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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. The important thing to realize, this seems similar to what we've seen before when we talked about things like marginal revenue and marginal cost for a firm's goods. But here we're talking about a firm's inputs. And so instead of it being the marginal revenue and the price in a perfectly competitive firm that is defined by the equilibrium price, here it is the firm's cost that is defined by the equilibrium wage in the market. | Introduction to labor markets Microeconomics Khan Academy.mp3 |
It's kind of a derivative idea of what you've seen often in an introductory algebra course, where, hey, you've gotten a certain amount of money, and you can spend it on a certain combination of goods. What are all the different possibilities that you can actually buy? So that's really what a budget line is. So let's say that you have an income, and I'll do it both in the abstract and the concrete. So I'll do it with variables, and then I'll also do it with actual numbers. So let's say your income in a month is y, and let's say that you spend all of your money. So your income is equal to your expenditures. | Budget Line.mp3 |
So let's say that you have an income, and I'll do it both in the abstract and the concrete. So I'll do it with variables, and then I'll also do it with actual numbers. So let's say your income in a month is y, and let's say that you spend all of your money. So your income is equal to your expenditures. So we're assuming in our little model here that you're not going to be saving any money. And to show how overly simplified we can make a model, we are going to only assume that you can spend on two different goods, and that's so that we can actually plot all of the combinations on a two-dimensional surface, like the screen over here. Obviously, most people buy money more, or they at least are choosing between many, many more than two goods. | Budget Line.mp3 |
So your income is equal to your expenditures. So we're assuming in our little model here that you're not going to be saving any money. And to show how overly simplified we can make a model, we are going to only assume that you can spend on two different goods, and that's so that we can actually plot all of the combinations on a two-dimensional surface, like the screen over here. Obviously, most people buy money more, or they at least are choosing between many, many more than two goods. But let's say you can choose between two goods and two, let's just take goods that we've been using in recent videos. The two goods that you buy are either chocolate or fruit. You can buy chocolate by the bar or fruit by the pound. | Budget Line.mp3 |
Obviously, most people buy money more, or they at least are choosing between many, many more than two goods. But let's say you can choose between two goods and two, let's just take goods that we've been using in recent videos. The two goods that you buy are either chocolate or fruit. You can buy chocolate by the bar or fruit by the pound. So what are going to be your expenditures, assuming you spend it all on chocolate and fruit? Well, the amount that you spend on chocolate will be the price of chocolate times the quantity of chocolate you buy, which is the number of bars. And then the amount you spend on fruit will be the price of fruit per pound times the quantity of fruit. | Budget Line.mp3 |
You can buy chocolate by the bar or fruit by the pound. So what are going to be your expenditures, assuming you spend it all on chocolate and fruit? Well, the amount that you spend on chocolate will be the price of chocolate times the quantity of chocolate you buy, which is the number of bars. And then the amount you spend on fruit will be the price of fruit per pound times the quantity of fruit. And so, for example, if y is equal to $20 a month, $20 per month, and the price, and we actually will plot this in a second, the price of chocolate is equal to $1 per bar, and the price of fruit is equal to $2 per pound, I think these were the prices I used, per pound of fruit, then all of a sudden you would know what this is, you would know what this is and this is, you would know what the p's are and the y, and then you could actually graph one of these quantities relative to the other. And what we can do is, and let's do that, we can graph, we can graph the quantity of one relative to the other. Why don't we put the quantity of chocolate on this axis over here, and let's put the quantity of fruit on this axis over here. | Budget Line.mp3 |
And then the amount you spend on fruit will be the price of fruit per pound times the quantity of fruit. And so, for example, if y is equal to $20 a month, $20 per month, and the price, and we actually will plot this in a second, the price of chocolate is equal to $1 per bar, and the price of fruit is equal to $2 per pound, I think these were the prices I used, per pound of fruit, then all of a sudden you would know what this is, you would know what this is and this is, you would know what the p's are and the y, and then you could actually graph one of these quantities relative to the other. And what we can do is, and let's do that, we can graph, we can graph the quantity of one relative to the other. Why don't we put the quantity of chocolate on this axis over here, and let's put the quantity of fruit on this axis over here. And first, and if we wanted to graph it, I like to put it, since I put quantity of chocolate on the vertical axis here, I'd like to solve this equation for quantity of chocolate as a function of quantity of fruit, and it should make it pretty straightforward to graph. So let's try that out. So first I'm just going to rewrite this without expenditures in between. | Budget Line.mp3 |
Why don't we put the quantity of chocolate on this axis over here, and let's put the quantity of fruit on this axis over here. And first, and if we wanted to graph it, I like to put it, since I put quantity of chocolate on the vertical axis here, I'd like to solve this equation for quantity of chocolate as a function of quantity of fruit, and it should make it pretty straightforward to graph. So let's try that out. So first I'm just going to rewrite this without expenditures in between. So we have our income, our income y, is equal to the price of chocolate times the quantity of chocolate, plus the price of fruit times the quantity of fruit. Now, I want to solve for the quantity of chocolate. Let me make that orange so we know that this is this one right over here. | Budget Line.mp3 |
So first I'm just going to rewrite this without expenditures in between. So we have our income, our income y, is equal to the price of chocolate times the quantity of chocolate, plus the price of fruit times the quantity of fruit. Now, I want to solve for the quantity of chocolate. Let me make that orange so we know that this is this one right over here. So if I want to solve for that, the best way I could isolate it on one side of this equation, so let me get rid of this yellow part right over here, and the best way to do that is to subtract it from both sides. So let's subtract the price of fruit times the quantity of fruit. And I can substitute the numbers in first, and that might actually make it a little bit easier to understand, but I like to keep it general first, so you see you don't have to just use it with these numbers. | Budget Line.mp3 |
Let me make that orange so we know that this is this one right over here. So if I want to solve for that, the best way I could isolate it on one side of this equation, so let me get rid of this yellow part right over here, and the best way to do that is to subtract it from both sides. So let's subtract the price of fruit times the quantity of fruit. And I can substitute the numbers in first, and that might actually make it a little bit easier to understand, but I like to keep it general first, so you see you don't have to just use it with these numbers. You can just see kind of the general result here. So I'm going to subtract it from the left-hand side and the right-hand side. And the whole point is to get rid of it from the right-hand side. | Budget Line.mp3 |
