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Now, capital is an interesting one. It means one thing in everyday language, and it means something slightly more specific when we talk about it in an economics context. In an economic context, capital is something produced to produce other things. So examples of capital would be tools that you use to produce other thi... | Four factors of production AP Microeconomics Khan Academy.mp3 |
So examples of capital would be tools that you use to produce other things. It could be a building that you need in order to produce other things. It could be the machinery in a factory. So in these two pictures, there's many examples of capital. You could view this table and the tools that these folks are using. That ... | Four factors of production AP Microeconomics Khan Academy.mp3 |
So in these two pictures, there's many examples of capital. You could view this table and the tools that these folks are using. That is capital. You could view the whole building itself and all of the light fixtures and all of that as capital. So all of this stuff is capital. The hangers that they're putting the coats ... | Four factors of production AP Microeconomics Khan Academy.mp3 |
You could view the whole building itself and all of the light fixtures and all of that as capital. So all of this stuff is capital. The hangers that they're putting the coats on after they produce it, that is capital. In this farm example, the capital would be the buildings. These were constructed so that they could pr... | Four factors of production AP Microeconomics Khan Academy.mp3 |
In this farm example, the capital would be the buildings. These were constructed so that they could produce the food from the farm. This little, it looks like some type of machinery there, that is capital for the farm. It's being used to produce the output of the farm. Now, the place that that's different than everyday... | Four factors of production AP Microeconomics Khan Academy.mp3 |
It's being used to produce the output of the farm. Now, the place that that's different than everyday language, in everyday language when people talk about capital, they'll often include financial capital, financial assets that could be used to get benefit in the future, things like money. But in an economic context, w... | Four factors of production AP Microeconomics Khan Academy.mp3 |
We're only thinking about things that were produced in order to produce other things. The fourth factor of production is entrepreneurship. Entrepreneurship in our everyday language means putting things together so you're trying to create other things. When someone's an entrepreneur, you might imagine someone who's tryi... | Four factors of production AP Microeconomics Khan Academy.mp3 |
When someone's an entrepreneur, you might imagine someone who's trying to start a business. In an economic context, it has a related idea. Entrepreneurship is putting together all of the other factors of production so that you can actually produce things. You can't just randomly build buildings and randomly plant seeds... | Four factors of production AP Microeconomics Khan Academy.mp3 |
You can't just randomly build buildings and randomly plant seeds. Someone has to think about how do you put these things together so that you can produce things in a reasonable way. And obviously, you wanna produce as much as possible given the other factors that you are putting into the production. A related idea, and... | Four factors of production AP Microeconomics Khan Academy.mp3 |
A related idea, and it sometimes is used interchangeably in an economics course, is technology. So sometimes you'll see the four factors of production is land, labor, capital, and entrepreneurship, and sometimes you'll see it listed as land, labor, capital, and technology. But when you see this, when you see technology... | Four factors of production AP Microeconomics Khan Academy.mp3 |
When people are talking about technology as a factor of production, they are really talking about entrepreneurship. They're talking about the know-how of putting together the other factors of production in order to produce that output. Finally, I wanna leave on one idea, the idea of the two types of things that could b... | Four factors of production AP Microeconomics Khan Academy.mp3 |
Broadly speaking, we could produce something that could be used to produce more things, and we already talked about it. We could be, in that situation, be producing capital goods. That could be that we are constructing a factory that itself maybe produces tools for other people to use in some other production process. ... | Four factors of production AP Microeconomics Khan Academy.mp3 |
The other option we have is to produce what are known as consumption goods. Consumption goods. Consumption goods are goods that are just used. It might make people happy. They might find pleasure in it, but it's not being used to produce other things. And because our production resources are scarce, there's a trade-off... | Four factors of production AP Microeconomics Khan Academy.mp3 |
It might make people happy. They might find pleasure in it, but it's not being used to produce other things. And because our production resources are scarce, there's a trade-off when a society or a factory or whoever decides how much capital to produce versus how much consumption goods. You need some consumption goods,... | Four factors of production AP Microeconomics Khan Academy.mp3 |
