Circular flow of income and expenditures

WEBVTT
Kind: captions
Language: en

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Let's say, that there's a
country that's made up only of

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this island that that's sitting
in the middle of the lake

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and on that island there
is only one dude here.

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He has one house and he has some land

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on which crops can be grown.

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But he wants to think a
little bit more formally

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about his economy and he
starts setting up some

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institutions that start to
resemble things that we would

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see in more complex economies.

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So what he decides to do is,

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he decides to set up a firm.

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So let me put the firm right over here.

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He decides to create a legal entity called

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some firm over here, some corporation

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and he's sitting here. He's the household.

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He's the household of exactly one person.

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So this is him as a household

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and he decides to give multiple

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factors of production to the firm.

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So he gives factors of
production to the firm.

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So he gives ... He essentially
rents out his building,

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so he gives capital.

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He rents out the land to the firm,

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so he gets ... He's giving land

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and he also works for the
firm, so he is giving labor

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and he is the owner of the firm
and he's ... He was the guy

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who thought of this entrepreneurial
activity, so he's also

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giving the factor of
production that's sometimes

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thrown in there as entrepreneurship.

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Entrepreneurship. I'll just ... I'll
just abbreviate it just like that.

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And in return the firm
will essentially pay rents

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for these factors of production.

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So the firm will pay him ...
will pay him money in exchange

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for being allowed to
use all of these things.

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So for the rent on the capital,
on the building itself,

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so for the building ... the
building and we'll talk about

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let's say this is all in a given year.

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For the building, the
firm is going to pay him,

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the firm that he owns is going
to pay him $1000 per year.

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$1,000, so this is the building rent.

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Let me make it clear that this is

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building rent or building lease.

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Building rent is going to pay him $1,000.

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For the land ... For the land
rent, he's also going to get paid

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another $1,000 and then for his wages,

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essentially the rent on his labor,

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so his wages, you could view
that as a rent on labor.

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They're renting his ...
his energy and his time.

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His wages, he's also going
to get $1,000 per year.

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Did I say a $1,000 per month?

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It should be $1,000 per year.

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So he's getting $1,000 a
month in building rent,

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$1,000 a month in land and
$1,000 a month in wages

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and he gets whatever profit
... whatever profit comes

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from the firm because he is the
owner of the ... of the firm

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and you could say that
that's the compensation

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in exchange for his entrepreneurship.

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So in this ... in the ...
Looking at only this part

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or these two lines, the
household ... He is providing

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all of the factors of
production for the firm,

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so the firm can produce useful things.

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So the firm can produce goods and services

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and it's good that the firm
will produce goods and services

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because this household needs to survive.

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He needs a place to stay
and he needs food to eat.

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And so let's say, with the labor
and this land and you know,

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so this guy is working at
this firm and it has this land

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and all of the rest, it's
able to produce some food.

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And so it sells ... It sells
him goods and services.

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So it sells ... It sells his
household goods and services and

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in particular, it sells him
food and it also rents out

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the property and I think you
could see this is already getting

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kind of circular here.

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He's essentailly renting
out his own property,

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but this is a nice simple example.

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Obviously, once you expand
beyond one ... more than one

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person or more than one firm,
things get complicated fast.

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So he's getting food and shelter

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and in exchange for the
food and the shelter,

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he's going to pay the firm.

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In exchange for that he's
going to pay the firm

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and so he's going to pay the firm.

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Let's just say that he decides
there isn't much of a market

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right over here. He is the market.

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But let's say for the food ...
for the food he decides to pay,

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he pays $2,300. $2,300 a year for the food

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and for the use of the building
that is ... that the firm

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is renting, he is paying ...
let's say he's paying $1,200.

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Rent of $1,200.

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So a couple of ways to think about it.

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You can look at it from the
household's point of view.

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What are his total expenditures?

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Well, total expenditures
come out to what? $3,500.

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So this is total ... Let me
do this in a different color.

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This is total ... total
expenditures for this household

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and what's his total income?

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Well, he gets $1,000 for the building,

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$1,000 for land, $1,000
for wages and he gets

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some profit from that firm.

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So we don't know what that profit is,

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so why don't we hold off a
little bit on his total income.

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So I'll just write it here.

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Total ... total income.

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We don't quite know what that is yet

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because we have to figure
out how much profit

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he's getting from the firm.

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So let's look at the firm's point of view.

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What is the total revenue
that they're getting?

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For the firm, the total
revenue ... total revenue.

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Well, he's getting 20 ...
The firm is getting $2,300

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for the food, $1,200 for the rent,

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getting total revenue of $3,500 per year.

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Everything here is on an annual basis.

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I have a feeling I said per
month by accident a few times.

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Everything here is on an annual basis.

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Getting $3,500 per year

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and what are the firm's expenditures?

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Well, the firm has to has
... So this is expenses

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and here we're going to be thinking

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in terms of economic profit

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because we're really just thinking about

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how much money is coming out of this firm,

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out of this business.

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So, expenses ... So, for the
building ... the building,

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the firm has to pay $1,000.

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For the land, the firm has to pay $1,000

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and for the labor ... and
for the labor, the firm also

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has to pay $1,000 and so
what's left over is the profit.

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We're assuming that
there's no taxes over here.

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This is the profit for the owners,

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$3,500 minus 3,000 gives
us a profit of $500

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and that's going to go
to the owner of the firm,

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who happens to be this
guy right over here.

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So the profit is $500 and so
his total income is $3,500,

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$3,500 and it's good that his income

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is at least $3,500 because
that's how much he's

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spending it per month, spending per month.

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Now the whole reason why I did
this is to kind of show you

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the circular flow of goods and services.

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These are the goods and services up here.

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Let me show ... These are
the goods and services.

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Goods and services.

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The firms provide the
households goods and services

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and then the households
are providing the firms,

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the factors of production.

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And sometimes you might say,

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"Well, aren't other firms also providing"

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"the factors of production?"

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Yes, other firms could if
there were other firms but

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those firms at the end of
the day are owned by someone.

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They are getting their
factors of production

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by some household or they
are owned by some household.

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So you can view it as
at the end of the day,

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the households are really giving the firms

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the factors of production.

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Factors ... Factors of production.

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At an exchange for the
factors of production,

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the households in exchange
for giving these things,

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the firms give the households income,

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essentially rents on the
different factors of production

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that are being given to
the firm for the most part

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and over here in exchange
for the goods and services,

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the households are making expenditures

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that can also be considered
revenue of the firm.

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Now, if you were an economist
that were to observe this

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and I guess if we're to
focus on this island maybe

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he would also have to
be the island economist

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and you would say, "How
would you measure ... "

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"How would you measure the
total ... the total value of the

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"product ... production
of my country here?",

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maybe we could call it the
Gross Domestic Product.

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How would we measure it?

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Would you count just the
total expenditures or

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would you count the total
expenditures and the total income

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or would you even count
that and the revenue?

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Well if you counted all of that,

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you would be essentially triple counting.

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If you counted the total
revenue, the total expenditures

00:08:02.961 --> 00:08:05.670
and the total income,
they are all about $3,500.

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You would be triple counting.

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So what you could do,
you could just measure

00:08:08.766 --> 00:08:10.137
only one of these things.

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You could say your GDP,
your Gross Domestic Product,

00:08:13.897 --> 00:08:17.329
your Gross Domestic Product
is the total expenditures

00:08:17.329 --> 00:08:21.263
by the households. So
it would be the $3,500.

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You could say it is the total
income by the households,

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so that would also be
$3,500 and the total revenue

00:08:28.628 --> 00:08:30.878
really is the same thing
as the total expenditures.

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So the whole point of this
video and this is, obviously,

00:08:32.869 --> 00:08:35.069
a very artificial case where
we're dealing with an island

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with only one person and he's
essentially renting out his

00:08:38.070 --> 00:08:41.292
own labor by using this firm
as some type of vehicle.

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He's consuming his own labor.

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He's renting out a house from a firm

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that he has rented his house to.

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So it is very, very, very
circular but hopefully this

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appreciate ... you kind of appreciate

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how the resources are going around

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in this kind of a circular flow.


Adding demand curves

WEBVTT
Kind: captions
Language: en

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>>In the last few videos,

00:00:01.825 --> 00:00:04.457
we constructed a marginal
product revenue curve

00:00:04.457 --> 00:00:06.677
for our little competitive car wash,

00:00:06.677 --> 00:00:08.921
and we essentially figured out

00:00:08.921 --> 00:00:11.648
how this is really just the demand curve

00:00:11.648 --> 00:00:14.647
for labor from this firm.

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I talked about on the very first video

00:00:17.074 --> 00:00:18.977
that if you know the demand curve for,

00:00:18.977 --> 00:00:19.876
in a certain market,

00:00:19.876 --> 00:00:22.526
and this is the market for
labor of a certain kind,

00:00:22.526 --> 00:00:23.839
maybe the type of labor that would work

00:00:23.839 --> 00:00:25.062
at a car wash,

00:00:25.062 --> 00:00:26.453
then if you knew it from one firm

00:00:26.453 --> 00:00:28.007
and all of the other firms in the market

00:00:28.007 --> 00:00:28.999
for that type of labor,

00:00:28.999 --> 00:00:30.421
you could add their demand curves

00:00:30.421 --> 00:00:32.360
to get the entire market demand

00:00:32.360 --> 00:00:33.799
for that type of labor,

00:00:33.799 --> 00:00:35.642
for that good or service.

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What I want to do in this
video is to make sure

00:00:37.342 --> 00:00:39.715
you understand what it
means to add demand curves.

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It's, on one level, straightforward,

00:00:41.045 --> 00:00:43.998
but on another level,
a little non-intuitive

00:00:43.998 --> 00:00:47.271
because of the ways that
the axes are defined

00:00:47.271 --> 00:00:48.600
in economics,

00:00:48.600 --> 00:00:50.908
that the price axis is the vertical axis.

00:00:50.908 --> 00:00:53.001
Let's draw the demand curve for two firms.

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I'll do simplified versions.

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I won't use this one right over here.

00:00:55.600 --> 00:00:57.692
I'll just do two simplified demand curves.

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This doesn't apply just to labor markets.

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This applies to any demand curve.

00:01:01.661 --> 00:01:03.083
If I want to add two demand curves,

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this is one entity's demand,

00:01:05.799 --> 00:01:08.040
so this is one firm's demand.

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That's price, and this is quantity.

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This is quantity.

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Let's say at a price of 10,

00:01:16.710 --> 00:01:18.040
they demand nothing,

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if that's the hourly wages,

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and if the price were 0,

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they would essentially get up to

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they would demand 10 people.

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And so you have a situation.

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You have a demand curve
that would look something,

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a demand curve that would
look something like that,

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a dot,

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a demand curve that would look like that.

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I'll do one other point
on the demand curve.

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At a price of 5 a
quantity, or $5 per hour,

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this firm would demand,

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if we're thinking of it in terms of labor,

00:01:47.087 --> 00:01:49.060
at a price of $5 per hour of labor,

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this firm would demand 5 people per hour.

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Obviously,

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what I'm going to do is
general to any demand curve,

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but we'll just keep it
in the labor mindset.

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This is Firm 1.

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This is a firm's demand.

00:02:01.044 --> 00:02:02.036
Firm 1.

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If we're talking about
this as demand for oranges,

00:02:03.361 --> 00:02:04.414
then this wouldn't be a firm.

00:02:04.414 --> 00:02:06.910
This would be a consumer
or maybe a wholesaler

00:02:06.910 --> 00:02:08.010
or something like that.

00:02:08.010 --> 00:02:10.739
This is Firm 1's demand for labor.

00:02:10.739 --> 00:02:13.001
Let's say Firm 2's demand
looks something like this.

00:02:13.001 --> 00:02:15.007
I'll try to align them.

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Firm 2's demand looks something like this.

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The axes are going to have
the exact same labels.

00:02:19.966 --> 00:02:20.958
This is Quantity.

00:02:20.958 --> 00:02:22.694
This is Price right over here.

00:02:22.709 --> 00:02:23.923
This is 5.