And I can substitute the numbers in first, and that might actually make it a little bit easier to understand, but I like to keep it general first, so you see you don't have to just use it with these numbers. You can just see kind of the general result here. So I'm going to subtract it from the left-hand side and the right-hand side. And the whole point is to get rid of it from the right-hand side. This cancels out. The left-hand side becomes your income minus the price of fruit times the quantity of fruit, and this is going to be equal to your right-hand side, which is just the price of chocolate times the quantity of chocolate. Now, if we want to solve for the quantity of chocolate, we just divide both sides by the price of chocolate, and then you get, and I'll flip the sides, you get the quantity of chocolate is going to be equal to your income divided by the price of chocolate minus the price of fruit times the quantity of fruit, all of that over the price of chocolate. | Budget Line.mp3 |
And the whole point is to get rid of it from the right-hand side. This cancels out. The left-hand side becomes your income minus the price of fruit times the quantity of fruit, and this is going to be equal to your right-hand side, which is just the price of chocolate times the quantity of chocolate. Now, if we want to solve for the quantity of chocolate, we just divide both sides by the price of chocolate, and then you get, and I'll flip the sides, you get the quantity of chocolate is going to be equal to your income divided by the price of chocolate minus the price of fruit times the quantity of fruit, all of that over the price of chocolate. And we can actually substitute these numbers in here, and then we can actually plot what this, essentially this budget line will look like. So in our situation, 20, y is equal to 20, the price of chocolate is equal to 1, and so this term right over here, $20 per month divided by $1 per bar, which would actually give you 20 bars per month if you work out the units. So this term right over here just simplifies to 20. | Budget Line.mp3 |
Now, if we want to solve for the quantity of chocolate, we just divide both sides by the price of chocolate, and then you get, and I'll flip the sides, you get the quantity of chocolate is going to be equal to your income divided by the price of chocolate minus the price of fruit times the quantity of fruit, all of that over the price of chocolate. And we can actually substitute these numbers in here, and then we can actually plot what this, essentially this budget line will look like. So in our situation, 20, y is equal to 20, the price of chocolate is equal to 1, and so this term right over here, $20 per month divided by $1 per bar, which would actually give you 20 bars per month if you work out the units. So this term right over here just simplifies to 20. And this is actually an interesting term. Your income in dollars divided by the price of an actual good or service, you can view this term right over here as your real income. And the reason why it's called real income is it's actually pegging what your earnings to what you can buy. | Budget Line.mp3 |
So this term right over here just simplifies to 20. And this is actually an interesting term. Your income in dollars divided by the price of an actual good or service, you can view this term right over here as your real income. And the reason why it's called real income is it's actually pegging what your earnings to what you can buy. It's pegging it to a certain real goods. It's not tied to some abstract quantity like money, which always has a changing buying power. What you could buy for $20 in 2010 is very different than what you could buy for $20 in 1940. | Budget Line.mp3 |
And the reason why it's called real income is it's actually pegging what your earnings to what you can buy. It's pegging it to a certain real goods. It's not tied to some abstract quantity like money, which always has a changing buying power. What you could buy for $20 in 2010 is very different than what you could buy for $20 in 1940. But here, when you divide your income by a price of some good, it's really telling you your income in terms of that good. So you could view your income as $20 per month, or you could view your income, if you wanted your income in chocolate bars, you could say my income is, I could buy 20 chocolate bars each month, so I could say my income is 20 chocolate bars per month. They would be equivalent to you, assuming that you could sell the chocolate bars for the same price you could buy it, and that's somewhat of an assumption. | Budget Line.mp3 |
What you could buy for $20 in 2010 is very different than what you could buy for $20 in 1940. But here, when you divide your income by a price of some good, it's really telling you your income in terms of that good. So you could view your income as $20 per month, or you could view your income, if you wanted your income in chocolate bars, you could say my income is, I could buy 20 chocolate bars each month, so I could say my income is 20 chocolate bars per month. They would be equivalent to you, assuming that you could sell the chocolate bars for the same price you could buy it, and that's somewhat of an assumption. But you could say I have the equivalent income of 20 bars a month. You could have also done it in fruit. I have the equivalent income of 20 divided by 2, 10 pounds of fruit a month. | Budget Line.mp3 |
They would be equivalent to you, assuming that you could sell the chocolate bars for the same price you could buy it, and that's somewhat of an assumption. But you could say I have the equivalent income of 20 bars a month. You could have also done it in fruit. I have the equivalent income of 20 divided by 2, 10 pounds of fruit a month. It's tying your income to real things, not the abstract quantity like money. But anyway, so this is going to be equal to, so let me write it over here, my quantity of chocolate is going to be equal to, this term right over here is 20, and if you wanted to do the units, it would be 20 bars per month, and you could do a little bit of dimensional analysis to come up with that. You could treat the units just like numbers and see how they cancel out. | Budget Line.mp3 |
I have the equivalent income of 20 divided by 2, 10 pounds of fruit a month. It's tying your income to real things, not the abstract quantity like money. But anyway, so this is going to be equal to, so let me write it over here, my quantity of chocolate is going to be equal to, this term right over here is 20, and if you wanted to do the units, it would be 20 bars per month, and you could do a little bit of dimensional analysis to come up with that. You could treat the units just like numbers and see how they cancel out. 20 bars per month, and then minus the price of fruit divided by the price of chocolate. $2 per pound of fruit, so it's going to be, so the price of fruit is going to be $2, and I actually want to look at the units because that's interesting. So it's going to be, let me write it here. | Budget Line.mp3 |
You could treat the units just like numbers and see how they cancel out. 20 bars per month, and then minus the price of fruit divided by the price of chocolate. $2 per pound of fruit, so it's going to be, so the price of fruit is going to be $2, and I actually want to look at the units because that's interesting. So it's going to be, let me write it here. So the price of fruit, the price of fruit is equal to $2 per pound, let me write it this way, $2 per pound of fruit, I'll show you how the units cancel out, and then we're dividing that by the price of chocolate, dividing it by the price of chocolate, which is equal to $1 per bar of chocolate. Now obviously the math is fairly straightforward, we just get 2, but the units are a little bit interesting. You have a dollar in the numerator of the numerator and a dollar in the numerator of the denominator, those will cancel out. | Budget Line.mp3 |
So it's going to be, let me write it here. So the price of fruit, the price of fruit is equal to $2 per pound, let me write it this way, $2 per pound of fruit, I'll show you how the units cancel out, and then we're dividing that by the price of chocolate, dividing it by the price of chocolate, which is equal to $1 per bar of chocolate. Now obviously the math is fairly straightforward, we just get 2, but the units are a little bit interesting. You have a dollar in the numerator of the numerator and a dollar in the numerator of the denominator, those will cancel out. You could actually view this as, this is going to be the same thing, just to look at the units, so this is going to be, this is the same thing as the numerator times the inverse, times the inverse, or the reciprocal of the denominator right over here. So you could say $2 per pound times, the reciprocal of 1 is just 1, times 1 bar per dollar. And then the dollars cancel out, and you are left with 2 bars per pound of fruit. | Budget Line.mp3 |
