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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. And the price of that first pound of fruit is equal to 2. So I'm getting 60 marginal utility points per dollar. I'm getting 60. | Marginal Utility.mp3 |
So for that first incremental fruit, the marginal utility for that first fruit is 120. And the price of that first pound of fruit is equal to 2. So I'm getting 60 marginal utility points per dollar. I'm getting 60. Here, 100 marginal utility points, but I'm spending $2. So that's 50 points per dollar. This is 25 points per dollar. | Marginal Utility.mp3 |
I'm getting 60. Here, 100 marginal utility points, but I'm spending $2. So that's 50 points per dollar. This is 25 points per dollar. This is 10 points per dollar. Now this makes things a little bit more interesting. If I had $5 to spend, how would I want to spend my $5? | Marginal Utility.mp3 |
This is 25 points per dollar. This is 10 points per dollar. Now this makes things a little bit more interesting. If I had $5 to spend, how would I want to spend my $5? Well, you really just want to think about where are you getting the most satisfaction for each dollar? Where are you getting the most bang for your buck? So where am I going to spend my first dollar? | Marginal Utility.mp3 |
If I had $5 to spend, how would I want to spend my $5? Well, you really just want to think about where are you getting the most satisfaction for each dollar? Where are you getting the most bang for your buck? So where am I going to spend my first dollar? So $1. So let's think about it a little bit. My first dollar, so $1, where am I going to get the most satisfaction per dollar? | Marginal Utility.mp3 |
So where am I going to spend my first dollar? So $1. So let's think about it a little bit. My first dollar, so $1, where am I going to get the most satisfaction per dollar? Well, I get the most satisfaction per dollar right over here. I get 100 satisfaction units per dollar. Even though I like a pound of fruit, I'm getting less satisfaction per dollar. | Marginal Utility.mp3 |
My first dollar, so $1, where am I going to get the most satisfaction per dollar? Well, I get the most satisfaction per dollar right over here. I get 100 satisfaction units per dollar. Even though I like a pound of fruit, I'm getting less satisfaction per dollar. So I'm getting less bang for my buck. So my first dollar is going to go right over there. I'm going to buy one candy bar. | Marginal Utility.mp3 |
Even though I like a pound of fruit, I'm getting less satisfaction per dollar. So I'm getting less bang for my buck. So my first dollar is going to go right over there. I'm going to buy one candy bar. Then where am I going to spend my second dollar? $1, $2. So once again, I just want to look at all of my options. | Marginal Utility.mp3 |
I'm going to buy one candy bar. Then where am I going to spend my second dollar? $1, $2. So once again, I just want to look at all of my options. And we're going to assume that I'm going to spend my $5 on either of these two just to limit our universe. Once again, I'm going to maximize my bang for buck. I get 80 satisfaction points or marginal utility points over here per dollar. | Marginal Utility.mp3 |
So once again, I just want to look at all of my options. And we're going to assume that I'm going to spend my $5 on either of these two just to limit our universe. Once again, I'm going to maximize my bang for buck. I get 80 satisfaction points or marginal utility points over here per dollar. I only get 60 over here. So I'm going to buy even a second chocolate bar. I am going to buy a second chocolate bar. | Marginal Utility.mp3 |
I get 80 satisfaction points or marginal utility points over here per dollar. I only get 60 over here. So I'm going to buy even a second chocolate bar. I am going to buy a second chocolate bar. Let's keep going. Where am I going to spend my third dollar? Now it gets a little bit interesting. | Marginal Utility.mp3 |
I am going to buy a second chocolate bar. Let's keep going. Where am I going to spend my third dollar? Now it gets a little bit interesting. Now it gets a little bit interesting. I could spend my third dollar right over here and get 60 points per dollar. Or I could spend it over here and get 60 points per dollar. | Marginal Utility.mp3 |
Now it gets a little bit interesting. Now it gets a little bit interesting. I could spend my third dollar right over here and get 60 points per dollar. Or I could spend it over here and get 60 points per dollar. Or I could actually get the same amount. They're both 60 points per dollar. So I'm kind of neutral. | Marginal Utility.mp3 |
Or I could spend it over here and get 60 points per dollar. Or I could actually get the same amount. They're both 60 points per dollar. So I'm kind of neutral. I'm going to get the same bang for my buck whether I get another chocolate bar or whether I get another fruit. So just for simplicity, let's say I get another chocolate bar. I could have got the fruit too. | Marginal Utility.mp3 |
So I'm kind of neutral. I'm going to get the same bang for my buck whether I get another chocolate bar or whether I get another fruit. So just for simplicity, let's say I get another chocolate bar. I could have got the fruit too. These are really a toss up. I could flip a coin and I choose to get another chocolate bar. So I first spent my first $3 on three chocolate bars. | Marginal Utility.mp3 |
I could have got the fruit too. These are really a toss up. I could flip a coin and I choose to get another chocolate bar. So I first spent my first $3 on three chocolate bars. Now where am I going to spend my fourth dollar? Well, my fourth dollar, now my best bang for my buck isn't to get another chocolate bar. I'm only going to get 40 units per buck there. | Marginal Utility.mp3 |
So I first spent my first $3 on three chocolate bars. Now where am I going to spend my fourth dollar? Well, my fourth dollar, now my best bang for my buck isn't to get another chocolate bar. I'm only going to get 40 units per buck there. Now it is to spend it on fruit. So now the next dollar I could spend on half a pound of fruit and I would get this. And then I have my fourth dollar I could spend on this for half a pound of fruit because it's $2 per pound. | Marginal Utility.mp3 |
I'm only going to get 40 units per buck there. Now it is to spend it on fruit. So now the next dollar I could spend on half a pound of fruit and I would get this. And then I have my fourth dollar I could spend on this for half a pound of fruit because it's $2 per pound. And then I could spend my fifth dollar there too. So this is my fourth and my fifth dollar because it's $2. You could think of it that we're spending $2 for one pound of fruit and we're getting 60 utility points per dollar. | Marginal Utility.mp3 |
And then I have my fourth dollar I could spend on this for half a pound of fruit because it's $2 per pound. And then I could spend my fifth dollar there too. So this is my fourth and my fifth dollar because it's $2. You could think of it that we're spending $2 for one pound of fruit and we're getting 60 utility points per dollar. We're getting the best bang for our buck right over there. But what was useful about this is it allowed us, without thinking about money, just saying, how much do we like these things, irrespective of their actual price? And then given a certain price, it allowed us to think rationally about, well, how would we actually spend our money? | Marginal Utility.mp3 |
So this is some laptop that's on the market. And this, let's just say, is the cheapest car that happens to be on the market. This is actually a picture of a 1985 Yugo. But we're just assuming it's the cheapest car on the market. So let's just think about their hypothetical demand curves right now. So once again, in the vertical axis, we're going to put price. In the horizontal axis, we put quantity. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
But we're just assuming it's the cheapest car on the market. So let's just think about their hypothetical demand curves right now. So once again, in the vertical axis, we're going to put price. In the horizontal axis, we put quantity. Quantity. Quantity. And then over here, let me do it for the same thing. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
