Sentence stringlengths 159 3.48k | video_title stringlengths 15 104 |
|---|---|
This length right over here is 300 pounds. And then our height over here. And we can just use this as the area of a triangle because this is a simple linear demand curve. We would actually have to use a little bit of calculus if this was a nonlinear curve. But the height here is two. The height here is two. So our area, the area between the demand curve and our price equals two is equal to 1 1⁄2 times base times height. | Total consumer surplus as area Microeconomics Khan Academy.mp3 |
We would actually have to use a little bit of calculus if this was a nonlinear curve. But the height here is two. The height here is two. So our area, the area between the demand curve and our price equals two is equal to 1 1⁄2 times base times height. 1 1⁄2 times the base, which is 300 pounds, times 300 pounds, times the height, which is $2, which is $2 per pound, times $2, all right, this way, times $2 per pound. The pounds cancel out. 1 1⁄2 times two is one, times 300 is 300. | Total consumer surplus as area Microeconomics Khan Academy.mp3 |
So our area, the area between the demand curve and our price equals two is equal to 1 1⁄2 times base times height. 1 1⁄2 times the base, which is 300 pounds, times 300 pounds, times the height, which is $2, which is $2 per pound, times $2, all right, this way, times $2 per pound. The pounds cancel out. 1 1⁄2 times two is one, times 300 is 300. So we get 300, 300, and all we're left with is dollars. So the total consumer surplus in this case is $300. And it really is just the area between the demand curve and this price equals two line right over there. | Total consumer surplus as area Microeconomics Khan Academy.mp3 |
So let's say that this is that both of our players in our duopoly, and this would actually apply to an oligopoly generally, but the analysis would be a little bit more difficult if we had more than two players. But let's say each player has an identical, they're identical companies. And they both have a marginal cost curve that looks something like that. So they both have a marginal cost curve, an individual marginal cost curve that looks like that. And they both have an average total cost curve that looks something like this. So they both have an average total cost curve that looks something like that. And they are identical. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So they both have a marginal cost curve, an individual marginal cost curve that looks like that. And they both have an average total cost curve that looks something like this. So they both have an average total cost curve that looks something like that. And they are identical. So I'll just draw it once. This is the marginal cost and average total cost for both firms. Now let's think about what it would look like for the market. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And they are identical. So I'll just draw it once. This is the marginal cost and average total cost for both firms. Now let's think about what it would look like for the market. Well, one way to think about it, pick an arbitrary marginal cost. So for one firm, what can they produce, or what quantity will they be at that marginal cost? Well, they'll be at this quantity for that marginal cost. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Now let's think about what it would look like for the market. Well, one way to think about it, pick an arbitrary marginal cost. So for one firm, what can they produce, or what quantity will they be at that marginal cost? Well, they'll be at this quantity for that marginal cost. But if you have two firms that are just like that, they could have twice as much quantity to be at that point in marginal cost. So two firms will be over there. And if you picked this marginal cost, one firm would produce that quantity to be right at that marginal cost for that next incremental good. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Well, they'll be at this quantity for that marginal cost. But if you have two firms that are just like that, they could have twice as much quantity to be at that point in marginal cost. So two firms will be over there. And if you picked this marginal cost, one firm would produce that quantity to be right at that marginal cost for that next incremental good. But two firms could produce two, especially if they had the exact same cost structure, could produce two. So what you're going to have is you're essentially adding this curve to itself in the horizontal direction. So if you look at the marginal cost curve for both firms together, you're essentially going to get a curve that is twice as fat as the marginal cost curve for one firm. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And if you picked this marginal cost, one firm would produce that quantity to be right at that marginal cost for that next incremental good. But two firms could produce two, especially if they had the exact same cost structure, could produce two. So what you're going to have is you're essentially adding this curve to itself in the horizontal direction. So if you look at the marginal cost curve for both firms together, you're essentially going to get a curve that is twice as fat as the marginal cost curve for one firm. So it will look something like this. And I'll do it in yellow. So it will look something like that. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So if you look at the marginal cost curve for both firms together, you're essentially going to get a curve that is twice as fat as the marginal cost curve for one firm. So it will look something like this. And I'll do it in yellow. So it will look something like that. So that is the marginal cost for the market, where the market in this example is both of these firms. And that will also be true for the average total cost. If at this price, or actually I should say if the average total cost is up here for one firm, that means that they are producing this quantity. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So it will look something like that. So that is the marginal cost for the market, where the market in this example is both of these firms. And that will also be true for the average total cost. If at this price, or actually I should say if the average total cost is up here for one firm, that means that they are producing this quantity. But two firms together could provide twice the quantity of that average total cost. So two firms would produce twice. And so what you're going to have is an average total cost curve that is twice as fat as the average total cost curve for one firm, if you talk about the market. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
If at this price, or actually I should say if the average total cost is up here for one firm, that means that they are producing this quantity. But two firms together could provide twice the quantity of that average total cost. So two firms would produce twice. And so what you're going to have is an average total cost curve that is twice as fat as the average total cost curve for one firm, if you talk about the market. So the market's average total cost curve is going to look something like this. It's going to be twice as fat. It's the exact same logic. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And so what you're going to have is an average total cost curve that is twice as fat as the average total cost curve for one firm, if you talk about the market. So the market's average total cost curve is going to look something like this. It's going to be twice as fat. It's the exact same logic. It's going to look something like that. So that is the average total cost curve for the market. So so far, the convention that I've ended up using is orange for an individual firm, and then this dotted yellow line for the market as a whole. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