You have a dollar in the numerator of the numerator and a dollar in the numerator of the denominator, those will cancel out. You could actually view this as, this is going to be the same thing, just to look at the units, so this is going to be, this is the same thing as the numerator times the inverse, times the inverse, or the reciprocal of the denominator right over here. So you could say $2 per pound times, the reciprocal of 1 is just 1, times 1 bar per dollar. And then the dollars cancel out, and you are left with 2 bars per pound of fruit. So what we've actually done over here, this term right over here, it gives us bars of chocolate per pound of fruit, and it simplifies to 2 bars of chocolate per pound of fruit, it's actually giving you the opportunity cost of a pound of fruit. It's saying, hey, you could buy a pound of fruit, but you'd be giving up 2 bars of chocolate, because the price, you could get 2 bars of chocolate for every pound of fruit. So you can view this as the relative price, so this right over here is the relative price, this is the relative price, relative price of fruit in this example. | Budget Line.mp3 |
And then the dollars cancel out, and you are left with 2 bars per pound of fruit. So what we've actually done over here, this term right over here, it gives us bars of chocolate per pound of fruit, and it simplifies to 2 bars of chocolate per pound of fruit, it's actually giving you the opportunity cost of a pound of fruit. It's saying, hey, you could buy a pound of fruit, but you'd be giving up 2 bars of chocolate, because the price, you could get 2 bars of chocolate for every pound of fruit. So you can view this as the relative price, so this right over here is the relative price, this is the relative price, relative price of fruit in this example. It's telling you the opportunity cost, it's telling you how much fruit costs in terms of chocolate bars. But regardless, that number is fairly straightforward, it was just a 2, so minus 2 times the quantity of fruit, and this is fairly straightforward to plot. So if the quantity of fruit is 0, our quantity of chocolate is 20. | Budget Line.mp3 |
So you can view this as the relative price, so this right over here is the relative price, this is the relative price, relative price of fruit in this example. It's telling you the opportunity cost, it's telling you how much fruit costs in terms of chocolate bars. But regardless, that number is fairly straightforward, it was just a 2, so minus 2 times the quantity of fruit, and this is fairly straightforward to plot. So if the quantity of fruit is 0, our quantity of chocolate is 20. So this is going to be 20 over here, so this is 20, this is going to be 10, this is 15, this is 5, so this is a point on our budget line right over there. And there's multiple ways that you could think about this. One way you could say is if you buy no chocolate, if the quantity of chocolate is 0, what is going to be the quantity of fruit? | Budget Line.mp3 |
So if the quantity of fruit is 0, our quantity of chocolate is 20. So this is going to be 20 over here, so this is 20, this is going to be 10, this is 15, this is 5, so this is a point on our budget line right over there. And there's multiple ways that you could think about this. One way you could say is if you buy no chocolate, if the quantity of chocolate is 0, what is going to be the quantity of fruit? And then you could solve this, or you could just say, look, if I have $20 a month and I'm going to spend it all on fruit, I can buy 10 pounds of fruit. So let's say that this right over here is 10, so let's say this right over here is 10, this is 5, so this is also on our budget line, and every point in between is going to be on our budget line. Every point in between is going to be on our budget line. | Budget Line.mp3 |
One way you could say is if you buy no chocolate, if the quantity of chocolate is 0, what is going to be the quantity of fruit? And then you could solve this, or you could just say, look, if I have $20 a month and I'm going to spend it all on fruit, I can buy 10 pounds of fruit. So let's say that this right over here is 10, so let's say this right over here is 10, this is 5, so this is also on our budget line, and every point in between is going to be on our budget line. Every point in between is going to be on our budget line. Another way you could have done this, and this comes straight out of your typical Algebra 1 course, you could say, look, in this case, if you view this as the y-axis, you could say your y-intercept, or you could say my chocolate quantity intercept is 20, and then my slope is negative 2. My slope is negative 2. For every extra pound of fruit I buy, I have to give up 2 pounds of chocolate. | Budget Line.mp3 |
Every point in between is going to be on our budget line. Another way you could have done this, and this comes straight out of your typical Algebra 1 course, you could say, look, in this case, if you view this as the y-axis, you could say your y-intercept, or you could say my chocolate quantity intercept is 20, and then my slope is negative 2. My slope is negative 2. For every extra pound of fruit I buy, I have to give up 2 pounds of chocolate. You could also view this as the opportunity cost of fruit. So you see the slope. As we go forward, if we buy one more quantity of fruit, we're giving up 2 bars of chocolate. | Budget Line.mp3 |
For every extra pound of fruit I buy, I have to give up 2 pounds of chocolate. You could also view this as the opportunity cost of fruit. So you see the slope. As we go forward, if we buy one more quantity of fruit, we're giving up 2 bars of chocolate. Now one statement I did just make, I said every point on this line is a possibility, and I can only say that if we assume that both of these goods are divisible goods, which means we can buy arbitrarily small amounts of it, that we could buy a tenth of a bar of chocolate, on average especially, or we could buy a hundredth of a pound of fruit. If they weren't divisible, if they were indivisible, then only the whole quantities would be the possibility points. But we'll just assume they're divisible, especially even if the store only sells indivisible bars of chocolate. | Budget Line.mp3 |
As we go forward, if we buy one more quantity of fruit, we're giving up 2 bars of chocolate. Now one statement I did just make, I said every point on this line is a possibility, and I can only say that if we assume that both of these goods are divisible goods, which means we can buy arbitrarily small amounts of it, that we could buy a tenth of a bar of chocolate, on average especially, or we could buy a hundredth of a pound of fruit. If they weren't divisible, if they were indivisible, then only the whole quantities would be the possibility points. But we'll just assume they're divisible, especially even if the store only sells indivisible bars of chocolate. If you buy one bar of chocolate every four months, on average you're buying 0.25 bars of chocolate per month. So even in that way, on average, almost anything here is divisible. So this line right over here shows all the combinations we can buy, all the combinations of the divisible goods we can buy if we spend all of our money. | Budget Line.mp3 |
But we'll just assume they're divisible, especially even if the store only sells indivisible bars of chocolate. If you buy one bar of chocolate every four months, on average you're buying 0.25 bars of chocolate per month. So even in that way, on average, almost anything here is divisible. So this line right over here shows all the combinations we can buy, all the combinations of the divisible goods we can buy if we spend all of our money. So that right over there is our budget line. And any combination out here is unaffordable. We don't have enough money for that. | Budget Line.mp3 |
