price in that market.

00:01:32.300 --> 00:01:36.170
So let me put that right
over there, marginal revenue.

00:01:36.170 --> 00:01:38.720
Once again, for every incremental unit,

00:01:38.720 --> 00:01:40.310
how much revenue you're going to get,

00:01:40.310 --> 00:01:44.300
so it would just be
the price of that unit.

00:01:44.300 --> 00:01:46.920
So how much would a rational firm produce

00:01:46.920 --> 00:01:49.100
in order to maximize its profit?

00:01:49.100 --> 00:01:54.100
If the marginal revenue is
higher than the marginal cost,

00:01:54.360 --> 00:01:57.390
well, that means every
incremental unit it produces,

00:01:57.390 --> 00:02:01.610
it's going to bring in some
net money into the door.

00:02:01.610 --> 00:02:03.520
So it's rational for it to do it.

00:02:03.520 --> 00:02:05.610
So it would keep
producing, keep producing,

00:02:05.610 --> 00:02:07.040
keep producing, keep producing.

00:02:07.040 --> 00:02:09.940
Now, it gets interesting
as the marginal cost starts

00:02:09.940 --> 00:02:12.530
to approach the marginal revenue.

00:02:12.530 --> 00:02:14.440
As long as the marginal revenue is higher

00:02:14.440 --> 00:02:15.640
than the marginal cost,

00:02:15.640 --> 00:02:18.010
it's rational for the firm to produce.

00:02:18.010 --> 00:02:19.310
But right at that unit

00:02:19.310 --> 00:02:22.840
where the marginal cost is
equal to the marginal revenue,

00:02:22.840 --> 00:02:25.700
well, there, on that incremental unit,

00:02:25.700 --> 00:02:29.490
the firm just breaks even
at least on the margin.

00:02:29.490 --> 00:02:31.410
It might be able to utilize

00:02:31.410 --> 00:02:33.590
some of its fixed costs a little bit.

00:02:33.590 --> 00:02:35.350
But then, after that point,

00:02:35.350 --> 00:02:39.120
it makes no sense at all
for it to keep producing.

00:02:39.120 --> 00:02:40.170
Why is that?

00:02:40.170 --> 00:02:42.090
Well, if the marginal cost is higher

00:02:42.090 --> 00:02:45.080
than the marginal revenue,
that would be like saying,

00:02:45.080 --> 00:02:47.500
hey, I'm gonna sell a doughnut for $1

00:02:47.500 --> 00:02:49.580
even though that incremental doughnut

00:02:49.580 --> 00:02:52.090
costs me $1.10 to produce.

00:02:52.090 --> 00:02:53.860
Well, no rational person,

00:02:53.860 --> 00:02:56.560
if they want to maximize
their profit, would do that.

00:02:56.560 --> 00:02:58.590
So a rational firm that's trying

00:02:58.590 --> 00:03:01.730
to maximize its profit
will produce the quantity

00:03:01.730 --> 00:03:05.270
where marginal cost
intersects marginal revenue.

00:03:05.270 --> 00:03:08.460
It will produce this quantity

00:03:08.460 --> 00:03:10.440
right over there.

00:03:10.440 --> 00:03:13.090
Now, a natural question might be

00:03:13.090 --> 00:03:18.090
how much profit will it make
from producing that quantity?

00:03:18.130 --> 00:03:19.520
Well, all you have to do is think about,

00:03:19.520 --> 00:03:22.460
this is the marginal revenue that it gets,

00:03:22.460 --> 00:03:23.610
and another way you could think about it,

00:03:23.610 --> 00:03:26.270
because this is constant,
it's also going to be

00:03:26.270 --> 00:03:29.730
the average revenue that it gets per unit.

00:03:29.730 --> 00:03:31.710
And this right over here,

00:03:31.710 --> 00:03:34.530
is the average total cost per unit.

00:03:34.530 --> 00:03:36.040
And so what you could do is,

00:03:36.040 --> 00:03:40.000
this is how much it's
getting on average per unit,

00:03:40.000 --> 00:03:44.380
and then multiply that
times the number of units.

00:03:44.380 --> 00:03:49.380
And what you get is the
area of this rectangle.

00:03:49.490 --> 00:03:52.400
So for those of you who
are more visually inclined,

00:03:52.400 --> 00:03:56.000
one way to think about it
is a profit-maximizing firm,

00:03:56.000 --> 00:03:58.440
a rational profit-maximizing firm,

00:03:58.440 --> 00:04:01.410
would want to maximize this area.

00:04:01.410 --> 00:04:02.820
Think about what would happen

00:04:02.820 --> 00:04:05.630
if they only produced this much.

00:04:05.630 --> 00:04:09.230
Well, then they're
giving up a ton of area.

00:04:09.230 --> 00:04:12.200
Then the rectangle would only be this big.

00:04:12.200 --> 00:04:14.100
This would be the profit

00:04:14.100 --> 00:04:17.000
that the firm is going to
be making from those units.

00:04:17.000 --> 00:04:20.480
And then if it decides,
for some irrational reason,

00:04:20.480 --> 00:04:22.410
to produce more than this quantity

00:04:22.410 --> 00:04:24.900
that we settled on before,
let's say this right over here,

00:04:24.900 --> 00:04:26.440
notice even though that the base

00:04:26.440 --> 00:04:28.410
of this rectangle is
longer, the height is less,

00:04:28.410 --> 00:04:31.160
and this would actually have a lower area.

00:04:31.160 --> 00:04:33.850
And the reason why I feel
very confident that this

00:04:33.850 --> 00:04:38.410
will have a lower area is
because, in this situation,

00:04:38.410 --> 00:04:43.100
the firm is losing money on
all of these incremental units

00:04:43.100 --> 00:04:46.870
where the marginal cost is
higher than the marginal revenue.

00:04:46.870 --> 00:04:49.300
So big takeaway, a rational firm

00:04:49.300 --> 00:04:51.990
that's trying to maximize its profit

00:04:51.990 --> 00:04:55.910
will produce the quantity
where marginal cost

00:04:55.910 --> 00:04:59.003
and marginal revenue
are equal to each other.


Khan Stories: Brooke Hogan

WEBVTT
Kind: captions
Language: en

00:00:02.990 --> 00:00:04.730
- We're gonna go ahead
and grab our Chrome Books,

00:00:04.730 --> 00:00:06.177
we're gonna log in.

00:00:06.177 --> 00:00:07.010
- Good morning.

00:00:07.010 --> 00:00:07.843
- Good morning.

00:00:07.843 --> 00:00:08.676
- My name is Brooke Hogan,

00:00:08.676 --> 00:00:10.510
I've been teaching for nine years.

00:00:10.510 --> 00:00:13.303
I teach seventh grade
math, science, and health.

00:00:14.140 --> 00:00:16.840
I try and get to know each
and every one of my students

00:00:16.840 --> 00:00:17.880
on a personal level.

00:00:17.880 --> 00:00:19.260
Good job.

00:00:19.260 --> 00:00:20.093
Awesome.

00:00:20.093 --> 00:00:22.740
So that they know that I
recognize them as a human being

00:00:22.740 --> 00:00:25.420
and as a person, not just as
my student within my room.

00:00:25.420 --> 00:00:27.370
Log in to Khan Academy.

00:00:27.370 --> 00:00:30.710
I use Khan on an almost every day basis,

00:00:30.710 --> 00:00:32.030
at least every other day.

00:00:32.030 --> 00:00:34.340
You guys will see that I have assigned

00:00:34.340 --> 00:00:36.120
you guys two assignments.

00:00:36.120 --> 00:00:37.880
I will give them as assignments,

00:00:37.880 --> 00:00:39.850
I have given them as quizzes.

00:00:39.850 --> 00:00:43.130
The kids love using Khan
as quizzes because I allow

00:00:43.130 --> 00:00:45.700
them one retake, so if they
don't like their score,

00:00:45.700 --> 00:00:47.350
'cause they get their score at the end,

00:00:47.350 --> 00:00:49.160
then they're like, I wanna retake it.

00:00:49.160 --> 00:00:51.440
Alright, let's get to work.

00:00:51.440 --> 00:00:54.810
When I assign an assignment,
I go back and I look

00:00:54.810 --> 00:00:57.400
at the data on the reports tab.

00:00:57.400 --> 00:01:00.250
With Khan in my classroom
and having that accessibility

00:01:00.250 --> 00:01:03.650
in my classroom on a daily
basis, it really allows me to

00:01:03.650 --> 00:01:06.620
work with small groups within
our instructional time.

00:01:06.620 --> 00:01:07.973
- We don't know how to do the ink one.

00:01:07.973 --> 00:01:12.090
- Those kids who need
that reteaching or to be,

00:01:12.090 --> 00:01:15.920
have some concepts reinforced
within my instructional time.

00:01:15.920 --> 00:01:17.360
Yeah, nice work.