It's the exact same logic. It's going to look something like that. So that is the average total cost curve for the market. So so far, the convention that I've ended up using is orange for an individual firm, and then this dotted yellow line for the market as a whole. Now let's think about what a good equilibrium price, or what the right price should be if they were able to coordinate together, if they were to essentially combine their firms and almost behave like a monopoly. And to think about that, we're going to have to draw a demand curve. So let me draw the market demand curve. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So so far, the convention that I've ended up using is orange for an individual firm, and then this dotted yellow line for the market as a whole. Now let's think about what a good equilibrium price, or what the right price should be if they were able to coordinate together, if they were to essentially combine their firms and almost behave like a monopoly. And to think about that, we're going to have to draw a demand curve. So let me draw the market demand curve. Let's say the market demand curve looks something like that. It's really big, so it's hard for me. We'll assume that this is a line. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So let me draw the market demand curve. Let's say the market demand curve looks something like that. It's really big, so it's hard for me. We'll assume that this is a line. So that's pretty good. So this is the market demand curve. Market demand curve. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
We'll assume that this is a line. So that's pretty good. So this is the market demand curve. Market demand curve. So if both of these firms operated together, if they and oh, I drew the market demand curve, I also want to draw the market marginal revenue curve. Now remember, we're going to assume that both of these firms are acting together. If they perfectly coordinate, they can join their capacities and act essentially like a monopoly. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Market demand curve. So if both of these firms operated together, if they and oh, I drew the market demand curve, I also want to draw the market marginal revenue curve. Now remember, we're going to assume that both of these firms are acting together. If they perfectly coordinate, they can join their capacities and act essentially like a monopoly. So if they did act like a monopoly, their marginal revenue curve would be twice the slope of this market demand curve. So it would hit the horizontal axis right over there. And so it would look something like this. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
If they perfectly coordinate, they can join their capacities and act essentially like a monopoly. So if they did act like a monopoly, their marginal revenue curve would be twice the slope of this market demand curve. So it would hit the horizontal axis right over there. And so it would look something like this. It would look something like that. So this right over here is the market marginal revenue curve. So if they were to behave like a monopoly, you could view this dotted line as their marginal cost curve. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And so it would look something like this. It would look something like that. So this right over here is the market marginal revenue curve. So if they were to behave like a monopoly, you could view this dotted line as their marginal cost curve. This would be their average total cost. And now this is their marginal revenue. If they were to behave as a monopoly, what would be the optimal quantity? | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So if they were to behave like a monopoly, you could view this dotted line as their marginal cost curve. This would be their average total cost. And now this is their marginal revenue. If they were to behave as a monopoly, what would be the optimal quantity? Well, it would be right there, right where marginal revenue is equal to marginal cost. Before that, they would keep wanting to produce because marginal revenue is higher than marginal quantity. Marginal revenue is higher than marginal cost. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
If they were to behave as a monopoly, what would be the optimal quantity? Well, it would be right there, right where marginal revenue is equal to marginal cost. Before that, they would keep wanting to produce because marginal revenue is higher than marginal quantity. Marginal revenue is higher than marginal cost. And then after that, they don't want to produce because marginal cost is higher than marginal revenue. And they're going to take economic losses on each of those incremental units. And so this is the quantity that they would produce. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Marginal revenue is higher than marginal cost. And then after that, they don't want to produce because marginal cost is higher than marginal revenue. And they're going to take economic losses on each of those incremental units. And so this is the quantity that they would produce. And the price they would get for that, they just have to go to the market demand curve. They would get this price right over here. Let's say they would get that price right over there. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And so this is the quantity that they would produce. And the price they would get for that, they just have to go to the market demand curve. They would get this price right over here. Let's say they would get that price right over there. And their average total cost per unit, once again, we have to go to the market here. It's this dotted line right over here. That is their average total cost per unit. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Let's say they would get that price right over there. And their average total cost per unit, once again, we have to go to the market here. It's this dotted line right over here. That is their average total cost per unit. So their average economic profit per unit is going to be their revenue per unit minus their average total cost per unit. So this height is their economic profit per unit. And if we multiply that times the total number of units, you would get their total economic profit if they coordinate perfectly, essentially behaving like a monopoly. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