So this line right over here shows all the combinations we can buy, all the combinations of the divisible goods we can buy if we spend all of our money. So that right over there is our budget line. And any combination out here is unaffordable. We don't have enough money for that. And any combination down here is affordable, and actually we would end up with extra money if we're below the budget line. And this isn't all that different than what we saw with the production possibilities frontier. Remember, we had a curve that really showed if we were producing two goods, what combinations of goods we could produce. | Budget Line.mp3 |
We don't have enough money for that. And any combination down here is affordable, and actually we would end up with extra money if we're below the budget line. And this isn't all that different than what we saw with the production possibilities frontier. Remember, we had a curve that really showed if we were producing two goods, what combinations of goods we could produce. Anything on that curve for the production possibility frontier was efficient. Anything outside of it was unattainable. And anything inside was attainable but inefficient. | Budget Line.mp3 |
Now let's think about what happens at the market level. So we're gonna go back to some of what we've thought about in the past in terms of just supply and demand curves. So this is the orange juice market, and let's just draw some supply and demand curves right over here. So this is going to be the price per gallon. Price per gallon. And let's say that this right over here is $1. This right over here is 50 cents. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
So this is going to be the price per gallon. Price per gallon. And let's say that this right over here is $1. This right over here is 50 cents. And this is zero. Zero. And let's say that this is the quantity. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
This right over here is 50 cents. And this is zero. Zero. And let's say that this is the quantity. Quantity. In gallons per week. And gallons per week, and we're gonna talk about the entire orange juice market. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And let's say that this is the quantity. Quantity. In gallons per week. And gallons per week, and we're gonna talk about the entire orange juice market. So this is going to be in millions of gallons per week. Millions. Millions of gallons per week. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And gallons per week, and we're gonna talk about the entire orange juice market. So this is going to be in millions of gallons per week. Millions. Millions of gallons per week. Per week. And that is, let's say this is one, two, three, four, five, and six. And let's just say, and I'm gonna simplify it relative to what we saw in the last video. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Millions of gallons per week. Per week. And that is, let's say this is one, two, three, four, five, and six. And let's just say, and I'm gonna simplify it relative to what we saw in the last video. Let's just say that the supply curve for the orange juice market, and I'll be careful this time. This is the near-term supply curve, or the short-term supply curve. Looks like, looks something like this. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And let's just say, and I'm gonna simplify it relative to what we saw in the last video. Let's just say that the supply curve for the orange juice market, and I'll be careful this time. This is the near-term supply curve, or the short-term supply curve. Looks like, looks something like this. That is the supply curve. And this is the entire market. These are all of the orange juice producers. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Looks like, looks something like this. That is the supply curve. And this is the entire market. These are all of the orange juice producers. So you get to make them produce even that first gallon. It looks like they need about 20 cents for that first gallon. And then each incremental gallon, they need more and more money. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
These are all of the orange juice producers. So you get to make them produce even that first gallon. It looks like they need about 20 cents for that first gallon. And then each incremental gallon, they need more and more money. The marginal cost of that incremental gallon for the market as a whole is going higher and higher and higher. They have to get oranges from further away and transport them further and further. So this right over here is the supply curve, or you could view it as the marginal cost. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And then each incremental gallon, they need more and more money. The marginal cost of that incremental gallon for the market as a whole is going higher and higher and higher. They have to get oranges from further away and transport them further and further. So this right over here is the supply curve, or you could view it as the marginal cost. Marginal cost curve. Now let's just draw an arbitrary demand curve here. So the demand curve, let's say it looks something like this. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
So this right over here is the supply curve, or you could view it as the marginal cost. Marginal cost curve. Now let's just draw an arbitrary demand curve here. So the demand curve, let's say it looks something like this. Say that's our current demand. That is our current demand curve. And now what I'm going to add to this is I'm going to add the price at which firms, the suppliers of the orange juice, make our neutral with returns to economic profit, or when economic profit is equal to zero. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
So the demand curve, let's say it looks something like this. Say that's our current demand. That is our current demand curve. And now what I'm going to add to this is I'm going to add the price at which firms, the suppliers of the orange juice, make our neutral with returns to economic profit, or when economic profit is equal to zero. So let's say right over here, which happens to be our current equilibrium price, this is the price, so 50 cents per gallon, this is the price at which economic profit is zero. So I'll just write economic profit is equal to zero. And I want to remind you, economic profit being zero does not mean that the accounting profit is zero. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And now what I'm going to add to this is I'm going to add the price at which firms, the suppliers of the orange juice, make our neutral with returns to economic profit, or when economic profit is equal to zero. So let's say right over here, which happens to be our current equilibrium price, this is the price, so 50 cents per gallon, this is the price at which economic profit is zero. So I'll just write economic profit is equal to zero. And I want to remind you, economic profit being zero does not mean that the accounting profit is zero. People could be making money at this price. It just says that they're neutral whether or not they should be doing this business, that the amount of money that they're making is roughly comparable to their opportunity cost to be doing other things. So when I say economic profit is zero, sometimes that's called the normal profit, when economic profit is zero. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And I want to remind you, economic profit being zero does not mean that the accounting profit is zero. People could be making money at this price. It just says that they're neutral whether or not they should be doing this business, that the amount of money that they're making is roughly comparable to their opportunity cost to be doing other things. So when I say economic profit is zero, sometimes that's called the normal profit, when economic profit is zero. This is the price at which people are neutral between shutting down and starting up their business. If you have positive economic profit, that means that more people will want to go into this market. And if you have negative economic profit, that means that people are going to want to essentially use up their fixed expenses, their equipment and any labor contracts they might have, and then go out of business. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