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This is 10.

00:02:25.578 --> 00:02:28.010
Then this is 15.

00:02:28.010 --> 00:02:31.705
Let's say that this is 5,

00:02:31.705 --> 00:02:34.021
and let's say this is 6 right over here.

00:02:34.021 --> 00:02:36.387
Their demand curve looks like this.

00:02:36.387 --> 00:02:38.082
It looks like that.

00:02:38.082 --> 00:02:41.036
Let me make it a little bit neater.

00:02:41.036 --> 00:02:42.059
That looks less neat.

00:02:42.059 --> 00:02:44.041
It looks something like that.

00:02:44.041 --> 00:02:46.040
I could put some extra points here.

00:02:46.040 --> 00:02:48.004
At a price of 10,

00:02:48.004 --> 00:02:51.266
this firm will demand 2 units.

00:02:51.266 --> 00:02:52.073
If we're thinking of labor,

00:02:52.073 --> 00:02:53.111
$10 per hour,

00:02:53.111 --> 00:02:55.091
they'll get 2 people per hour.

00:02:55.091 --> 00:02:56.975
At a price of 5,

00:02:56.975 --> 00:03:00.001
they will demand 4.

00:03:00.001 --> 00:03:02.057
They will demand 4 units.

00:03:02.057 --> 00:03:03.033
These are all ...

00:03:03.033 --> 00:03:04.270
We've looked at a couple of points

00:03:04.270 --> 00:03:05.308
on this demand curve.

00:03:05.308 --> 00:03:07.307
Now we are ready to add them together.

00:03:07.307 --> 00:03:09.734
This is Firm 2,

00:03:09.734 --> 00:03:11.539
Firm 2's demand for labor.

00:03:11.539 --> 00:03:13.583
Let's add these two curves.

00:03:13.583 --> 00:03:15.036
When I said it's unintuitive,

00:03:15.036 --> 00:03:15.950
we're actually going to look at ...

00:03:15.950 --> 00:03:16.997
For a given price,

00:03:16.997 --> 00:03:20.682
how much total quantity
of labor is now demanded?

00:03:20.682 --> 00:03:22.565
We're going to essentially
add it horizontally,

00:03:22.565 --> 00:03:23.587
and you're going to see
what I'm talking about

00:03:23.587 --> 00:03:25.056
in a second.

00:03:25.056 --> 00:03:26.944
When I add them together,

00:03:26.944 --> 00:03:28.074
I add them together,

00:03:28.074 --> 00:03:31.080
I'm going to have the same axes.

00:03:31.989 --> 00:03:33.995
Let's say this is 5.

00:03:33.995 --> 00:03:36.601
This is 10.

00:03:36.601 --> 00:03:37.885
Actually, let me get a little bit further

00:03:37.885 --> 00:03:40.999
on this axis, on this second axis.

00:03:40.999 --> 00:03:42.704
The second axis,

00:03:42.704 --> 00:03:44.320
I'll make it as straight as possible.

00:03:44.320 --> 00:03:49.913
Let's say that this is 5, 10, 15,

00:03:49.913 --> 00:03:50.904
5, 10, 15,

00:03:50.904 --> 00:03:54.357
and this is 5, 10, 15.

00:03:54.357 --> 00:03:56.486
I'm doing my best to
align it horizontally,

00:03:56.486 --> 00:03:58.052
that this 15 is this 15,

00:03:58.052 --> 00:04:00.972
that this 10 is with this 10,

00:04:00.972 --> 00:04:01.548
is with that 10,

00:04:01.548 --> 00:04:05.031
and that 5 is with that 5 and with that 5.

00:04:05.031 --> 00:04:07.078
At a price of 15 in the market,

00:04:07.078 --> 00:04:09.091
what is the total quantity demanded?

00:04:09.091 --> 00:04:10.402
It's still going to be 0

00:04:10.402 --> 00:04:14.025
because even this firm
is still demanding 0.

00:04:14.025 --> 00:04:17.948
But then if we go to a price of 10,

00:04:17.948 --> 00:04:19.032
this firm,

00:04:19.032 --> 00:04:20.412
the Firm 1 is demanding 0,

00:04:20.412 --> 00:04:23.066
but Firm 2 over here is demanding 2.

00:04:23.066 --> 00:04:24.519
So we're going to go 10.

00:04:24.519 --> 00:04:26.034
It's going to be right over there.

00:04:26.034 --> 00:04:28.496
This is right about 2.

00:04:28.496 --> 00:04:30.608
That distance is right about 2.

00:04:30.608 --> 00:04:32.016
Then if we go to 5,

00:04:32.016 --> 00:04:33.686
at a price of 5,

00:04:33.686 --> 00:04:35.461
Firm 1 is going to demand 5.

00:04:35.461 --> 00:04:39.016
Firm 2 is going to
demand 4 units of labor.

00:04:39.016 --> 00:04:40.462
At a price of 5,

00:04:40.462 --> 00:04:42.966
you're going to have 5 plus 4.

00:04:42.966 --> 00:04:44.035
At a price of 5,

00:04:44.035 --> 00:04:48.990
you're going to have 5
plus 4 or 9 units of labor,

00:04:48.990 --> 00:04:51.795
9 units of labor.

00:04:51.795 --> 00:04:53.345
Then at a price of 0,

00:04:53.345 --> 00:04:54.183
if labor is free,

00:04:54.183 --> 00:04:55.658
this firm would demand 10 units,

00:04:55.658 --> 00:04:57.329
and this firm would demand 6 units.

00:04:57.329 --> 00:04:57.736
You add them together,

00:04:57.736 --> 00:04:59.556
you get 16 units.

00:04:59.556 --> 00:05:01.585
You'd get 16 units.

00:05:01.585 --> 00:05:05.798
The combined demand for labor curve

00:05:05.798 --> 00:05:06.981
will look something like ...

00:05:06.981 --> 00:05:07.772
I'll do it in ...

00:05:07.772 --> 00:05:08.964
or actually, I'll do it in blue.

00:05:08.964 --> 00:05:11.398
The combined demand for labor curve

00:05:11.398 --> 00:05:12.728
will look like this.

00:05:12.728 --> 00:05:14.058
Between $15 and $10,

00:05:14.058 --> 00:05:16.740
only Firm 1 is interested
in getting any labor.

00:05:16.740 --> 00:05:19.443
So this part right over here
will look just like that.

00:05:19.443 --> 00:05:20.525
But then after that point,

00:05:20.525 --> 00:05:22.212
you're going to essentially add Firm 1

00:05:22.212 --> 00:05:23.096
to the mix,

00:05:23.096 --> 00:05:24.057
and then Firm 1,

00:05:24.057 --> 00:05:26.012
maybe I'll do that part
in a different color,

00:05:26.012 --> 00:05:27.538
it will look something like ...

00:05:27.538 --> 00:05:30.747
it will look something like that.

00:05:30.747 --> 00:05:31.985
We have essentially added,

00:05:31.985 --> 00:05:35.754
we've horizontally added
this line to this line.

00:05:35.754 --> 00:05:37.038
You could imagine taking this line,

00:05:37.038 --> 00:05:38.076
and at any given point,

00:05:38.076 --> 00:05:39.390
so at 5 right over here,

00:05:39.390 --> 00:05:41.042
you're taking its value and quantity

00:05:41.042 --> 00:05:42.979
and adding to this quantity here.

00:05:42.979 --> 00:05:46.002
The reason why I said this is
a little bit nonintuitive is

00:05:46.002 --> 00:05:47.781
this would have been easier
at least for me to add

00:05:47.781 --> 00:05:50.043
with the background of
the traditional algebraic

00:05:50.043 --> 00:05:51.752
conventions we're used to.

00:05:51.752 --> 00:05:54.668
We're used to adding vertically.

00:05:54.668 --> 00:05:55.965
If we were to flip price and quantity,

00:05:55.965 --> 00:05:58.189
then we could stack these
on top of each other

00:05:58.189 --> 00:05:59.027
and add them vertically.

00:05:59.027 --> 00:06:00.731
That's why it's a little nonintuitive.

00:06:00.731 --> 00:06:01.769
But hopefully, this makes sense.

00:06:01.769 --> 00:06:03.976
We're just looking at each
of their demand curves

00:06:03.976 --> 00:06:05.721
at any given price,

00:06:05.721 --> 00:06:06.451
and we're saying,

00:06:06.451 --> 00:06:08.000
"OK, what is the demand from Firm 2?

00:06:08.000 --> 00:06:09.252
"What is the demand from Firm 1?"

00:06:09.252 --> 00:06:10.535
and we're adding them together,

00:06:10.535 --> 00:06:11.884
and then we get this.

00:06:11.884 --> 00:06:14.945
We get this combined market demand curve,

00:06:14.945 --> 00:06:17.097
Firm 1 plus Firm 2.


How many people to hire given the MPR curve

WEBVTT
Kind: captions
Language: en

00:00:00.363 --> 00:00:01.538
Voiceover: What i want to do in this video

00:00:01.538 --> 00:00:02.772
is dig a little bit deeper

00:00:02.772 --> 00:00:04.270
in this marginal product revenue curve,

00:00:04.270 --> 00:00:05.938
and really make sure we understand

00:00:05.938 --> 00:00:07.009
what it's telling us,

00:00:07.009 --> 00:00:08.899
that it really is the
marginal benefit curve

00:00:08.899 --> 00:00:10.407
for this firm.

00:00:10.407 --> 00:00:13.995
In the video we constructed,
this firm is a car wash.

00:00:13.995 --> 00:00:16.337
Also, how we can use this to think about

00:00:16.337 --> 00:00:18.361
what's a rational number of people

00:00:18.361 --> 00:00:20.492
for this firm to hire?

00:00:20.492 --> 00:00:23.009
Just as a reminder, this
horizontal axis here,

00:00:23.009 --> 00:00:25.571
this is a quantity of labor per hour,

00:00:25.571 --> 00:00:28.079
so this is people per hour

00:00:28.079 --> 00:00:29.069
that are working at the firm.

00:00:29.069 --> 00:00:31.338
People per hour.

00:00:31.338 --> 00:00:33.212
And the vertical axis here,

00:00:33.212 --> 00:00:35.383
the marginal product revenue,

00:00:35.614 --> 00:00:36.492
that you could view as

00:00:36.492 --> 00:00:37.936
the marginal dollars,

00:00:37.936 --> 00:00:40.408
or the incremental dollars
that you're getting

00:00:40.408 --> 00:00:42.337
per person, per hour.

00:00:42.337 --> 00:00:46.673
Per person, per hour,

00:00:46.673 --> 00:00:48.875
per hour.

00:00:49.090 --> 00:00:51.412
And to just verify that it's
telling us the same thing

00:00:51.412 --> 00:00:54.516
visually that this table
told us right up here,

00:00:54.516 --> 00:00:56.784
we can think about what is the marginal,

00:00:56.784 --> 00:00:59.106
how much incremental revenue do we get

00:00:59.106 --> 00:01:01.169
from hiring that 1st person.

00:01:01.169 --> 00:01:03.832
What we could do is we
could multiply the quantity

00:01:03.832 --> 00:01:04.754
of people,

00:01:04.754 --> 00:01:05.757
which is 1,

00:01:05.757 --> 00:01:07.847
times the average,

00:01:07.847 --> 00:01:10.475
times the average increment,

00:01:10.475 --> 00:01:13.093
the average marginal product revenue

00:01:13.093 --> 00:01:15.140
that we get from 1 person,

00:01:15.140 --> 00:01:17.139
or I should say, the average we get

00:01:17.139 --> 00:01:19.498
going from 0 to 1 person,

00:01:19.498 --> 00:01:22.048
and the average is 25.

00:01:22.048 --> 00:01:24.477
The average is 25.

00:01:24.477 --> 00:01:26.384
The reason why I said it that way,

00:01:26.384 --> 00:01:27.839
is you could imagine a reality

00:01:27.839 --> 00:01:29.862
where getting a tenth of a person,

00:01:29.862 --> 00:01:31.969
you get a value higher than 25.