That is their average total cost per unit. So their average economic profit per unit is going to be their revenue per unit minus their average total cost per unit. So this height is their economic profit per unit. And if we multiply that times the total number of units, you would get their total economic profit if they coordinate perfectly, essentially behaving like a monopoly. And let's just say for argument that this height right over here, let's say that that is 10. And let's say that this quantity that they would want to produce as a monopolist is 50. So what is the total economic profit here? | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And if we multiply that times the total number of units, you would get their total economic profit if they coordinate perfectly, essentially behaving like a monopoly. And let's just say for argument that this height right over here, let's say that that is 10. And let's say that this quantity that they would want to produce as a monopolist is 50. So what is the total economic profit here? Well, their total economic profit is 500, if they coordinate is 500. And so they see this. And they say, look, why don't we agree to each produce exactly half of this, and we would split the economic profit. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So what is the total economic profit here? Well, their total economic profit is 500, if they coordinate is 500. And so they see this. And they say, look, why don't we agree to each produce exactly half of this, and we would split the economic profit. And to see that, let's just say one firm says, OK, they both decide that they're going to produce 25. They're going to get this price for it up here, which was the market price. They're going to get that price for it. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And they say, look, why don't we agree to each produce exactly half of this, and we would split the economic profit. And to see that, let's just say one firm says, OK, they both decide that they're going to produce 25. They're going to get this price for it up here, which was the market price. They're going to get that price for it. And their costs are right here. Now we're going on each individual firm. And that makes sense, because this cost is just twice as far away as this cost. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
They're going to get that price for it. And their costs are right here. Now we're going on each individual firm. And that makes sense, because this cost is just twice as far away as this cost. And the dotted line yellow average total cost for the market is just a fatter version, twice as fat as the orange line. And so each firm will make this much economic profit per unit times 25 units. And so each firm would make this orange area in terms of economic profit, or half of the entire 500, or 250 per firm. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And that makes sense, because this cost is just twice as far away as this cost. And the dotted line yellow average total cost for the market is just a fatter version, twice as fat as the orange line. And so each firm will make this much economic profit per unit times 25 units. And so each firm would make this orange area in terms of economic profit, or half of the entire 500, or 250 per firm. Now let's think about why there is an incentive for one or both of the firms to cheat. Let's say one firm in particular. So the other firm holds at 25 units. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And so each firm would make this orange area in terms of economic profit, or half of the entire 500, or 250 per firm. Now let's think about why there is an incentive for one or both of the firms to cheat. Let's say one firm in particular. So the other firm holds at 25 units. But the other firm says, hey, I like this price. I'm already making economic profit. Let me produce 10 more units. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So the other firm holds at 25 units. But the other firm says, hey, I like this price. I'm already making economic profit. Let me produce 10 more units. So the other firm says, I'm not going to produce 25. I am going to produce 35 units. And if that guy produces 35 units, and the other firm in the market, the other duopolist, I guess we could say it, continues to produce at 25, then the total market production is now going to be 60. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Let me produce 10 more units. So the other firm says, I'm not going to produce 25. I am going to produce 35 units. And if that guy produces 35 units, and the other firm in the market, the other duopolist, I guess we could say it, continues to produce at 25, then the total market production is now going to be 60. Now what is the total economic profit? So we can go up the demand curve right over there. That's the new price. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And if that guy produces 35 units, and the other firm in the market, the other duopolist, I guess we could say it, continues to produce at 25, then the total market production is now going to be 60. Now what is the total economic profit? So we can go up the demand curve right over there. That's the new price. That right over there is the new price. The cost per unit is this right over here. And then the number of units that they're producing is 60. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
That's the new price. That right over there is the new price. The cost per unit is this right over here. And then the number of units that they're producing is 60. So the new economic profit is this area. And this bluish, purplish color that I just drew. And even visually, this is true. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And then the number of units that they're producing is 60. So the new economic profit is this area. And this bluish, purplish color that I just drew. And even visually, this is true. Looks like the demand curve and the average total cost curve have gotten closer together. So let's say that this height right over here is 8. And it's going to be $8 of economic profit per unit times 60 units. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And even visually, this is true. Looks like the demand curve and the average total cost curve have gotten closer together. So let's say that this height right over here is 8. And it's going to be $8 of economic profit per unit times 60 units. So if they cheat, let's talk about the cheating circumstance. If they cheat, this was coordinate. Now let's think about if they cheat. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And it's going to be $8 of economic profit per unit times 60 units. So if they cheat, let's talk about the cheating circumstance. If they cheat, this was coordinate. Now let's think about if they cheat. Now we have 60 units for the whole market times $8 of economic profit per unit. You're going to have total economic profit of 480. Your total economic profit went down. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Now let's think about if they cheat. Now we have 60 units for the whole market times $8 of economic profit per unit. You're going to have total economic profit of 480. Your total economic profit went down. And that makes sense. Because now as a market, you're producing beyond the point where marginal revenue is equal to marginal cost. Now marginal cost as a market is higher than marginal revenue. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Your total economic profit went down. And that makes sense. Because now as a market, you're producing beyond the point where marginal revenue is equal to marginal cost. Now marginal cost as a market is higher than marginal revenue. And so all of this is essentially you're creating economic loss. Because each of these incremental units as a market, the cost is higher than the revenue, and you have an economic loss. And so that's why your total economic profit as a market went down from 500 to 480. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Now marginal cost as a market is higher than marginal revenue. And so all of this is essentially you're creating economic loss. Because each of these incremental units as a market, the cost is higher than the revenue, and you have an economic loss. And so that's why your total economic profit as a market went down from 500 to 480. But how much is this character going to be making? The one that decided to cheat. Well, he now has 35 units. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And so that's why your total economic profit as a market went down from 500 to 480. But how much is this character going to be making? The one that decided to cheat. Well, he now has 35 units. He's producing 35 units. And he's getting an economic profit of $8 per unit. So he gets this entire area right over here. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Well, he now has 35 units. He's producing 35 units. And he's getting an economic profit of $8 per unit. So he gets this entire area right over here. So let's multiply 35 times 8. I'll do it right over here. 35 times 8. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