So when I say economic profit is zero, sometimes that's called the normal profit, when economic profit is zero. This is the price at which people are neutral between shutting down and starting up their business. If you have positive economic profit, that means that more people will want to go into this market. And if you have negative economic profit, that means that people are going to want to essentially use up their fixed expenses, their equipment and any labor contracts they might have, and then go out of business. So this is where, this is that point right over there. Now let's think of a couple of scenarios. Let's say a research paper comes out, and in that research paper, for whatever reason, we don't know if it was well done research, it says oranges are bad for you, for whatever reason. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And if you have negative economic profit, that means that people are going to want to essentially use up their fixed expenses, their equipment and any labor contracts they might have, and then go out of business. So this is where, this is that point right over there. Now let's think of a couple of scenarios. Let's say a research paper comes out, and in that research paper, for whatever reason, we don't know if it was well done research, it says oranges are bad for you, for whatever reason. So when the research paper comes out, says oranges are bad for you, what happens to demand? Well at any given price, demand will go down. At any given price, demand will go down, and the new demand curve might look something like this. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Let's say a research paper comes out, and in that research paper, for whatever reason, we don't know if it was well done research, it says oranges are bad for you, for whatever reason. So when the research paper comes out, says oranges are bad for you, what happens to demand? Well at any given price, demand will go down. At any given price, demand will go down, and the new demand curve might look something like this. Now in the near term, we have a new equilibrium price, and we have a new equilibrium quantity. This was the old equilibrium price, that the way I set it up, was just happened to be the price at which economic profit is zero, and this was our old equilibrium quantity, a little over three million gallons a week. Now we have a new lower equilibrium price. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
At any given price, demand will go down, and the new demand curve might look something like this. Now in the near term, we have a new equilibrium price, and we have a new equilibrium quantity. This was the old equilibrium price, that the way I set it up, was just happened to be the price at which economic profit is zero, and this was our old equilibrium quantity, a little over three million gallons a week. Now we have a new lower equilibrium price. We have a new lower equilibrium price. I don't know, this looks like about 40 cents per gallon, and we have a new lower equilibrium quantity. Now what happens at this price? | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Now we have a new lower equilibrium price. We have a new lower equilibrium price. I don't know, this looks like about 40 cents per gallon, and we have a new lower equilibrium quantity. Now what happens at this price? Obviously in the near term, people are willing to produce there, because that's where their marginal cost is. So, and we saw in multiple videos, that someone's willing to produce when the price is equal to their marginal cost, or they're willing to produce a quantity up to when their marginal cost is equal to the marginal revenue, or the price that they're going to get. But I just said, that they need to be getting 50 cents a gallon in order to make an economic profit. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Now what happens at this price? Obviously in the near term, people are willing to produce there, because that's where their marginal cost is. So, and we saw in multiple videos, that someone's willing to produce when the price is equal to their marginal cost, or they're willing to produce a quantity up to when their marginal cost is equal to the marginal revenue, or the price that they're going to get. But I just said, that they need to be getting 50 cents a gallon in order to make an economic profit. Now if they get, I don't know, this looks like about 40 cents a gallon, they're going to be having an economic loss. So no profit. No profit there. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
But I just said, that they need to be getting 50 cents a gallon in order to make an economic profit. Now if they get, I don't know, this looks like about 40 cents a gallon, they're going to be having an economic loss. So no profit. No profit there. And if there's no profit there, it really doesn't make sense for them to continue, or at least doesn't make sense for all of them to continue in that business. So what's going to happen is that over time, it will make sense for them in the near term to produce, to use up, they've already put in their costs for their equipment and maybe labor contracts and whatever else, but over time, when prices are this low, as people use up their equipment, there's no incentive for them to buy new equipment. As the labor contracts expire, there's no incentive for them to renew the labor contract. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
No profit there. And if there's no profit there, it really doesn't make sense for them to continue, or at least doesn't make sense for all of them to continue in that business. So what's going to happen is that over time, it will make sense for them in the near term to produce, to use up, they've already put in their costs for their equipment and maybe labor contracts and whatever else, but over time, when prices are this low, as people use up their equipment, there's no incentive for them to buy new equipment. As the labor contracts expire, there's no incentive for them to renew the labor contract. As those things expire, they're just going to shut down the business. And so as they shut down the business, as they shut down the business, two things will happen. Quantity produced in the market will go down and the price will go up. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
As the labor contracts expire, there's no incentive for them to renew the labor contract. As those things expire, they're just going to shut down the business. And so as they shut down the business, as they shut down the business, two things will happen. Quantity produced in the market will go down and the price will go up. We will essentially move along this curve until we get to this point. That's the point, once the price is at 50 cents a gallon again, then people are neutral now. They're not going to shut down their firms. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Quantity produced in the market will go down and the price will go up. We will essentially move along this curve until we get to this point. That's the point, once the price is at 50 cents a gallon again, then people are neutral now. They're not going to shut down their firms. So we're going to get to this new equilibrium price and equilibrium quantity in the long term. In the long term. Now let's think of another situation. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
They're not going to shut down their firms. So we're going to get to this new equilibrium price and equilibrium quantity in the long term. In the long term. Now let's think of another situation. Instead of a newspaper report saying that oranges are bad, let's say a newspaper report comes out saying oranges are very good. They make you live longer. They are the best thing that you can have. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Now let's think of another situation. Instead of a newspaper report saying that oranges are bad, let's say a newspaper report comes out saying oranges are very good. They make you live longer. They are the best thing that you can have. Well then at any given price, you're going to have more demand. And so you would have a demand curve that looks something like that. And then you'd have a higher equilibrium quantity and a higher equilibrium price. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
They are the best thing that you can have. Well then at any given price, you're going to have more demand. And so you would have a demand curve that looks something like that. And then you'd have a higher equilibrium quantity and a higher equilibrium price. And people are going to be making, since the price is higher than the price at which the economic profit is zero, people are going to be making very positive economic profits, which means that there's a strong incentive, that people are neutral between shutting down the business or starting up the business. At that point, a lot of people are strongly motivated to enter into the business. So what's going to happen is more and more people are going to get more and more equipment, hire more and more people. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