00:01:17.360 --> 00:01:18.193
Good job.

00:01:19.300 --> 00:01:20.500
My students love it.

00:01:20.500 --> 00:01:22.890
They absolutely love Khan.

00:01:22.890 --> 00:01:26.140
When I say, on any given
day, okay guys, we're gonna

00:01:26.140 --> 00:01:27.680
work on Khan today, yes!

00:01:27.680 --> 00:01:29.880
I hear them starting to
challenge each other, like oh

00:01:29.880 --> 00:01:30.770
what are you going to work on?

00:01:30.770 --> 00:01:32.750
Oh I'm gonna work on this,
I'm gonna work on this.

00:01:32.750 --> 00:01:35.730
Just in taking practice
tests, their math scores have

00:01:35.730 --> 00:01:37.740
jumped so much.

00:01:37.740 --> 00:01:40.070
Not only their math scores,
but I've seen their confidence

00:01:40.070 --> 00:01:41.110
go up a lot.

00:01:41.110 --> 00:01:42.110
Perfect!

00:01:42.110 --> 00:01:42.943
Awesome.

00:01:42.943 --> 00:01:43.776
Perfect, perfect.

00:01:43.776 --> 00:01:46.830
I love seeing the light
bulbs go off on my kids'

00:01:46.830 --> 00:01:49.100
faces when they finally
understand a concept

00:01:49.100 --> 00:01:50.540
and they get it.

00:01:50.540 --> 00:01:52.760
You see that excitement,
they're like, I got it!

00:01:52.760 --> 00:01:53.743
And I'm like, yes!

00:01:56.030 --> 00:01:58.970
I really want them to be able
to transfer the knowledge

00:01:58.970 --> 00:02:01.160
that they learn in the
classroom and be able to

00:02:01.160 --> 00:02:02.790
transfer it to their real lives.

00:02:02.790 --> 00:02:04.100
Yay, perfect.

00:02:04.100 --> 00:02:05.343
Perfect, perfect.


Substitution and income effects and the Law of Demand

WEBVTT
Kind: captions
Language: en

00:00:00.340 --> 00:00:02.460
- [Narrator] In other videos,
we have already talked about

00:00:02.460 --> 00:00:04.800
the Law of Demand, which tells us,

00:00:04.800 --> 00:00:07.900
and this is probably already
somewhat intuitive for you,

00:00:07.900 --> 00:00:12.359
that if a certain good is
currently at a higher price,

00:00:12.359 --> 00:00:15.730
that the quantity demanded
will be quite low,

00:00:15.730 --> 00:00:18.260
and then as the price were to decrease,

00:00:18.260 --> 00:00:21.060
the quantity demanded would increase.

00:00:21.060 --> 00:00:23.110
So if we were to graph demand,

00:00:23.110 --> 00:00:25.520
and so this right over
here is our demand curve,

00:00:25.520 --> 00:00:27.330
where price is on our vertical axis

00:00:27.330 --> 00:00:29.130
and quantity is on our horizontal axis,

00:00:29.130 --> 00:00:32.260
which is the standard
convention for most economists,

00:00:32.260 --> 00:00:35.439
you would have a
downward-sloping demand curve.

00:00:35.439 --> 00:00:36.960
Well, what we're gonna do in this video

00:00:36.960 --> 00:00:38.530
is dig a little bit deeper

00:00:38.530 --> 00:00:42.510
into why we have that
downward-sloping demand curve,

00:00:42.510 --> 00:00:43.467
and I know what some of y'all are saying.

00:00:43.467 --> 00:00:45.287
"Well, it kind of makes common sense.

00:00:45.287 --> 00:00:48.247
"As the price goes down,
I would want more of that,

00:00:48.247 --> 00:00:49.848
"and so would everyone else."

00:00:49.848 --> 00:00:53.700
But let's dig into why you
would want more of something

00:00:53.700 --> 00:00:55.940
as the price goes down.

00:00:55.940 --> 00:01:00.210
So one category of reasons
why you might want more of it

00:01:00.210 --> 00:01:01.540
as the price goes down,

00:01:01.540 --> 00:01:04.820
economists will call
the substitution effect.

00:01:04.820 --> 00:01:07.787
Substitution, substitution effect.

00:01:11.130 --> 00:01:12.860
And this is the idea that

00:01:12.860 --> 00:01:14.940
if we're looking at the
price versus quantity,

00:01:14.940 --> 00:01:17.280
say, of candy, and let's say at first,

00:01:17.280 --> 00:01:22.280
the price is right over
here at $4, and at $4,

00:01:22.840 --> 00:01:26.090
the quantity demanded
in the market would be,

00:01:26.090 --> 00:01:30.480
let's say that is 100 units of the candy,

00:01:30.480 --> 00:01:32.840
maybe it's 100 pounds of the candy,

00:01:32.840 --> 00:01:37.320
that if the price were to
then go to $2 for some reason,

00:01:37.320 --> 00:01:41.030
so let's say the price is at $2,

00:01:41.030 --> 00:01:43.157
well, then, a lot of folks could say,

00:01:43.157 --> 00:01:45.767
"Gee, that candy is looking a lot better

00:01:45.767 --> 00:01:48.317
"relative to other things that I might buy

00:01:48.317 --> 00:01:49.710
"with my money."

00:01:49.710 --> 00:01:51.990
So, for example, people
might be picking between

00:01:51.990 --> 00:01:54.890
candy and fruit, and maybe, at first,

00:01:54.890 --> 00:01:57.230
they were both $4 a pound,
but now all of a sudden,

00:01:57.230 --> 00:02:00.580
if the candy is $2 a
pound, or $2 per unit,

00:02:00.580 --> 00:02:02.180
well, then, it's looking a lot better

00:02:02.180 --> 00:02:03.860
relative to the fruit.

00:02:03.860 --> 00:02:07.010
So some of that quantity of
fruit people would have bought,

00:02:07.010 --> 00:02:08.957
they'll say, "Hey, now
candy is a better deal.

00:02:08.957 --> 00:02:12.040
"I'm going to substitute
the fruit with candy."

00:02:12.040 --> 00:02:15.046
And so that's why you
have a higher quantity

00:02:15.046 --> 00:02:17.020
of candy demanded.

00:02:17.020 --> 00:02:21.720
This might maybe be now 250 units.

00:02:21.720 --> 00:02:24.610
Another major category
why you would expect

00:02:24.610 --> 00:02:28.610
this downward-sloping demand
curve for normal goods,

00:02:28.610 --> 00:02:30.840
and we'll talk about
things like inferior goods

00:02:30.840 --> 00:02:35.660
in future videos, is the
income effect, income effect.

00:02:35.660 --> 00:02:38.590
And in some ways, this
might be the most intuitive.

00:02:38.590 --> 00:02:41.094
Well, if the price went from $4 to $2,

00:02:41.094 --> 00:02:44.970
well, the cost of those 100
units would now be half as much.

00:02:44.970 --> 00:02:47.050
It would go from $400 to $200.

00:02:47.050 --> 00:02:50.630
And so the market would
have an extra $200 to use

00:02:50.630 --> 00:02:54.460
to buy things with, and
some of that extra $200,

00:02:54.460 --> 00:02:56.177
they'll buy more candy with.

00:02:56.177 --> 00:02:59.161
But then they might also
buy other things with that.

00:02:59.161 --> 00:03:02.640
Now the last dimension that
economists will often talk about

00:03:02.640 --> 00:03:05.960
for why the Law of Demand is
downward-sloping like this,

00:03:05.960 --> 00:03:08.020
and we talk about this in other videos,

00:03:08.020 --> 00:03:13.020
is this idea of decreasing,
decreasing marginal utility,

00:03:14.900 --> 00:03:16.872
and that's that idea that that first,

00:03:16.872 --> 00:03:19.861
if you're just that first amount of candy,

00:03:19.861 --> 00:03:21.690
there's gonna be people the market

00:03:21.690 --> 00:03:23.670
who take a lot of value from it.

00:03:23.670 --> 00:03:25.780
They are just addicted to candy.

00:03:25.780 --> 00:03:28.499
Their bodies are dependent on that candy.

00:03:28.499 --> 00:03:30.911
But as soon as folks are satiated,

00:03:30.911 --> 00:03:33.953
that next incremental amount,
that next marginal amount,

00:03:33.953 --> 00:03:36.880
the utility might be a little bit lower.

00:03:36.880 --> 00:03:39.730
And so as you have more and more candy,

00:03:39.730 --> 00:03:42.010
the marginal utility goes down.

00:03:42.010 --> 00:03:43.960
And so that's another
way of thinking about

00:03:43.960 --> 00:03:47.463
why we have a
downward-sloping demand curve.


Tariff and imports worked example

WEBVTT
Kind: captions
Language: en

00:00:00.580 --> 00:00:02.070
- [Instructor] We're told
sugar is freely traded

00:00:02.070 --> 00:00:03.320
in the world market.