We've spent several videos already talking about graphs like you see here. This is the graph for a particular firm. Maybe it's making donuts, so it's in the donut industry. And we can see how the marginal cost relates to the average variable cost and average total cost. We go into some depth several videos ago, but we ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And we can see how the marginal cost relates to the average variable cost and average total cost. We go into some depth several videos ago, but we see that trend, that marginal cost can trend down initially because as quantity increases, each incremental unit could benefit from things like specialization. And then the ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And then we've also seen how that relates to average variable cost, that while marginal cost is below average variable cost, every incremental unit is going to bring down the average variable cost. But then when marginal cost crosses average variable cost, well now every incremental unit is going to bring up the averag... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And of course, the difference between, for any given quantity between the average total cost and the average variable cost, that is the average fixed cost. Now with that out of the way, we're going to think about how this firm would react under different market conditions. We're going to assume that it's in a very comp... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And so let's first imagine what would be a positive scenario for this firm. Let's imagine the price up here. So let's call this P sub one. And in a previous video, we already said it would be rational for a profit-maximizing firm to produce at a quantity where the marginal cost and the marginal revenue is meet. And if ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And in a previous video, we already said it would be rational for a profit-maximizing firm to produce at a quantity where the marginal cost and the marginal revenue is meet. And if we're talking about a competitive market, then this price right over here is not going to be a function of the firm's quantity, so that's w... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And this is a good situation for the firm because the price that it's getting is higher than its average total cost, and so there is going to be a nice amount of profit for this firm. The profit is going to be the price minus the average total cost at that quantity times the actual quantity. So because P one is greater... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Firm is profitable. It would want to stay in the market, but because you have a profitable firm in this market, and you're likely to have many profitable firms in that market, it will probably attract entrance. Attract, attract entrance. Other people might say, hey, I wanna make just as much money as this donut company... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Other people might say, hey, I wanna make just as much money as this donut company right over here than this firm, and so you'll probably have more and more entrance into the market, which will probably reduce the prices. Now, they could reduce the prices until you get to a price that looks something like this. So I wi... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Now, a profit-maximizing firm in this world would keep producing until the marginal cost is equal to the marginal revenue, which in this case is the price. And so this would be, my lines aren't completely straight there, but you get the idea. So that's Q sub two. Now, in this situation, P sub two is equal to the averag... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Now, in this situation, P sub two is equal to the average total cost, so the firm is break-even. It's not running at a loss or a profit, so it is break-even. And so here, the firm is neutral about whether in the long run it stays in the market or it exits the market, but you're no longer likely attracting entrance. So ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
So no longer attracting, attracting entrance. But it does make sense for the firm to keep operating at this situation, even in the long run, because it is at least break-even. Now, let's imagine another scenario. Let's imagine this price level. So for whatever reason, the market price gets to that. As we've talked abou... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Let's imagine this price level. So for whatever reason, the market price gets to that. As we've talked about, a rational firm would be producing at Q sub three. And at P sub three right over here, there's some interesting things. Because P sub three is less than your average total cost, your firm is running at a loss. ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And at P sub three right over here, there's some interesting things. Because P sub three is less than your average total cost, your firm is running at a loss. It's running at a loss here. So running, so firm, firm not profitable. Not profitable. Now, you might say, well, what is this firm likely to do? Would it just sh... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
So running, so firm, firm not profitable. Not profitable. Now, you might say, well, what is this firm likely to do? Would it just shut down? Well, in the short run, it would not make sense for this firm to shut down, because the price that it's getting is still higher than its average variable cost. In the short run, t... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Would it just shut down? Well, in the short run, it would not make sense for this firm to shut down, because the price that it's getting is still higher than its average variable cost. In the short run, the fixed costs, they've already been spent. So you might as well get as much incremental profit on the margin as you... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
So you might as well get as much incremental profit on the margin as you can. And so as long as the price is higher than the average variable cost, well, outside of their fixed costs, they're still making some money to make up those fixed costs. So you have two things going on. So they would stay operating in the short... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
So they would stay operating in the short run, stay operating, operating in the short run, short run. But what would this firm do in the long run? Well, in the long run, it makes no sense to be in a market where you can't make a profit. So in the long run, it will exit. So it will exit in the long run. And in general, ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