And then you'd have a higher equilibrium quantity and a higher equilibrium price. And people are going to be making, since the price is higher than the price at which the economic profit is zero, people are going to be making very positive economic profits, which means that there's a strong incentive, that people are neutral between shutting down the business or starting up the business. At that point, a lot of people are strongly motivated to enter into the business. So what's going to happen is more and more people are going to get more and more equipment, hire more and more people. And as they do that, quantity is going to go up and the price is going to go down. And so over the long term, you're going to shift back to this line. Once the price gets down to that, then there's no reason for more people to enter. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
So what's going to happen is more and more people are going to get more and more equipment, hire more and more people. And as they do that, quantity is going to go up and the price is going to go down. And so over the long term, you're going to shift back to this line. Once the price gets down to that, then there's no reason for more people to enter. They're kind of neutral about it. So what you see happening is in the short term, you would look at where the demand curve intersects with the short term supply curve. But in the long term, you care where it intersects with this kind of horizontal line, which is the price at which economic profit is zero. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
Once the price gets down to that, then there's no reason for more people to enter. They're kind of neutral about it. So what you see happening is in the short term, you would look at where the demand curve intersects with the short term supply curve. But in the long term, you care where it intersects with this kind of horizontal line, which is the price at which economic profit is zero. And that's why you will hear, and this is kind of a more precise way of thinking about it than we've done in the previous videos, this horizontal line right over here, you could view this as the long run, the long run supply curve. Long run supply curve. And that says, look, pretty much whatever we will always produce over the long run, we will always produce whatever supply is kind of necessary, given that people are neutral when it comes to economic profit. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
But in the long term, you care where it intersects with this kind of horizontal line, which is the price at which economic profit is zero. And that's why you will hear, and this is kind of a more precise way of thinking about it than we've done in the previous videos, this horizontal line right over here, you could view this as the long run, the long run supply curve. Long run supply curve. And that says, look, pretty much whatever we will always produce over the long run, we will always produce whatever supply is kind of necessary, given that people are neutral when it comes to economic profit. You go down here, yes, people will try to use up their fixed costs, but once they're used up their fixed costs, no incentive for them to stay in business. Then some of them go out of business, price goes up, quantity goes down. You get back to the long run supply curve and where that intersects with the demand curve. | Long term supply curve and economic profit Microeconomics Khan Academy.mp3 |
What I want to do in this video is think about a concept that we've already thought about multiple times in the context of many, many videos. And this is the idea of utility, which is really just a way of saying how much benefit or satisfaction or value do you get out of getting a good or service. But the angle that we're going to take in this video is going to be slightly different. In the past, when we were measuring benefit or value, we either measured in terms of dollars, where we said, hey, the benefit of getting an incremental Honda Civic was $5,000. And when we talk about the incremental, we're talking about, and we've heard the word many times, we were talking about the marginal benefit. Or early on, when we talked about the production possibilities frontier, and we talked about the marginal benefit of another squirrel, we were talking about it in terms of berries. We were talking about it in terms of another good or service. | Marginal Utility.mp3 |
In the past, when we were measuring benefit or value, we either measured in terms of dollars, where we said, hey, the benefit of getting an incremental Honda Civic was $5,000. And when we talk about the incremental, we're talking about, and we've heard the word many times, we were talking about the marginal benefit. Or early on, when we talked about the production possibilities frontier, and we talked about the marginal benefit of another squirrel, we were talking about it in terms of berries. We were talking about it in terms of another good or service. What we're going to do in this video is just think about it in absolute terms. We're just going to think of some arbitrary way of measuring utility, and then just assign values to what's the value of getting one chocolate bar? And then what's the value that we give to the next chocolate bar? | Marginal Utility.mp3 |
We were talking about it in terms of another good or service. What we're going to do in this video is just think about it in absolute terms. We're just going to think of some arbitrary way of measuring utility, and then just assign values to what's the value of getting one chocolate bar? And then what's the value that we give to the next chocolate bar? And then the chocolate bar after that. And we're going to do the same things about fruit. And from that, we're going to see if we can kind of build up some of the things that we already know about demand curves and how things relate to price and the price of other goods and things like that. | Marginal Utility.mp3 |
And then what's the value that we give to the next chocolate bar? And then the chocolate bar after that. And we're going to do the same things about fruit. And from that, we're going to see if we can kind of build up some of the things that we already know about demand curves and how things relate to price and the price of other goods and things like that. And in particular, we're going to focus on marginal utility. So obviously, you could have total utility. If I have four chocolate bars, you could say the total utility I'm getting from all four of them. | Marginal Utility.mp3 |
And from that, we're going to see if we can kind of build up some of the things that we already know about demand curves and how things relate to price and the price of other goods and things like that. And in particular, we're going to focus on marginal utility. So obviously, you could have total utility. If I have four chocolate bars, you could say the total utility I'm getting from all four of them. Or you could think about marginal utility, the utility I'm getting from the next incremental chocolate bar or the next incremental pound of fruit. And before I move on, there's one thing. This was a point of confusion for me when I first learned this. | Marginal Utility.mp3 |
If I have four chocolate bars, you could say the total utility I'm getting from all four of them. Or you could think about marginal utility, the utility I'm getting from the next incremental chocolate bar or the next incremental pound of fruit. And before I move on, there's one thing. This was a point of confusion for me when I first learned this. OK, I'm using the word marginal utility now. In the past, I've used the word marginal benefit. They sound very similar. | Marginal Utility.mp3 |
This was a point of confusion for me when I first learned this. OK, I'm using the word marginal utility now. In the past, I've used the word marginal benefit. They sound very similar. In fact, I even used the word benefit when I defined the word utility. How are these two things different? And the simple answer is, conceptually, they aren't. | Marginal Utility.mp3 |