00:00:03.320 --> 00:00:05.100
Assume that a country, Loriland,

00:00:05.100 --> 00:00:08.000
is a price taker in the
world market for sugar.

00:00:08.000 --> 00:00:09.760
Some of the sugar consumed in Loriland

00:00:09.760 --> 00:00:12.690
is produced domestically
while the rest is imported.

00:00:12.690 --> 00:00:15.320
The world price of sugar is $2 per pound.

00:00:15.320 --> 00:00:18.370
The graph below shows
Loriland's sugar market,

00:00:18.370 --> 00:00:21.780
and P sub W represents the world price.

00:00:21.780 --> 00:00:23.790
So we see our domestic demand,

00:00:23.790 --> 00:00:25.580
we see our domestic supply,

00:00:25.580 --> 00:00:27.670
and then we see the world price.

00:00:27.670 --> 00:00:30.100
All right, now let's try
to answer the questions

00:00:30.100 --> 00:00:32.563
that they have given us.

00:00:33.560 --> 00:00:36.080
At the world price of $2 per pound,

00:00:36.080 --> 00:00:39.230
how much sugar is Loriland importing?

00:00:39.230 --> 00:00:40.150
So pause this video,

00:00:40.150 --> 00:00:42.910
and see if you can figure
that out on your own.

00:00:42.910 --> 00:00:44.870
All right, now let's do it together.

00:00:44.870 --> 00:00:47.960
So at first, you look at
your domestic demand and see,

00:00:47.960 --> 00:00:51.530
well, what would the domestic
demand be at the world price?

00:00:51.530 --> 00:00:54.010
So that would be where
these two lines intersect.

00:00:54.010 --> 00:00:56.070
So the domestic demand at the world price

00:00:56.070 --> 00:00:57.730
would be 14 million pounds.

00:00:57.730 --> 00:01:00.030
You might be tempted to
put 14 million pounds here,

00:01:00.030 --> 00:01:01.730
but that would be the
total domestic demand

00:01:01.730 --> 00:01:02.563
at that world price.

00:01:02.563 --> 00:01:04.330
But some of that is domestically produced,

00:01:04.330 --> 00:01:06.460
and some of it is imported.

00:01:06.460 --> 00:01:08.430
How much is domestically produced?

00:01:08.430 --> 00:01:12.250
Well, at a price of $2, the
domestic producers are up

00:01:12.250 --> 00:01:15.830
for producing two million
of those 14 million pounds.

00:01:15.830 --> 00:01:17.650
So this is domestic production.

00:01:17.650 --> 00:01:21.290
And so between these
two points, that length,

00:01:21.290 --> 00:01:24.400
that represents how much
is actually imported.

00:01:24.400 --> 00:01:27.220
So to go from two million
pounds to 14 million pounds,

00:01:27.220 --> 00:01:29.290
14 minus two is 12 million pounds.

00:01:29.290 --> 00:01:30.620
That is imported,

00:01:30.620 --> 00:01:33.570
12 million pounds.

00:01:33.570 --> 00:01:36.150
Part b, suppose that Loriland

00:01:36.150 --> 00:01:38.990
imposes a per-unit
tariff on sugar imports,

00:01:38.990 --> 00:01:42.650
and the new domestic price
including the tariff is $4.

00:01:42.650 --> 00:01:45.820
Identify the new level
of domestic production.

00:01:45.820 --> 00:01:49.160
So once again, pause the video,
and try to figure that out.

00:01:49.160 --> 00:01:51.670
All right, so they say
the new domestic price

00:01:51.670 --> 00:01:53.303
including the tariff is $4.

00:01:54.450 --> 00:01:56.710
So we are now in this situation.

00:01:56.710 --> 00:01:59.700
This is the new price.

00:01:59.700 --> 00:02:03.250
Now, they say what is the new
level of domestic production?

00:02:03.250 --> 00:02:05.560
So the domestic supply, at that price,

00:02:05.560 --> 00:02:09.300
the domestic suppliers look
like they are willing to

00:02:09.300 --> 00:02:12.140
supply six million pounds.

00:02:12.140 --> 00:02:15.440
So that is our new level
of domestic production,

00:02:15.440 --> 00:02:18.470
six million pounds.

00:02:18.470 --> 00:02:20.460
All right, part ii,

00:02:20.460 --> 00:02:24.540
calculate the domestic
consumer surplus for Loriland.

00:02:24.540 --> 00:02:26.330
You must show your work.

00:02:26.330 --> 00:02:29.470
Pause the video, and see
if you can figure that out.

00:02:29.470 --> 00:02:32.070
Well, the domestic consumer
surplus for Loriland

00:02:32.070 --> 00:02:35.290
in this scenario, where this is the price,

00:02:35.290 --> 00:02:38.690
well, then we are going to,
let me scroll down a little bit

00:02:38.690 --> 00:02:41.430
so we can see the entire consumer surplus.

00:02:41.430 --> 00:02:43.800
That is going to be the area

00:02:43.800 --> 00:02:46.310
above this horizontal line at the price

00:02:46.310 --> 00:02:49.610
and below our domestic demand curve.

00:02:49.610 --> 00:02:52.510
So this right over here
is the consumer surplus

00:02:52.510 --> 00:02:54.230
in that scenario.

00:02:54.230 --> 00:02:57.470
And so that is going to be this width,

00:02:57.470 --> 00:03:02.440
which is the quantity demanded,
which is 10 million pounds,

00:03:02.440 --> 00:03:05.110
times the height,

00:03:05.110 --> 00:03:08.280
which is, you're going from four to $9,

00:03:08.280 --> 00:03:10.573
so it has a height of $5,

00:03:11.740 --> 00:03:13.100
and then times 1/2.

00:03:13.100 --> 00:03:15.130
If I just multiplied the
quantity times the height,

00:03:15.130 --> 00:03:17.400
I'd be figuring out the area
of this entire rectangle,

00:03:17.400 --> 00:03:19.130
so it's a little bit of a geometry review.

00:03:19.130 --> 00:03:22.890
To get half of that, we
would multiply it by half.

00:03:22.890 --> 00:03:24.610
So this is going to be,

00:03:24.610 --> 00:03:26.440
it's going to be 10 million pounds.

00:03:26.440 --> 00:03:28.290
I'll do it right over
here, so I have some space.

00:03:28.290 --> 00:03:29.810
10 million

00:03:29.810 --> 00:03:32.060
pounds times,

00:03:32.060 --> 00:03:36.087
we have a difference of $5 per pound,

00:03:36.087 --> 00:03:36.990
$5

00:03:37.900 --> 00:03:39.520
per pound.

00:03:39.520 --> 00:03:42.290
And then, of course, we want
to multiply it times 1/2,

00:03:42.290 --> 00:03:43.950
so this one right over here.

00:03:43.950 --> 00:03:46.690
So let's see, the pounds cancel out.

00:03:46.690 --> 00:03:48.780
And so, if you multiply it out,

00:03:48.780 --> 00:03:52.080
this is going to be $50 million times 1/2.

00:03:52.080 --> 00:03:55.883
So it's going to be $25 million.

00:03:56.970 --> 00:03:58.650
All right, part iii,

00:03:58.650 --> 00:03:59.900
scroll down a little bit.

00:04:00.790 --> 00:04:02.660
Calculate the total tariff revenue

00:04:02.660 --> 00:04:04.160
collected by the government.

00:04:04.160 --> 00:04:06.800
This also says you must show your work.

00:04:06.800 --> 00:04:07.950
Once again, pause the video,

00:04:07.950 --> 00:04:10.100
and see if you can work through that.

00:04:10.100 --> 00:04:12.750
So the tariff revenue
collected by the government,

00:04:12.750 --> 00:04:15.550
well, we went from a world
price of $2 per pound

00:04:15.550 --> 00:04:18.600
to a domestic price of $4 per pound,

00:04:18.600 --> 00:04:21.710
so it was a $2 per pound tariff.

00:04:21.710 --> 00:04:24.750
And the government is
collecting that $2 per pound

00:04:24.750 --> 00:04:26.260
on the imports.

00:04:26.260 --> 00:04:30.110
So in this situation, this
is the domestic supply.

00:04:30.110 --> 00:04:31.480
We've already talked about that.

00:04:31.480 --> 00:04:34.380
And so this amount right
over here, are the imports.

00:04:34.380 --> 00:04:36.130
So if you multiply this amount,

00:04:36.130 --> 00:04:39.310
which went from six million
pounds to 10 million pounds,

00:04:39.310 --> 00:04:42.170
so this is going to be
four million pounds,

00:04:42.170 --> 00:04:43.950
times the tariff,

00:04:43.950 --> 00:04:47.200
which is $2 per pound,

00:04:47.200 --> 00:04:49.290
per pound,

00:04:49.290 --> 00:04:51.140
you're going to get this area,

00:04:51.140 --> 00:04:53.450
which would be the government revenue.