In the horizontal axis, we put quantity. Quantity. Quantity. And then over here, let me do it for the same thing. So this is price. This is price. And this right over here is quantity. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And then over here, let me do it for the same thing. So this is price. This is price. And this right over here is quantity. And both of them satisfy the law of demand. If the price is really high, the quantity demanded is going to be really low for the laptop. And so it might be right over there. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And this right over here is quantity. And both of them satisfy the law of demand. If the price is really high, the quantity demanded is going to be really low for the laptop. And so it might be right over there. And if the price is low, the quantity demanded is going to increase. So the demand curve might look something like that. And it doesn't have to be a curve, or it doesn't have to be a line. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And so it might be right over there. And if the price is low, the quantity demanded is going to increase. So the demand curve might look something like that. And it doesn't have to be a curve, or it doesn't have to be a line. It could be a curve. It could be anything like that. So that is the current demand for the laptop. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And it doesn't have to be a curve, or it doesn't have to be a line. It could be a curve. It could be anything like that. So that is the current demand for the laptop. So this is the current demand. All else equal. So we're not talking about shifting any of those other factors that we've been talking about in the last few videos. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So that is the current demand for the laptop. So this is the current demand. All else equal. So we're not talking about shifting any of those other factors that we've been talking about in the last few videos. Now, we could draw a similar demand curve for this very cheap automobile. If the price is high, very few people are going to want to buy it. And I'm not going to even specify what the price is, but this is a general idea. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So we're not talking about shifting any of those other factors that we've been talking about in the last few videos. Now, we could draw a similar demand curve for this very cheap automobile. If the price is high, very few people are going to want to buy it. And I'm not going to even specify what the price is, but this is a general idea. If the price is higher, fewer people are going to want to buy it. If the price is lower, more people are going to want to buy it. So its demand curve will also have this shape. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And I'm not going to even specify what the price is, but this is a general idea. If the price is higher, fewer people are going to want to buy it. If the price is lower, more people are going to want to buy it. So its demand curve will also have this shape. From the top left to the bottom right, it satisfies the law of demand. So once again, that is the current demand. Now let's think about how the demand for each of these goods might change depending on changes in income. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So its demand curve will also have this shape. From the top left to the bottom right, it satisfies the law of demand. So once again, that is the current demand. Now let's think about how the demand for each of these goods might change depending on changes in income. So we're going to focus on the income factor, the income effect for this video, and see how these two products might change. So let's just assume that income in the general population goes up. So for something like a laptop, wow, if more people are making more money, especially in real terms, they have more money to spend. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Now let's think about how the demand for each of these goods might change depending on changes in income. So we're going to focus on the income factor, the income effect for this video, and see how these two products might change. So let's just assume that income in the general population goes up. So for something like a laptop, wow, if more people are making more money, especially in real terms, they have more money to spend. Well, at any given price point, there's going to be a higher quantity that's demanded. At any given price point, higher quantity demanded. At any price point, a higher quantity demanded. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So for something like a laptop, wow, if more people are making more money, especially in real terms, they have more money to spend. Well, at any given price point, there's going to be a higher quantity that's demanded. At any given price point, higher quantity demanded. At any price point, a higher quantity demanded. And so if income goes up for this laptop, the demand will increase. And the way we show demand increasing is the whole curve shifts to the right. So this right over here, demand increased. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
At any price point, a higher quantity demanded. And so if income goes up for this laptop, the demand will increase. And the way we show demand increasing is the whole curve shifts to the right. So this right over here, demand increased. Demand went up when income went up. And that makes complete sense. And if income were to go down, demand would go down because people would have less money to buy something like a laptop. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So this right over here, demand increased. Demand went up when income went up. And that makes complete sense. And if income were to go down, demand would go down because people would have less money to buy something like a laptop. And this is the case for most goods. And we call things like this, when income goes up, demand goes up. The whole curve shifts to the right. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And if income were to go down, demand would go down because people would have less money to buy something like a laptop. And this is the case for most goods. And we call things like this, when income goes up, demand goes up. The whole curve shifts to the right. Income goes down, demand goes down. Whole curve shifts to the left. We call this a normal good. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
The whole curve shifts to the right. Income goes down, demand goes down. Whole curve shifts to the left. We call this a normal good. So this right over here is a normal good. Now let's think about what happens with the cheapest car on the market. And let's assume that we are in a developed country where almost everyone has some form of a car. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
We call this a normal good. So this right over here is a normal good. Now let's think about what happens with the cheapest car on the market. And let's assume that we are in a developed country where almost everyone has some form of a car. Now, what happens when income goes up? So people have more money, but are they going to spend that money buying the cheapest car on the market? Well, in most cases, if income goes up generally, people say, well, I have a little bit more money now. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And let's assume that we are in a developed country where almost everyone has some form of a car. Now, what happens when income goes up? So people have more money, but are they going to spend that money buying the cheapest car on the market? Well, in most cases, if income goes up generally, people say, well, I have a little bit more money now. Maybe I'll buy a slightly nicer car. And maybe in particular, the people who were going to buy this car at any given price point. At this price point, the people who were going to buy the car will say, wait, I can now afford a better car. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Well, in most cases, if income goes up generally, people say, well, I have a little bit more money now. Maybe I'll buy a slightly nicer car. And maybe in particular, the people who were going to buy this car at any given price point. At this price point, the people who were going to buy the car will say, wait, I can now afford a better car. Why should I go, this is not safe maybe, or not as safe as the other cars, and I want to impress my friends from high school and all of that. So something very strange might happen for this car, for the demand for this car. It actually will decrease. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
At this price point, the people who were going to buy the car will say, wait, I can now afford a better car. Why should I go, this is not safe maybe, or not as safe as the other cars, and I want to impress my friends from high school and all of that. So something very strange might happen for this car, for the demand for this car. It actually will decrease. So the whole curve could shift to the left. So income did a very strange thing for this good. Because income increasing made people say, hey, you know what? | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