They sound very similar. In fact, I even used the word benefit when I defined the word utility. How are these two things different? And the simple answer is, conceptually, they aren't. Conceptually, they are the exact same thing. The difference is how the words tend to be used in the context of a traditional microeconomics class. So when people talk about utility, they tend to measure it in terms of some type of absolute measure that they just came up with, some type of, you could view them as utility units, some type of satisfaction units. | Marginal Utility.mp3 |
And the simple answer is, conceptually, they aren't. Conceptually, they are the exact same thing. The difference is how the words tend to be used in the context of a traditional microeconomics class. So when people talk about utility, they tend to measure it in terms of some type of absolute measure that they just came up with, some type of, you could view them as utility units, some type of satisfaction units. While when they talk about marginal benefit, they tend to measure it either in dollars or in terms of some other goods. But I've seen either term used either way. So they really do mean the exact same thing. | Marginal Utility.mp3 |
So when people talk about utility, they tend to measure it in terms of some type of absolute measure that they just came up with, some type of, you could view them as utility units, some type of satisfaction units. While when they talk about marginal benefit, they tend to measure it either in dollars or in terms of some other goods. But I've seen either term used either way. So they really do mean the exact same thing. But in this video, we're going to use the term utility. And we're going to come up with a measuring scale. And it's a somewhat arbitrary one. | Marginal Utility.mp3 |
So they really do mean the exact same thing. But in this video, we're going to use the term utility. And we're going to come up with a measuring scale. And it's a somewhat arbitrary one. And we're going to use that to come up with some conclusions about the kind of the basket of goods someone might purchase, depending on different prices. So as you can imagine, I pre-wrote these two things. We're going to talk about chocolate bars. | Marginal Utility.mp3 |
And it's a somewhat arbitrary one. And we're going to use that to come up with some conclusions about the kind of the basket of goods someone might purchase, depending on different prices. So as you can imagine, I pre-wrote these two things. We're going to talk about chocolate bars. And we are going to talk about fruit. So right here in these little tables here, I've shown the marginal utility of each incremental, in the case of chocolate bars, each incremental bar. And in the case of fruit, each incremental pound of fruit. | Marginal Utility.mp3 |
We're going to talk about chocolate bars. And we are going to talk about fruit. So right here in these little tables here, I've shown the marginal utility of each incremental, in the case of chocolate bars, each incremental bar. And in the case of fruit, each incremental pound of fruit. So this is saying that first chocolate bar, obviously if I have no chocolate bars, I'm getting no utility from chocolate bars. And this is saying that that first chocolate bar has a marginal utility. So the utility of that next incremental one is 100. | Marginal Utility.mp3 |
And in the case of fruit, each incremental pound of fruit. So this is saying that first chocolate bar, obviously if I have no chocolate bars, I'm getting no utility from chocolate bars. And this is saying that that first chocolate bar has a marginal utility. So the utility of that next incremental one is 100. I'm not saying $100. I'm not saying it's equivalent to 100 pounds of fruit. I'm not saying it's equivalent to 100 berries. | Marginal Utility.mp3 |
So the utility of that next incremental one is 100. I'm not saying $100. I'm not saying it's equivalent to 100 pounds of fruit. I'm not saying it's equivalent to 100 berries. I'm just arbitrarily saying it is 100. And what matters is not that this is 100 or 1,000 or 1,000,000, what matters is how this compares to other things. So for example, if I say this is 100, and if I know that I like fruit, a pound of fruit 20% more, then that first, or if I like an incremental, my first pound of fruit 20% more, then I would have to say that the marginal utility of my first pound of fruit is 120. | Marginal Utility.mp3 |
I'm not saying it's equivalent to 100 berries. I'm just arbitrarily saying it is 100. And what matters is not that this is 100 or 1,000 or 1,000,000, what matters is how this compares to other things. So for example, if I say this is 100, and if I know that I like fruit, a pound of fruit 20% more, then that first, or if I like an incremental, my first pound of fruit 20% more, then I would have to say that the marginal utility of my first pound of fruit is 120. And this is what we said right over here. And if another way to think about it is if the marginal utility of the second chocolate bar I get, because I've already enjoyed a little bit of chocolate bar and I'm a little chocolated out, is 20% less than that, then if this is 100, then this would have to be 80. I could have said this to be 1,000 and this to be 800 and this to be 1,200. | Marginal Utility.mp3 |
So for example, if I say this is 100, and if I know that I like fruit, a pound of fruit 20% more, then that first, or if I like an incremental, my first pound of fruit 20% more, then I would have to say that the marginal utility of my first pound of fruit is 120. And this is what we said right over here. And if another way to think about it is if the marginal utility of the second chocolate bar I get, because I've already enjoyed a little bit of chocolate bar and I'm a little chocolated out, is 20% less than that, then if this is 100, then this would have to be 80. I could have said this to be 1,000 and this to be 800 and this to be 1,200. I could have said this to be 10 and this to be 8 and this to be 12. What matters is that they really just have the same ratios between them that really do reflect my actual preferences. So let's just think about this a little bit. | Marginal Utility.mp3 |
I could have said this to be 1,000 and this to be 800 and this to be 1,200. I could have said this to be 10 and this to be 8 and this to be 12. What matters is that they really just have the same ratios between them that really do reflect my actual preferences. So let's just think about this a little bit. My first chocolate bar, I'm pretty excited. I just call it 100. The next chocolate bar, I'm a little bit less excited about it. | Marginal Utility.mp3 |
So let's just think about this a little bit. My first chocolate bar, I'm pretty excited. I just call it 100. The next chocolate bar, I'm a little bit less excited about it. I've already had some chocolate. My craving has been satiated to some degree. But I still like chocolate, so I'll call that an 80. | Marginal Utility.mp3 |
The next chocolate bar, I'm a little bit less excited about it. I've already had some chocolate. My craving has been satiated to some degree. But I still like chocolate, so I'll call that an 80. We could call it 80 satisfaction units, whatever you want to call it. Then the next chocolate bar after this, now I'm starting to get pretty stuffed. And I'm really chocolated out. | Marginal Utility.mp3 |
But I still like chocolate, so I'll call that an 80. We could call it 80 satisfaction units, whatever you want to call it. Then the next chocolate bar after this, now I'm starting to get pretty stuffed. And I'm really chocolated out. And so I'm not getting as much benefit from it. And then finally, if you give me another chocolate bar, it's even less. And if we were to list a fifth chocolate bar, I might not want it at all. | Marginal Utility.mp3 |
And I'm really chocolated out. And so I'm not getting as much benefit from it. And then finally, if you give me another chocolate bar, it's even less. And if we were to list a fifth chocolate bar, I might not want it at all. My marginal utility might go to 0 maybe for that fifth chocolate bar. Maybe a sixth chocolate bar, I have to somehow get rid of it somehow because I'm so tired of chocolate bars. Maybe I have a negative marginal utility. | Marginal Utility.mp3 |