00:01:31.969 --> 00:01:32.382
You might say,

00:01:32.382 --> 00:01:33.539
how do I get a tenth of a person?

00:01:33.539 --> 00:01:36.386
Well, what if one person
shows up every ten days?

00:01:36.386 --> 00:01:38.938
Then you get a little less
benefit as you get closer

00:01:38.938 --> 00:01:41.270
and closer to a whole person per hour.

00:01:41.270 --> 00:01:44.109
But on average, as we
go from 0 to 1 person,

00:01:44.693 --> 00:01:48.081
we are getting $25 of value,

00:01:48.081 --> 00:01:53.268
or $25 of marginal revenue
per person per hour.

00:01:53.268 --> 00:01:55.221
So if you wanted to figure
out what's the total

00:01:55.221 --> 00:01:58.666
marginal revenue that
we got from this person

00:01:58.666 --> 00:01:59.268
right over here,

00:01:59.268 --> 00:02:00.886
the total incremental revenue

00:02:00.886 --> 00:02:02.835
that this is allowing us to get,

00:02:02.835 --> 00:02:04.670
well, it's the one person

00:02:04.670 --> 00:02:07.765
times the average
marginal product revenue,

00:02:07.765 --> 00:02:09.181
which is 25,

00:02:09.181 --> 00:02:11.549
so that would give us the
area of this rectangle

00:02:11.549 --> 00:02:12.269
right over there,

00:02:12.269 --> 00:02:14.229
which would be $25.

00:02:14.705 --> 00:02:16.662
Now, and you would really have to do

00:02:16.662 --> 00:02:18.914
a little bit of calculus
to fully appreciate it,

00:02:18.914 --> 00:02:20.337
but I think you can look
at it geometrically,

00:02:20.337 --> 00:02:21.812
that also happens to be,

00:02:21.812 --> 00:02:23.090
given that this is a line,

00:02:23.090 --> 00:02:24.083
that our curve,

00:02:24.083 --> 00:02:25.664
our marginal product revenue

00:02:25.664 --> 00:02:27.633
is a line right over here,

00:02:27.633 --> 00:02:29.671
that the area under this rectangle

00:02:29.671 --> 00:02:31.368
is going to be the same thing as the area

00:02:31.368 --> 00:02:33.152
under the orange curve.

00:02:33.152 --> 00:02:34.151
The orange curve,

00:02:34.689 --> 00:02:38.800
between 0 and ½ is above this rectangle

00:02:38.800 --> 00:02:40.216
and between ½ and one,

00:02:40.216 --> 00:02:41.836
it is below the rectangle.

00:02:41.836 --> 00:02:44.655
The area above is the
same as the area below.

00:02:44.655 --> 00:02:47.873
So $25 is also the area,

00:02:48.349 --> 00:02:52.510
is also the area under this curve.

00:02:52.510 --> 00:02:54.016
That's essentially how much benefit

00:02:54.016 --> 00:02:55.656
the firm is getting from hiring,

00:02:55.933 --> 00:02:57.962
from going from 0 to 1 person.

00:02:57.962 --> 00:03:00.644
They're getting $25 of benefit.

00:03:00.996 --> 00:03:02.087
Now, how much benefit do they get

00:03:02.087 --> 00:03:04.139
going from 1 to 2 people?

00:03:04.539 --> 00:03:05.840
Well, going from 1 to 2,

00:03:05.840 --> 00:03:09.848
our change in quantity
of people per hour is 1,

00:03:09.848 --> 00:03:12.632
and then our average
marginal product revenue

00:03:13.032 --> 00:03:16.142
going from 1 to 2 people is $20.

00:03:16.757 --> 00:03:20.538
So, it is $20, and so
the area is 1 times 20,

00:03:20.538 --> 00:03:21.666
and that's also going to be the same

00:03:21.666 --> 00:03:23.766
as the area under the curve.

00:03:23.766 --> 00:03:25.765
So the area under the
curve right over there

00:03:25.765 --> 00:03:27.853
is going to be 20.

00:03:27.853 --> 00:03:29.878
Likewise, the area under the curve,

00:03:29.878 --> 00:03:31.103
if we want to say how much ...

00:03:31.103 --> 00:03:33.284
What's the marginal product revenue we get

00:03:33.284 --> 00:03:34.587
going from 2 to 3 people?

00:03:34.587 --> 00:03:36.350
Well, the average height here,

00:03:36.350 --> 00:03:37.266
we'd essentially just say,

00:03:37.266 --> 00:03:40.096
"What is the area between 2 and 3?"

00:03:40.096 --> 00:03:41.552
And we can figure out that area

00:03:41.552 --> 00:03:43.178
by saying, "Well the average height,

00:03:43.178 --> 00:03:45.141
The average height is 15.

00:03:45.141 --> 00:03:47.666
Multiply 15, so this height,

00:03:47.666 --> 00:03:48.468
the average height is 15.

00:03:48.468 --> 00:03:50.189
Multiply 15 times 1.

00:03:50.189 --> 00:03:52.075
You get $15,

00:03:52.075 --> 00:03:53.945
$15 of benefit.

00:03:53.945 --> 00:03:57.269
Between 3 and 4, the average height is 10.

00:03:57.269 --> 00:04:00.767
The average height is 10,
so you get 10 times 1.

00:04:00.767 --> 00:04:02.565
You get $10 of benefit,

00:04:02.565 --> 00:04:05.306
would be the area under
the curve right over here.

00:04:05.306 --> 00:04:06.670
$10 of benefit.

00:04:06.670 --> 00:04:07.755
Then the area under the curve there,

00:04:07.755 --> 00:04:10.807
by the same argument, is $5.

00:04:10.807 --> 00:04:13.159
Is $5 of benefit.

00:04:13.159 --> 00:04:14.280
Now, we've ...

00:04:14.803 --> 00:04:16.676
Given this, this is just
telling us the revenue

00:04:16.676 --> 00:04:17.332
we're getting,

00:04:17.332 --> 00:04:18.504
but it's really not telling us,

00:04:18.504 --> 00:04:19.850
it's really not telling us

00:04:19.850 --> 00:04:21.171
what is the optimal,

00:04:21.171 --> 00:04:23.418
or the rational number
of employees to hire?

00:04:23.418 --> 00:04:24.004
To do that,

00:04:24.004 --> 00:04:25.689
we have to think about
the cost per employee,

00:04:25.689 --> 00:04:29.031
the marginal cost that we
are actually incurring.

00:04:29.031 --> 00:04:31.520
I mentioned earlier that
this is a competitive firm.

00:04:32.166 --> 00:04:33.167
When I mentioned it before,

00:04:33.167 --> 00:04:34.798
I talked about it being competitive

00:04:34.798 --> 00:04:37.050
in terms of the car wash market,

00:04:37.050 --> 00:04:39.229
so it was a competitive supplier,

00:04:39.229 --> 00:04:42.083
but let's assume that it
is also a competitive buyer

00:04:42.083 --> 00:04:43.268
in the labor market,

00:04:43.268 --> 00:04:44.402
so these are two different,

00:04:44.402 --> 00:04:45.824
these are two different markets,

00:04:45.824 --> 00:04:47.165
and I want to clarify.

00:04:47.165 --> 00:04:48.233
In the car wash market,

00:04:48.233 --> 00:04:49.812
in the car wash market,

00:04:49.812 --> 00:04:51.189
we are competitive,

00:04:51.589 --> 00:04:53.480
we are a competitive supplier,

00:04:53.480 --> 00:04:56.141
or I guess we could say
are a seller of car washes.

00:04:56.141 --> 00:04:57.656
In the labor market,

00:04:57.656 --> 00:04:58.816
in the labor market,

00:04:58.816 --> 00:05:00.497
our firm is a competitive,

00:05:00.943 --> 00:05:04.109
is a competitve buyer.

00:05:04.109 --> 00:05:06.163
Now, I'll do a little
bit of an aside here,

00:05:06.163 --> 00:05:09.506
because when we talk about suppliers,

00:05:09.506 --> 00:05:11.066
there's the competitive suppliers,

00:05:11.066 --> 00:05:12.736
where there's many undifferentiated people

00:05:12.736 --> 00:05:15.012
who are supplying some
type of good or service

00:05:15.012 --> 00:05:18.013
and the opposite of that was a monopoly,

00:05:18.382 --> 00:05:19.885
so a non-competitive,

00:05:20.531 --> 00:05:22.475
non-competitive.

00:05:23.336 --> 00:05:25.667
As a seller, we call that a monopoly.

00:05:26.143 --> 00:05:29.331
If we had a non-competitive buyer,

00:05:29.331 --> 00:05:32.237
so if you had many sellers
but only one big buyer

00:05:32.237 --> 00:05:33.673
that could have a lot of market influence,

00:05:33.673 --> 00:05:35.665
and we haven't done a
deep analysis of that yet,

00:05:36.065 --> 00:05:37.471
that word, just so you know it,

00:05:37.871 --> 00:05:40.327
and you're not taken by
surprise if someone says it,

00:05:40.819 --> 00:05:42.408
it means monopsony,

00:05:42.408 --> 00:05:44.446
or the word is monopsony.

00:05:45.122 --> 00:05:46.048
Monopsony.

00:05:46.048 --> 00:05:47.153
Not relevant to this video.

00:05:47.553 --> 00:05:49.375
We are the opposite of a monopsony

00:05:49.375 --> 00:05:50.563
in the labor market.

00:05:51.025 --> 00:05:52.744
We are assuming that we
are a competitive buyer.

00:05:52.744 --> 00:05:53.710
There are many, many, many, many,

00:05:53.710 --> 00:05:54.896
many buyers here,

00:05:54.896 --> 00:05:57.070
so we essentially just have
to take the market wages,

00:05:57.070 --> 00:05:59.150
and we are also the opposite of a monopoly

00:05:59.150 --> 00:06:00.869
in the car wash market.

00:06:00.869 --> 00:06:02.481
We're assuming that we are one of many

00:06:02.481 --> 00:06:03.185
competitive sellers.

00:06:03.185 --> 00:06:05.678
Monopoly means only one seller,

00:06:05.678 --> 00:06:09.192
monopsony means one powerful buyer.

00:06:09.192 --> 00:06:10.601
The whole reason why I'm saying

00:06:10.601 --> 00:06:12.393
that we are competitive
in the labor market

00:06:12.393 --> 00:06:13.633
is I'm assuming that we're
just going to have to

00:06:13.633 --> 00:06:15.493
take the market wages,

00:06:15.493 --> 00:06:18.258
so the market wage for the
type of labor we're hiring,

00:06:18.258 --> 00:06:19.376
so the market wage,

00:06:19.376 --> 00:06:20.751
and we're just going to have to take that.

00:06:20.751 --> 00:06:23.381
The market wage is going to be,

00:06:23.381 --> 00:06:25.321
let's just say it is $10 per hour.

00:06:25.321 --> 00:06:26.936
$10 per hour.

00:06:27.320 --> 00:06:29.291
Given that, what is a rational number

00:06:29.291 --> 00:06:30.948
of people to hire?

00:06:31.378 --> 00:06:33.081
Well, that 1st person we hire,

00:06:33.419 --> 00:06:35.140
we're getting $25 of benefit.

00:06:35.555 --> 00:06:37.291
The marginal cost of them,

00:06:37.291 --> 00:06:39.132
and we can actually draw
a marginal cost curve.

00:06:39.132 --> 00:06:41.357
The marginal cost curve
will just be flat right here

00:06:41.357 --> 00:06:43.006
at $25.

00:06:43.006 --> 00:06:45.943
It'll just be, sorry,
it'll be flat here at $10.

00:06:45.943 --> 00:06:47.395
That's how much it costs us.

00:06:47.395 --> 00:06:48.542
If we hire one person,

00:06:48.542 --> 00:06:50.757
it costs us, the area would be $10.