It actually will decrease. So the whole curve could shift to the left. So income did a very strange thing for this good. Because income increasing made people say, hey, you know what? I could trade out of this good. I could get a good that I'd rather have than just getting more of this thing right over here. Demand went down. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Because income increasing made people say, hey, you know what? I could trade out of this good. I could get a good that I'd rather have than just getting more of this thing right over here. Demand went down. And goods like this we call inferior goods. And the general way to think about inferior goods are the goods that people will want to not own if they had more money. They would want to buy, I guess, less inferior goods. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Demand went down. And goods like this we call inferior goods. And the general way to think about inferior goods are the goods that people will want to not own if they had more money. They would want to buy, I guess, less inferior goods. Or another way to think about it is if income were to go down and more people are budget strapped and they can't afford the Mercedes-Benz or the BMW or even the midsize sedan anymore, so if incomes were to go down and things would get tighter, more people would want this car. More people would have to trade down to this because they're strapped, they're tightening their belts. And so you would have this strange situation where if income goes down, demand would go up for this thing. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
They would want to buy, I guess, less inferior goods. Or another way to think about it is if income were to go down and more people are budget strapped and they can't afford the Mercedes-Benz or the BMW or even the midsize sedan anymore, so if incomes were to go down and things would get tighter, more people would want this car. More people would have to trade down to this because they're strapped, they're tightening their belts. And so you would have this strange situation where if income goes down, demand would go up for this thing. So income goes down, demand goes up. And remember, when we're talking about demand, we're talking about the entire shifting of the curve. At any given price point, the quantity demanded will go up because this is the, or we're assuming it's the cheapest car on the market. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And so you would have this strange situation where if income goes down, demand would go up for this thing. So income goes down, demand goes up. And remember, when we're talking about demand, we're talking about the entire shifting of the curve. At any given price point, the quantity demanded will go up because this is the, or we're assuming it's the cheapest car on the market. And likewise, if income were to go down, for a normal good, it would do what you expect. Demand would go down. So an inferior good does the opposite of a normal good. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
At any given price point, the quantity demanded will go up because this is the, or we're assuming it's the cheapest car on the market. And likewise, if income were to go down, for a normal good, it would do what you expect. Demand would go down. So an inferior good does the opposite of a normal good. And that's when we're talking about the income effect, and this is important. When we're talking about the income effect, an inferior good will do the opposite of a normal good. And that's because people want to trade out of it when their income goes up or they don't want to buy it. | Normal and inferior goods Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
We have already thought about the demand curves for perfect competition and monopolies and the types of economic profit that might result in. And this video, we're going to focus on something in between which we've talked about in previous videos which is monopolistic competition. So as you can see in all three scenarios, we have a similar cost structure. We have our marginal cost curve and our average total cost curve that's at a minimum point right where it intersects the marginal cost curve. But it's very different whether we're talking about a monopoly or perfect competition when it comes to the demand curve. For perfect competition, it is one of many firms with an undifferentiated product and no barriers to entry. So these firms just have to be price takers. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
We have our marginal cost curve and our average total cost curve that's at a minimum point right where it intersects the marginal cost curve. But it's very different whether we're talking about a monopoly or perfect competition when it comes to the demand curve. For perfect competition, it is one of many firms with an undifferentiated product and no barriers to entry. So these firms just have to be price takers. Whatever the price is in the market, each of those firms just have to take that price. And that price is going to be their demand curve and their marginal revenue curve. And we've talked about that in the long run under perfect competition, none of these firms are going to be able to make an economic profit. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
So these firms just have to be price takers. Whatever the price is in the market, each of those firms just have to take that price. And that price is going to be their demand curve and their marginal revenue curve. And we've talked about that in the long run under perfect competition, none of these firms are going to be able to make an economic profit. That if they are, they're going to have more entrance which is going to push this price down. And if they're making negative economic profit, then you're going to have people who are going to exit which is going to push this line up. And so it's going to, in the long run, be at a point where none of the firms are making economic profit. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
And we've talked about that in the long run under perfect competition, none of these firms are going to be able to make an economic profit. That if they are, they're going to have more entrance which is going to push this price down. And if they're making negative economic profit, then you're going to have people who are going to exit which is going to push this line up. And so it's going to, in the long run, be at a point where none of the firms are making economic profit. And so another way to think about it, where our marginal revenue curve intersects with our marginal cost curve, which for any of these situations is the rational amount to produce, the rational quantity to produce for a profit-maximizing firm, that's going to be exactly at a level where the price is equal to average total cost so you have zero economic profit, zero economic profit. Now there's some interesting things about this. We talked about how it's allocatively efficient because we're producing at a quantity where marginal cost is equal to demand. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
And so it's going to, in the long run, be at a point where none of the firms are making economic profit. And so another way to think about it, where our marginal revenue curve intersects with our marginal cost curve, which for any of these situations is the rational amount to produce, the rational quantity to produce for a profit-maximizing firm, that's going to be exactly at a level where the price is equal to average total cost so you have zero economic profit, zero economic profit. Now there's some interesting things about this. We talked about how it's allocatively efficient because we're producing at a quantity where marginal cost is equal to demand. It's also productively efficient because we're producing at the minimum point of the average total cost curve. So it's very efficient from a productive point of view. Now a monopoly is the opposite extreme. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
We talked about how it's allocatively efficient because we're producing at a quantity where marginal cost is equal to demand. It's also productively efficient because we're producing at the minimum point of the average total cost curve. So it's very efficient from a productive point of view. Now a monopoly is the opposite extreme. They are the only player in the market with insurmountable barriers to entry. And so their demand curve, they're the only player. So you could view this as the market demand curve, but it's their demand curve because they're the only product there. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