So he gets this entire area right over here. So let's multiply 35 times 8. I'll do it right over here. 35 times 8. 5 times 8 is 40. 3 times 8 is 24. Plus 4 is 280. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
35 times 8. 5 times 8 is 40. 3 times 8 is 24. Plus 4 is 280. So now the cheating firm has $280 of economic profit in this period. And then the honest firm or the fair firm, what they're both doing might be illegal by even attempting to coordinate, the non-cheater, I guess I could call them, the non-cheater will have the rest. The non-cheater is going to have the balance of the economic profit. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
Plus 4 is 280. So now the cheating firm has $280 of economic profit in this period. And then the honest firm or the fair firm, what they're both doing might be illegal by even attempting to coordinate, the non-cheater, I guess I could call them, the non-cheater will have the rest. The non-cheater is going to have the balance of the economic profit. And if the total economic profit was 480, the cheater is getting 280. The non-cheater is only going to get 200. So the cheater definitely benefited by increasing quantity past that optimal one. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
The non-cheater is going to have the balance of the economic profit. And if the total economic profit was 480, the cheater is getting 280. The non-cheater is only going to get 200. So the cheater definitely benefited by increasing quantity past that optimal one. He went from 250 to 280. So it made sense for him. It reduced the total economic profit. | Why parties to cartels cheat Game theory and Nash equilibrium Microeconomics Khan Academy.mp3 |
And in all of these videos, whether we're talking about renting units or hiring people, these are huge oversimplifications. But we're doing it this way so we can apply some of these basic ideas that we're being exposed to in this kind of survey of microeconomics so that we can apply those basic ideas to kind of real-world things. But it's important to realize that we're making huge oversimplifications and oftentimes the real context can be more complicated or a little bit nuanced. But it gives us a way of thinking about things. So this is the unskilled labor market, so people who don't have any specific training or experience for a given job. The vertical axis is their wage rate per hour. It's essentially the price of labor. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
But it gives us a way of thinking about things. So this is the unskilled labor market, so people who don't have any specific training or experience for a given job. The vertical axis is their wage rate per hour. It's essentially the price of labor. This little gap here shows I started at zero, but then I jumped up to five, six, seven. And this right here is a quantity of labor. We're measuring that in terms of millions of hours per month. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
It's essentially the price of labor. This little gap here shows I started at zero, but then I jumped up to five, six, seven. And this right here is a quantity of labor. We're measuring that in terms of millions of hours per month. And once again, we have this little gap here so we can jump to 20, 20 million hours, 21 million hours. And it's important to realize when we think about demand in the labor market, we're not talking about individual consumers. We're talking about employers. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
We're measuring that in terms of millions of hours per month. And once again, we have this little gap here so we can jump to 20, 20 million hours, 21 million hours. And it's important to realize when we think about demand in the labor market, we're not talking about individual consumers. We're talking about employers. In most cases, demand comes from individual consumers, but now the demand is coming from employers. These are the people who are essentially buying labor. And the supply is not coming from corporations. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
We're talking about employers. In most cases, demand comes from individual consumers, but now the demand is coming from employers. These are the people who are essentially buying labor. And the supply is not coming from corporations. The supply is coming from the people who provide labor. So now it's coming from individual workers. So now it is coming from workers. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
And the supply is not coming from corporations. The supply is coming from the people who provide labor. So now it's coming from individual workers. So now it is coming from workers. So let's just say that this market starts off being completely unregulated. And so it has a natural equilibrium price or equilibrium wage at $6 an hour and an equilibrium quantity of labor supplied, which is 22 millions of hours per month. But let's say the government in this hypothetical city or country says, you know what, $6 is a really low wage. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
So now it is coming from workers. So let's just say that this market starts off being completely unregulated. And so it has a natural equilibrium price or equilibrium wage at $6 an hour and an equilibrium quantity of labor supplied, which is 22 millions of hours per month. But let's say the government in this hypothetical city or country says, you know what, $6 is a really low wage. We have trouble imagining how people live well off of a $6 an hour wage. So they say that this right over here is too low. The government does not like it. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
But let's say the government in this hypothetical city or country says, you know what, $6 is a really low wage. We have trouble imagining how people live well off of a $6 an hour wage. So they say that this right over here is too low. The government does not like it. And maybe many of their voters are people making that wage. So they say, hey, you know what? We are going to pass some well-intentioned legislation. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
The government does not like it. And maybe many of their voters are people making that wage. So they say, hey, you know what? We are going to pass some well-intentioned legislation. We are going to pass a minimum wage. We are going to pass a law, minimum wage, that says any employer has to pay at least $7 an hour. $7 an hour. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