00:06:50.757 --> 00:06:52.039
If we hire 2 people,

00:06:52.039 --> 00:06:54.381
the area would be between 0 and 2,

00:06:54.381 --> 00:06:55.253
and under the curve,

00:06:55.253 --> 00:06:56.192
which would be 20,

00:06:56.192 --> 00:06:57.396
or you could say the increment

00:06:57.396 --> 00:07:00.508
from going from 1 to 2
people is another $10,

00:07:00.508 --> 00:07:01.810
or going from 2 to 3 people,

00:07:01.810 --> 00:07:05.226
this area right over here is another $10.

00:07:05.226 --> 00:07:06.700
If you go from 3 to 4 people,

00:07:06.700 --> 00:07:09.196
this area under here is another $10,

00:07:09.196 --> 00:07:10.865
under this green curve.

00:07:11.342 --> 00:07:12.802
Does it make sense to
hire that 1st person?

00:07:12.802 --> 00:07:15.104
Sure, you're going to get $25 in revenue,

00:07:15.104 --> 00:07:16.879
and you're going to have $10 in wages,

00:07:16.879 --> 00:07:19.091
so you're going to have $15 of benefit.

00:07:19.091 --> 00:07:20.960
You definitely want to hire one person.

00:07:20.960 --> 00:07:23.166
Does it make sense to
hire that 2nd person?

00:07:23.519 --> 00:07:26.139
Well, the marginal product revenue

00:07:26.139 --> 00:07:28.122
is going to be $20 from that 2nd person.

00:07:28.491 --> 00:07:30.999
Your marginal cost from
that 2nd person is $10,

00:07:30.999 --> 00:07:33.674
so you're going to make
$10 on that 2nd person,

00:07:33.674 --> 00:07:35.138
so you should hire that 2nd person.

00:07:35.738 --> 00:07:38.477
The 3rd person, you're
going to make $15 off them,

00:07:38.477 --> 00:07:40.791
they're going to cost you $10 dollars,

00:07:41.130 --> 00:07:42.022
so you're going to,

00:07:42.022 --> 00:07:43.296
and this is all on a per-hour basis.

00:07:43.296 --> 00:07:44.392
You're going to make $5,

00:07:44.392 --> 00:07:45.410
so you should hire that.

00:07:45.886 --> 00:07:47.121
The 4th person,

00:07:47.412 --> 00:07:48.661
well, now it's interesting.

00:07:48.661 --> 00:07:53.047
The 4th person, you're
going to make $10 in total

00:07:53.047 --> 00:07:54.133
off of the 4th person,

00:07:54.501 --> 00:07:55.506
but you're not,

00:07:55.506 --> 00:07:57.302
but you're also going to have to pay $10

00:07:57.302 --> 00:07:58.624
for that 4th person,

00:07:58.624 --> 00:07:59.966
so it doesn't make sense for you to hire

00:07:59.966 --> 00:08:02.301
another total 4th person.

00:08:02.562 --> 00:08:03.490
Now, if you could,

00:08:03.490 --> 00:08:05.414
it could make sense for you to hire

00:08:05.414 --> 00:08:06.902
another half person,

00:08:06.902 --> 00:08:09.282
maybe someone who shows
up every other day,

00:08:09.282 --> 00:08:10.398
if this still holds,

00:08:10.398 --> 00:08:13.096
or maybe someone who
shows up for half an hour,

00:08:13.096 --> 00:08:15.414
or maybe someone who is doing this job

00:08:15.414 --> 00:08:17.289
and also operating the cash register,

00:08:17.289 --> 00:08:19.027
and they're kind of going in between.

00:08:19.243 --> 00:08:20.677
Because for a half-person,

00:08:20.677 --> 00:08:21.970
it does make sense.

00:08:21.970 --> 00:08:24.547
A half-person is going to cost $5,

00:08:24.547 --> 00:08:26.917
and their marginal benefit is going to be

00:08:26.917 --> 00:08:29.498
the area under the
curve between this point

00:08:29.498 --> 00:08:30.210
and this point,

00:08:30.210 --> 00:08:30.984
and so we get,

00:08:30.984 --> 00:08:33.093
so the profit from that person,

00:08:33.093 --> 00:08:35.429
the net benefit we're going to get

00:08:35.429 --> 00:08:37.239
is going to be this area right over here.

00:08:37.239 --> 00:08:39.194
It would be rational to get them.

00:08:39.194 --> 00:08:40.497
But what you're seeing is,

00:08:40.497 --> 00:08:43.092
is it makes sense to keep increasing

00:08:43.092 --> 00:08:44.713
the quantity demanded.

00:08:44.974 --> 00:08:48.080
It makes sense to keep
hiring more and more people

00:08:48.080 --> 00:08:49.758
until the marginal benefit,

00:08:49.758 --> 00:08:50.616
or another way of saying,

00:08:50.616 --> 00:08:52.531
the marginal product revenue curve

00:08:52.531 --> 00:08:54.933
is equal to the marginal cost curve.

00:08:54.933 --> 00:08:56.824
After that point, the person's costs

00:08:56.824 --> 00:08:58.614
are higher than their benefits,

00:08:58.614 --> 00:09:01.000
and you wouldn't want to hire them.


A firm's marginal product revenue curve

WEBVTT
Kind: captions
Language: en

00:00:00.735 --> 00:00:01.803
Narrator: What we're
going to do in this video

00:00:01.803 --> 00:00:05.536
is dig a little bit
deeper into labor markets.

00:00:05.536 --> 00:00:08.679
It's really not going to be
any fundamentally new concepts.

00:00:08.679 --> 00:00:11.206
We're really just going
to reapply concepts

00:00:11.206 --> 00:00:12.799
that we've already seen before and

00:00:12.799 --> 00:00:14.473
maybe use slightly different words,

00:00:14.473 --> 00:00:17.139
but the reason why labor is interesting

00:00:17.139 --> 00:00:19.724
is labor is one of the
factors of production.

00:00:19.724 --> 00:00:21.522
It's one of the inputs you need for firms

00:00:21.522 --> 00:00:23.821
to produce whatever they do produce.

00:00:24.129 --> 00:00:26.599
Unlike in most markets,

00:00:26.599 --> 00:00:28.270
if we're talking about
the computer markets,

00:00:28.270 --> 00:00:29.205
let me write over here.

00:00:29.205 --> 00:00:33.938
In the computer market, the demand

00:00:33.938 --> 00:00:36.023
is coming from individuals.

00:00:36.608 --> 00:00:39.083
It's coming from, I'll just
call it, individual people

00:00:39.083 --> 00:00:42.212
while the supply is coming from firms,

00:00:42.212 --> 00:00:43.886
is coming from firms.

00:00:44.210 --> 00:00:46.470
In the labor market it's
the other way around.

00:00:47.100 --> 00:00:50.669
In the labor market the demand is coming

00:00:50.669 --> 00:00:53.465
from firms, these are the
people who need labor,

00:00:53.465 --> 00:00:56.500
who are hiring the labor,
so this is coming from firms

00:00:56.500 --> 00:00:59.838
and the supply is coming
from individual people.

00:01:00.208 --> 00:01:04.682
So, it's coming from individual people.

00:01:05.282 --> 00:01:07.059
What's interesting about that is

00:01:07.059 --> 00:01:09.203
because the demand is coming from firms,

00:01:09.203 --> 00:01:12.103
in the past, when the supply
was coming from firms,

00:01:12.103 --> 00:01:13.842
we could look at a firms cost structure

00:01:13.842 --> 00:01:16.602
and we could come up with
a supply curve from that.

00:01:16.602 --> 00:01:18.672
Now that the demand is coming from firms,

00:01:18.672 --> 00:01:21.603
we can look at a firms, essentially
their revenue structure,

00:01:21.603 --> 00:01:23.338
how much incremental revenue do they get

00:01:23.338 --> 00:01:25.608
per extra employee and we could actually

00:01:25.608 --> 00:01:28.999
generate a demand curve,
their marginal benefit curve,

00:01:28.999 --> 00:01:31.278
by looking at their business
a little bit closer.

00:01:31.417 --> 00:01:33.747
That's essentially what we're
going to be doing in this video.

00:01:33.747 --> 00:01:35.532
These aren't any fundamentally new ideas,

00:01:35.532 --> 00:01:37.469
we just applying them in
a slightly different way

00:01:37.469 --> 00:01:39.347
and we'll use slightly different words.

00:01:39.747 --> 00:01:42.274
Now, let's assume, for
the sake of this video

00:01:42.274 --> 00:01:45.387
that I run a car wash, a car wash.

00:01:45.741 --> 00:01:47.543
It is a competitive car wash.

00:01:47.543 --> 00:01:50.020
It is a competitive car wash.

00:01:50.159 --> 00:01:52.209
I have to be a price taker.

00:01:52.209 --> 00:01:53.803
I do not have a monopoly, or an oligopoly.

00:01:53.803 --> 00:01:55.590
I'm not even a monopolistic competitor.

00:01:55.590 --> 00:01:57.425
There are many car washes in this city.

00:01:57.425 --> 00:02:00.408
We are undifferentiated. We are
all offering the same service.

00:02:00.408 --> 00:02:02.335
So, I'm going to be a price taker.

00:02:02.335 --> 00:02:04.914
Let's say the equilibrium
price in this market

00:02:04.914 --> 00:02:09.186
for competitive car
washes is $5 per car wash,

00:02:09.494 --> 00:02:11.863
$5 per car wash.

00:02:12.248 --> 00:02:14.471
Just as a little bit of
review, that also means,

00:02:14.471 --> 00:02:15.825
remember, this is a competitive firm,

00:02:15.825 --> 00:02:16.607
not a monopoly,

00:02:16.607 --> 00:02:21.336
that my marginal revenue is equal
to a constant $5 per car wash.

00:02:21.336 --> 00:02:24.005
If I do 1 car wash I'll
get $5, 2 car washes, $10

00:02:24.005 --> 00:02:26.335
3 car washes, $15.

00:02:26.335 --> 00:02:29.098
In a monopoly, the marginal
revenue would change.

00:02:29.098 --> 00:02:32.249
Let's think about how
much benefit I would get

00:02:32.249 --> 00:02:34.158
from each incremental employee.

00:02:34.943 --> 00:02:38.272
First, I'll do a ...
let's make this column

00:02:38.272 --> 00:02:41.125
right over here, let's
take this L for labor.

00:02:41.125 --> 00:02:43.403
This is going to be the quantity of labor.

00:02:43.403 --> 00:02:45.507
I'm going to think what
I hire, what zero people,

00:02:45.507 --> 00:02:50.598
1, 2, 3, 4, or 5 people.

00:02:51.598 --> 00:02:55.832
Let's think about how
much that we can produce

00:02:55.832 --> 00:02:58.340
when I hire these amounts of people.

00:02:58.340 --> 00:03:02.004
I'll call that total
product, or we could call it

00:03:02.004 --> 00:03:04.037
total product of labor.

00:03:04.037 --> 00:03:06.404
It's essentially saying,
how many cars can I wash?

00:03:06.404 --> 00:03:08.333
This is going to be car washes per hour,

00:03:09.086 --> 00:03:14.540
so cars washed per hour.

00:03:15.602 --> 00:03:17.418
How many cars can I wash
per hour with a different

00:03:17.418 --> 00:03:18.838
number of people here?

00:03:18.838 --> 00:03:21.504
Well, if I have zero people,
I'm going to wash zero cars.

00:03:21.504 --> 00:03:23.505
Let's say that I find if I have one person

00:03:23.505 --> 00:03:27.756
that person can wash 5 cars
per hour by him or herself.

00:03:27.756 --> 00:03:30.335
Two people can wash 9 cars together.

00:03:30.335 --> 00:03:32.243
Three people can do 12 cars.

00:03:32.243 --> 00:03:34.206
Four people can do 14

00:03:34.206 --> 00:03:38.819
and 5 people can do 15 cars together.

00:03:38.819 --> 00:03:39.844
We can plot this.

00:03:39.844 --> 00:03:41.497
Let's actually plot this on a graph

00:03:41.497 --> 00:03:43.081
just to see what's going on.

00:03:43.081 --> 00:03:44.542
It always helps to visualize things,

00:03:45.203 --> 00:03:48.881
so that is going to be our total product.