00:04:53.450 --> 00:04:58.410
So this is going to be four million pounds

00:04:58.410 --> 00:05:01.230
times $2 per pound,

00:05:01.230 --> 00:05:04.360
times $2 per pound.

00:05:04.360 --> 00:05:05.960
Pound cancels out,

00:05:05.960 --> 00:05:08.120
and this is an area of a rectangle here.

00:05:08.120 --> 00:05:12.187
And so this is going to
be equal to eight million,

00:05:12.187 --> 00:05:13.263
$8 million.

00:05:14.160 --> 00:05:16.083
All right, now let's do part c.

00:05:17.120 --> 00:05:21.230
Given the world price of
$2, what per-unit tariff

00:05:21.230 --> 00:05:26.230
maximizes the sum of Loriland's
domestic consumer surplus

00:05:26.730 --> 00:05:29.170
and producer surplus?

00:05:29.170 --> 00:05:30.460
Pause the video once more,

00:05:30.460 --> 00:05:32.210
and see if you can figure this out.

00:05:33.340 --> 00:05:35.820
All right, so you might be tempted

00:05:35.820 --> 00:05:37.930
to try out a bunch of tariffs

00:05:37.930 --> 00:05:41.430
and figure out if you can
get a higher total surplus,

00:05:41.430 --> 00:05:44.040
but the important thing
to realize is any tariff

00:05:44.040 --> 00:05:47.540
is going to reduce your
total economic surplus.

00:05:47.540 --> 00:05:50.540
So you can immediately
go and say that, hey,

00:05:50.540 --> 00:05:53.380
the ideal per-unit tariff

00:05:53.380 --> 00:05:57.630
is going to be $0 per unit.

00:05:57.630 --> 00:05:59.950
And if you want to see
visually why that is,

00:05:59.950 --> 00:06:01.780
we talk about it in other videos.

00:06:01.780 --> 00:06:03.640
Remember, in the first situation,

00:06:03.640 --> 00:06:06.050
where we're just at the world
price without any tariffs,

00:06:06.050 --> 00:06:08.130
the total economic surplus,

00:06:08.130 --> 00:06:10.360
this is the domestic producer surplus,

00:06:10.360 --> 00:06:13.940
which isn't that much, but you
have a huge consumer surplus.

00:06:13.940 --> 00:06:16.603
You have all of this area as well.

00:06:17.620 --> 00:06:21.000
So those two triangles make
the total economic surplus.

00:06:21.000 --> 00:06:25.110
Now, a tariff is going
to raise this level.

00:06:25.110 --> 00:06:26.590
And as you raise this level,

00:06:26.590 --> 00:06:28.780
as you saw in the case of part b,

00:06:28.780 --> 00:06:31.570
well, you're going to
shrink this upper triangle.

00:06:31.570 --> 00:06:34.240
You will grow this bottom triangle,

00:06:34.240 --> 00:06:36.160
but you're still going to be smaller

00:06:36.160 --> 00:06:38.800
than your two triangles
that you had before.

00:06:38.800 --> 00:06:40.410
Because look at that second scenario,

00:06:40.410 --> 00:06:41.980
the scenario in part b.

00:06:41.980 --> 00:06:45.080
Your consumer surplus has now shrunk

00:06:45.080 --> 00:06:46.610
to this right over here.

00:06:46.610 --> 00:06:49.880
Your producer surplus has
grown to that over there.

00:06:49.880 --> 00:06:53.570
But you haven't grown the total surplus.

00:06:53.570 --> 00:06:56.520
In fact, now for the
consumers and the producers,

00:06:56.520 --> 00:06:58.500
you've lost this entire triangle.

00:06:58.500 --> 00:07:01.660
Some of it is captured
by government revenue,

00:07:01.660 --> 00:07:04.720
but you also have deadweight loss.

00:07:04.720 --> 00:07:06.620
You also just have this section

00:07:06.620 --> 00:07:08.870
and this section as just deadweight loss.

00:07:08.870 --> 00:07:12.390
And so any tariff is going to reduce the,

00:07:12.390 --> 00:07:15.860
is going to reduce your
possible economic surplus.

00:07:15.860 --> 00:07:18.420
So a $0 tariff, theoretically,

00:07:18.420 --> 00:07:21.153
would maximize your
total economic surplus.


Trade and tariffs

WEBVTT
Kind: captions
Language: en

00:00:00.390 --> 00:00:02.190
- [Instructor] In this video,
we're gonna think about how

00:00:02.190 --> 00:00:06.240
trade affects the total
economic surplus in a market,

00:00:06.240 --> 00:00:07.960
and we're also gonna think about tariffs,

00:00:07.960 --> 00:00:10.990
which are a per unit
charge that a government

00:00:10.990 --> 00:00:14.720
will often put on some type of
good that is being imported,

00:00:14.720 --> 00:00:17.580
usually to protect a domestic industry,

00:00:17.580 --> 00:00:20.230
but sometimes it's also to raise revenue.

00:00:20.230 --> 00:00:22.710
So, right over here,
we have a simple model

00:00:22.710 --> 00:00:25.910
for the sugar market in some country.

00:00:25.910 --> 00:00:28.090
And we're originally
initially going to assume

00:00:28.090 --> 00:00:31.630
that this country is
operating in isolation.

00:00:31.630 --> 00:00:35.280
So, this is the supply curve
for the suppliers of sugar

00:00:35.280 --> 00:00:38.600
in that country, and then
this is the demand curve

00:00:38.600 --> 00:00:41.950
for the people who would want
to use sugar in that country.

00:00:41.950 --> 00:00:43.720
And you can see the equilibrium

00:00:43.720 --> 00:00:46.590
price and quantity in that country.

00:00:46.590 --> 00:00:49.590
Now, in this world, we've
reviewed this in many videos,

00:00:49.590 --> 00:00:51.730
what's the total economic surplus?

00:00:51.730 --> 00:00:53.810
Well, the total economic surplus would be

00:00:53.810 --> 00:00:57.260
defined by this triangle right over here.

00:00:57.260 --> 00:01:00.240
It's the area above the supply

00:01:00.240 --> 00:01:02.140
curve and below the demand curve.

00:01:02.140 --> 00:01:07.140
And we know that the part
above this horizontal line

00:01:07.300 --> 00:01:12.300
at the price of three, this
would be the consumer surplus;

00:01:12.330 --> 00:01:17.330
and then down here, this
would be the producer surplus.

00:01:17.800 --> 00:01:20.810
Now, let's say that this market opens up

00:01:20.810 --> 00:01:23.460
to the world, to the world price.

00:01:23.460 --> 00:01:26.350
And let's say when it does
so, it does not affect

00:01:26.350 --> 00:01:29.010
the world price itself, the
world market is so large,

00:01:29.010 --> 00:01:31.720
and let's say this country's
market is relatively small.

00:01:31.720 --> 00:01:34.820
And so, the world market,
let's say that sugar

00:01:34.820 --> 00:01:38.050
is trading at $1.50 per pound.

00:01:38.050 --> 00:01:40.821
So, this right over
here is the world price,

00:01:40.821 --> 00:01:44.450
$1.50 per pound, let me
write it right over there.

00:01:44.450 --> 00:01:49.450
So, this is our world, our world price.

00:01:49.450 --> 00:01:51.530
Now, if we assume that it's opened up

00:01:51.530 --> 00:01:53.623
to this world price, what will happen?

00:01:54.770 --> 00:01:59.340
Well, at the world price,
the consumers in this market,

00:01:59.340 --> 00:02:01.730
the people who are using the sugar,

00:02:01.730 --> 00:02:03.320
well, they're going to use a lot more.

00:02:03.320 --> 00:02:05.460
At $1.50, the place where that

00:02:05.460 --> 00:02:09.580
intersects the demand curve is out here.

00:02:09.580 --> 00:02:11.810
So, now, what is the consumer surplus

00:02:11.810 --> 00:02:14.580
in this country, in this market?

00:02:14.580 --> 00:02:16.800
Well, the consumer surplus in this

00:02:16.800 --> 00:02:19.220
country is now much larger.

00:02:19.220 --> 00:02:21.350
It contains the triangle
that it contained before,

00:02:21.350 --> 00:02:24.450
and then all of this area
that I am now shading in.

00:02:24.450 --> 00:02:28.900
And that has come at the
cost of the producer surplus.

00:02:28.900 --> 00:02:32.270
The producers in this
country, or in this market,

00:02:32.270 --> 00:02:34.840
they are now only getting that

00:02:34.840 --> 00:02:36.880
producer of surplus right over there.

00:02:36.880 --> 00:02:38.760
But if you look at the total economic

00:02:38.760 --> 00:02:41.090
surplus, it has definitely grown.

00:02:41.090 --> 00:02:44.100
The total economic surplus,
instead of just being that

00:02:44.100 --> 00:02:49.060
original triangle, it has
now extended to include

00:02:49.060 --> 00:02:52.950
this entire area that goes
all the way out there.