Now a monopoly is the opposite extreme. They are the only player in the market with insurmountable barriers to entry. And so their demand curve, they're the only player. So you could view this as the market demand curve, but it's their demand curve because they're the only product there. So at high prices, you have a low quantity demanded, and at low prices, you have a high quantity demanded. And in multiple videos, we've talked about that in many situations, a monopoly firm cannot do price discrimination. It has to charge the same price to every consumer. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
So you could view this as the market demand curve, but it's their demand curve because they're the only product there. So at high prices, you have a low quantity demanded, and at low prices, you have a high quantity demanded. And in multiple videos, we've talked about that in many situations, a monopoly firm cannot do price discrimination. It has to charge the same price to every consumer. Well, in that situation, your marginal revenue is going to go down twice as fast because as you go further and further down the demand curve, you're lowering the price for everyone. And we've studied this. This is all review, but it never hurts to get more review. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
It has to charge the same price to every consumer. Well, in that situation, your marginal revenue is going to go down twice as fast because as you go further and further down the demand curve, you're lowering the price for everyone. And we've studied this. This is all review, but it never hurts to get more review. The rational quantity to produce, and once again, this is true for any firm, is where marginal revenue intersects marginal cost. So we would produce at that quantity. And the price at that quantity would go to the demand curve. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
This is all review, but it never hurts to get more review. The rational quantity to produce, and once again, this is true for any firm, is where marginal revenue intersects marginal cost. So we would produce at that quantity. And the price at that quantity would go to the demand curve. It would be right over there. And you could see that this monopoly firm is able to get quite a nice economic profit because the average total cost at that quantity is right over there. And so on a per unit basis, they're able to make that much times the number of units. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
And the price at that quantity would go to the demand curve. It would be right over there. And you could see that this monopoly firm is able to get quite a nice economic profit because the average total cost at that quantity is right over there. And so on a per unit basis, they're able to make that much times the number of units. And so you have a nice economic profit. Now, the negative from an economic or market point of view, if you were to be allocatively efficient, you'd be producing at a quantity where marginal cost intersects demand. But that is not happening over here. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
And so on a per unit basis, they're able to make that much times the number of units. And so you have a nice economic profit. Now, the negative from an economic or market point of view, if you were to be allocatively efficient, you'd be producing at a quantity where marginal cost intersects demand. But that is not happening over here. And so you have all of this deadweight loss right over there. Now, to help understand monopolistic competition, let's say you start as a monopoly, but now all of a sudden, the market dynamics have changed where what were insurmountable barriers to entry now become low barriers to entry. What is likely to happen? | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
But that is not happening over here. And so you have all of this deadweight loss right over there. Now, to help understand monopolistic competition, let's say you start as a monopoly, but now all of a sudden, the market dynamics have changed where what were insurmountable barriers to entry now become low barriers to entry. What is likely to happen? Well, you have this nice economic profit going on here, so more firms are likely to enter the market. And if more firms enter the market, what is going to happen to your demand curve? Well, the demand for your specific product is going to go down because there's other people who are offering similar alternatives. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
What is likely to happen? Well, you have this nice economic profit going on here, so more firms are likely to enter the market. And if more firms enter the market, what is going to happen to your demand curve? Well, the demand for your specific product is going to go down because there's other people who are offering similar alternatives. In monopolistic competition, you aren't completely undifferentiated. You might have a brand, you might have certain features that are better or worse, but there are other substitutes which people could go for which are giving you that competition. So as more and more people enter as you have this economic profit, your particular demand curve is going to shift down and to the left. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
Well, the demand for your specific product is going to go down because there's other people who are offering similar alternatives. In monopolistic competition, you aren't completely undifferentiated. You might have a brand, you might have certain features that are better or worse, but there are other substitutes which people could go for which are giving you that competition. So as more and more people enter as you have this economic profit, your particular demand curve is going to shift down and to the left. And so your demand curve will keep shifting until you're no longer able to get any economic profit. And so your demand curve might go something like this. Once the firms aren't able to get economic profit, well, then it doesn't really make sense for more people to try to enter it. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
So as more and more people enter as you have this economic profit, your particular demand curve is going to shift down and to the left. And so your demand curve will keep shifting until you're no longer able to get any economic profit. And so your demand curve might go something like this. Once the firms aren't able to get economic profit, well, then it doesn't really make sense for more people to try to enter it. So if you started a monopoly, your demand would shift to the left like that to the point where you get like that. And your marginal revenue curve would look something like this. It would have twice the slope, twice the slope down. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
Once the firms aren't able to get economic profit, well, then it doesn't really make sense for more people to try to enter it. So if you started a monopoly, your demand would shift to the left like that to the point where you get like that. And your marginal revenue curve would look something like this. It would have twice the slope, twice the slope down. So this would be your marginal revenue curve. And notice what has now happened. It is now rational for you to be producing at a quantity where the price that you are getting is equal to your average total cost. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
It would have twice the slope, twice the slope down. So this would be your marginal revenue curve. And notice what has now happened. It is now rational for you to be producing at a quantity where the price that you are getting is equal to your average total cost. So once again, as more and more people entered because you were getting economic profit and the players in this industry were getting economic profit, the demand curve has shifted to the left so now there is zero economic profit in the long run. Now, once again, this is a situation where you have deadweight loss. This is not allocatively efficient. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
It is now rational for you to be producing at a quantity where the price that you are getting is equal to your average total cost. So once again, as more and more people entered because you were getting economic profit and the players in this industry were getting economic profit, the demand curve has shifted to the left so now there is zero economic profit in the long run. Now, once again, this is a situation where you have deadweight loss. This is not allocatively efficient. You're not producing at a level where marginal cost is equal to demand. It's also not productively efficient. To be productively efficient, you'd be producing at a quantity where you're at the minimum point of your average total cost curve. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