00:03:50.020 --> 00:03:52.119
That is going to be our total product

00:03:52.119 --> 00:03:56.136
and this is going to be
our quantity of labor.

00:03:56.136 --> 00:04:03.866
The quantity of labor we can
have 1, 2, 3, 4, or 5 people

00:04:03.866 --> 00:04:05.849
and this is actually zero
people right over here

00:04:05.849 --> 00:04:08.334
and my total product goes
all the way up to 15.

00:04:08.334 --> 00:04:11.603
Let's say that this is
15, this would be 10

00:04:11.603 --> 00:04:12.992
and this would be 5,

00:04:12.992 --> 00:04:15.331
5, 10 and 15.

00:04:15.670 --> 00:04:17.872
So we can plot these
points right over here.

00:04:17.872 --> 00:04:19.736
What is the total product?

00:04:19.736 --> 00:04:21.402
Well, this is zero/zero.

00:04:21.402 --> 00:04:24.438
Zero people, I'm not
washing any cars per hour.

00:04:24.808 --> 00:04:26.777
Total product is in cars washed per hour.

00:04:27.008 --> 00:04:32.068
If I have 1 person, I
can wash 5 cars per hour.

00:04:32.652 --> 00:04:36.739
If I have 2 people I can
wash 9 cars per hour,

00:04:36.739 --> 00:04:39.544
2 people I can wash 9 cars per hour,

00:04:39.544 --> 00:04:43.007
3 people, I can was 12 cars per hour,

00:04:43.007 --> 00:04:46.915
3 people I can wash 12 cars,
that's about right there.

00:04:46.915 --> 00:04:50.011
Four people, I can wash 14 cars per hour,

00:04:50.395 --> 00:04:53.280
4 people, 14 is right about there

00:04:53.280 --> 00:04:56.334
and then finally I will do this ...

00:04:56.334 --> 00:04:58.208
well let's see. I'm already
using a lot of my colors.

00:04:58.208 --> 00:04:59.005
Let's see, pink.

00:04:59.005 --> 00:05:01.608
Five people, I can wash 15 cars per hour,

00:05:01.608 --> 00:05:04.667
5 people I could wash 15 cars per hour.

00:05:05.421 --> 00:05:09.135
So, total product is a
function of quantity of labor

00:05:09.135 --> 00:05:11.000
it will look like a curve that
looks something like this.

00:05:11.000 --> 00:05:12.003
I could just connect the dots

00:05:12.003 --> 00:05:13.606
or I could make it look
a little bit more curvy,

00:05:14.375 --> 00:05:18.789
so it's going to look something like that.

00:05:19.682 --> 00:05:21.267
One way that we should think about it,

00:05:21.267 --> 00:05:23.319
as you'll see in economics
when you always want

00:05:23.319 --> 00:05:24.673
to think about how much
you want to produce

00:05:24.673 --> 00:05:26.002
or how much you want to hire,

00:05:26.002 --> 00:05:26.843
you always want to think about

00:05:26.843 --> 00:05:29.867
how much benefit are you getting
for that incremental thing

00:05:29.867 --> 00:05:31.501
when you're thinking
about your cost structure.

00:05:31.501 --> 00:05:33.335
How much cost for that incremental unit?

00:05:33.335 --> 00:05:35.535
When you're thinking about your benefits

00:05:35.535 --> 00:05:36.580
or your demand, you're thinking,

00:05:36.580 --> 00:05:38.003
how much benefit am I getting from

00:05:38.003 --> 00:05:39.180
that incremental unit?

00:05:39.518 --> 00:05:42.473
Let's view this as the marginal ...

00:05:42.473 --> 00:05:45.748
Let's write marginal product, MP.

00:05:45.748 --> 00:05:47.937
Sometimes in some economics text books

00:05:47.937 --> 00:05:49.868
I've seen this referred to as MPL,

00:05:49.868 --> 00:05:51.504
marginal product of labor.

00:05:51.504 --> 00:05:52.536
Actually, I'll just write the L there

00:05:52.536 --> 00:05:53.211
to make this clear.

00:05:53.211 --> 00:05:55.942
This is the marginal product of labor.

00:05:55.942 --> 00:05:59.418
So, when we go from
zero people to 1 person,

00:05:59.418 --> 00:06:02.136
on average between those
2 points over there,

00:06:02.136 --> 00:06:04.751
we're able to ... our delta, our change.

00:06:04.751 --> 00:06:08.335
Delta is just the Greek
letter that symbolizes change.

00:06:08.781 --> 00:06:10.674
Our change in total product is 5.

00:06:10.828 --> 00:06:14.936
We can view that as the
average marginal product,

00:06:14.936 --> 00:06:17.807
or you can kind of view
that as marginal product

00:06:17.807 --> 00:06:19.422
halfway between these or
you could view that as

00:06:19.422 --> 00:06:21.845
the average marginal product between

00:06:21.845 --> 00:06:23.329
those two points right over there.

00:06:23.329 --> 00:06:24.469
That's why I wrote it in a row.

00:06:24.469 --> 00:06:26.543
That it is in between these two points.

00:06:26.543 --> 00:06:29.472
It's taking us from zero to 1.

00:06:29.472 --> 00:06:32.468
Actually, let me plot
these while I calculate

00:06:32.468 --> 00:06:33.667
what they are.

00:06:33.667 --> 00:06:38.450
So, I'll draw this one
a little bit more flat,

00:06:38.450 --> 00:06:41.940
so I have space, which I can
scroll down a little bit.

00:06:41.940 --> 00:06:46.622
So, in this axis I'm going to
do marginal product of labor

00:06:46.622 --> 00:06:48.197
and then on this axis I'm going to have

00:06:48.197 --> 00:06:49.551
the quantity of labor.

00:06:49.551 --> 00:06:57.406
This is 1, this is 2, this
is 3, 4 people and 5 people.

00:06:57.406 --> 00:06:59.439
So, this point right over here,

00:06:59.439 --> 00:07:01.689
this point right over here, that's the

00:07:01.689 --> 00:07:03.600
marginal product of labor, halfway.

00:07:03.600 --> 00:07:05.431
You could view this as a slope halfway

00:07:05.431 --> 00:07:07.546
between zero and 1 or you could view this

00:07:07.546 --> 00:07:10.004
as the average slope from zero to 1.

00:07:10.004 --> 00:07:11.630
So, I'll plot it right over here.

00:07:11.630 --> 00:07:14.373
I'll view it and actually I
haven't labeled these axis.

00:07:14.373 --> 00:07:19.686
This is, let's call this 5, 4, 3, 2, 1.

00:07:20.163 --> 00:07:22.857
So, halfway between zero and 1

00:07:22.857 --> 00:07:26.056
my marginal product of labor is 5,

00:07:26.056 --> 00:07:27.736
right over there.

00:07:27.736 --> 00:07:32.085
Then halfway between 1 and 2,

00:07:32.085 --> 00:07:35.212
my marginal product of labor,
I go from 5 cars washed

00:07:35.212 --> 00:07:38.870
per hour to 9, so my marginal
product of labor is 4.

00:07:38.870 --> 00:07:43.069
So, between 1 and 2 my
marginal product of labor is 4

00:07:43.699 --> 00:07:48.264
and then between 2 and 3,

00:07:48.264 --> 00:07:49.644
my marginal product of labor,

00:07:49.644 --> 00:07:53.006
I go from 9 car washes,
cars washed per hour to 12.

00:07:53.006 --> 00:07:55.322
So, I have 3 incremental cars washed

00:07:55.322 --> 00:07:57.212
by adding that third person,

00:07:57.212 --> 00:07:58.986
so the average that you could view that

00:07:58.986 --> 00:08:02.122
as the slope right over
there is going to be 3.

00:08:02.122 --> 00:08:04.661
So, the slope right over
there is going to be 3.

00:08:05.077 --> 00:08:07.721
I didn't make this completely to scale

00:08:07.721 --> 00:08:10.071
and then, these are a
little bit more bunched up

00:08:10.071 --> 00:08:12.338
down here, but let's just keep going.

00:08:12.338 --> 00:08:14.869
Then from going from 3 to 4,

00:08:14.869 --> 00:08:16.705
the marginal product of labor,

00:08:16.705 --> 00:08:19.044
I'll go from 12 cars washed to 14,

00:08:19.044 --> 00:08:22.378
so I get 2 extra cars washed
by adding that fourth person,

00:08:22.378 --> 00:08:25.871
so between 3 and 4 I get
an incremental, on average,

00:08:25.871 --> 00:08:29.803
2 cars for that extra person

00:08:29.803 --> 00:08:34.003
and then finally between 4
and 5, I get one extra car.

00:08:34.003 --> 00:08:37.069
So, between 4 and 5 I
get exactly 1 extra car.

00:08:37.069 --> 00:08:40.007
I'm going to get, it looks a
little bit like a curve here

00:08:40.007 --> 00:08:41.470
because I bunched up the measurements,

00:08:41.470 --> 00:08:43.071
but this really should be a line.

00:08:43.532 --> 00:08:46.862
This really should be a line.

00:08:47.601 --> 00:08:50.003
Maybe I'll ... Well, that's my best.

00:08:50.741 --> 00:08:52.876
I don't want to have to
re-plot all the points,

00:08:52.876 --> 00:08:54.602
but this should be a line like that.

00:08:54.602 --> 00:09:00.803
Every time we moved up 1, we went down 1.

00:09:00.803 --> 00:09:03.791
Every time we moved up 1, we moved down 1.

00:09:03.791 --> 00:09:04.806
We see that over here.

00:09:04.806 --> 00:09:07.471
We went to 5, 4, 3, 2, 1.

00:09:07.471 --> 00:09:09.542
So, this is 5, 4, 3, 2, 1.

00:09:09.542 --> 00:09:11.954
This really should be a straight line.

00:09:11.954 --> 00:09:14.207
This is essentially plotting the slope

00:09:14.207 --> 00:09:16.606
of this curve at any point.

00:09:16.606 --> 00:09:18.872
Now, what we can think about is,

00:09:18.872 --> 00:09:21.205
because this by itself, this is telling us

00:09:21.205 --> 00:09:23.332
the marginal benefit in
terms of cars washed,

00:09:23.332 --> 00:09:25.005
but this doesn't tell
us the marginal benefit

00:09:25.005 --> 00:09:26.800
in terms of dollars.

00:09:27.107 --> 00:09:31.118
To do that we need the
marginal product revenue

00:09:31.118 --> 00:09:32.284
or you could call it the value

00:09:32.284 --> 00:09:34.351
of the marginal product of labor.

00:09:34.813 --> 00:09:36.534
Let me write that over here.

00:09:36.534 --> 00:09:41.961
We could call this the MPR,
for marginal product revenue

00:09:41.961 --> 00:09:44.010
or we could view that as the value

00:09:44.010 --> 00:09:46.676
of the marginal product of labor,

00:09:46.676 --> 00:09:47.740
but essentially we're saying

00:09:47.740 --> 00:09:51.099
okay, if we're washing 5 extra
cars from that first person

00:09:51.099 --> 00:09:53.238
and I'm going to get $5 per car wash.

00:09:53.238 --> 00:09:55.876
I have a constant marginal revenue.

00:09:55.876 --> 00:09:57.217
I am a price taker.

00:09:57.217 --> 00:09:59.957
Then I'm going to make $25
on those incremental 5 cars

00:10:00.526 --> 00:10:03.546
and if I wash 4 more cars, 4 times 5,

00:10:03.546 --> 00:10:05.546
I'm going to make $20 extra dollars.

00:10:05.546 --> 00:10:09.205
If I wash 3 extra cars, I'm
going to make $15 extra dollars.

00:10:09.205 --> 00:10:11.403
Two extra cars, $10 extra dollars.

00:10:11.403 --> 00:10:12.908
I'm just multiplying by 5 every time.

00:10:12.908 --> 00:10:16.806
This is times 5, times 5, times 5, times 5

00:10:16.806 --> 00:10:19.629
and if I wash one extra
car, times $5 per car,

00:10:19.629 --> 00:10:21.211
I'm going to make $5 extra.