And if we were to list a fifth chocolate bar, I might not want it at all. My marginal utility might go to 0 maybe for that fifth chocolate bar. Maybe a sixth chocolate bar, I have to somehow get rid of it somehow because I'm so tired of chocolate bars. Maybe I have a negative marginal utility. And we could think about the same thing with fruit. The first pound of fruit, I'm pretty excited about fruit. I have a fruit craving. | Marginal Utility.mp3 |
Maybe I have a negative marginal utility. And we could think about the same thing with fruit. The first pound of fruit, I'm pretty excited about fruit. I have a fruit craving. I like that first pound of fruit even more than that first chocolate bar. I like it 20% more. So I get 120, you could call it, utility points or whatever arbitrary unit you want to call it. | Marginal Utility.mp3 |
I have a fruit craving. I like that first pound of fruit even more than that first chocolate bar. I like it 20% more. So I get 120, you could call it, utility points or whatever arbitrary unit you want to call it. Then my next pound of fruit, once again, I'm having diminishing utility, diminishing benefit as I get more and more incremental pounds of fruit. Now, it's very important to realize this is marginal utility, not total utility. This is the utility I'm getting from each incremental pound. | Marginal Utility.mp3 |
So I get 120, you could call it, utility points or whatever arbitrary unit you want to call it. Then my next pound of fruit, once again, I'm having diminishing utility, diminishing benefit as I get more and more incremental pounds of fruit. Now, it's very important to realize this is marginal utility, not total utility. This is the utility I'm getting from each incremental pound. It's positive, so I'm still enjoying that next incremental pound. I'm just enjoying it a little bit less than the pound before. And to realize what total utility is, if I were to have two pounds of fruit, I would have 120 of utility from that first pound. | Marginal Utility.mp3 |
This is the utility I'm getting from each incremental pound. It's positive, so I'm still enjoying that next incremental pound. I'm just enjoying it a little bit less than the pound before. And to realize what total utility is, if I were to have two pounds of fruit, I would have 120 of utility from that first pound. And then I would have 100 from the second pound. And so you would say I had a total utility of 220, you could call them utility units, from both pounds. Now, with just the information that I've given here, there's a few things you could say. | Marginal Utility.mp3 |
And to realize what total utility is, if I were to have two pounds of fruit, I would have 120 of utility from that first pound. And then I would have 100 from the second pound. And so you would say I had a total utility of 220, you could call them utility units, from both pounds. Now, with just the information that I've given here, there's a few things you could say. Well, look, my first pound of fruit, I enjoy 20% more than my first chocolate bar. You could also say that my second pound of fruit, I enjoy it, or I derive about the same amount of value as my first chocolate bar. You could say that my second chocolate bar, I enjoy less than my first chocolate bar. | Marginal Utility.mp3 |
Now, with just the information that I've given here, there's a few things you could say. Well, look, my first pound of fruit, I enjoy 20% more than my first chocolate bar. You could also say that my second pound of fruit, I enjoy it, or I derive about the same amount of value as my first chocolate bar. You could say that my second chocolate bar, I enjoy less than my first chocolate bar. You could even say 20% less, if these numbers are good. But this still doesn't give you a lot of information about how you would actually spend your money. You might say, well, obviously, wouldn't you want to just buy fruit over chocolate bars, or at least that first pound of fruit or that first chocolate bar? | Marginal Utility.mp3 |
You could say that my second chocolate bar, I enjoy less than my first chocolate bar. You could even say 20% less, if these numbers are good. But this still doesn't give you a lot of information about how you would actually spend your money. You might say, well, obviously, wouldn't you want to just buy fruit over chocolate bars, or at least that first pound of fruit or that first chocolate bar? Well, you might, but it depends on how much that fruit actually costs. Just looking at this alone, we can just make relative judgments about how much we prefer each incremental bar or each incremental pound or them relative to each other. But it really doesn't tell us how we would spend our actual money. | Marginal Utility.mp3 |
You might say, well, obviously, wouldn't you want to just buy fruit over chocolate bars, or at least that first pound of fruit or that first chocolate bar? Well, you might, but it depends on how much that fruit actually costs. Just looking at this alone, we can just make relative judgments about how much we prefer each incremental bar or each incremental pound or them relative to each other. But it really doesn't tell us how we would spend our actual money. So let's think about things. Let's put some prices on some of these goods and think about how we would actually allocate our dollar, given these marginal utility numbers right over here. So let's say that the chocolate bars are $1 per bar. | Marginal Utility.mp3 |
But it really doesn't tell us how we would spend our actual money. So let's think about things. Let's put some prices on some of these goods and think about how we would actually allocate our dollar, given these marginal utility numbers right over here. So let's say that the chocolate bars are $1 per bar. And let's say that the fruit is $2 per pound. So this is going to be per pound. This is going to be per bar. | Marginal Utility.mp3 |
So let's say that the chocolate bars are $1 per bar. And let's say that the fruit is $2 per pound. So this is going to be per pound. This is going to be per bar. And what we're going to think about is we're going to think about marginal utility for that incremental chocolate bar per price of that incremental chocolate bar. And here, the price is going to be at $1 per pound. So here, for that first bar, I'm going to be spending $1. | Marginal Utility.mp3 |
This is going to be per bar. And what we're going to think about is we're going to think about marginal utility for that incremental chocolate bar per price of that incremental chocolate bar. And here, the price is going to be at $1 per pound. So here, for that first bar, I'm going to be spending $1. And I'm getting 100 marginal utility points, whatever you want to call it. So I'm getting 100 marginal utility points for that dollar. So I'm getting 100 marginal utility points per dollar. | Marginal Utility.mp3 |
So here, for that first bar, I'm going to be spending $1. And I'm getting 100 marginal utility points, whatever you want to call it. So I'm getting 100 marginal utility points for that dollar. So I'm getting 100 marginal utility points per dollar. Here, same logic. I'm getting 80 marginal utility points per dollar. This is pretty simple math. | Marginal Utility.mp3 |
So I'm getting 100 marginal utility points per dollar. Here, same logic. I'm getting 80 marginal utility points per dollar. This is pretty simple math. Here, I'm getting 60 marginal utility points for the dollar. Here, I'm getting 40. So that doesn't seem too interesting. | Marginal Utility.mp3 |
This is pretty simple math. Here, I'm getting 60 marginal utility points for the dollar. Here, I'm getting 40. So that doesn't seem too interesting. It might be a little bit more interesting here. I'm getting more marginal utility per incremental fruit than I'm getting per dollar, per price, or actually per price of the incremental fruit here. Well, here, that first pound of fruit, I'm getting 120 marginal utility points, we can call them. | Marginal Utility.mp3 |
So that doesn't seem too interesting. It might be a little bit more interesting here. I'm getting more marginal utility per incremental fruit than I'm getting per dollar, per price, or actually per price of the incremental fruit here. Well, here, that first pound of fruit, I'm getting 120 marginal utility points, we can call them. But I paid $2 for it. So 120, let me write it over here. So for that first incremental fruit, the marginal utility for that first fruit is 120. | Marginal Utility.mp3 |
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