We are going to pass some well-intentioned legislation. We are going to pass a minimum wage. We are going to pass a law, minimum wage, that says any employer has to pay at least $7 an hour. $7 an hour. So it has to be at least $7 an hour. So this right over here is a price floor. This is a minimum price in the market. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
$7 an hour. So it has to be at least $7 an hour. So this right over here is a price floor. This is a minimum price in the market. When we talked about rent control, that was a price ceiling. That was a maximum price for rent. Now this is a minimum price for labor. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
This is a minimum price in the market. When we talked about rent control, that was a price ceiling. That was a maximum price for rent. Now this is a minimum price for labor. And since the price floor, this minimum price, is higher than the actual clearing price, it's going to distort the market. So our price floor is right over here, $7. So this right over here is our minimum wage. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Now this is a minimum price for labor. And since the price floor, this minimum price, is higher than the actual clearing price, it's going to distort the market. So our price floor is right over here, $7. So this right over here is our minimum wage. So this right over here is our minimum wage. So what's going to happen here? Well, if you look at the demand side of things, the employers are going to say, wow, if I have to pay $7 an hour now, I can only afford 21 million hours of labor. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
So this right over here is our minimum wage. So this right over here is our minimum wage. So what's going to happen here? Well, if you look at the demand side of things, the employers are going to say, wow, if I have to pay $7 an hour now, I can only afford 21 million hours of labor. So they're going to say, I can only afford now 21 million hours of labor. But if you look at the workers, they're going to say, gee, if I can make $7 an hour, if I can make $7 an hour, then more people are going to be willing to work. Either an individual might say, well, if I was working 40 hours a week, making $6 an hour, if I'm making $7 an hour, I'm willing to work 45 hours a week. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Well, if you look at the demand side of things, the employers are going to say, wow, if I have to pay $7 an hour now, I can only afford 21 million hours of labor. So they're going to say, I can only afford now 21 million hours of labor. But if you look at the workers, they're going to say, gee, if I can make $7 an hour, if I can make $7 an hour, then more people are going to be willing to work. Either an individual might say, well, if I was working 40 hours a week, making $6 an hour, if I'm making $7 an hour, I'm willing to work 45 hours a week. Or there might be a student who's on the fence who says, wow, now wages have gone up enough that it makes sense for me to work. There might be maybe someone who's retired and now $6 wasn't enough for them to come out of retirement but $7 is, maybe a stay-at-home parent now says $7 is enough for them to come out of retirement or not stay at home anymore. And so it actually, the labor, the supply, the quantity supplied of labor in terms of hours will increase. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Either an individual might say, well, if I was working 40 hours a week, making $6 an hour, if I'm making $7 an hour, I'm willing to work 45 hours a week. Or there might be a student who's on the fence who says, wow, now wages have gone up enough that it makes sense for me to work. There might be maybe someone who's retired and now $6 wasn't enough for them to come out of retirement but $7 is, maybe a stay-at-home parent now says $7 is enough for them to come out of retirement or not stay at home anymore. And so it actually, the labor, the supply, the quantity supplied of labor in terms of hours will increase. And so at $7 an hour, people will be willing to supply that much labor. But what's going to happen, what's going to happen in this situation right over here? Well, in this situation, you have all of these people who want to work, but there's only demand for this much work. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
And so it actually, the labor, the supply, the quantity supplied of labor in terms of hours will increase. And so at $7 an hour, people will be willing to supply that much labor. But what's going to happen, what's going to happen in this situation right over here? Well, in this situation, you have all of these people who want to work, but there's only demand for this much work. So this is right here, this is going to be an oversupply of labor. Oversupply of labor. So another way to think about it, there's only jobs for 21 million people now and now 23 million people want to work. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Well, in this situation, you have all of these people who want to work, but there's only demand for this much work. So this is right here, this is going to be an oversupply of labor. Oversupply of labor. So another way to think about it, there's only jobs for 21 million people now and now 23 million people want to work. So you're going to have 2 million people who are by the classical definition of unemployed, people who are looking for work, who can't find work now. And once again, this is completely oversimplified because at this point right over here, based on the way I just viewed that, you would have no unemployment. And we all know even when the economy is humming maximally and there's no regulation, there is some unemployment just due to frictions in the market, people just randomly quitting jobs or firing, getting, or looking for a new job. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
So another way to think about it, there's only jobs for 21 million people now and now 23 million people want to work. So you're going to have 2 million people who are by the classical definition of unemployed, people who are looking for work, who can't find work now. And once again, this is completely oversimplified because at this point right over here, based on the way I just viewed that, you would have no unemployment. And we all know even when the economy is humming maximally and there's no regulation, there is some unemployment just due to frictions in the market, people just randomly quitting jobs or firing, getting, or looking for a new job. But so you could almost view this as excess unemployment, or you could view this as just a very oversimplified model. And in the ideal world, you get close to zero unemployment. Now you have more people looking for jobs because the wages have gone, but fewer jobs because the employers are forced to pay more. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