00:10:21.211 --> 00:10:22.793
So, essentially we could take every point

00:10:22.793 --> 00:10:25.972
on this curve and we
could multiply it by 5

00:10:25.972 --> 00:10:28.070
to get our marginal product of revenue

00:10:28.070 --> 00:10:29.953
or marginal product revenue.

00:10:29.953 --> 00:10:32.066
I have to be careful
where I say the 'of's'.

00:10:32.066 --> 00:10:32.875
So let me plot that

00:10:32.875 --> 00:10:34.202
and I'll try to plot
that a little bit neater

00:10:34.202 --> 00:10:36.027
so it's clear that this is a line.

00:10:37.611 --> 00:10:41.702
That's my marginal product revenue.

00:10:41.702 --> 00:10:42.802
You could also view that

00:10:42.802 --> 00:10:46.076
as the marginal benefit
calculated in terms of dollars.

00:10:46.076 --> 00:10:47.334
You could view this as a marginal benefit

00:10:47.334 --> 00:10:48.469
in terms of cars washed.

00:10:48.469 --> 00:10:51.334
This is the marginal
benefit in terms of dollars.

00:10:53.071 --> 00:10:55.875
Right over here we're going
to have the quantity of labor.

00:10:55.875 --> 00:11:00.373
So, 1, 2, 3 ... Actually, I want them

00:11:00.373 --> 00:11:01.739
to line up a little bit better.

00:11:02.277 --> 00:11:06.091
So, 1 is right over there,
2 is right over there,

00:11:06.091 --> 00:11:08.875
3 is there, 4 is there, and 5 is there.

00:11:08.875 --> 00:11:11.672
1, 2, 3, 4, 5

00:11:12.072 --> 00:11:13.038
Let me just go down a little bit.

00:11:13.038 --> 00:11:15.282
This is my quantity of labor

00:11:15.282 --> 00:11:17.386
and the marginal product
revenue goes up to 25.

00:11:17.386 --> 00:11:22.925
Let's say this is 5, 10, 15, 20 and 25.

00:11:24.539 --> 00:11:26.471
Halfway between zero and 1 person,

00:11:26.471 --> 00:11:28.341
so this is 25 right over here.

00:11:28.341 --> 00:11:32.202
I am producing $25, or
I get an incremental

00:11:32.202 --> 00:11:35.074
revenue of $25 halfway on average.

00:11:35.074 --> 00:11:36.631
You could view this point right over here.

00:11:36.631 --> 00:11:39.799
I multiply it by 5. I'm
getting $25 on average

00:11:39.799 --> 00:11:41.879
for that incremental person.

00:11:41.879 --> 00:11:44.871
Then, when we go to this
point right over here

00:11:44.871 --> 00:11:49.134
we're getting $20. That's
this right over there.

00:11:49.134 --> 00:11:51.736
Then when we go to this point in orange,

00:11:51.736 --> 00:11:55.020
if we multiply it times
five, we get $15 dollars.

00:11:55.020 --> 00:11:56.499
So, this is 5, 10, 15.

00:11:56.669 --> 00:11:58.816
So that's halfway between 2 and 3.

00:11:58.816 --> 00:12:02.231
Our marginal product revenue is $15,

00:12:02.231 --> 00:12:03.818
so that is ... I'm going to make it clear.

00:12:03.818 --> 00:12:05.736
This is 15 right over there

00:12:05.736 --> 00:12:10.740
and then halfway between
3 and 4 people it's $10,

00:12:10.740 --> 00:12:13.879
halfway between 3 and 4 it is $10,

00:12:13.879 --> 00:12:15.735
so it's going to look something like this

00:12:15.735 --> 00:12:19.002
and then halfway between,
finally between 4 and 5,

00:12:19.002 --> 00:12:21.897
it is $5, it is $5.

00:12:22.651 --> 00:12:24.936
So, we're just picking points along here.

00:12:24.936 --> 00:12:25.901
We picked kind of the mid-point,

00:12:25.901 --> 00:12:28.012
the slope at those points
or the average slope

00:12:28.012 --> 00:12:29.943
between zero and 1,

00:12:29.943 --> 00:12:33.400
but if you assume this
curve has a continuous slope

00:12:33.400 --> 00:12:34.739
the slope changes continuously,

00:12:34.739 --> 00:12:35.734
then this will be a line

00:12:35.734 --> 00:12:37.833
and then this will be a line as well.

00:12:38.341 --> 00:12:41.007
So, our line will look something like that

00:12:41.007 --> 00:12:42.970
and what's neat about this line

00:12:42.970 --> 00:12:46.007
is essentially, this is
the marginal benefit curve.

00:12:46.007 --> 00:12:48.272
Marginal benefit curve for this firm

00:12:48.272 --> 00:12:51.535
as it gets more and more labor.

00:12:51.535 --> 00:12:53.073
So, it's essentially the demand curve

00:12:53.073 --> 00:12:54.229
for this firm.

00:12:54.229 --> 00:12:56.343
If you wanted to find the
demand curve for the market

00:12:56.343 --> 00:12:57.939
you could just take the demand curve

00:12:57.939 --> 00:12:59.646
for each of these competitive firms

00:12:59.646 --> 00:13:01.840
and then you would just
add them all together.


Price discrimination

WEBVTT
Kind: captions
Language: en

00:00:00.613 --> 00:00:04.760
Narrator: Let's say that
I am a producer of wine

00:00:04.760 --> 00:00:07.946
and in this axis, vertical axis,
this is dollars per bottle,

00:00:07.946 --> 00:00:13.610
so 10, 20, 30, $40 per bottle.

00:00:13.610 --> 00:00:15.633
On this axis right over here I will have

00:00:15.633 --> 00:00:18.017
quantity of bottles I produce per week.

00:00:18.017 --> 00:00:22.619
Let's say that this is
100, this is 200, 300

00:00:22.619 --> 00:00:24.732
and then 400.

00:00:24.732 --> 00:00:31.954
This is quantity of
bottles per week, per week

00:00:31.954 --> 00:00:36.361
and this is dollars per bottle.

00:00:36.361 --> 00:00:38.131
Let's think about the demand curve here.

00:00:38.131 --> 00:00:40.524
The demand curve for my type of wine,

00:00:40.524 --> 00:00:42.192
we're going to assume this
is highly differentiated

00:00:42.192 --> 00:00:45.859
wine, the demand curve
looks something like that.

00:00:45.859 --> 00:00:48.356
Now, I'm doing it as a
straight line for simplicity.

00:00:48.356 --> 00:00:49.901
The demand curve looks like that.

00:00:49.901 --> 00:00:52.391
Since I said differentiated,
this is not going to be

00:00:52.391 --> 00:00:53.661
perfect competition.

00:00:53.661 --> 00:00:55.995
I have a monopoly in my type of wine,

00:00:55.995 --> 00:00:57.979
so this isn't the market
for wine generally,

00:00:57.979 --> 00:01:00.998
this is a market for my wine.

00:01:00.998 --> 00:01:02.995
My wine has won some taste tests,

00:01:02.995 --> 00:01:05.334
it has this unique
flavor and whatever else,

00:01:05.334 --> 00:01:09.460
so you can view me as a
monopolistic competitor.

00:01:09.460 --> 00:01:11.410
There's obviously
competition from other wine

00:01:11.410 --> 00:01:13.072
labels, from other wine producers,

00:01:13.072 --> 00:01:15.803
but my wine is differentiated
and I have a monopoly

00:01:15.803 --> 00:01:18.535
in my particular type of wine.

00:01:18.535 --> 00:01:20.204
We've done this multiple times,

00:01:20.204 --> 00:01:22.377
if I have a monopoly in my type of wine,

00:01:22.377 --> 00:01:24.136
we're talking about the market in my wine,

00:01:24.136 --> 00:01:25.733
then my marginal revenue curve,

00:01:25.733 --> 00:01:28.180
my marginal revenue curve
will have twice the slope

00:01:28.180 --> 00:01:31.581
of this, so it will look
something like that.

00:01:31.581 --> 00:01:33.913
It will actually keep
going negative after that,

00:01:33.913 --> 00:01:37.000
so that is my marginal revenue curve.

00:01:37.000 --> 00:01:38.739
Then we can think about the cost side.

00:01:38.739 --> 00:01:42.117
The cost side of things, my marginal cost

00:01:42.117 --> 00:01:44.599
might look something like this.

00:01:44.599 --> 00:01:46.527
Marginal cost or you
could even view that as

00:01:46.527 --> 00:01:48.988
a supply curve for my wine.

00:01:48.988 --> 00:01:51.324
Then we can also do average total cost.

00:01:51.324 --> 00:01:53.725
So the average total cost start off high,

00:01:53.725 --> 00:01:56.596
we have a fixed cost
divided by a small quantity,

00:01:56.596 --> 00:01:59.159
but the marginal costs
are lower than the average

00:01:59.159 --> 00:02:00.825
so the average keeps going down and down

00:02:00.825 --> 00:02:02.680
and down and down, then they're equal.

00:02:02.680 --> 00:02:04.481
Now each incremental unit is bring up the

00:02:04.481 --> 00:02:07.376
average in cost, so then
the average total in cost

00:02:07.376 --> 00:02:08.873
might look something like that.

00:02:08.873 --> 00:02:10.526
Average total cost.

00:02:10.526 --> 00:02:13.693
We've seen this show multiple times.

00:02:13.693 --> 00:02:16.127
If in the near term, I
do have a monopoly here,

00:02:16.127 --> 00:02:19.068
so I will just produce the quantity where

00:02:19.068 --> 00:02:21.862
my marginal revenue is
equal to my marginal cost.

00:02:21.862 --> 00:02:23.861
Before that quantity, for every unit,

00:02:23.861 --> 00:02:26.098
I'm getting economic
profit, economic profit,

00:02:26.098 --> 00:02:27.194
economic profit.

00:02:27.194 --> 00:02:28.394
If I produce more than
that I'm not getting

00:02:28.394 --> 00:02:30.462
any economic profit
anymore, so I'm going to

00:02:30.462 --> 00:02:33.271
produce this quantity which, I don't know,

00:02:33.271 --> 00:02:36.016
looks like about 160 units
and I'm going to sell it

00:02:36.016 --> 00:02:38.681
... I'm going to sell it for ...

00:02:38.681 --> 00:02:40.269
Oh, I'm going to be careful here.

00:02:40.269 --> 00:02:42.195
The price I'm going to be able to sell it,

00:02:42.195 --> 00:02:44.539
so this is the quantity that
I'm going to be able to sell,

00:02:44.539 --> 00:02:46.139
the price that I'm going to sell it at,

00:02:46.139 --> 00:02:48.278
go up to the demand curve,
that point of the demand

00:02:48.278 --> 00:02:50.279
curve and it looks like
I'll be able to sell it

00:02:50.279 --> 00:02:53.767
for about, I don't know, $33 a bottle.

00:02:53.767 --> 00:02:56.861
So, $33 a bottle and if
we want to think about

00:02:56.861 --> 00:02:59.796
economic profit, this
is the average revenue

00:02:59.796 --> 00:03:02.880
per bottle, this is the
average cost per bottle.

00:03:02.880 --> 00:03:04.933
So, this is the average economic profit

00:03:04.933 --> 00:03:07.428
per bottle and I multiply
that times the total number

00:03:07.428 --> 00:03:11.178
of bottles and I'm going
to get my economic profit.

00:03:11.178 --> 00:03:15.361
This area right over here
is my total economic profit.

00:03:15.361 --> 00:03:17.457
We can think about how
much are the consumers

00:03:17.457 --> 00:03:20.017
benefiting from it and how
benefit are they getting

00:03:20.017 --> 00:03:21.859
excess of what they're paying for it

00:03:21.859 --> 00:03:24.199
and that would be this
area right over here.

00:03:24.199 --> 00:03:26.687
That is the consumer surplus.

00:03:26.687 --> 00:03:30.394
(writing) Consumer, consumer surplus.

00:03:30.394 --> 00:03:32.195
Now, let's say I'm just
not happy with this.

