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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. So they want a price of charms, so it really could be in terms of berries. So let's see, let's look at each of their cost of charms. So kalos' opportunity cost of a charm is two berries per charm, johto's is three berries per charm. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Well the key is, is that we can give a price in terms of opportunity cost. So they want a price of charms, so it really could be in terms of berries. So let's see, let's look at each of their cost of charms. So kalos' opportunity cost of a charm is two berries per charm, johto's is three berries per charm. So let me rewrite that over here. So, kalos, kalos' opportunity cost of charms is two berries per charm, and then johto, opportunity cost of charms, is three berries per charm. And here we're going to appreciate why comparative advantage works. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
So kalos' opportunity cost of a charm is two berries per charm, johto's is three berries per charm. So let me rewrite that over here. So, kalos, kalos' opportunity cost of charms is two berries per charm, and then johto, opportunity cost of charms, is three berries per charm. And here we're going to appreciate why comparative advantage works. We said that kalos would be the one that would focus on the charms. And so notice, if they can sell the charms to johto for something that is higher than their opportunity cost and lower than johto's opportunity cost, then they both benefit. And so a good price, let's say you could go halfway between the two, but it really could be anything in between the two. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
And here we're going to appreciate why comparative advantage works. We said that kalos would be the one that would focus on the charms. And so notice, if they can sell the charms to johto for something that is higher than their opportunity cost and lower than johto's opportunity cost, then they both benefit. And so a good price, let's say you could go halfway between the two, but it really could be anything in between the two. Let's say 2.5 berries per charm, they both benefit. So they would trade at this, trade at 2.5 berries per charm. Why does this make sense for johto, even though they have the absolute advantage? | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
And so a good price, let's say you could go halfway between the two, but it really could be anything in between the two. Let's say 2.5 berries per charm, they both benefit. So they would trade at this, trade at 2.5 berries per charm. Why does this make sense for johto, even though they have the absolute advantage? Well, if they produce nothing but charms, it would cost them three berries per, or no matter what they do, it'll cost them three berries per charm. But now they figured out a way through trade to get charms at 2.5 berries per charm. And so this will be a better deal for johto. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Why does this make sense for johto, even though they have the absolute advantage? Well, if they produce nothing but charms, it would cost them three berries per, or no matter what they do, it'll cost them three berries per charm. But now they figured out a way through trade to get charms at 2.5 berries per charm. And so this will be a better deal for johto. And so one thing to appreciate when we talk about comparative advantage, some people think that it's about one country benefiting more than the other. But if we assume all the assumptions about comparative advantage in our models, then it's actually about both countries that are trading benefit. They will both be better off. | Comparative advantage worked example Basic economics concepts AP Macroeconomics Khan Academy.mp3 |
Let's say I'm making $20 a month. So my income is $20 per month. Let's say per month, the price of chocolate is $1 per bar. And the price of fruit is $2 per pound. And we've already done this before, but I'll just redraw a budget line. So this axis, let's say this is the quantity of chocolate. I could have picked it either way. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And the price of fruit is $2 per pound. And we've already done this before, but I'll just redraw a budget line. So this axis, let's say this is the quantity of chocolate. I could have picked it either way. And that is the quantity of fruit. Not quantity of four. The quantity of fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
I could have picked it either way. And that is the quantity of fruit. Not quantity of four. The quantity of fruit. If I spent all my money on chocolate, I could buy 20 bars of chocolate a month. So that is 20. This is 10 right over here. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
The quantity of fruit. If I spent all my money on chocolate, I could buy 20 bars of chocolate a month. So that is 20. This is 10 right over here. At these prices, if I spent all of my money on fruit, I could buy 10 pounds per month. So this is 10. So that's 10 pounds per month. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
This is 10 right over here. At these prices, if I spent all of my money on fruit, I could buy 10 pounds per month. So this is 10. So that's 10 pounds per month. That would be 20. And so I have a budget line that looks like this. And the equation of this budget line is going to be, well, I could write it like this. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So that's 10 pounds per month. That would be 20. And so I have a budget line that looks like this. And the equation of this budget line is going to be, well, I could write it like this. My budget, 20, is going to be equal to the price of chocolate, which is 1 times the quantity of chocolate. So this is 1 times the quantity of chocolate. Plus the price of fruit, which is 2, times the quantity of fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And the equation of this budget line is going to be, well, I could write it like this. My budget, 20, is going to be equal to the price of chocolate, which is 1 times the quantity of chocolate. So this is 1 times the quantity of chocolate. Plus the price of fruit, which is 2, times the quantity of fruit. And if I want to write this explicitly in terms of my quantity of chocolate, since I put that on my vertical axis and that tends to be the more dependent axis, I can just subtract 2 times the quantity of fruit from both sides. And I could flip them. And I get my quantity of chocolate is equal to 20 minus 2 times my quantity of fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