And we all know even when the economy is humming maximally and there's no regulation, there is some unemployment just due to frictions in the market, people just randomly quitting jobs or firing, getting, or looking for a new job. But so you could almost view this as excess unemployment, or you could view this as just a very oversimplified model. And in the ideal world, you get close to zero unemployment. Now you have more people looking for jobs because the wages have gone, but fewer jobs because the employers are forced to pay more. If we make all of the assumptions in the model, you just want to say how many fewer jobs are there because this obviously we're talking about more people even looking for jobs because the perceived wages have gone up. But in the absolute level, if you, based on these linear supply and demand curves, before there was demand for 22 million jobs and that was actually where the quantity demanded was, and that's also where the quantity supplied was, but now it's only 21 million. So based on this model, you're going to have 1 million fewer jobs. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Now you have more people looking for jobs because the wages have gone, but fewer jobs because the employers are forced to pay more. If we make all of the assumptions in the model, you just want to say how many fewer jobs are there because this obviously we're talking about more people even looking for jobs because the perceived wages have gone up. But in the absolute level, if you, based on these linear supply and demand curves, before there was demand for 22 million jobs and that was actually where the quantity demanded was, and that's also where the quantity supplied was, but now it's only 21 million. So based on this model, you're going to have 1 million fewer jobs. 1 million fewer jobs. Now, when you think about it in terms of surplus, so before the minimum wage, the entire surplus was this entire area over here. So this entire area that's below the demand curve and above the supply curve. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
So based on this model, you're going to have 1 million fewer jobs. 1 million fewer jobs. Now, when you think about it in terms of surplus, so before the minimum wage, the entire surplus was this entire area over here. So this entire area that's below the demand curve and above the supply curve. This entire was a total surplus and it was being divided between the consumer surplus and the producer surplus. So this right over here, so between the price and the supply curve was the producer surplus. And the producer surplus, remember the producers of labor are the individual workers. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
So this entire area that's below the demand curve and above the supply curve. This entire was a total surplus and it was being divided between the consumer surplus and the producer surplus. So this right over here, so between the price and the supply curve was the producer surplus. And the producer surplus, remember the producers of labor are the individual workers. So this was the benefit above and beyond the opportunity cost that the workers were getting was this area right over here that I'm doing kind of in dark white or filled in white. And the consumer surplus or the employer surplus here was the value that the employers were getting, the value that the employers were getting above and beyond the price that they had to pay. Now, in this situation of a minimum wage, now this is the set price. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
And the producer surplus, remember the producers of labor are the individual workers. So this was the benefit above and beyond the opportunity cost that the workers were getting was this area right over here that I'm doing kind of in dark white or filled in white. And the consumer surplus or the employer surplus here was the value that the employers were getting, the value that the employers were getting above and beyond the price that they had to pay. Now, in this situation of a minimum wage, now this is the set price. This is the quantity of labor that is demanded. And so what you lose now, the surplus that we lose is this quantity right over here. This quantity right over here. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Now, in this situation of a minimum wage, now this is the set price. This is the quantity of labor that is demanded. And so what you lose now, the surplus that we lose is this quantity right over here. This quantity right over here. And we could figure out that area quite easily. Let's see, this height right over here is 1 million hours per month. So it's going to be 1 million, I'll just write one for, we'll just remember it's on millions, times this height, times this height right over here, which is $2 per hour. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
This quantity right over here. And we could figure out that area quite easily. Let's see, this height right over here is 1 million hours per month. So it's going to be 1 million, I'll just write one for, we'll just remember it's on millions, times this height, times this height right over here, which is $2 per hour. So times two, times 1 1⁄2. If we just multiply these, we get this whole rectangle. For the area of the triangle, we multiply it times 1 1⁄2. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
So it's going to be 1 million, I'll just write one for, we'll just remember it's on millions, times this height, times this height right over here, which is $2 per hour. So times two, times 1 1⁄2. If we just multiply these, we get this whole rectangle. For the area of the triangle, we multiply it times 1 1⁄2. Times 1 1⁄2. That gives us, that cancels out, that gives us exactly one. And the units are dollars per hour times millions of hours per month gives us millions of dollars per month. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
For the area of the triangle, we multiply it times 1 1⁄2. Times 1 1⁄2. That gives us, that cancels out, that gives us exactly one. And the units are dollars per hour times millions of hours per month gives us millions of dollars per month. So it becomes $1 million per month of surplus, of benefit, of benefit above and beyond, of total benefit that is lost to this market because of this regulation, if you assume all of the things in this model. So just like we talked about in the last video, we have a $1 million per month deadweight loss. Deadweight loss. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
And the units are dollars per hour times millions of hours per month gives us millions of dollars per month. So it becomes $1 million per month of surplus, of benefit, of benefit above and beyond, of total benefit that is lost to this market because of this regulation, if you assume all of the things in this model. So just like we talked about in the last video, we have a $1 million per month deadweight loss. Deadweight loss. Now, not everyone loses here. Because the price was set up, because the price is set up over here, for the people who are working, those first 21 million hours per month, their producer surplus has now increased because the space between what they're getting and their opportunity cost has now increased. So for those lucky enough to produce, to actually have a job, they are, those workers now do have a higher surplus. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Deadweight loss. Now, not everyone loses here. Because the price was set up, because the price is set up over here, for the people who are working, those first 21 million hours per month, their producer surplus has now increased because the space between what they're getting and their opportunity cost has now increased. So for those lucky enough to produce, to actually have a job, they are, those workers now do have a higher surplus. But for those employers, which is on the demand side right now, their surplus, who are employing those first 21 million hours of labor, they now have a smaller consumer surplus or demand surplus or employer surplus right there. So for the first 21 million units of labor, it's redistributing the pie between the employers and the workers. But then because you are making the wage higher, it's reducing the overall demand. | Minimum wage and price floors Microeconomics Khan Academy.mp3 |