00:03:32.195 --> 00:03:34.065
I see that there's an
opportunity here to get

00:03:34.065 --> 00:03:36.203
even more economic
profit because after all

00:03:36.203 --> 00:03:38.390
we've been talking about
this from the beginning.

00:03:38.390 --> 00:03:40.234
There are people here who are getting over

00:03:40.234 --> 00:03:43.491
$40 of benefit from my
wine, but I'm selling

00:03:43.491 --> 00:03:45.140
it to them for only $33.

00:03:45.140 --> 00:03:47.936
Everything we've assumed so
far is that we're selling

00:03:47.936 --> 00:03:50.392
... all the consumers are
buying something at the

00:03:50.392 --> 00:03:54.270
exact same price, but I'm
a crafty wine producer

00:03:54.270 --> 00:03:56.813
and I say, well, let me
call that in to question.

00:03:56.813 --> 00:04:00.059
Why can't I just put a
different label on my exact

00:04:00.059 --> 00:04:02.559
same wine and sell it to these people for

00:04:02.559 --> 00:04:04.937
a different price and so
I do that exact thing.

00:04:04.937 --> 00:04:07.604
I still produce this exact same quantity,

00:04:07.604 --> 00:04:09.678
I produce this exact same quantity,

00:04:09.678 --> 00:04:12.874
but the first hundred units of my quantity

00:04:12.874 --> 00:04:14.563
I put a different label on it.

00:04:14.563 --> 00:04:17.741
This label says 'Super Fancy Wine.'

00:04:17.741 --> 00:04:19.992
(writing) Super Fancy
Premium, the best wine

00:04:19.992 --> 00:04:20.890
you ever drank.

00:04:20.890 --> 00:04:24.189
Super Fancy Premium Wine,
it has all of the awards,

00:04:24.189 --> 00:04:26.459
all of the fancy people who like it.

00:04:26.459 --> 00:04:28.486
I put it in the best wine boutiques

00:04:28.486 --> 00:04:30.532
and the best restaurants, with that label,

00:04:30.532 --> 00:04:32.327
all the exact same stuff in the bottle

00:04:32.327 --> 00:04:35.026
and I sell that one at $40 a bottle.

00:04:35.026 --> 00:04:38.737
So the first hundred units
I sell at $40 a bottle,

00:04:38.737 --> 00:04:41.263
so now my economic
profit on those units ...

00:04:41.263 --> 00:04:43.659
remember, I'm producing 150, so my average

00:04:43.659 --> 00:04:45.404
total cost is down here.

00:04:45.404 --> 00:04:47.575
My average total cost is
this line right over here.

00:04:47.575 --> 00:04:49.488
So, on those bottles I'm getting this much

00:04:49.488 --> 00:04:51.079
economic profit per bottle times

00:04:51.079 --> 00:04:52.431
these hundred units.

00:04:52.431 --> 00:04:54.927
I've now increased my economic profit.

00:04:54.927 --> 00:04:57.577
I've eaten into the consumer surplus.

00:04:57.577 --> 00:04:59.859
I've taken some of that for
myself and turned it in to

00:04:59.859 --> 00:05:01.819
economic profit and then the other,

00:05:01.819 --> 00:05:04.345
I don't know, this looks
like about 60 or 70 bottles,

00:05:04.345 --> 00:05:05.994
I just have with the traditional label

00:05:05.994 --> 00:05:08.142
and I maybe sell at the supermarket.

00:05:08.142 --> 00:05:11.484
(writing) Traditional, traditional label

00:05:11.484 --> 00:05:13.123
and I just sell it at the supermarket.

00:05:13.123 --> 00:05:14.913
I call it, just, Pretty Good Wine,

00:05:14.913 --> 00:05:16.593
just so in case someone
who bought it at the fancy

00:05:16.593 --> 00:05:18.352
place doesn't see that
the Pretty Good Wine

00:05:18.352 --> 00:05:20.567
is the exact same thing.

00:05:20.567 --> 00:05:23.751
What I've just done here
is I've discriminated,

00:05:23.751 --> 00:05:25.594
I've discriminated amongst consumers

00:05:25.594 --> 00:05:27.992
depending on consumers willingness to pay,

00:05:27.992 --> 00:05:29.926
I've essentially charged
them different prices

00:05:29.926 --> 00:05:33.075
and also, to some degree,
based on where they shop

00:05:33.075 --> 00:05:35.272
and their gullibility, I am charging them

00:05:35.272 --> 00:05:37.243
two completely different prices.

00:05:37.243 --> 00:05:43.786
This right over here is
called price discrimination.

00:05:45.755 --> 00:05:48.712
It's a way that a supplier
can essentially take

00:05:48.712 --> 00:05:51.116
some of the consumer
surplus for themselves,

00:05:51.116 --> 00:05:54.454
eat into some of that
excess marginal benefit

00:05:54.454 --> 00:05:56.380
that they're essentially
giving it to the consumer

00:05:56.380 --> 00:06:00.143
and turning it into economic profit.


Tragedy of the commons

WEBVTT
Kind: captions
Language: en

00:00:00.030 --> 00:00:07.259
let's say that we have three small ponds
so this is pond a this is pond B and

00:00:07.259 --> 00:00:13.080
this is pond C over here and let's say
that this first pond right over here

00:00:13.080 --> 00:00:18.990
it's a privately owned pond it's owned
by it's owned by Al and this pond over

00:00:18.990 --> 00:00:25.500
here is owned by Carol is owned by Carol
but this middle pond pond B I guess we

00:00:25.500 --> 00:00:29.640
called it to start off with this is
common land or I guess this is a common

00:00:29.640 --> 00:00:36.840
pound or this is open to the public open
open to the public open to the public

00:00:36.840 --> 00:00:41.520
and let's say that Al and Carol they're
both Fisher I guess Carol would be a

00:00:41.520 --> 00:00:46.530
Fisher a fisherwoman they're there they
both like the fish that's how they make

00:00:46.530 --> 00:00:52.770
their living and Al and his in his pond
he has fish in there and he does some

00:00:52.770 --> 00:00:57.899
fishing in his in his pond but he makes
sure not to over fish because he doesn't

00:00:57.899 --> 00:01:02.250
want to deplete the stock of fish yeah
so he fishes just enough that he can he

00:01:02.250 --> 00:01:05.729
can pay his bills and whatever else but
not so much that it depletes the fish

00:01:05.729 --> 00:01:10.049
and essentially makes them extinct in
his pond so he doesn't want to over fish

00:01:10.049 --> 00:01:14.610
and Carol does the same thing
she's got fish in her pond and but and

00:01:14.610 --> 00:01:18.630
she uses them to make a living she she
gets them out and sells them and eats

00:01:18.630 --> 00:01:22.830
them and whatever else but she's careful
not to over fish because if you over

00:01:22.830 --> 00:01:26.250
fished then there wouldn't be fish there
wouldn't be a next generation of fish

00:01:26.250 --> 00:01:32.670
but over here in this public pond there
are also fish there are also fish I'll

00:01:32.670 --> 00:01:36.930
draw their fish in orange
there are also fish in this public pond

00:01:36.930 --> 00:01:42.329
over here they're smiling maybe they
won't be smiling for long and what is

00:01:42.329 --> 00:01:48.210
going to happen anyone can go and fish
in this public pond so al might say and

00:01:48.210 --> 00:01:51.390
we're just assume we're in a world of
two people obviously the real world has

00:01:51.390 --> 00:01:54.930
more than two people I will say okay I'm
going to I'm going to be very careful in

00:01:54.930 --> 00:01:57.990
my own pond I'm going to fish just
enough that I don't deplete the fish

00:01:57.990 --> 00:02:02.790
there but I can any extra fish I need I
could go over here to this public pond

00:02:02.790 --> 00:02:08.849
and fish all I want and I might be
concerned about depletion in the public

00:02:08.849 --> 00:02:12.959
pond except for the fact if I'm
concerned about depletion that's still

00:02:12.959 --> 00:02:15.630
not going to help
situation because other people might

00:02:15.630 --> 00:02:20.160
come and still and still not be so
concerned and so I won't even get the

00:02:20.160 --> 00:02:24.240
benefit of the depletion if I hold back
and other people come and deplete the

00:02:24.240 --> 00:02:29.400
pond and so when you have this pond that
is open to the public all of the all of

00:02:29.400 --> 00:02:32.520
the surrounding people whether it's Al
or Carol or I guess you could have other

00:02:32.520 --> 00:02:36.420
people here they would say look I'm
going to fish here I'm going to get some

00:02:36.420 --> 00:02:41.340
benefit and even if I over fish my
benefit the benefit of overfishing I'm

00:02:41.340 --> 00:02:44.700
going to get on in the near term I'm
going to get all of those fish and then

00:02:44.700 --> 00:02:48.390
the cost of that overfishing which is in
the future there won't be as many Fisher

00:02:48.390 --> 00:02:52.950
and no fishes and no fish at all that's
going to be spread out amongst everyone

00:02:52.950 --> 00:02:58.320
else and so you have the situation where
you have because there's no one I guess

00:02:58.320 --> 00:03:02.370
you could say either owning this land or
there's no one protecting this lake or

00:03:02.370 --> 00:03:07.140
however you want to describe it you have
there's a a rationale and I want to be

00:03:07.140 --> 00:03:11.070
clear rationale does not always mean
good they're rational actors might

00:03:11.070 --> 00:03:17.220
decide to over fish decide to over fish
and is essentially by doing that

00:03:17.220 --> 00:03:20.940
everyone's going to be worse off they're
going to destroy the productivity of

00:03:20.940 --> 00:03:28.850
this pond they're going to destroy the
productivity productivity of the pond of

00:03:28.850 --> 00:03:35.310
the pond right over here and this idea
that if there's this common land or

00:03:35.310 --> 00:03:40.140
common resource in this case it was a
pond and people can spread out the cost

00:03:40.140 --> 00:03:43.950
and they get their benefits directly
you're essentially you have a situation

00:03:43.950 --> 00:03:49.110
where that that shared resource can get
abused and this is called the tragedy of

00:03:49.110 --> 00:03:57.690
the Commons so this is the tragedy
tragedy of the Commons we're in this in

00:03:57.690 --> 00:04:02.489
the example we did here the pond is the
common space that's being that's being

00:04:02.489 --> 00:04:06.570
abused and it's a it's especially a
tragedy and I've already hinted at this

00:04:06.570 --> 00:04:10.320
already is that even if al decides that
hey you know what I'm going to hold back

00:04:10.320 --> 00:04:13.650
a little bit I'm not going to fish so
much because I don't want to deplete it

00:04:13.650 --> 00:04:17.130
he'll say but wait if I do that if I do
that other people are going to come and

00:04:17.130 --> 00:04:20.700
deplete it so I have no incentive to
hold back and so other people are also

00:04:20.700 --> 00:04:23.700
going to have the same logic and then
this thing is going to get over fished

00:04:23.700 --> 00:04:27.330
here and the first classic example of
tragedy

00:04:27.330 --> 00:04:32.280
where the example was first given was
common grazing land same exact idea if

00:04:32.280 --> 00:04:36.900
this was private grazing land over here
where I can keep my cows and my sheep

00:04:36.900 --> 00:04:41.099
and this is private grazing land over
here where someone else has their Colin

00:04:41.099 --> 00:04:45.629
sheep but this over here is literally a
Commons where anyone can graze their cow

00:04:45.629 --> 00:04:50.129
and sheep then just like the fishing
huge incentive for people to let their

00:04:50.129 --> 00:04:54.659
cow and sheep maybe over graze the land
destroy the land make it not sustainable

00:04:54.659 --> 00:04:59.430
but the costs of it are going to be
shared by everyone else and the benefit

00:04:59.430 --> 00:05:04.169
of over grazing at least in the near
term you the the the person who's over

00:05:04.169 --> 00:05:07.650
grazing is going to get from it and you
might even say I'm not even the one over

00:05:07.650 --> 00:05:12.599
grazing it's all of us collectively over
grazing so you don't blame me now what