00:02:52.950 --> 00:02:55.790
And you could see that
that completely contains

00:02:55.790 --> 00:02:58.830
the previous total economic surplus,

00:02:58.830 --> 00:03:01.020
which we had right over here.

00:03:01.020 --> 00:03:04.270
So, theoretically, when a market opens up

00:03:04.270 --> 00:03:06.460
to the world price like this,

00:03:06.460 --> 00:03:10.880
it's going to increase your
total economic surplus.

00:03:10.880 --> 00:03:14.300
And if that world price is
below the equilibrium price

00:03:14.300 --> 00:03:17.830
in your isolated economy,
then it's probably going to be

00:03:17.830 --> 00:03:21.220
to the benefit of the
consumers, but the producers

00:03:21.220 --> 00:03:24.550
are going to lose out on
some of their surplus.

00:03:24.550 --> 00:03:27.000
Now, let's say that a
government comes into power

00:03:27.000 --> 00:03:30.450
in this market, and says,
hey, I've been elected

00:03:30.450 --> 00:03:32.570
by the sugar producers of this country.

00:03:32.570 --> 00:03:35.030
I don't like this thing going on.

00:03:35.030 --> 00:03:37.760
Our sugar producers in our
country are getting hurt a lot,

00:03:37.760 --> 00:03:39.150
and they're a big voting block,

00:03:39.150 --> 00:03:41.420
so I am going to enact a tariff.

00:03:41.420 --> 00:03:44.030
And once again, a tariff
is a per unit charge,

00:03:44.030 --> 00:03:45.980
or it's oftentimes a per unit charge.

00:03:45.980 --> 00:03:50.980
And let's say the tariff
is 50 cents per pound,

00:03:52.170 --> 00:03:56.800
per pound on imported sugar.

00:03:56.800 --> 00:03:59.830
Well, then what is the world
price going to look like

00:03:59.830 --> 00:04:03.040
to the market that we're talking about?

00:04:03.040 --> 00:04:06.090
Well then, for the
consumers in this market,

00:04:06.090 --> 00:04:09.260
instead of being able to get
the world price at $1.50,

00:04:09.260 --> 00:04:12.090
they would have to pay 50 cents
per pound higher than that.

00:04:12.090 --> 00:04:17.090
So, the tariff would make
the price go over here.

00:04:17.180 --> 00:04:20.420
So, in that situation,
what has just happened?

00:04:20.420 --> 00:04:22.670
Well, now, where we
intersect the demand curve

00:04:22.670 --> 00:04:26.360
is a lower quantity than
when we used the world price.

00:04:26.360 --> 00:04:28.330
At the world price, we were consuming

00:04:28.330 --> 00:04:29.480
a lot of sugar in this market,

00:04:29.480 --> 00:04:31.680
and now we're going to consume
a little bit less sugar.

00:04:31.680 --> 00:04:35.140
But since, even with the
tariff, our price is still lower

00:04:35.140 --> 00:04:36.840
than our previous equilibrium price,

00:04:36.840 --> 00:04:38.420
when we were operating in isolation,

00:04:38.420 --> 00:04:41.690
we're still consuming more
sugar, using more sugar,

00:04:41.690 --> 00:04:43.890
demanding more sugar in this market

00:04:43.890 --> 00:04:47.440
than we were when we did not
have it opened up to trade.

00:04:47.440 --> 00:04:51.570
Now, what did this tariff
do to the surpluses?

00:04:51.570 --> 00:04:54.080
Well, the consumer
surplus has now gone down

00:04:54.080 --> 00:04:56.330
relative to the free trade scenario.

00:04:56.330 --> 00:04:58.760
We've lost this area down here.

00:04:58.760 --> 00:05:00.350
So, now, the consumer surplus,

00:05:00.350 --> 00:05:03.970
I will shade it in this blue color.

00:05:03.970 --> 00:05:07.690
And we have increased the
domestic producer surplus.

00:05:07.690 --> 00:05:10.400
It has increased to this, right over here.

00:05:10.400 --> 00:05:14.000
But what about this region that we seem,

00:05:14.000 --> 00:05:16.430
that seems to no longer be there,

00:05:16.430 --> 00:05:19.560
either in the consumer
or the producer surplus?

00:05:19.560 --> 00:05:22.240
Well, some of it is
the government revenue.

00:05:22.240 --> 00:05:24.140
What's the government revenue going to be?

00:05:24.140 --> 00:05:25.800
Well, it's going to be the amount

00:05:25.800 --> 00:05:28.000
of the tariff times the quantity.

00:05:28.000 --> 00:05:32.100
So, the amount of the tariff
is going to be that 50 cents,

00:05:32.100 --> 00:05:33.870
so that's that height right over there.

00:05:33.870 --> 00:05:35.140
And then what's the quantity that

00:05:35.140 --> 00:05:36.960
they're getting that tariff on?

00:05:36.960 --> 00:05:39.620
Well, this whole section right over

00:05:39.620 --> 00:05:44.620
here is the imported quantity.

00:05:44.730 --> 00:05:47.810
This section right over here
is the domestic production,

00:05:47.810 --> 00:05:49.910
and this is the imported quantity,

00:05:49.910 --> 00:05:53.230
so the imported quantity times the tariff,

00:05:53.230 --> 00:05:55.820
so this area right over here,

00:05:55.820 --> 00:05:58.530
that is going to be government revenue.

00:05:58.530 --> 00:06:01.210
But you do have some of
that total economic surplus

00:06:01.210 --> 00:06:03.930
that is just, becomes deadweight loss now.

00:06:03.930 --> 00:06:06.690
You have this region right over here

00:06:06.690 --> 00:06:09.610
that is now deadweight
loss, and this region

00:06:09.610 --> 00:06:12.270
right over here that is deadweight loss.

00:06:12.270 --> 00:06:13.660
So, I'll leave you there.

00:06:13.660 --> 00:06:17.500
As you can see here, that
when you open up to trade,

00:06:17.500 --> 00:06:21.270
theoretically, it increases
the total economic surplus.

00:06:21.270 --> 00:06:23.900
But that could have
consequences on the producers.

00:06:23.900 --> 00:06:25.080
And actually, there's
cases where it can have

00:06:25.080 --> 00:06:28.620
consequences on the users of whatever,

00:06:28.620 --> 00:06:31.800
or the people who are the
buyers in this market.

00:06:31.800 --> 00:06:34.940
And many times, a government
will enact a tariff.

00:06:34.940 --> 00:06:36.740
Now, you can see that that tariff

00:06:36.740 --> 00:06:39.250
will reduce the total economic surplus.

00:06:39.250 --> 00:06:41.810
Some of that will go towards revenue,

00:06:41.810 --> 00:06:45.560
while other parts of it will
just be deadweight loss.

00:06:45.560 --> 00:06:48.840
Another idea that a
government might sometimes do

00:06:48.840 --> 00:06:51.610
is an idea of a quota,
where they're saying,

00:06:51.610 --> 00:06:53.830
hey, we just don't like the total amount

00:06:53.830 --> 00:06:55.340
of imports that are happening,

00:06:55.340 --> 00:06:57.310
so they might just put a cap on it.

00:06:57.310 --> 00:07:00.460
I'll let you think about how
you might deal with a quota

00:07:00.460 --> 00:07:04.753
and how that might also
affect the economic surplus.


Khan Stories: Alejandro

WEBVTT
Kind: captions
Language: en

00:00:00.781 --> 00:00:03.364
(guitar music)

00:00:12.303 --> 00:00:16.053
(speaks in foreign language)


Mutation as a source of variation

WEBVTT
Kind: captions
Language: en

00:00:00.300 --> 00:00:03.180
- [Instructor] In many videos
when we've discussed evolution

00:00:03.180 --> 00:00:06.290
and natural selection, we've
talked about how variation

00:00:06.290 --> 00:00:10.920
in a population can fuel
natural selection and evolution.

00:00:10.920 --> 00:00:12.900
So if you have a population of circles,

00:00:12.900 --> 00:00:15.060
obviously a very simple model here,

00:00:15.060 --> 00:00:17.760
maybe some of these circles
are that off-white color,

00:00:17.760 --> 00:00:20.650
maybe some of them are blue,

00:00:20.650 --> 00:00:24.860
and maybe some of them
are this salmon color.

00:00:24.860 --> 00:00:28.270
For certain traits, your environment

00:00:28.270 --> 00:00:32.590
might make certain of them
better for reproduction,

00:00:32.590 --> 00:00:35.480
better for survival, evading predators,

00:00:35.480 --> 00:00:37.160
better for finding food.

00:00:37.160 --> 00:00:38.880
Now let's say these circles
for whatever reason,

00:00:38.880 --> 00:00:41.900
they're in an environment
where maybe being blue

00:00:41.900 --> 00:00:43.880
makes it a little bit
easier to evade predators

00:00:43.880 --> 00:00:47.060
and a little bit easier to
reproduce and find food.