So in the long run, it will exit. So it will exit in the long run. And in general, the terminology, when people are talking about, well, do you start or stop in the short run, they usually talk about, do you either shut down or operate in the short run? And then in the long run, where it's like, hey, are you going to s... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And then in the long run, where it's like, hey, are you going to sell your factories or somehow dismantle them, or are you gonna build new factories? That's all about exiting or entering the industry. And of course, you have another even worse scenario for this firm, which might be down here, where you have price sub f... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
Here, in theory, this is where we intersect the marginal cost curve, Q sub four. Now here, it makes no sense for the company to operate at all. So because P sub four is less than the average total cost, you would want to exit in the long run, exit in long run, exit the market. But you wouldn't even wait for that long, ... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
But you wouldn't even wait for that long, wait to sell your factories. Because P sub four is less than your average variable cost, you would also just shut down, shut down in the short run. So big picture, from a firm's point of view, you obviously want to be at P one, where you make a profit, but you might attract ent... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
At P sub two, you as a firm, in the long run, are neutral versus exiting the market or entering the market or other people entering the market. You're at break even. At P sub three, in the long run, you'd want to exit because you're not profitable if the prices stay at P sub three. Your price is below your average tota... | Shutting down or exiting industry based on price APⓇ Microeconomics Khan Academy.mp3 |
And this is in per worker per day. So for example, in country A, per worker per day, they could, if they put all of their energy into pants, they could produce 20. If they put all of their energy into shirts, they could produce 10. Or there could be some combination that would sit on this line. Now to help us digest th... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
Or there could be some combination that would sit on this line. Now to help us digest the production possibility curves for these two countries, let me construct an output table. So this will be, this column will be the output for country A, this column will be the output for country B. And we're gonna think about the ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And we're gonna think about the maximum number of pants. Maximum pants, the maximum output of pants per worker per day, the input is the worker per day. And then let's think about the maximum number of shirts. So pause this video and see if you can fill this out. What are the max pants and shirts in country A and count... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So pause this video and see if you can fill this out. What are the max pants and shirts in country A and country B? Well in country A, I already talked about it. The maximum pants is 20, 20 pants. And then the maximum shirts, if they didn't make any pants, are 10. And in country B, the maximum pants are 30. And the max... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
The maximum pants is 20, 20 pants. And then the maximum shirts, if they didn't make any pants, are 10. And in country B, the maximum pants are 30. And the maximum shirts, it looks like that is about 45. Now from either of these production possibility curves or from this output table, because we have a constant opportun... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And the maximum shirts, it looks like that is about 45. Now from either of these production possibility curves or from this output table, because we have a constant opportunity cost, these production possibility curves are straight lines with a fixed slope, we can calculate the opportunity cost. So let's do that next. ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So this is country A and then this is country B. And let me calculate the opportunity cost of pants. And let's calculate the opportunity cost of shirts. So pause this video and see if you can figure that out. What are the opportunity costs of pants and shirts in countries A and B and fill out this table? Well, one way ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So pause this video and see if you can figure that out. What are the opportunity costs of pants and shirts in countries A and B and fill out this table? Well, one way to think about it, in country A, I could put all of my energy into pants and produce 20 pants. Or I could put all of my energy into shirts and produce 10... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
Or I could put all of my energy into shirts and produce 10 shirts. 10 shirts, S for shirts, P for pants. And so if I want the cost of pants, I could just divide both sides by 20 and I would get pants, the amount of energy per pant, is equal to, well, 10 divided by 20 is 1 1⁄2 a shirt. So the energy for a pant is 1 1⁄2,... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So the energy for a pant is 1 1⁄2, is the same as the energy for 1⁄2 a shirt. And so we could say the opportunity cost of producing a pant is 1 1⁄2 a shirt. If we want the opportunity cost for shirts, we could take the reciprocal of this number, we could say it's going to be two over one pants, or we could start with t... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So if you divide both sides of this equation by 10, you would get, you would get 2P is equal to S. Or another way of thinking about it, the energy to create one shirt is equal to the energy to create two pants. So the opportunity cost of producing a shirt is two pants. With that same energy of the shirt, you could prod... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