00:05:12.599 --> 00:05:16.919
is the solution to the tragedy of the
Commons how does a government or

00:05:16.919 --> 00:05:21.479
jurisdiction or a group of people avoid
this type of destruction of a resource

00:05:21.479 --> 00:05:26.460
well one way that you could do is you
could make this somehow into private

00:05:26.460 --> 00:05:30.240
land so if that was owned by the
government it could sell it auction it

00:05:30.240 --> 00:05:35.370
off to private people who could then
sell access to this or if the government

00:05:35.370 --> 00:05:39.960
does retain control of it it could sell
permits to the land so in this situation

00:05:39.960 --> 00:05:45.629
you could sell you could sell permits so
it could figure out hey if someone

00:05:45.629 --> 00:05:50.909
fishes responsibly in a given day
they're going to get I don't know $200

00:05:50.909 --> 00:05:54.539
or value by doing this so we're going to
make a permit cost I don't know one

00:05:54.539 --> 00:05:57.779
hundred and fifty dollars so someone
still has an incentive to do it but that

00:05:57.779 --> 00:06:01.409
will also limit the amount of fishing
that can be there and you can have some

00:06:01.409 --> 00:06:05.940
you know conservationists that make sure
that the that not too many permits are

00:06:05.940 --> 00:06:10.680
given are given for this space over you
and we see that happening if you wanted

00:06:10.680 --> 00:06:13.259
to go hunting
there are permits you need to have if

00:06:13.259 --> 00:06:16.620
you want to if you want to go fishing in
a lot of places there are permanent to

00:06:16.620 --> 00:06:19.589
have if you want to go camping in a lot
of places there are permits because you

00:06:19.589 --> 00:06:22.620
could even over a camping area if too
many people are walking there too much

00:06:22.620 --> 00:06:26.940
trash is there it could ruin the
campgrounds and so this tragedy the

00:06:26.940 --> 00:06:32.009
Commons the best way or the way most
often seen is through this the best way

00:06:32.009 --> 00:06:35.759
of preventing the tragedy of Commons is
through some type of a permitting

00:06:35.759 --> 00:06:38.209
process


Positive externalities

WEBVTT
Kind: captions
Language: en

00:00:00.030 --> 00:00:04.680
let's think about the market for a
certain type of bush or a certain type

00:00:04.680 --> 00:00:10.019
of tree that people can plant in their
gardens and here's our quantity of that

00:00:10.019 --> 00:00:16.410
tree planted planted each year 1 million
2 million maybe this is nationwide these

00:00:16.410 --> 00:00:20.550
are fairly large numbers for a
particular type of tree 4 million and so

00:00:20.550 --> 00:00:24.740
forth and so on and then here let me put
the price so this is the quantity

00:00:24.740 --> 00:00:32.669
quantity per year per year planted
planted in our country and over here

00:00:32.669 --> 00:00:38.850
this is going to be our dollars per tree
dollars per tree and maybe this is ten

00:00:38.850 --> 00:00:45.840
dollars this is 20 this is 30 this is 40
and our marginal cost curve for our

00:00:45.840 --> 00:00:49.559
supply curve would look just to even get
that first tree planted to get someone

00:00:49.559 --> 00:00:54.449
to to plant it and grow it and then
replant it in your garden you're gonna

00:00:54.449 --> 00:00:58.920
have to pay them at least ten dollars
and then each incremental tree is going

00:00:58.920 --> 00:01:01.680
to get a little bit more expensive and
so our marginal cost curve will look

00:01:01.680 --> 00:01:04.530
something like that
that's our marginal cost or supply curve

00:01:04.530 --> 00:01:08.520
and then our demand curve that very
first tree someone's going to get a huge

00:01:08.520 --> 00:01:11.700
benefit from it and then each
incremental tree people might get a

00:01:11.700 --> 00:01:14.729
little bit lower and lower benefit so it
might look something like this our

00:01:14.729 --> 00:01:21.540
demand curve would look like that demand
and this is the market for a certain

00:01:21.540 --> 00:01:27.960
nice tree nice tree and just let the if
you just let the market happen the way

00:01:27.960 --> 00:01:32.280
it's happening right over here we get to
a very natural equilibrium quantity it

00:01:32.280 --> 00:01:38.880
looks like it's about 2.7 million trees
planted per year and our equilibrium

00:01:38.880 --> 00:01:44.759
price is about $20 per tree and we
generate we generate all of this total

00:01:44.759 --> 00:01:49.320
surplus that's that split essentially
between the consumers the people who are

00:01:49.320 --> 00:01:54.210
buying the trees and the people who are
producing the trees now let's say that a

00:01:54.210 --> 00:01:59.520
research study comes out and this
particular breed of trees the nice tree

00:01:59.520 --> 00:02:05.100
it turns out has all of these benefits
to it so let's say that it's it does it

00:02:05.100 --> 00:02:09.599
has you know some it's somehow related
to pest control maybe all the pests that

00:02:09.599 --> 00:02:13.050
people don't like when they eat this
bark they go away or something

00:02:13.050 --> 00:02:17.130
that the mosquitos go away and you know
do you get less disease let's say it

00:02:17.130 --> 00:02:23.520
also improves air quality air quality
and let's say on top of that it's just

00:02:23.520 --> 00:02:28.680
it's just nice-looking so you know even
even if it's not your tree you pass it

00:02:28.680 --> 00:02:31.890
by in a neighborhood it just calms your
nerves and makes you feel better about

00:02:31.890 --> 00:02:39.960
the world so they are just nice nice to
look at to look at and this study that

00:02:39.960 --> 00:02:43.800
these researchers conduct they
determined that the benefit of all of

00:02:43.800 --> 00:02:47.760
these things of the pest control and the
air quality and the just the aesthetic

00:02:47.760 --> 00:02:52.950
benefit of society at large comes out
over the life of a tree to ten dollars a

00:02:52.950 --> 00:03:01.140
tree so it is ten dollars ten dollars
per tree per tree benefit so the is

00:03:01.140 --> 00:03:04.950
essentially saying that above and beyond
the benefit that the owner of the garden

00:03:04.950 --> 00:03:09.060
gets there's a societal there's an
external benefit and so you can imagine

00:03:09.060 --> 00:03:13.110
we're now talking about positive
externalities there's an external

00:03:13.110 --> 00:03:18.540
benefit of planting the tree that
amounts to ten dollars per tree so how

00:03:18.540 --> 00:03:22.950
would we factor that in how do we
determine if just right just given this

00:03:22.950 --> 00:03:26.640
equilibrium price and quantity whether
we we really are we do really have the

00:03:26.640 --> 00:03:31.739
optimal number of trees in society well
in the past we in the last few videos we

00:03:31.739 --> 00:03:36.239
had a negative externality we had a
external cost and so we added that cost

00:03:36.239 --> 00:03:40.620
to the cost curve now we have an
external benefit we have a positive

00:03:40.620 --> 00:03:46.620
externality so we can add this this
benefit to the marginal benefit curve so

00:03:46.620 --> 00:03:50.400
essentially this is the benefit that the
buyers of the tree are getting and to

00:03:50.400 --> 00:03:54.690
that let's add the benefit that society
is getting so society is getting ten

00:03:54.690 --> 00:03:58.500
dollars more benefit so this for
millions a tree or it's actually a

00:03:58.500 --> 00:04:01.560
little bit lower looks like it's about
three and a half million three there's

00:04:01.560 --> 00:04:05.100
ten dollars of benefit but if you
combine it with society's benefit so

00:04:05.100 --> 00:04:09.209
another ten dollars you would get up
here and so you would essentially and

00:04:09.209 --> 00:04:12.690
this first tree it looks like it's
almost fifty dollars of benefit but if

00:04:12.690 --> 00:04:16.590
you add society's benefit it's actually
closer to 60 dollars a benefit and so

00:04:16.590 --> 00:04:19.560
you're essentially taking this demand
curve and you're shifting it up by ten

00:04:19.560 --> 00:04:25.110
dollars when you are factoring in the
benefit when you are factoring in the

00:04:25.110 --> 00:04:29.370
benefit to society
so that up there and you could call this

00:04:29.370 --> 00:04:35.550
you could call this the marginal benefit
plus the external plus the external

00:04:35.550 --> 00:04:40.470
benefit curve so it's factoring in all
of the the benefit that society is

00:04:40.470 --> 00:04:44.340
getting by these trees planted but when
you look at that curve you get a

00:04:44.340 --> 00:04:48.210
slightly different equilibrium price you
get a slightly different equilibrium

00:04:48.210 --> 00:04:53.190
price the equilibrium price goes all the
way out here so now the equilibrium

00:04:53.190 --> 00:04:57.510
pressure goes up to this the equilibrium
price looks closer instead of $20 at $27

00:04:57.510 --> 00:05:03.630
and the quantity the quantity actually
produced looks closer to 3.3 million and

00:05:03.630 --> 00:05:08.370
so if we just let the market happen
without factoring in this benefit in

00:05:08.370 --> 00:05:12.450
some way we're essentially leaving all
the table leaving on the table all of

00:05:12.450 --> 00:05:15.810
this all of the surplus that could have
happened if we just let the market

00:05:15.810 --> 00:05:19.740
settle in on its on it's natural price
in equilibrium and equilibrium quantity

00:05:19.740 --> 00:05:23.760
equilibrium price and equilibrium
quantity we're going to produce this 2.7

00:05:23.760 --> 00:05:27.990
million and so the total benefit to
society is going to be this whole curve

00:05:27.990 --> 00:05:32.370
right or you can say society's benefit
is going to be this right over here the

00:05:32.370 --> 00:05:36.630
consumers benefit is going to be is
going to be this part right over here

00:05:36.630 --> 00:05:41.010
and then actually this part all the way
over here because our equilibrium prices

00:05:41.010 --> 00:05:46.830
gets right over there and then the
producers surplus is this is that right

00:05:46.830 --> 00:05:52.080
over there but we're leaving some
societal benefit on the table we are

00:05:52.080 --> 00:05:54.720
leaving if you think of it from
society's point of view you can view

00:05:54.720 --> 00:05:59.040
this orange area as a deadweight loss
we're leaving that on the table if we

00:05:59.040 --> 00:06:03.660
don't somehow create an incentive for
more of these trees to be produced and

00:06:03.660 --> 00:06:09.690
so in this situation a way to make the
optimal quantity produce in order for

00:06:09.690 --> 00:06:13.920
society to get this surplus what they
could do is in the case of a negative

00:06:13.920 --> 00:06:18.690
externality we imposed a tax that
factors in the negative externality now

00:06:18.690 --> 00:06:24.780
we could put some type of a subsidy we
could say hey if you plant a tree if if

00:06:24.780 --> 00:06:31.260
someone plants a tree plants a tree buys
and plants one of these trees you will

00:06:31.260 --> 00:06:37.470
get a $10 tax credit $10 tax credit so
it's essentially saying whoever plants

00:06:37.470 --> 00:06:40.470
one of these trees their taxes are going
to be $10

00:06:40.470 --> 00:06:44.190
lower than what they would have
otherwise had paid and so essentially

00:06:44.190 --> 00:06:47.190
they're saying look whatever benefit you
were going to get from the tree we're

00:06:47.190 --> 00:06:50.310
going to give you ten dollars more
benefit for that and so you're

00:06:50.310 --> 00:06:53.940
essentially you're essentially making
sure that the optimal quantity is being

00:06:53.940 --> 00:06:58.500
produced now in that circumstance you're
essentially giving all of the marginal

00:06:58.500 --> 00:07:03.570
benefit that extra $10 benefit you're
giving it you're giving it to the people

00:07:03.570 --> 00:07:07.920
who are planting the trees so
essentially all of this all of this

00:07:07.920 --> 00:07:11.370
becomes their benefit as well because
they are going to get the ten dollars

00:07:11.370 --> 00:07:15.990
but the good thing is at least at least
that positive surplus is getting is

00:07:15.990 --> 00:07:20.820
going to someone it's not being lost
you're not giving up you're not giving

00:07:20.820 --> 00:07:25.850
up on this orange area right over there