Plus the price of fruit, which is 2, times the quantity of fruit. And if I want to write this explicitly in terms of my quantity of chocolate, since I put that on my vertical axis and that tends to be the more dependent axis, I can just subtract 2 times the quantity of fruit from both sides. And I could flip them. And I get my quantity of chocolate is equal to 20 minus 2 times my quantity of fruit. And I get this budget line right over there. Well, we've also looked at the idea of an indifference curve. So for example, let's say I'm sitting at some point on my budget line where I have, let's say, I am consuming 18 bars of chocolate and 1 pound of fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And I get my quantity of chocolate is equal to 20 minus 2 times my quantity of fruit. And I get this budget line right over there. Well, we've also looked at the idea of an indifference curve. So for example, let's say I'm sitting at some point on my budget line where I have, let's say, I am consuming 18 bars of chocolate and 1 pound of fruit. And you can verify that makes sense. It's going to be $18 plus 2, which is 20. So let's say I'm at this point on my budget line. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So for example, let's say I'm sitting at some point on my budget line where I have, let's say, I am consuming 18 bars of chocolate and 1 pound of fruit. And you can verify that makes sense. It's going to be $18 plus 2, which is 20. So let's say I'm at this point on my budget line. 18 pounds, sorry, 18 bars of chocolate, so this is in bars, and 1 pound of fruit per month. So that is 1, and this is in pounds. And this is chocolate, and this is fruit right over here. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So let's say I'm at this point on my budget line. 18 pounds, sorry, 18 bars of chocolate, so this is in bars, and 1 pound of fruit per month. So that is 1, and this is in pounds. And this is chocolate, and this is fruit right over here. Well, we know we have this idea of an indifference curve. There's different combinations of chocolate and fruit to which we are indifferent, to which we will get the same exact total utility. And so we can plot all of those points. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And this is chocolate, and this is fruit right over here. Well, we know we have this idea of an indifference curve. There's different combinations of chocolate and fruit to which we are indifferent, to which we will get the same exact total utility. And so we can plot all of those points. I'll do it in white. It could look something like this. I'll do it as a dotted line. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And so we can plot all of those points. I'll do it in white. It could look something like this. I'll do it as a dotted line. It makes it a little bit easier. Actually, let me draw it like this. So let's say I'm indifferent between any of these points, any of those points right over there. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
I'll do it as a dotted line. It makes it a little bit easier. Actually, let me draw it like this. So let's say I'm indifferent between any of these points, any of those points right over there. Let me draw it a little bit better. So between any of these points right over there. So for example, I could have 18 bars of chocolate and 1 pound of fruit, or I could have, let's say that is 4 bars of chocolate and roughly 8 pounds of fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So let's say I'm indifferent between any of these points, any of those points right over there. Let me draw it a little bit better. So between any of these points right over there. So for example, I could have 18 bars of chocolate and 1 pound of fruit, or I could have, let's say that is 4 bars of chocolate and roughly 8 pounds of fruit. I'm indifferent. I get the same exact total utility. Now, am I maximizing my total utility at either of those points? | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So for example, I could have 18 bars of chocolate and 1 pound of fruit, or I could have, let's say that is 4 bars of chocolate and roughly 8 pounds of fruit. I'm indifferent. I get the same exact total utility. Now, am I maximizing my total utility at either of those points? Well, we've already seen that anything to the top right of our indifference curve, of this white curve right over here, let me label this. This is our indifference curve. Everything to the top right of our indifference curve is preferable. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
Now, am I maximizing my total utility at either of those points? Well, we've already seen that anything to the top right of our indifference curve, of this white curve right over here, let me label this. This is our indifference curve. Everything to the top right of our indifference curve is preferable. We're going to get more total utility. So let me color that in. So everything to the top right of our indifference curve is going to be preferable. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