Now let's also fill it out for country B. If you haven't done so already, try to use the same method to fill this, the opportunity cost for pants and shirts for country B. Well, in country B, I could put all of my energy into pants and produce 30 pants, or all of my energy into shirts and produce 45 shirts. So the oppo... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So the opportunity cost per pant, if I divide both sides by 30, it'd be 45 over 30, which would be equal to, they're both divisible by 15, 3 1 2 of a shirt. The energy for one pair of pants is the same as the energy for 1 1 2 shirts, I guess I could say. So let me write it that way. So the opportunity cost of pants is,... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So the opportunity cost of pants is, for each pair, I'm giving up 1 1 2 shirts. And then in the opportunity cost for shirts, well, I could just solve for S here. If I divide both sides by 45, I get the same energy for one shirt would be 30 4 1 5 of a pair of pants, which is the same thing as 2 3 of a pair of pants. And... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And so I could write that as 2 3 of a pair of pants, or if I wanted, oh, let me just write it that way, 2 3 of a pair of pants. So given the opportunity costs, what should each of these countries focus on? Pause this video and try to figure that out. Well, let's first compare their opportunity costs in pants. So let's ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
Well, let's first compare their opportunity costs in pants. So let's first compare their opportunity cost in pants. It is clear that country A has a lower opportunity cost for producing a pair of pants. It's only giving up half a shirt, while country B is giving up 1 1 2 shirts. So country A has the comparative advanta... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
It's only giving up half a shirt, while country B is giving up 1 1 2 shirts. So country A has the comparative advantage right over here. So comparative advantage right over here in pants. And so it should focus all of its energy, according to the theory of comparative advantage, it should focus all of its energy on pan... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And so it should focus all of its energy, according to the theory of comparative advantage, it should focus all of its energy on pants. And likewise, if we look at, so here we compared this to this, and likewise, if we try to look at shirts right over here, if we look at their opportunity costs, country B is only givin... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So country B should put all of their focus here on shirts. Now I know what you might be thinking. People can't just walk around wearing only shirts. That might, people might get cold below their waist. Or people don't wanna only wear pants. They might get cold above their waist. And so how can people in these countries... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
That might, people might get cold below their waist. Or people don't wanna only wear pants. They might get cold above their waist. And so how can people in these countries get the other type of garment? Well, the obvious answer is, if they focus in this way, they can trade. And what would be an acceptable trading price... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And so how can people in these countries get the other type of garment? Well, the obvious answer is, if they focus in this way, they can trade. And what would be an acceptable trading price, let's say for pants? Let's focus on pants for a second. So if we're thinking about the market for pants, so if you're country A, ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
Let's focus on pants for a second. So if we're thinking about the market for pants, so if you're country A, what would you be willing to sell pants for in terms of shirts? Well, a good price, so to speak, would be something higher than your opportunity cost. So A, willing to sell, sell pants at price, I'll put that in ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So A, willing to sell, sell pants at price, I'll put that in quotes, because we're really thinking of price in terms of another good, at price greater than their opportunity cost, greater than one half of a shirt. And you could think of this willing to trade or sell. I'll put that in quotes. We're really trading in our... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
We're really trading in our everyday language right over here. And likewise, what about country B? Well, B, willing to buy pants, they need pants, otherwise they would just be walking around with only shirts on, willing to buy pants at a price less than their opportunity cost for pants. And so that would be less than 1... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And so that would be less than 1.5 of a shirt. So what would be a price that is greater than half a shirt and less than one half, and less than one and a half of a shirt? And really, any price in between these two values would work. Well, a nice round number is, well, they could trade at one pair of pants for one shirt... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
Well, a nice round number is, well, they could trade at one pair of pants for one shirt. So a clearing price, a price that would work, would work, could be one P, one pants, for one shirt. And now let's appreciate the gains from trade that they would both have here. So let's imagine this world where country A is produc... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So let's imagine this world where country A is producing 20 pants per worker per day. But let's say they decide that they want, instead of those 20 pants, they would wanna trade 15 of them away for shirts. And so they would get, at this price, they would get 15 shirts. So they're gonna give up 15 pants. They're giving ... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So they're gonna give up 15 pants. They're giving up 15 pants, so they'll only have five pants right over here. But they're going to get 15 shirts. So they're gonna get 15 shirts. And they're going to end up right over here. This is where country A is going to end up. And what's cool about this is we've gone beyond the... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So they're gonna get 15 shirts. And they're going to end up right over here. This is where country A is going to end up. And what's cool about this is we've gone beyond the production possibilities curve. So you see very clearly the gain from trade. Country A could not have gotten to this point on its own. This is abov... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