This is not allocatively efficient. You're not producing at a level where marginal cost is equal to demand. It's also not productively efficient. To be productively efficient, you'd be producing at a quantity where you're at the minimum point of your average total cost curve. And so this difference right over here, we could view this as the quantity for, I'll call it efficient scale. This right over here, this distance, this is going, you could view this as excess capacity. Excess capacity. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
To be productively efficient, you'd be producing at a quantity where you're at the minimum point of your average total cost curve. And so this difference right over here, we could view this as the quantity for, I'll call it efficient scale. This right over here, this distance, this is going, you could view this as excess capacity. Excess capacity. Now, one thing that might be a little bit counterintuitive is in previous videos, we talk about how, hey, as people enter and exit a market, it would shift the supply curve. But here we're shifting the demand curve. Well, when people enter and exit the market, it shifts the supply curve for the entire market. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
Excess capacity. Now, one thing that might be a little bit counterintuitive is in previous videos, we talk about how, hey, as people enter and exit a market, it would shift the supply curve. But here we're shifting the demand curve. Well, when people enter and exit the market, it shifts the supply curve for the entire market. It would not shift the demand curve for the entire market. But what we have drawn over here is not the demand curve for the entire market. What we have drawn here is the demand curve for this particular firm's product. | Long term economic profit for monopolistic competition Microeconomics Khan Academy.mp3 |
In fact, in this video, we're going to start thinking about capital as well, which we know is another one of the factors of production. But just as a little bit of review, we've already thought about it from a firm's perspective on what is the rational amount of labor to hire based on the marginal revenue product of labor and based on the marginal factor cost of labor. So in the horizontal axis, we have the quantity of labor hired by the firm, and in the vertical axis, you have the wage rate, wage rate, which you could view as the price of labor. And we've seen this multiple times. You're likely to have a downward-sloping marginal revenue product curve, MRP, and I'm going to be very specific that this one is the marginal revenue product of labor. And then we have the marginal factor cost curve, and if we're assuming that this firm is in a competitive, perfectly competitive labor market, well, they're just going to have to pay whatever the wage is in the market, and so that's why we have a horizontal line there. So that's the marginal factor cost of labor. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
And we've seen this multiple times. You're likely to have a downward-sloping marginal revenue product curve, MRP, and I'm going to be very specific that this one is the marginal revenue product of labor. And then we have the marginal factor cost curve, and if we're assuming that this firm is in a competitive, perfectly competitive labor market, well, they're just going to have to pay whatever the wage is in the market, and so that's why we have a horizontal line there. So that's the marginal factor cost of labor. And we've talked about multiple times that it's rational for the firm to keep hiring as long as the marginal revenue product of labor, as long as the incremental revenue that the firm gets for each of those people or each of those units of labor that they hire is higher than the incremental cost of each of those units of labor, and so it'll keep hiring until these two lines intersect, and so it would be rational for it to hire that quantity of labor. I'll do this as the labor for the firm, and I'll put a little star over here, so that quantity of labor. And we can draw an analogous thing for capital. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
So that's the marginal factor cost of labor. And we've talked about multiple times that it's rational for the firm to keep hiring as long as the marginal revenue product of labor, as long as the incremental revenue that the firm gets for each of those people or each of those units of labor that they hire is higher than the incremental cost of each of those units of labor, and so it'll keep hiring until these two lines intersect, and so it would be rational for it to hire that quantity of labor. I'll do this as the labor for the firm, and I'll put a little star over here, so that quantity of labor. And we can draw an analogous thing for capital. So this is how a firm thinks about that input, how it thinks about labor, but we could also do something similar for capital, or we could do it for land as well, but hopefully, so this is going to be the firm, the firm as they think about capital, and we'll see that they have analogous axes. The horizontal axis right over here is going to be the quantity not of labor, but the quantity of capital, and then the vertical axis, the price of capital, you could view that as the rent rate, rent rate, if you're thinking about maybe you're renting some type of machinery, and so you will have your marginal revenue product of capital. We could still imagine that you have diminishing returns, so that's why it's downward sloping, so marginal revenue product, and we typically use a K for capital, just so we don't get the C confused with other things, and then we have our marginal factor cost, which is really just, and we'll assume, once again, that this is a perfectly competitive capital market, so you just have to pay whatever the market rate for renting that capital is, and so that would be the marginal factor cost of the capital, and so once again, it makes sense to keep bringing on more and more and more capital as long as the incremental revenue that you get from each of those extra units of capital is higher than the cost of each of those extra units of capital, and so here, it would be rational for the firm, if we're just looking at the dimension of capital, to produce this much, so this would be, actually, let me, this would be the capital, the quantity of capital for the firm to employ. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
And we can draw an analogous thing for capital. So this is how a firm thinks about that input, how it thinks about labor, but we could also do something similar for capital, or we could do it for land as well, but hopefully, so this is going to be the firm, the firm as they think about capital, and we'll see that they have analogous axes. The horizontal axis right over here is going to be the quantity not of labor, but the quantity of capital, and then the vertical axis, the price of capital, you could view that as the rent rate, rent rate, if you're thinking about maybe you're renting some type of machinery, and so you will have your marginal revenue product of capital. We could still imagine that you have diminishing returns, so that's why it's downward sloping, so marginal revenue product, and we typically use a K for capital, just so we don't get the C confused with other things, and then we have our marginal factor cost, which is really just, and we'll assume, once again, that this is a perfectly competitive capital market, so you just have to pay whatever the market rate for renting that capital is, and so that would be the marginal factor cost of the capital, and so once again, it makes sense to keep bringing on more and more and more capital as long as the incremental revenue that you get from each of those extra units of capital is higher than the cost of each of those extra units of capital, and so here, it would be rational for the firm, if we're just looking at the dimension of capital, to produce this much, so this would be, actually, let me, this would be the capital, the quantity of capital for the firm to employ. Now, an interesting question that might have already crossed your minds are is that firms have a certain amount of resources that they are going to think about, well, how much do I put in labor versus how much do I put into capital, so they don't just think about these dimensions of how many, how much inputs of these factors they want. They have to think about them relative to each other, and to