Everything to the top right of our indifference curve is preferable. We're going to get more total utility. So let me color that in. So everything to the top right of our indifference curve is going to be preferable. So all of these other points on our budget line, even a few points below our budget line where we would actually save money, are preferable. So either of these points are not going to maximize our total utility. We can maximize our total utility at all of these other points in between along our budget line. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So everything to the top right of our indifference curve is going to be preferable. So all of these other points on our budget line, even a few points below our budget line where we would actually save money, are preferable. So either of these points are not going to maximize our total utility. We can maximize our total utility at all of these other points in between along our budget line. So to actually maximize our total utility, what we want to do is find a point on our budget line that is just tangent, that is exactly touches at exactly one point one of our indifference curves. We can have an infinite number of indifference curves. There could be an indifference curve that looks like that. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
We can maximize our total utility at all of these other points in between along our budget line. So to actually maximize our total utility, what we want to do is find a point on our budget line that is just tangent, that is exactly touches at exactly one point one of our indifference curves. We can have an infinite number of indifference curves. There could be an indifference curve that looks like that. There could be another indifference curve that looks like that. All that says is that we are indifferent between any points on this curve. And so there is an indifference curve that touches exactly this budget line or exactly touches the line at one point. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
There could be an indifference curve that looks like that. There could be another indifference curve that looks like that. All that says is that we are indifferent between any points on this curve. And so there is an indifference curve that touches exactly this budget line or exactly touches the line at one point. And so I might have an indifference curve that looks like this. We do this in a vibrant color, in magenta. So I could have an indifference curve that looks like this. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And so there is an indifference curve that touches exactly this budget line or exactly touches the line at one point. And so I might have an indifference curve that looks like this. We do this in a vibrant color, in magenta. So I could have an indifference curve that looks like this. And because it's tangent, it touches in exactly one point. And also the slope of my indifference curve, which we've learned was the marginal rate of substitution, is the exact same as the slope of our budget line right over there, which we learned earlier was the relative price. So this right here is the optimal allocation on our budget line. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So I could have an indifference curve that looks like this. And because it's tangent, it touches in exactly one point. And also the slope of my indifference curve, which we've learned was the marginal rate of substitution, is the exact same as the slope of our budget line right over there, which we learned earlier was the relative price. So this right here is the optimal allocation on our budget line. That right here is optimal. And how do we know it is optimal? Well, there is no other point on the budget line that is to the top right. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So this right here is the optimal allocation on our budget line. That right here is optimal. And how do we know it is optimal? Well, there is no other point on the budget line that is to the top right. In fact, every other point on our budget line is to the bottom left of this indifference curve. So every other point on our budget line is not preferable. Remember, everything below an indifference curve, so all of the shaded area. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
Well, there is no other point on the budget line that is to the top right. In fact, every other point on our budget line is to the bottom left of this indifference curve. So every other point on our budget line is not preferable. Remember, everything below an indifference curve, so all of the shaded area. Let me actually do it in another color. Because the indifference curve, we are indifferent. But everything below an indifference curve, so all of this area in green, is not preferable. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
Remember, everything below an indifference curve, so all of the shaded area. Let me actually do it in another color. Because the indifference curve, we are indifferent. But everything below an indifference curve, so all of this area in green, is not preferable. And every other point on the budget line is not preferable to that point right over there. Because that's the only point, or I guess you could say every other point on our budget line is not preferable to the points on the indifference curve. So they're also not preferable to that point right over there, which actually is on the indifference curve. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
But everything below an indifference curve, so all of this area in green, is not preferable. And every other point on the budget line is not preferable to that point right over there. Because that's the only point, or I guess you could say every other point on our budget line is not preferable to the points on the indifference curve. So they're also not preferable to that point right over there, which actually is on the indifference curve. Now, let's think about what happens if the price of fruit were to go down. So the price of fruit were to go from $2 to $1 per pound. So if the price of fruit went from $2 to $1, then our actual budget line will look different. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So they're also not preferable to that point right over there, which actually is on the indifference curve. Now, let's think about what happens if the price of fruit were to go down. So the price of fruit were to go from $2 to $1 per pound. So if the price of fruit went from $2 to $1, then our actual budget line will look different. Our new budget line, I'll do it in blue, would look like this. If we spent all our money on chocolate, we could buy 20 bars. If we spent all of our money on fruit at the new price, we could buy 20 pounds of fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So if the price of fruit went from $2 to $1, then our actual budget line will look different. Our new budget line, I'll do it in blue, would look like this. If we spent all our money on chocolate, we could buy 20 bars. If we spent all of our money on fruit at the new price, we could buy 20 pounds of fruit. So our new budget line would look something like that. So now what would be the optimal allocation of our dollars, or the best combination that we would buy? Well, we would do the exact same exercise. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