00:00:47.060 --> 00:00:50.410
Well then, in the next generation,
in the next generation,

00:00:50.410 --> 00:00:52.350
because the blue's more likely to be able

00:00:52.350 --> 00:00:54.890
to get to reproduction,
because they weren't eaten,

00:00:54.890 --> 00:00:57.690
you're likely to have more blues.

00:00:57.690 --> 00:01:00.170
So we draw a few more blues.

00:01:00.170 --> 00:01:03.410
And maybe a little bit
less of the other ones,

00:01:03.410 --> 00:01:05.410
because they're also
competing for resources

00:01:05.410 --> 00:01:08.770
amongst each other, at least
in this model that I'm doing.

00:01:08.770 --> 00:01:12.550
And so over time, if this blue phenotype,

00:01:12.550 --> 00:01:16.160
remember, phenotype is the expressed trait

00:01:16.160 --> 00:01:18.870
that's actually observable,
versus a genotype,

00:01:18.870 --> 00:01:21.550
which is the overlying
genetics, which is sometimes

00:01:21.550 --> 00:01:24.780
observable and sometimes
not, but as you can see,

00:01:24.780 --> 00:01:29.440
if in this environment,
blue seems to carry

00:01:29.440 --> 00:01:31.180
some advantage, even if it's a slight

00:01:31.180 --> 00:01:34.260
probabilistic advantage,
over many generations,

00:01:34.260 --> 00:01:37.730
blue will start to dominate.

00:01:37.730 --> 00:01:42.730
And so you start to see that
evolution of this population

00:01:42.970 --> 00:01:46.350
to being more blue as a species.

00:01:46.350 --> 00:01:49.770
So, you have these blue circles.

00:01:49.770 --> 00:01:53.650
One way to think about
it is, you have variation

00:01:53.650 --> 00:01:57.760
in a species is really
what natural selection

00:01:57.760 --> 00:01:58.593
is based off of.

00:01:58.593 --> 00:02:02.240
Certain variants might be
more favorable than others,

00:02:02.240 --> 00:02:07.240
so that is what's really
necessary for natural selection

00:02:07.880 --> 00:02:10.530
to fuel evolution.

00:02:10.530 --> 00:02:13.223
To fuel evolution.

00:02:14.320 --> 00:02:17.580
Now, a key question is,
where does this variation

00:02:17.580 --> 00:02:19.600
in a population come from?

00:02:19.600 --> 00:02:22.520
And to think about that, we
just have to remind ourselves

00:02:22.520 --> 00:02:24.820
where our phenotypes come from.

00:02:24.820 --> 00:02:28.310
How do these expressed
traits get expressed?

00:02:28.310 --> 00:02:30.760
Well, in all the living
organisms we're aware of,

00:02:31.773 --> 00:02:32.606
we have DNA.

00:02:32.606 --> 00:02:35.390
As human beings we have
23 pair of chromosomes,

00:02:35.390 --> 00:02:37.910
and each chromosome you can view

00:02:37.910 --> 00:02:41.450
as just a very very
very long strand of DNA,

00:02:41.450 --> 00:02:45.890
and sections of that DNA
code for various traits,

00:02:45.890 --> 00:02:48.160
and each of those sections that code for,

00:02:48.160 --> 00:02:52.510
say a certain protein
or a part of an enzyme,

00:02:52.510 --> 00:02:55.120
we call those things genes.

00:02:55.120 --> 00:02:58.160
We call those things genes.

00:02:58.160 --> 00:03:00.330
We have multiple chromosomes.

00:03:00.330 --> 00:03:02.650
As human beings, different
species have a different number,

00:03:02.650 --> 00:03:05.170
but as human beings we have
23 pair of chromosomes.

00:03:05.170 --> 00:03:08.260
Each chromosome you view
as a long strand of DNA.

00:03:08.260 --> 00:03:11.250
Parts of that DNA code for specific genes,

00:03:11.250 --> 00:03:13.150
and then if you were to zoom in,

00:03:13.150 --> 00:03:15.190
if you were to zoom in on those genes,

00:03:15.190 --> 00:03:17.700
you would see those nucleotide sequences,

00:03:17.700 --> 00:03:18.560
and this is all a review.

00:03:18.560 --> 00:03:20.540
We've seen this in other videos,

00:03:20.540 --> 00:03:22.990
where you see your adenine, your guanine,

00:03:22.990 --> 00:03:25.120
your cytosine, your thiamine,

00:03:25.120 --> 00:03:28.580
in order that carries the information

00:03:28.580 --> 00:03:30.660
that will eventually be coded into MRNA,

00:03:30.660 --> 00:03:34.000
which then gets coded into protein.

00:03:34.000 --> 00:03:37.630
Now there's two primary
sources of variation.

00:03:37.630 --> 00:03:41.670
One source of a variation
is sexual reproduction.

00:03:41.670 --> 00:03:45.470
Sexual reproduction.

00:03:45.470 --> 00:03:49.130
Now, not all organisms reproduce sexually,

00:03:49.130 --> 00:03:50.890
but many of the ones that we know,

00:03:50.890 --> 00:03:52.820
including human beings, do,

00:03:52.820 --> 00:03:54.477
where a male member of the species

00:03:54.477 --> 00:03:56.780
and a female member of the species

00:03:56.780 --> 00:04:00.090
each contribute a random
half of their chromosomes

00:04:00.090 --> 00:04:01.570
to the next organism.

00:04:01.570 --> 00:04:04.620
So one way to think about
sexual reproduction is

00:04:04.620 --> 00:04:07.780
it keeps shuffling the
different versions of the genes

00:04:07.780 --> 00:04:11.330
that you have in the population
into different combinations

00:04:11.330 --> 00:04:16.000
of those versions of genes, and
so that generates variation.

00:04:16.000 --> 00:04:19.630
But sexual reproduction
by itself will not create

00:04:19.630 --> 00:04:23.150
new versions of genes,
which we call alleles,

00:04:23.150 --> 00:04:26.980
or new genes entirely,
and so the primary way

00:04:26.980 --> 00:04:29.970
that that happens is through mutations,

00:04:29.970 --> 00:04:31.360
and you might have guessed
that we were gonna talk

00:04:31.360 --> 00:04:33.530
about that, 'cause I
had this title up here.

00:04:33.530 --> 00:04:36.100
So, another source of variation,

00:04:36.100 --> 00:04:38.440
and you could almost view
this as a more fundamental one

00:04:38.440 --> 00:04:40.760
because this would
happen even in organisms

00:04:40.760 --> 00:04:43.290
that aren't reproducing sexually,

00:04:43.290 --> 00:04:47.670
is that over time, there
can be just random mistakes.

00:04:47.670 --> 00:04:50.160
There could be edits to these genes,

00:04:50.160 --> 00:04:52.380
and it could be a random, maybe this G

00:04:52.380 --> 00:04:54.470
gets turned into a C randomly,

00:04:54.470 --> 00:04:57.940
or maybe this T and A gets cut out

00:04:57.940 --> 00:05:01.360
during the DNA replication process.

00:05:01.360 --> 00:05:04.710
These mutations, which
are all about genotype,

00:05:04.710 --> 00:05:05.810
and let me make this very clear,

00:05:05.810 --> 00:05:07.800
so when we're looking at the sequence,

00:05:07.800 --> 00:05:09.990
we're thinking about genotype.

00:05:09.990 --> 00:05:13.120
Differences in genotype
are not always obvious

00:05:13.120 --> 00:05:15.300
from expressed traits.

00:05:15.300 --> 00:05:17.060
Sometimes they do change phenotype

00:05:17.060 --> 00:05:18.380
where they're observable in phenotype.

00:05:18.380 --> 00:05:19.890
Sometimes they're not.

00:05:19.890 --> 00:05:24.350
But when they are observable in phenotype,

00:05:24.350 --> 00:05:26.820
as I just mentioned,
many times it could be

00:05:26.820 --> 00:05:28.260
a negative change in phenotype

00:05:28.260 --> 00:05:30.350
where it makes it less
viable for that organism

00:05:30.350 --> 00:05:33.870
or it's harder for them
to survive and reproduce,

00:05:33.870 --> 00:05:35.870
but every now and then it could result

00:05:35.870 --> 00:05:39.610
in a variation in phenotype
that is maybe neutral

00:05:39.610 --> 00:05:43.470
or even confers some type of advantage.

00:05:43.470 --> 00:05:45.810
So it might have been a random mutation

00:05:45.810 --> 00:05:48.540
that somehow turned one
of these white circles

00:05:48.540 --> 00:05:51.840
into a blue circle, and
there might have been

00:05:51.840 --> 00:05:53.440
another mutation that
turned a white circle

00:05:53.440 --> 00:05:55.530
into a square, and that
just wasn't even viable

00:05:55.530 --> 00:05:58.800
as an organism, but the blue circles

00:05:58.800 --> 00:06:01.790
happened to be, in the
environment they're in,

00:06:01.790 --> 00:06:04.953
happened to be a favorable variation.