Now we're gonna talk about the markets for the factors of production, often known as the factor markets. What are those factors of production? Well, we've talked about them multiple times, things like land, labor, capital, and in particular, we're going to focus in this video on labor. So what we have here are some axes where the vertical axis is labeled the wage rate. You could view that as the price of labor, it'd be per unit time. And on the horizontal axis in both of these cases, we have the quantity of labor, which would be the number of workers in, say, that unit of time. And what we're going to do on the right-hand side right here is think about it from the point of view of a firm, and then on the left-hand side, we're gonna think about it from the point of view of the market as a whole. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
So what we have here are some axes where the vertical axis is labeled the wage rate. You could view that as the price of labor, it'd be per unit time. And on the horizontal axis in both of these cases, we have the quantity of labor, which would be the number of workers in, say, that unit of time. And what we're going to do on the right-hand side right here is think about it from the point of view of a firm, and then on the left-hand side, we're gonna think about it from the point of view of the market as a whole. And to understand it first on the firm's point of view, we can think about the demand from a firm. How much benefit is a firm getting when it hires that incremental worker? And to do that, we're gonna think about something called marginal revenue product. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
And what we're going to do on the right-hand side right here is think about it from the point of view of a firm, and then on the left-hand side, we're gonna think about it from the point of view of the market as a whole. And to understand it first on the firm's point of view, we can think about the demand from a firm. How much benefit is a firm getting when it hires that incremental worker? And to do that, we're gonna think about something called marginal revenue product. Now marginal revenue product sounds very fancy, but I'm gonna set up a little table here so that we can understand it in reasonable terms. So let's say that this is our labor unit, so I'm gonna set up several columns here. This is how much product the firm can produce based on the number of labor units. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
And to do that, we're gonna think about something called marginal revenue product. Now marginal revenue product sounds very fancy, but I'm gonna set up a little table here so that we can understand it in reasonable terms. So let's say that this is our labor unit, so I'm gonna set up several columns here. This is how much product the firm can produce based on the number of labor units. Then you have the marginal product of labor, which is for each incremental unit of labor, how much more are you able to produce? So let me make some columns here, and I'm going to add more columns in a little bit. So let's say we could have zero units of labor, one unit of labor, two units of labor. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
This is how much product the firm can produce based on the number of labor units. Then you have the marginal product of labor, which is for each incremental unit of labor, how much more are you able to produce? So let me make some columns here, and I'm going to add more columns in a little bit. So let's say we could have zero units of labor, one unit of labor, two units of labor. When you have zero units, you're definitely going to produce zero units in that time period. Let's say when you have one unit of labor, one worker in the time period, you're able to produce two. When you have that second laborer or that second worker, you're now able to produce six. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
So let's say we could have zero units of labor, one unit of labor, two units of labor. When you have zero units, you're definitely going to produce zero units in that time period. Let's say when you have one unit of labor, one worker in the time period, you're able to produce two. When you have that second laborer or that second worker, you're now able to produce six. And so we can think about the marginal product of labor. That first worker is able to produce an incremental two. We went from zero to two. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
When you have that second laborer or that second worker, you're now able to produce six. And so we can think about the marginal product of labor. That first worker is able to produce an incremental two. We went from zero to two. But that second worker, by adding them, now you're able to produce an incremental three units. And so here, this might be due to specialization, things like that, but over time, you might have diminishing marginal products of labor. But then if you want to think about, well, what's the real benefit to the firm? | Introduction to labor markets Microeconomics Khan Academy.mp3 |
We went from zero to two. But that second worker, by adding them, now you're able to produce an incremental three units. And so here, this might be due to specialization, things like that, but over time, you might have diminishing marginal products of labor. But then if you want to think about, well, what's the real benefit to the firm? It's not just what is being produced, but how much the firm can get for that. So we could think about the marginal revenue. And so let's just say that that is, I don't know, $4. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
But then if you want to think about, well, what's the real benefit to the firm? It's not just what is being produced, but how much the firm can get for that. So we could think about the marginal revenue. And so let's just say that that is, I don't know, $4. And it's just a constant $4. And then we could think about the marginal revenue product, which is just going to be the marginal product of labor times the amount of dollars or incremental amount of dollars per unit. So it's just gonna be two times four here, which is just going to be $8. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
And so let's just say that that is, I don't know, $4. And it's just a constant $4. And then we could think about the marginal revenue product, which is just going to be the marginal product of labor times the amount of dollars or incremental amount of dollars per unit. So it's just gonna be two times four here, which is just going to be $8. So one way to think about it, when the firm goes from zero laborers or zero workers to one worker, you're going to have an incremental $8 of revenue based on what that worker can produce. And then when you add another worker, you get three times four. You get an incremental $12 of revenue. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
So it's just gonna be two times four here, which is just going to be $8. So one way to think about it, when the firm goes from zero laborers or zero workers to one worker, you're going to have an incremental $8 of revenue based on what that worker can produce. And then when you add another worker, you get three times four. You get an incremental $12 of revenue. And so we can graph this. And as I said, sometimes you might say, initially, you could get some benefits of specialization, but then over time, you get diminishing returns. So it might look something like this. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