If we spent all of our money on fruit at the new price, we could buy 20 pounds of fruit. So our new budget line would look something like that. So now what would be the optimal allocation of our dollars, or the best combination that we would buy? Well, we would do the exact same exercise. Assuming that we had data on all of these indifference curves, we would find the indifference curve that is exactly tangent to our new budget line. So let's say that this point right over here is exactly tangent to another indifference curve. So just like that. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
Well, we would do the exact same exercise. Assuming that we had data on all of these indifference curves, we would find the indifference curve that is exactly tangent to our new budget line. So let's say that this point right over here is exactly tangent to another indifference curve. So just like that. So there's another indifference curve that looks like that. Let me draw it a little bit neater. So it looks something like that. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So just like that. So there's another indifference curve that looks like that. Let me draw it a little bit neater. So it looks something like that. And so based on how the price, if we assume we have access to these many, many, many, many indifference curves, we can now see, based on all else equal, how a change in the price of fruit changed the quantity of fruit we demanded. Because now our optimal spend is this point on our new budget line, which looks like it's about, well, give or take, about 10 pounds of fruit. So all of a sudden, when we were, so let's think about just the fruit. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So it looks something like that. And so based on how the price, if we assume we have access to these many, many, many, many indifference curves, we can now see, based on all else equal, how a change in the price of fruit changed the quantity of fruit we demanded. Because now our optimal spend is this point on our new budget line, which looks like it's about, well, give or take, about 10 pounds of fruit. So all of a sudden, when we were, so let's think about just the fruit. Everything else we're holding equal. So just the fruit, let's do when the price was 2, the quantity demanded was 8 pounds. And now when the price is 1, the quantity demanded is 10 pounds. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So all of a sudden, when we were, so let's think about just the fruit. Everything else we're holding equal. So just the fruit, let's do when the price was 2, the quantity demanded was 8 pounds. And now when the price is 1, the quantity demanded is 10 pounds. And so what we're actually doing, and once again, we're kind of looking at the exact same ideas from different directions. Before, we looked at it in terms of marginal utility per dollar. And we thought about how you maximize it. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And now when the price is 1, the quantity demanded is 10 pounds. And so what we're actually doing, and once again, we're kind of looking at the exact same ideas from different directions. Before, we looked at it in terms of marginal utility per dollar. And we thought about how you maximize it. And we were able to change the prices and then figure out and derive a demand curve from that. Here, we're just looking at it from a slightly different lens. But they really are all of the same ideas. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And we thought about how you maximize it. And we were able to change the prices and then figure out and derive a demand curve from that. Here, we're just looking at it from a slightly different lens. But they really are all of the same ideas. But by assuming we had access to a bunch of indifference curves, we can see how a change in price changes our budget line and how that would change the optimal quantity we would want of a given product. So for example, we could keep doing this. And we could plot our new demand curve. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
But they really are all of the same ideas. But by assuming we had access to a bunch of indifference curves, we can see how a change in price changes our budget line and how that would change the optimal quantity we would want of a given product. So for example, we could keep doing this. And we could plot our new demand curve. So I could do a demand curve now for fruit. So at least I have 2 points on that demand curve. So if this is the price of fruit and this is the quantity demanded of fruit, when the price is 2, quantity is 8. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
And we could plot our new demand curve. So I could do a demand curve now for fruit. So at least I have 2 points on that demand curve. So if this is the price of fruit and this is the quantity demanded of fruit, when the price is 2, quantity is 8. When the price is 2, the quantity demanded is 8. And when the price is, actually, let me do it a little bit different. When the price is 2, and these aren't to scale, the quantity demanded is 8. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