help us think through this, let's say that we are at a certain level of output, so let's say that our output right now, I don't know, our current output, our current output is, I'm just going to make up something, 1,000 units per day, and at our current output, we know what the marginal product of labor and the marginal product of capital is. Let's say that we know that our marginal product of labor at this output, remember, it changes as we have very different output and we bring on more labor or more capital, so our marginal product of labor at that level is 90 units, so another way to think about it, for every incremental unit of labor we bring on, we're going to be able to produce 90 more units of output, so this is, and then let's say that the price of labor, which is the wage rate, is equal to $10, $10 per unit of labor, so let me call this output units, output units, and let's say that the marginal product of capital, I'm using a different color, the marginal product of capital right now is 80 output units, output units, so every unit of this factor of capital, we are able to produce an incremental 80 output units, and let's say that the price of capital, which would be the rent, is equal to $5, $5 per input unit of the factor, so right at this moment, if I have an incremental dollar, would it be more rational for me to add more labor or would it be more rational for me to add more capital? | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
We could still imagine that you have diminishing returns, so that's why it's downward sloping, so marginal revenue product, and we typically use a K for capital, just so we don't get the C confused with other things, and then we have our marginal factor cost, which is really just, and we'll assume, once again, that this is a perfectly competitive capital market, so you just have to pay whatever the market rate for renting that capital is, and so that would be the marginal factor cost of the capital, and so once again, it makes sense to keep bringing on more and more and more capital as long as the incremental revenue that you get from each of those extra units of capital is higher than the cost of each of those extra units of capital, and so here, it would be rational for the firm, if we're just looking at the dimension of capital, to produce this much, so this would be, actually, let me, this would be the capital, the quantity of capital for the firm to employ. Now, an interesting question that might have already crossed your minds are is that firms have a certain amount of resources that they are going to think about, well, how much do I put in labor versus how much do I put into capital, so they don't just think about these dimensions of how many, how much inputs of these factors they want. They have to think about them relative to each other, and to help us think through this, let's say that we are at a certain level of output, so let's say that our output right now, I don't know, our current output, our current output is, I'm just going to make up something, 1,000 units per day, and at our current output, we know what the marginal product of labor and the marginal product of capital is. Let's say that we know that our marginal product of labor at this output, remember, it changes as we have very different output and we bring on more labor or more capital, so our marginal product of labor at that level is 90 units, so another way to think about it, for every incremental unit of labor we bring on, we're going to be able to produce 90 more units of output, so this is, and then let's say that the price of labor, which is the wage rate, is equal to $10, $10 per unit of labor, so let me call this output units, output units, and let's say that the marginal product of capital, I'm using a different color, the marginal product of capital right now is 80 output units, output units, so every unit of this factor of capital, we are able to produce an incremental 80 output units, and let's say that the price of capital, which would be the rent, is equal to $5, $5 per input unit of the factor, so right at this moment, if I have an incremental dollar, would it be more rational for me to add more labor or would it be more rational for me to add more capital? Pause this video and see if you can figure that out. Well, to think about which one is more rational, you just have to think about which one do I get more of a bang for my buck? So per dollar, how many output units do I get when I put a dollar into labor versus per dollar, how many output units do I get when I put that dollar into capital? | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
Let's say that we know that our marginal product of labor at this output, remember, it changes as we have very different output and we bring on more labor or more capital, so our marginal product of labor at that level is 90 units, so another way to think about it, for every incremental unit of labor we bring on, we're going to be able to produce 90 more units of output, so this is, and then let's say that the price of labor, which is the wage rate, is equal to $10, $10 per unit of labor, so let me call this output units, output units, and let's say that the marginal product of capital, I'm using a different color, the marginal product of capital right now is 80 output units, output units, so every unit of this factor of capital, we are able to produce an incremental 80 output units, and let's say that the price of capital, which would be the rent, is equal to $5, $5 per input unit of the factor, so right at this moment, if I have an incremental dollar, would it be more rational for me to add more labor or would it be more rational for me to add more capital? Pause this video and see if you can figure that out. Well, to think about which one is more rational, you just have to think about which one do I get more of a bang for my buck? So per dollar, how many output units do I get when I put a dollar into labor versus per dollar, how many output units do I get when I put that dollar into capital? So let's do it first for labor. So if you want your bang for the buck, so to speak, you would just take your marginal, let me do this in a different color, if you want your bang for a buck, you would just take your marginal product of labor, so your output, and divide it by the price, so this is gonna tell you output per dollar, and so in this situation, it's 90 output units, we could say widgets for a general term for output units, output units, over $10, over $10, and so this is going to be equal to nine output units per dollar, so this is equal to nine output units per dollar, so that's our measure of our bang for our buck when we put an incremental buck into labor. Now what about for capital? | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
So per dollar, how many output units do I get when I put a dollar into labor versus per dollar, how many output units do I get when I put that dollar into capital? So let's do it first for labor. So if you want your bang for the buck, so to speak, you would just take your marginal, let me do this in a different color, if you want your bang for a buck, you would just take your marginal product of labor, so your output, and divide it by the price, so this is gonna tell you output per dollar, and so in this situation, it's 90 output units, we could say widgets for a general term for output units, output units, over $10, over $10, and so this is going to be equal to nine output units per dollar, so this is equal to nine output units per dollar, so that's our measure of our bang for our buck when we put an incremental buck into labor. Now what about for capital? Well, our marginal product of capital divided by the price of capital, right at this moment, remember it changes depending on our output level and different combinations, is going to be equal to 80 output units divided by $5, which is equal to 16 output units per dollar. So which one would I get a better bang for my buck? Well, right at this moment, I'm getting a better bang for my buck from investing in capital. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
Now what about for capital? Well, our marginal product of capital divided by the price of capital, right at this moment, remember it changes depending on our output level and different combinations, is going to be equal to 80 output units divided by $5, which is equal to 16 output units per dollar. So which one would I get a better bang for my buck? Well, right at this moment, I'm getting a better bang for my buck from investing in capital. Every extra dollar I put, I get 16 output units, so it'd be rational for this firm that wants to maximize its profit and reduce its cost, if it has an extra dollar to invest, it would put it into capital. And so maybe it puts it into capital and then it gets a little bit more output, and then the marginal product of capital is likely to go down, and so you could imagine at some point, these things might be equal and then the firm might be indifferent between the two, and then maybe at some point, if they kept adding capital, then maybe you get a better bang for your buck from the labor. In general, a firm would wanna keep investing in one or the other until these two things are equal to each other. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