Minimum efficient scale and market concentration

WEBVTT
Kind: captions
Language: en

00:00:00.200 --> 00:00:01.490
- [Narrator] In this
video, we're going to think

00:00:01.490 --> 00:00:05.170
about the concept of
minimum efficient scale

00:00:05.170 --> 00:00:08.690
and then how that impacts
market concentration.

00:00:08.690 --> 00:00:09.970
And we're going to make sure we understand

00:00:09.970 --> 00:00:11.790
what both of these ideas are.

00:00:11.790 --> 00:00:14.600
So first of all, minimum efficient scale,

00:00:14.600 --> 00:00:17.600
you can view it as the smallest scale

00:00:17.600 --> 00:00:21.540
at which we stop getting
economies of scale,

00:00:21.540 --> 00:00:24.660
or another way of thinking
about it is the minimum scale

00:00:24.660 --> 00:00:26.740
at which we are no longer,

00:00:26.740 --> 00:00:31.070
our long-run average total
cost curve is declining.

00:00:31.070 --> 00:00:33.200
So in this example, let's see,

00:00:33.200 --> 00:00:35.000
when we talk about our taco trucks,

00:00:35.000 --> 00:00:36.530
when we were at about 80 units,

00:00:36.530 --> 00:00:38.270
we're not at minimum efficient scale yet

00:00:38.270 --> 00:00:40.570
because our long-run
average total cost curve

00:00:40.570 --> 00:00:43.650
is still declining as we add
more and more and more units.

00:00:43.650 --> 00:00:46.980
We're getting economies of
scale all the way until,

00:00:46.980 --> 00:00:48.550
at least in this example,

00:00:48.550 --> 00:00:51.770
it looks like our long-run
average total cost curve

00:00:51.770 --> 00:00:55.630
stops declining around 200 units.

00:00:55.630 --> 00:00:57.140
So in this example,

00:00:57.140 --> 00:01:00.670
that would be our minimum efficient scale,

00:01:00.670 --> 00:01:02.797
which is sometimes abbreviated as MES.

00:01:05.036 --> 00:01:08.300
And one way to think about it
is this is the minimum scale

00:01:08.300 --> 00:01:11.620
at which an operation needs to run at

00:01:11.620 --> 00:01:13.740
in order to be very competitive,

00:01:13.740 --> 00:01:17.480
in order to be truly efficient
out there in the market.

00:01:17.480 --> 00:01:20.460
Because you can imagine,
if some operators are able

00:01:20.460 --> 00:01:23.050
to achieve minimum efficient
scale of, let's say,

00:01:23.050 --> 00:01:27.240
getting to the 200 tacos a
day while others are not,

00:01:27.240 --> 00:01:29.940
let's say they're only able
to stay at 100 tacos per day,

00:01:29.940 --> 00:01:32.077
and if the market were
to get very competitive

00:01:32.077 --> 00:01:34.730
and the price of a taco were to go down

00:01:34.730 --> 00:01:37.320
to, say, 55 cents per taco,

00:01:37.320 --> 00:01:39.740
the people who are at
minimum efficient scale

00:01:39.740 --> 00:01:42.420
could still operate and still make money

00:01:42.420 --> 00:01:45.350
while the people who are not
at minimum efficient scale,

00:01:45.350 --> 00:01:47.380
well, they're not going
to be able to participate

00:01:47.380 --> 00:01:48.600
in the market.

00:01:48.600 --> 00:01:51.660
And most well-functioning markets,

00:01:51.660 --> 00:01:53.500
it gets quite competitive.

00:01:53.500 --> 00:01:55.850
And so economists like to think about

00:01:55.850 --> 00:01:58.190
what the minimum efficient scale is

00:01:58.190 --> 00:02:01.840
and compare that to
the entire market size.

00:02:01.840 --> 00:02:03.970
Now, what do we mean by market size?

00:02:03.970 --> 00:02:06.660
Well, it depends on how you
are defining the market.

00:02:06.660 --> 00:02:08.880
In our example of our taco trucks,

00:02:08.880 --> 00:02:12.250
it might be the market for tacos,

00:02:12.250 --> 00:02:16.340
market for tacos

00:02:16.340 --> 00:02:19.400
in our city.

00:02:19.400 --> 00:02:21.290
And of course, you can
define different markets.

00:02:21.290 --> 00:02:22.880
You could define it as the market

00:02:22.880 --> 00:02:24.340
for food trucks in our city.

00:02:24.340 --> 00:02:27.345
You could define it as the
market for tacos in our state

00:02:27.345 --> 00:02:29.533
or our country. But let's say if we were

00:02:29.533 --> 00:02:31.600
to say the market for tacos in our city,

00:02:31.600 --> 00:02:35.710
and let's say that that market is 10,000,

00:02:35.710 --> 00:02:38.830
10,000 tacos

00:02:38.830 --> 00:02:41.320
per day.

00:02:41.320 --> 00:02:43.120
Well, in this reality,

00:02:43.120 --> 00:02:47.030
our minimum efficient
scale is 200 tacos per day,

00:02:47.030 --> 00:02:50.580
and it's a very small
fraction of the total market.

00:02:50.580 --> 00:02:52.340
And so that means that you could have

00:02:52.340 --> 00:02:54.240
many different competitors,

00:02:54.240 --> 00:02:56.980
each at that minimum efficient scale,

00:02:56.980 --> 00:03:01.260
so they're able to produce
tacos at that 50 cents per taco.

00:03:01.260 --> 00:03:02.780
And because of that,

00:03:02.780 --> 00:03:06.000
you are likely to have many competitors.

00:03:06.000 --> 00:03:07.220
So when this,

00:03:07.220 --> 00:03:10.020
when our minimum efficient
scale is a small fraction

00:03:10.020 --> 00:03:14.450
of the total market, that is
going to lead to fragmentation.

00:03:14.450 --> 00:03:16.930
So here, we're going to have a fragmented,

00:03:16.930 --> 00:03:20.010
fragmented market.

00:03:20.010 --> 00:03:23.850
So if this circle were to
represent the 10,000 tacos

00:03:23.850 --> 00:03:26.490
that are sold per day,

00:03:26.490 --> 00:03:28.960
if you're able to have
a lot of competitors,

00:03:28.960 --> 00:03:31.740
each operating at minimum efficient scale,

00:03:31.740 --> 00:03:33.560
in fact, there's no real advantage

00:03:33.560 --> 00:03:35.620
to operating above minimum efficient scale

00:03:35.620 --> 00:03:38.400
because then you start
getting diseconomies to scale,

00:03:38.400 --> 00:03:42.500
well, then you are going to
have maybe 50 competitors

00:03:42.500 --> 00:03:44.630
who are splitting this market.

00:03:44.630 --> 00:03:45.890
So I won't take the trouble of

00:03:45.890 --> 00:03:47.340
making this into 50 different chunks.

00:03:47.340 --> 00:03:48.900
So one competitor has
that part of the market.

00:03:48.900 --> 00:03:50.200
Another competitor has
that part of the market.

00:03:50.200 --> 00:03:51.880
Another competitor has
that part of the market.

00:03:51.880 --> 00:03:54.620
And you could imagine we're
going to have this market

00:03:54.620 --> 00:03:57.770
fragmented into maybe
50 different players,

00:03:57.770 --> 00:04:01.150
and so that's why it's called
a very fragmented market.

00:04:01.150 --> 00:04:03.290
But let's say that the
minimum efficient scale

00:04:03.290 --> 00:04:05.820
was pretty close to the market size.

00:04:05.820 --> 00:04:08.910
So let's say instead of a
market for 10,000 tacos per day,

00:04:08.910 --> 00:04:13.910
let's say that the market
in our city is for 400,

00:04:13.940 --> 00:04:16.360
400 tacos

00:04:16.360 --> 00:04:18.520
per day.

00:04:18.520 --> 00:04:21.780
Well, then the market is going
to be smaller, like this.

00:04:21.780 --> 00:04:24.240
And so then it makes sense for,

00:04:24.240 --> 00:04:27.110
if someone's able to get to
the minimum efficient scale,

00:04:27.110 --> 00:04:28.850
they can take up a lot of the market.

00:04:28.850 --> 00:04:31.350
In fact, they could take
up half of the market.

00:04:31.350 --> 00:04:33.120
So this type of market might only be able

00:04:33.120 --> 00:04:36.100
to really support two
players in this market.

00:04:36.100 --> 00:04:40.030
So this is considered to
be a far more concentrated,

00:04:40.030 --> 00:04:42.960
concentrated market.