You get an incremental $12 of revenue. And so we can graph this. And as I said, sometimes you might say, initially, you could get some benefits of specialization, but then over time, you get diminishing returns. So it might look something like this. Typically, in an econ class, you'll just see a downward-sloping line for simplicity. But the firm's marginal revenue product, you can view it as that individual firm's demand for labor. At those first few units of labor, it has a very high marginal revenue product, but then over time, you have diminishing returns from adding more and more people onto the staff. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
So it might look something like this. Typically, in an econ class, you'll just see a downward-sloping line for simplicity. But the firm's marginal revenue product, you can view it as that individual firm's demand for labor. At those first few units of labor, it has a very high marginal revenue product, but then over time, you have diminishing returns from adding more and more people onto the staff. Now, how would this look at the market? Well, what you could do is you could add up all the marginal revenue products from all the firms in the market, and if you add them up, you're going to get a market labor demand curve. And let me do this in a slightly different color. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
At those first few units of labor, it has a very high marginal revenue product, but then over time, you have diminishing returns from adding more and more people onto the staff. Now, how would this look at the market? Well, what you could do is you could add up all the marginal revenue products from all the firms in the market, and if you add them up, you're going to get a market labor demand curve. And let me do this in a slightly different color. If you add all of these up, you are going to get something like this. Let me write that out. That is the market labor demand curve. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
And let me do this in a slightly different color. If you add all of these up, you are going to get something like this. Let me write that out. That is the market labor demand curve. Now, what is going to be the reasonable level of labor quantity, both in the market, and how much would be rational for this firm to hire? Well, to think about that, we think about the market labor supply curve, and I'm gonna focus on the market first. And just like the market for most things, the higher the wage, you're going to have more folks willing to participate in that labor market. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
That is the market labor demand curve. Now, what is going to be the reasonable level of labor quantity, both in the market, and how much would be rational for this firm to hire? Well, to think about that, we think about the market labor supply curve, and I'm gonna focus on the market first. And just like the market for most things, the higher the wage, you're going to have more folks willing to participate in that labor market. So at a low wage, not a lot of people are going to wanna work in this industry, but as wages get higher and higher, well, then more and more people are going to be up for participating in this labor market. And so this right over here is the market labor supply curve. Supply curve. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
And just like the market for most things, the higher the wage, you're going to have more folks willing to participate in that labor market. So at a low wage, not a lot of people are going to wanna work in this industry, but as wages get higher and higher, well, then more and more people are going to be up for participating in this labor market. And so this right over here is the market labor supply curve. Supply curve. And so what would be the equilibrium price of labor, which was really just the wage rate? Well, it's where your supply and demand curves intersect, and we've seen this multiple times already. So this is, I'll just call that wage star like that. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
Supply curve. And so what would be the equilibrium price of labor, which was really just the wage rate? Well, it's where your supply and demand curves intersect, and we've seen this multiple times already. So this is, I'll just call that wage star like that. And then the equilibrium quantity of labor, we could just call that Q star right over here. Now, how would that impact what's going on in the firm? Well, if we assume that this is a perfectly competitive labor market, we'll assume that this firm can't set the wage. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
So this is, I'll just call that wage star like that. And then the equilibrium quantity of labor, we could just call that Q star right over here. Now, how would that impact what's going on in the firm? Well, if we assume that this is a perfectly competitive labor market, we'll assume that this firm can't set the wage. It's just going to have to pay people whatever the equilibrium wage actually is. And so this right over here is going to be the firm's, what's known as marginal factor cost, the cost per incremental unit of labor. That's just the wage it's going to have to pay. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
Well, if we assume that this is a perfectly competitive labor market, we'll assume that this firm can't set the wage. It's just going to have to pay people whatever the equilibrium wage actually is. And so this right over here is going to be the firm's, what's known as marginal factor cost, the cost per incremental unit of labor. That's just the wage it's going to have to pay. It can get as much of that labor as we need, we assume, because we're talking about a perfectly competitive labor market in this industry. I'm just trying to draw a straighter line. So this right over here is our marginal factor cost. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
That's just the wage it's going to have to pay. It can get as much of that labor as we need, we assume, because we're talking about a perfectly competitive labor market in this industry. I'm just trying to draw a straighter line. So this right over here is our marginal factor cost. And so you can imagine what is the rational quantity for this firm to hire. It would keep hiring all the way until the incremental revenue per unit of labor it gets is no longer higher than the incremental cost of that labor. And that would happen right over here. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
So this right over here is our marginal factor cost. And so you can imagine what is the rational quantity for this firm to hire. It would keep hiring all the way until the incremental revenue per unit of labor it gets is no longer higher than the incremental cost of that labor. And that would happen right over here. So this would tell us the rational quantity of labor. I'll call that quantity for, I'll call it Q star for the firm right over there. I'll leave you there now. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
Subsets and Splits
No community queries yet
The top public SQL queries from the community will appear here once available.