Well, right at this moment, I'm getting a better bang for my buck from investing in capital. Every extra dollar I put, I get 16 output units, so it'd be rational for this firm that wants to maximize its profit and reduce its cost, if it has an extra dollar to invest, it would put it into capital. And so maybe it puts it into capital and then it gets a little bit more output, and then the marginal product of capital is likely to go down, and so you could imagine at some point, these things might be equal and then the firm might be indifferent between the two, and then maybe at some point, if they kept adding capital, then maybe you get a better bang for your buck from the labor. In general, a firm would wanna keep investing in one or the other until these two things are equal to each other. So big picture, you would look at the marginal product of the factor divided by the price of the factor, and then you'd compare that to the marginal product of the other factors divided by the price of those other factors, and whichever one has the best bang for the buck, that's where it would be rational to invest in. And then you have, in some ways, one way is a very efficient combination, is if you get to that point that you're indifferent, when the marginal product divided by the prices of the various factors are equal to each other. So for example, if I were to tell you that we're at a different point of production, let me, let me cordon this off. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
In general, a firm would wanna keep investing in one or the other until these two things are equal to each other. So big picture, you would look at the marginal product of the factor divided by the price of the factor, and then you'd compare that to the marginal product of the other factors divided by the price of those other factors, and whichever one has the best bang for the buck, that's where it would be rational to invest in. And then you have, in some ways, one way is a very efficient combination, is if you get to that point that you're indifferent, when the marginal product divided by the prices of the various factors are equal to each other. So for example, if I were to tell you that we're at a different point of production, let me, let me cordon this off. So if we're at a different level of production where our marginal product of labor is equal to, I'll call it 10 widgets, this saves time, and let's say that the price of labor is equal to $5, and let's say that the price of capital is equal to $10, what would have to be the marginal product of capital for me to be indifferent between labor and capital? Pause this video and try to figure that out. Well, in order for me to be indifferent right over here, that means my marginal product of labor divided by price of labor needs to be equal to my marginal product of capital divided by my price of capital. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
So for example, if I were to tell you that we're at a different point of production, let me, let me cordon this off. So if we're at a different level of production where our marginal product of labor is equal to, I'll call it 10 widgets, this saves time, and let's say that the price of labor is equal to $5, and let's say that the price of capital is equal to $10, what would have to be the marginal product of capital for me to be indifferent between labor and capital? Pause this video and try to figure that out. Well, in order for me to be indifferent right over here, that means my marginal product of labor divided by price of labor needs to be equal to my marginal product of capital divided by my price of capital. And so I would have 10 over five would have to be equal to my marginal product of capital over 10. So 10 over five, this is two widgets per dollar. And so if I want two widgets per dollar over here, this has got to be equal to 20. | Cost minimizing choice of inputs Microeconomics Khan Academy.mp3 |
You gotta love these worlds created in these economic questions. The table below describes the production possibilities of each country in a day. So here it tells us that Kalos, if it puts all of its energy behind charms, it could produce 10 charms in a day. But if it put all of its energy behind berries, it could produce 20 berries in a day. And then Joto, all of its energy behind charms, 25. All of its energy behind berries, 75. Given these numbers are based on both countries having the same labor and capital inputs, who has the absolute advantage in charms? | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
But if it put all of its energy behind berries, it could produce 20 berries in a day. And then Joto, all of its energy behind charms, 25. All of its energy behind berries, 75. Given these numbers are based on both countries having the same labor and capital inputs, who has the absolute advantage in charms? So pause the video and see if you can figure this out. All right, so let's just remind ourselves. Absolute advantage is just who is more efficient? | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Given these numbers are based on both countries having the same labor and capital inputs, who has the absolute advantage in charms? So pause the video and see if you can figure this out. All right, so let's just remind ourselves. Absolute advantage is just who is more efficient? Who, given the same inputs, can produce more? And they told us that these countries, they have the same labor and capital inputs. So this is really just a question of who can produce more charms in a day. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Absolute advantage is just who is more efficient? Who, given the same inputs, can produce more? And they told us that these countries, they have the same labor and capital inputs. So this is really just a question of who can produce more charms in a day. And you can see very clearly that Joto can produce more charms in a day. And so I would say Joto, because they produce, let me write that a little bit neater, they produce more charms per day, charms per day, per day, with same inputs. Same inputs. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So this is really just a question of who can produce more charms in a day. And you can see very clearly that Joto can produce more charms in a day. And so I would say Joto, because they produce, let me write that a little bit neater, they produce more charms per day, charms per day, per day, with same inputs. Same inputs. So they are more efficient. More efficient. So they have the absolute advantage. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Same inputs. So they are more efficient. More efficient. So they have the absolute advantage. Now this is an interesting thing, because our intuition might say, well, whoever has the absolute advantage, maybe they're the ones that should be producing charms. But this is what's interesting when we study comparative advantage. That is not always the case. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So they have the absolute advantage. Now this is an interesting thing, because our intuition might say, well, whoever has the absolute advantage, maybe they're the ones that should be producing charms. But this is what's interesting when we study comparative advantage. That is not always the case. I suspect that this question will lead us there. All right, next question. They say, calculate the opportunity cost in kalos of charms. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
That is not always the case. I suspect that this question will lead us there. All right, next question. They say, calculate the opportunity cost in kalos of charms. So the opportunity cost in kalos of charms. So when kalos decides to produce 10 charms, they're trading off 20 berries. Or another way of thinking about it, it costs them 20 berries to produce 10 charms. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