00:04:42.960 --> 00:04:45.250
And you could go to a reality

00:04:45.250 --> 00:04:49.060
where your minimum efficient
scale is at the market size

00:04:49.060 --> 00:04:51.830
or is even larger than the market size.

00:04:51.830 --> 00:04:55.530
So let's say that the market
size is not 400 tacos per day,

00:04:55.530 --> 00:04:57.690
but let's say we had a market,

00:04:57.690 --> 00:05:01.036
let's say we had a market of

00:05:01.036 --> 00:05:04.520
195 tacos per day,

00:05:04.520 --> 00:05:05.983
per day.

00:05:07.090 --> 00:05:11.470
Well, in that world,
whoever can get to 195 tacos

00:05:11.470 --> 00:05:13.380
is going to produce most efficiently.

00:05:13.380 --> 00:05:15.800
They're not even getting to
the minimum efficient scale.

00:05:15.800 --> 00:05:18.390
But the more, the closer that
you can get to that number,

00:05:18.390 --> 00:05:20.880
you're going to have the
lowest average total,

00:05:20.880 --> 00:05:23.600
long-run average total cost of production,

00:05:23.600 --> 00:05:25.180
and so it's going to be very hard

00:05:25.180 --> 00:05:26.550
for anyone else to compete with you,

00:05:26.550 --> 00:05:28.640
especially if you're taking
up most of the market.

00:05:28.640 --> 00:05:30.460
No one else is going to
be able to get to scale,

00:05:30.460 --> 00:05:32.110
so they're going to be operating out here

00:05:32.110 --> 00:05:34.350
on the long-run average total cost curve.

00:05:34.350 --> 00:05:37.170
And so in that world, you
might only have one player.

00:05:37.170 --> 00:05:38.830
And when you have one player,

00:05:38.830 --> 00:05:41.110
where the market dynamics make it

00:05:41.110 --> 00:05:44.650
so that it is actually
efficient for only one player,

00:05:44.650 --> 00:05:49.240
this is sometimes referred
to as a natural monopoly.

00:05:49.240 --> 00:05:51.260
There's other dynamics that could lead

00:05:51.260 --> 00:05:52.700
to a natural monopoly.

00:05:52.700 --> 00:05:54.340
But one way to think about it is,

00:05:54.340 --> 00:05:57.510
is if you keep getting economies of scale,

00:05:57.510 --> 00:05:59.850
up to the market size,

00:05:59.850 --> 00:06:03.290
well, then whoever can get
to that market size first

00:06:03.290 --> 00:06:06.093
is going to be the most
efficient producer.


Economies and diseconomies of scale

WEBVTT
Kind: captions
Language: en

00:00:00.270 --> 00:00:02.630
- [Lecturer] In the last video,
we were able to construct

00:00:02.630 --> 00:00:07.210
here in red this long-run
average total cost curve

00:00:07.210 --> 00:00:09.760
based on connecting the minimum points

00:00:09.760 --> 00:00:11.630
or the bottoms of the U's

00:00:11.630 --> 00:00:15.430
of our various short-run
average total cost curves.

00:00:15.430 --> 00:00:19.010
Each of those short-run
average total cost curves

00:00:19.010 --> 00:00:22.910
were based on a certain
amount of fixed cost

00:00:22.910 --> 00:00:24.840
in the short run, but in the long run,

00:00:24.840 --> 00:00:26.280
you can change your fixed costs.

00:00:26.280 --> 00:00:28.140
And here are fixed costs
with the number of trucks.

00:00:28.140 --> 00:00:30.610
And so, we can vary it to optimize

00:00:30.610 --> 00:00:32.760
for a certain amount of quantity.

00:00:32.760 --> 00:00:35.460
Now when we did that, you
could see a little trend here

00:00:35.460 --> 00:00:37.680
especially as we go up
to, the way I drew it,

00:00:37.680 --> 00:00:39.440
it wouldn't necessarily be up to 200

00:00:39.440 --> 00:00:41.740
or whatever you're producing,
but the way I drew it,

00:00:41.740 --> 00:00:44.851
you see that this part right over here,

00:00:44.851 --> 00:00:49.851
it looks like our long-run
average total cost curve

00:00:49.930 --> 00:00:52.230
is declining down.

00:00:52.230 --> 00:00:54.630
So, one way to think about it is,

00:00:54.630 --> 00:00:57.020
we are getting more and more efficient

00:00:57.020 --> 00:01:00.130
at producing our tacos in the long run

00:01:00.130 --> 00:01:04.080
as we product more of them
until we get to 200 tacos.

00:01:04.080 --> 00:01:07.060
And so, at this part of our curve,

00:01:07.060 --> 00:01:10.483
we are experiencing economies of scale.

00:01:13.340 --> 00:01:15.760
And we've talked about
where economies of scale

00:01:15.760 --> 00:01:16.670
can come from.

00:01:16.670 --> 00:01:21.670
It can come from specialization
of labor or even machines.

00:01:23.380 --> 00:01:24.213
Specialization.

00:01:25.700 --> 00:01:27.710
So, as you get more and more scale,

00:01:27.710 --> 00:01:30.170
you can have different
parts of your process

00:01:30.170 --> 00:01:33.410
specializing in making the taco shells

00:01:33.410 --> 00:01:36.750
or grating the cheese or cooking the meat,

00:01:36.750 --> 00:01:37.760
whatever it is.

00:01:37.760 --> 00:01:39.300
So, there is a specialization.

00:01:39.300 --> 00:01:42.010
You could get better at sourcing.

00:01:42.010 --> 00:01:45.450
So, as you get more scale,
you might be able to order

00:01:45.450 --> 00:01:48.340
more of your supplies at a
time, so you get better deals.

00:01:48.340 --> 00:01:49.990
You might be able to even,
who knows, at some point,

00:01:49.990 --> 00:01:52.720
start a farm yourself and
then cut out the middleman,

00:01:52.720 --> 00:01:54.800
and so forth and so on.

00:01:54.800 --> 00:01:56.640
Now as we get past that point,

00:01:56.640 --> 00:01:59.060
we see that our long-run
average total cost curve,

00:01:59.060 --> 00:02:02.750
at least in this example,
started to trend up.

00:02:02.750 --> 00:02:04.670
And so, this part of the curve,

00:02:04.670 --> 00:02:06.470
you could say that we are experiencing

00:02:06.470 --> 00:02:08.650
diseconomies of scale.

00:02:08.650 --> 00:02:10.400
Diseconomies

00:02:11.440 --> 00:02:13.370
of scale.

00:02:13.370 --> 00:02:15.920
So, what would cause
diseconomies of scale?

00:02:15.920 --> 00:02:17.620
Well, these would most typically happen

00:02:17.620 --> 00:02:20.530
because what are known
as coordination issues.

00:02:20.530 --> 00:02:24.100
As an organization grows,
you have more people,

00:02:24.100 --> 00:02:26.420
more resources that
you have to coordinate.

00:02:26.420 --> 00:02:29.480
And so, that complexity can sometimes make

00:02:29.480 --> 00:02:31.450
an organization more inefficient.

00:02:31.450 --> 00:02:33.620
There's other diseconomies of scale.

00:02:33.620 --> 00:02:36.510
At some very large scale,
you might be depleting

00:02:36.510 --> 00:02:38.740
all of the low-hanging
fruit of your inputs,

00:02:38.740 --> 00:02:41.510
and so, you have to pay more
for some of your inputs.

00:02:41.510 --> 00:02:43.450
Maybe you've already depleted
the people who are willing

00:02:43.450 --> 00:02:45.820
to work for less, so
you have to raise wages,

00:02:45.820 --> 00:02:47.920
or you've depleted a lot
of the resources you need,

00:02:47.920 --> 00:02:51.560
so you have to find new,
more expensive resources.

00:02:51.560 --> 00:02:53.940
Now in this curve, it's not as obvious,

00:02:53.940 --> 00:02:57.110
but you can also have a notion
of constant returns to scale.

00:02:57.110 --> 00:03:00.760
So, if we had a long-run
average total cost curve

00:03:00.760 --> 00:03:04.593
that looked something like
this, let me draw it over here,

00:03:06.750 --> 00:03:09.290
then in this section right over here,

00:03:09.290 --> 00:03:12.630
as the average total cost, the
long-run average total cost

00:03:12.630 --> 00:03:16.570
is going down, that would
be economies of scale.

00:03:16.570 --> 00:03:17.810
This section over here,

00:03:17.810 --> 00:03:20.880
as the long-run average
total cost is going up,

00:03:20.880 --> 00:03:23.060
that would be our diseconomies of scale.

00:03:23.060 --> 00:03:26.540
But this section over
here where it is constant,

00:03:26.540 --> 00:03:28.250
you might guess what that is called.

00:03:28.250 --> 00:03:31.970
That is called constant economies of scale

00:03:31.970 --> 00:03:33.910
or constant returns to scale,

00:03:33.910 --> 00:03:36.563
sometimes known as efficient scale.