And what's cool about this is we've gone beyond the production possibilities curve. So you see very clearly the gain from trade. Country A could not have gotten to this point on its own. This is above the production possibilities curve. Likewise, country B was over here with 45 shirts. It gave up 15 of those shirts. It... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
This is above the production possibilities curve. Likewise, country B was over here with 45 shirts. It gave up 15 of those shirts. It now has 30 shirts. But it now has 15 pants. At least some of the people in the country are going to be able to wear pants now. So it now has 15 pants. | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
It now has 30 shirts. But it now has 15 pants. At least some of the people in the country are going to be able to wear pants now. So it now has 15 pants. Once again, it too is in a point beyond its production possibilities curve. It would not have been able to get here without the trade. So they are both better off. | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
So it now has 15 pants. Once again, it too is in a point beyond its production possibilities curve. It would not have been able to get here without the trade. So they are both better off. So the key thing, the key takeaway from this video is we now appreciate why comparative advantage is valuable. Once again, making al... | Terms of Trade and the Gains from Trade AP Macroeconomics Khan Academy.mp3 |
In this video, we're gonna think about it visually. So we constructed these curves several videos ago to visualize how average fixed cost trends over time as you take that fixed cost and then you spread it over more and more and more units, you see that that just asymptotes towards zero as you get more and more units. ... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
It hits the bottom of that U of average total cost. It goes from trending down to trending up, and then over time, this difference that you see between your average total cost and your average variable cost, that difference right over there. That is your average fixed cost, and so since your average fixed costs are asy... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
But now let's think about how these curves might be impacted if you have changes in productivity or cost. So let's start with a change in your fixed costs. Let's say your rent goes up. What would happen then? Pause this video and think about what would happen visually. Well then your average fixed costs would shift up ... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
What would happen then? Pause this video and think about what would happen visually. Well then your average fixed costs would shift up and it might look something like this. Your average fixed costs might look something like this. And then which of these other curves also have fixed costs embedded in it? Well your aver... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
Your average fixed costs might look something like this. And then which of these other curves also have fixed costs embedded in it? Well your average total costs is a combination of your average variable costs and your average fixed costs. So the amount that your average fixed costs went up for any quantity, your avera... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
So the amount that your average fixed costs went up for any quantity, your average total costs would also go up that amount for that quantity. So it would look something like this. It would look something like this. And once again, just as before, it will trend downwards until you intersect with your marginal cost curv... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
And once again, just as before, it will trend downwards until you intersect with your marginal cost curve and then it'll start trending upwards. So a change in your fixed costs, either upwards or downwards, would affect your average fixed costs. It would affect your average total costs. The reason why it doesn't affect... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
The reason why it doesn't affect your average variable costs is because your average variable costs are taking out your fixed costs, they're just thinking about the variable costs. And your marginal costs are thinking about a difference in costs between two different states of output. And the fixed costs are in either ... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
What would be a change in your variable costs? Let's say you have to give everyone a pay increase. Well then your variable costs will go up and your variable costs might look something like this. They will just shift up. And once again, they will trend downwards until you intersect with your marginal cost curve and the... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
They will just shift up. And once again, they will trend downwards until you intersect with your marginal cost curve and then you will trend upwards. Now a change in your variable costs will also affect your marginal costs because as you produce more output, well then you are likely to incur more incremental costs. So ... | Graphical impact of cost changes on marginal and average costs (2).mp3 |
So the first question they ask us is, is the market price greater than, less than, or equal to the firm's price? Explain. So pause this video and see if you can answer this on your own before we do it together. All right, now let's do it together. So remember, we are talking about a perfectly competitive market. So in ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
All right, now let's do it together. So remember, we are talking about a perfectly competitive market. So in a perfectly competitive market, all of the players in that market have to be price-takers. They have no pricing power. So the market price has to be equal to the firm's price. So market, market price, equal, equ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
They have no pricing power. So the market price has to be equal to the firm's price. So market, market price, equal, equal to firm price, firm price, because in perfectly, perfectly competitive market, market, firms are price-takers. Firms are price-takers. They have no pricing power. All right, part B. Draw correctly ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