They say, calculate the opportunity cost in kalos of charms. So the opportunity cost in kalos of charms. So when kalos decides to produce 10 charms, they're trading off 20 berries. Or another way of thinking about it, it costs them 20 berries to produce 10 charms. So we could say it costs 20 berries for 10 charms, which is equal to two berries, two berries per charm in kalos. So there you have it. The opportunity cost, they trade off two berries per charm. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Or another way of thinking about it, it costs them 20 berries to produce 10 charms. So we could say it costs 20 berries for 10 charms, which is equal to two berries, two berries per charm in kalos. So there you have it. The opportunity cost, they trade off two berries per charm. And actually, let me make a little column here. The opportunity cost. This is two berries per charm. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
The opportunity cost, they trade off two berries per charm. And actually, let me make a little column here. The opportunity cost. This is two berries per charm. And I have a feeling, and if you're taking an exam, say an AP exam, it's not a bad idea to just fill this thing out. So what is the opportunity cost of, they haven't asked us that yet, but I'm just gonna do it really fast. What is the opportunity cost of charms in johto? | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
This is two berries per charm. And I have a feeling, and if you're taking an exam, say an AP exam, it's not a bad idea to just fill this thing out. So what is the opportunity cost of, they haven't asked us that yet, but I'm just gonna do it really fast. What is the opportunity cost of charms in johto? Well, they are trading off, to produce 25 charms, they trade off 75 berries. So this would be 75 divided by 25. This would be three berries per charm. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
What is the opportunity cost of charms in johto? Well, they are trading off, to produce 25 charms, they trade off 75 berries. So this would be 75 divided by 25. This would be three berries per charm. 75 berries for 25 charms is three berries per charm. And if you wanna know the opportunity cost of berries, well, you could just take the reciprocal of each of these. So in kalos, the opportunity cost is 1 1 2 charms, charms per berry. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
This would be three berries per charm. 75 berries for 25 charms is three berries per charm. And if you wanna know the opportunity cost of berries, well, you could just take the reciprocal of each of these. So in kalos, the opportunity cost is 1 1 2 charms, charms per berry. And then in johto, it is 1 3rd charms per berry. That if they wanted to produce 25 berries, if they wanted to produce 75 berries, they would trade off 25 charms. So it would cost them 25 charms to produce 75 berries, or 1 3rd of a charm per berry. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So in kalos, the opportunity cost is 1 1 2 charms, charms per berry. And then in johto, it is 1 3rd charms per berry. That if they wanted to produce 25 berries, if they wanted to produce 75 berries, they would trade off 25 charms. So it would cost them 25 charms to produce 75 berries, or 1 3rd of a charm per berry. So I'm just doing a little bit of extra. But then it's gonna be useful, because in the next question, they actually are asking us, who, let me scroll up a little bit, they're saying, who has the comparative advantage in berries, explain. So berries, whoever has the lower opportunity cost has the comparative advantage. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So it would cost them 25 charms to produce 75 berries, or 1 3rd of a charm per berry. So I'm just doing a little bit of extra. But then it's gonna be useful, because in the next question, they actually are asking us, who, let me scroll up a little bit, they're saying, who has the comparative advantage in berries, explain. So berries, whoever has the lower opportunity cost has the comparative advantage. So we see here that johto has the lower opportunity cost in berries, 1 3rd is lower than 1 1 2. It's a lower opportunity cost of producing a berry. So johto has 1 3rd charms per berry opportunity cost, opportunity cost, which is lower than kalos's, lower than kalos's, kalos's 1 1 2 charms per berry opportunity cost. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So berries, whoever has the lower opportunity cost has the comparative advantage. So we see here that johto has the lower opportunity cost in berries, 1 3rd is lower than 1 1 2. It's a lower opportunity cost of producing a berry. So johto has 1 3rd charms per berry opportunity cost, opportunity cost, which is lower than kalos's, lower than kalos's, kalos's 1 1 2 charms per berry opportunity cost. So johto has comparative advantage. So johto has comparative, comparative advantage in berries. And I apologize a little bit for my penmanship, I'm trying to save time by writing a little bit fast, but hopefully me saying it out loud at the same time is making it somewhat legible. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So johto has 1 3rd charms per berry opportunity cost, opportunity cost, which is lower than kalos's, lower than kalos's, kalos's 1 1 2 charms per berry opportunity cost. So johto has comparative advantage. So johto has comparative, comparative advantage in berries. And I apologize a little bit for my penmanship, I'm trying to save time by writing a little bit fast, but hopefully me saying it out loud at the same time is making it somewhat legible. Alright, so the next question. If these countries were to specialize in trade, who would produce which good, explain. Well whoever has the comparative advantage in each will produce that one. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
And I apologize a little bit for my penmanship, I'm trying to save time by writing a little bit fast, but hopefully me saying it out loud at the same time is making it somewhat legible. Alright, so the next question. If these countries were to specialize in trade, who would produce which good, explain. Well whoever has the comparative advantage in each will produce that one. So kalos has comparative advantage, kalos has lower opportunity cost in, and let's see, they have the lower opportunity cost when you compare them to, oh let me say, let me put it this way, for charms, let me write it this way, kalos has a lower opportunity cost for charms. So kalos has advantage in charms, and then we already said, johto has advantage in berries. And so kalos, or kalos, I keep saying it weird, kalos produces charms, johto produces berries, produces berries. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Well whoever has the comparative advantage in each will produce that one. So kalos has comparative advantage, kalos has lower opportunity cost in, and let's see, they have the lower opportunity cost when you compare them to, oh let me say, let me put it this way, for charms, let me write it this way, kalos has a lower opportunity cost for charms. So kalos has advantage in charms, and then we already said, johto has advantage in berries. And so kalos, or kalos, I keep saying it weird, kalos produces charms, johto produces berries, produces berries. And once again, this goes back to something we touched on at the beginning of the video. Even though johto has the absolute advantage, in fact they have the absolute advantage in either, johto is not, even though they can produce charms way more efficiently than kalos, johto is actually, in this, if you buy all the arguments of comparative advantages, johto should actually produce the berries, while kalos should produce the charms, because they have a lower opportunity cost in terms of berries. Now let's answer this last question right over here. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
And so kalos, or kalos, I keep saying it weird, kalos produces charms, johto produces berries, produces berries. And once again, this goes back to something we touched on at the beginning of the video. Even though johto has the absolute advantage, in fact they have the absolute advantage in either, johto is not, even though they can produce charms way more efficiently than kalos, johto is actually, in this, if you buy all the arguments of comparative advantages, johto should actually produce the berries, while kalos should produce the charms, because they have a lower opportunity cost in terms of berries. Now let's answer this last question right over here. What would be a trading price that johto and kalos would agree on to trade charms for? Now you might be saying, well what's a price, I'm used to saying that in terms of just, you know, maybe dollars or some type of currency, how do I answer a price right over here? Well the key is, is that we can give a price in terms of opportunity cost. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
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