Firms are price-takers. They have no pricing power. All right, part B. Draw correctly labeled side-by-side graphs for both the market and a typical firm, and show each of the following. And then it'll ask us to do a bunch of stuff here. So once again, pause this video, and actually get out paper. This will be very valu... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
Draw correctly labeled side-by-side graphs for both the market and a typical firm, and show each of the following. And then it'll ask us to do a bunch of stuff here. So once again, pause this video, and actually get out paper. This will be very valuable for you to have a go at this. All right, so let's see. We wanna do... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
This will be very valuable for you to have a go at this. All right, so let's see. We wanna do these side-by-side graphs, and we wanna think about the market and the firm. And we've done this in multiple videos before. So let's think about what they're talking about is, so this is the market right over here. That's the ... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
And we've done this in multiple videos before. So let's think about what they're talking about is, so this is the market right over here. That's the market. And this is, on this axis is going to be price. On this axis is going to be quantity. And then let me do a similar thing for a firm here. So that would be the firm... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
And this is, on this axis is going to be price. On this axis is going to be quantity. And then let me do a similar thing for a firm here. So that would be the firm's price axis. Price. And then this would be quantity for the firm. Quantity. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
So that would be the firm's price axis. Price. And then this would be quantity for the firm. Quantity. Let me make it clear. This is the market. And then this right over here is the firm. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
Quantity. Let me make it clear. This is the market. And then this right over here is the firm. And let's see, they say market price and quantity. So the equilibrium price and quantity in the market. So we could draw the supply curve for the market. | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
And then this right over here is the firm. And let's see, they say market price and quantity. So the equilibrium price and quantity in the market. So we could draw the supply curve for the market. It might look something like this. Upward sloping, we've seen that multiple times. We could do the demand curve for the mar... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
So we could draw the supply curve for the market. It might look something like this. Upward sloping, we've seen that multiple times. We could do the demand curve for the market. It would look something like that. And then we have the equilibrium price in the market, which they want us to use P sub M. So P sub M. And th... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
We could do the demand curve for the market. It would look something like that. And then we have the equilibrium price in the market, which they want us to use P sub M. So P sub M. And then we have the equilibrium quantity in the market, which they want us to use Q sub M. So we've done this first part. All right, now l... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
All right, now let's see what else they want. The firm's quantity labeled Q sub F. The firm's average revenue curve labeled AR. The firm's average total cost curve labeled ATC. The area representing total cost shaded completely. So in order to do this first part, the quantity that would be rational for this profit-seek... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
The area representing total cost shaded completely. So in order to do this first part, the quantity that would be rational for this profit-seeking firm, or the profit-maximizing firm to produce, to think about that, we'd actually also have to think about the firm's average revenue. And the average revenue, which is goi... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
Remember, the firm in this perfectly competitive market has to be a price taker. So this horizontal line right over there, that is the firm's average revenue, AR, which is equal to its marginal revenue, which is equal to its demand curve, which is equal to this market price. And the quantity that it's rational for this... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
So the marginal cost curve might look something like this. So marginal cost. And so this right over here is our Q sub F. So we've done this part and this part. The firm's average total cost curve, well, the average total cost at this quantity needs to be below the marginal revenue and the average revenue of that quanti... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
The firm's average total cost curve, well, the average total cost at this quantity needs to be below the marginal revenue and the average revenue of that quantity, because we know that the firm is earning a positive economic profit. So we are dealing with a situation that likely looks like this so the average total cos... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
That tells us that we're earning economic profit in this situation. So I've done part four. The area representing total cost shaded completely. Well, the area representing total cost would be the cost per unit, the average cost per unit, which is that much, times the total number of units. And the total number of units... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
Well, the area representing total cost would be the cost per unit, the average cost per unit, which is that much, times the total number of units. And the total number of units is going to be this length, which is equal to Q sub F. And so your total cost is going to be this shaded area. If they were asking us our total... | AP Microeconomics FRQ on perfect competition AP(R) Microeconomics Khan Academy (2).mp3 |
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