So if this is the price of fruit and this is the quantity demanded of fruit, when the price is 2, quantity is 8. When the price is 2, the quantity demanded is 8. And when the price is, actually, let me do it a little bit different. When the price is 2, and these aren't to scale, the quantity demanded is 8. And then here is 8, and these aren't to scale. But when the price is 1, the quantity demanded is 10. So 2, 8 quantity demanded is 10. | Optimal point on budget line Microeconomics Khan Academy.mp3 |
In previous videos, we introduced the idea of a production function that takes in a bunch of inputs. Let's call this input one, input two, input three, and that based on how much of these various inputs you have, your production function can give you your output. In this video, we're going to constrain all of the inputs but one to really take it down to how does our output vary as a function of one input? And as we do that, we're going to be able to understand these ideas of total product, marginal product, and average product. So to give you a tangible example, let's say that we are running an ice cream factory and we care about how much our ice cream production per day varies as a function of the number of people working in the factory. So let me write this down. So per day, ice cream, ice cream production, production. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And as we do that, we're going to be able to understand these ideas of total product, marginal product, and average product. So to give you a tangible example, let's say that we are running an ice cream factory and we care about how much our ice cream production per day varies as a function of the number of people working in the factory. So let me write this down. So per day, ice cream, ice cream production, production. And so let me make a table here. So in our first column, I am going to put our labor, which is you could use the input that we're going to see how does that drive output. So I will put labor. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So per day, ice cream, ice cream production, production. And so let me make a table here. So in our first column, I am going to put our labor, which is you could use the input that we're going to see how does that drive output. So I will put labor. So you could view this as workers per day, workers. And we're going to see how our output varies whether we have zero workers, one worker per day, two workers per day, or three workers per day. Now our next column would just be our output. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So I will put labor. So you could view this as workers per day, workers. And we're going to see how our output varies whether we have zero workers, one worker per day, two workers per day, or three workers per day. Now our next column would just be our output. And we'll say that's our total product as a function of labor, TP standing for total product. And let's say that we know if we have zero people working in our ice cream factory, well then we're going to produce zero gallons of ice cream. And let's just assume that this is, our output is in gallons and it's gallons per day. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
Now our next column would just be our output. And we'll say that's our total product as a function of labor, TP standing for total product. And let's say that we know if we have zero people working in our ice cream factory, well then we're going to produce zero gallons of ice cream. And let's just assume that this is, our output is in gallons and it's gallons per day. If we have one worker at our factory, well then we're going to be able to produce 10 gallons a day. If we have two workers at our factory, we're going to produce 18 gallons a day. And if we have three workers at our factory, let's say we can produce 24 gallons a day. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And let's just assume that this is, our output is in gallons and it's gallons per day. If we have one worker at our factory, well then we're going to be able to produce 10 gallons a day. If we have two workers at our factory, we're going to produce 18 gallons a day. And if we have three workers at our factory, let's say we can produce 24 gallons a day. Fair enough. Now I'm going to introduce an idea, and you have seen this word marginal perhaps at other times in your life. I'm going to introduce marginal product of labor. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And if we have three workers at our factory, let's say we can produce 24 gallons a day. Fair enough. Now I'm going to introduce an idea, and you have seen this word marginal perhaps at other times in your life. I'm going to introduce marginal product of labor. And the way to think about marginal, that's how much for every increment of one thing, how much more of the other thing do you get? So here, our marginal product of labor says for each incremental unit of labor, for each incremental person working there per day, how much more, how many more gallons of ice cream am I producing? So my marginal product of labor, when I go from zero to one workers, I'm able to produce 10 more gallons from that first worker. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
I'm going to introduce marginal product of labor. And the way to think about marginal, that's how much for every increment of one thing, how much more of the other thing do you get? So here, our marginal product of labor says for each incremental unit of labor, for each incremental person working there per day, how much more, how many more gallons of ice cream am I producing? So my marginal product of labor, when I go from zero to one workers, I'm able to produce 10 more gallons from that first worker. Now what about when I go from one worker to two workers? Well then, I go from 10 to 18 gallons, so that second person gets me an incremental eight gallons per day. And then as I go from two people working there to three people working there, well, my total product goes up by six. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So my marginal product of labor, when I go from zero to one workers, I'm able to produce 10 more gallons from that first worker. Now what about when I go from one worker to two workers? Well then, I go from 10 to 18 gallons, so that second person gets me an incremental eight gallons per day. And then as I go from two people working there to three people working there, well, my total product goes up by six. So my marginal product of labor for that third worker is going to be six. Now there's something interesting that you're immediately seeing here. And this is actually pretty typical, is that your marginal product of labor will oftentimes go down the more and more people that you add. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And then as I go from two people working there to three people working there, well, my total product goes up by six. So my marginal product of labor for that third worker is going to be six. Now there's something interesting that you're immediately seeing here. And this is actually pretty typical, is that your marginal product of labor will oftentimes go down the more and more people that you add. And you might say, why is that the case? Well, they're just not going to be quite as productive. That second person might be waiting while the first person is using the mixer, and that third person's going to be waiting while the first person and the second person, maybe they're using the restroom or something, and the third person has to go. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And this is actually pretty typical, is that your marginal product of labor will oftentimes go down the more and more people that you add. And you might say, why is that the case? Well, they're just not going to be quite as productive. That second person might be waiting while the first person is using the mixer, and that third person's going to be waiting while the first person and the second person, maybe they're using the restroom or something, and the third person has to go. And you can imagine, you add four or five, six, at some point, you're not even going to be able to fit people into the factory. And so you're going to have what's known as a diminishing marginal return. And you see that right over here. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
That second person might be waiting while the first person is using the mixer, and that third person's going to be waiting while the first person and the second person, maybe they're using the restroom or something, and the third person has to go. And you can imagine, you add four or five, six, at some point, you're not even going to be able to fit people into the factory. And so you're going to have what's known as a diminishing marginal return. And you see that right over here. As you're adding more and more labor, your marginal return is getting smaller and smaller. So this is a diminishing marginal return. Now the last concept I'm going to introduce you to in this video is that of average product. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And you see that right over here. As you're adding more and more labor, your marginal return is getting smaller and smaller. So this is a diminishing marginal return. Now the last concept I'm going to introduce you to in this video is that of average product. And this is average product as a function of labor. So AP for average product. And all that is is our total product divided by our labor. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
Now the last concept I'm going to introduce you to in this video is that of average product. And this is average product as a function of labor. So AP for average product. And all that is is our total product divided by our labor. So over here, when we have one worker, our total product is 10 gallons, and we're going to divide that by one worker. So our average product per worker is going to be 10 gallons. Now when we have two people working per day, and we're producing 18 gallons per day, our average product as a function of labor is going to be 18 divided by two, which is going to be nine gallons per worker per day on average. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And all that is is our total product divided by our labor. So over here, when we have one worker, our total product is 10 gallons, and we're going to divide that by one worker. So our average product per worker is going to be 10 gallons. Now when we have two people working per day, and we're producing 18 gallons per day, our average product as a function of labor is going to be 18 divided by two, which is going to be nine gallons per worker per day on average. And then in this last situation, it's going to be 24 divided by three, which is eight gallons per worker per day on average. And you can see this visually as well. I could draw this on a curve. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
Now when we have two people working per day, and we're producing 18 gallons per day, our average product as a function of labor is going to be 18 divided by two, which is going to be nine gallons per worker per day on average. And then in this last situation, it's going to be 24 divided by three, which is eight gallons per worker per day on average. And you can see this visually as well. I could draw this on a curve. Let me do that. So if on our horizontal axis, I have our labor units, which is workers per day. So one, two, and three. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
I could draw this on a curve. Let me do that. So if on our horizontal axis, I have our labor units, which is workers per day. So one, two, and three. So this is labor right over here. And our vertical axis, I'll have our total output. So total product, I could say. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So one, two, and three. So this is labor right over here. And our vertical axis, I'll have our total output. So total product, I could say. So let's say that's 10, 20, and let's say that is 30 right over there. Well, this first one right over here, when we have one person working in the factory, we produce 10 gallons per day. And this is total product right over here. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So total product, I could say. So let's say that's 10, 20, and let's say that is 30 right over there. Well, this first one right over here, when we have one person working in the factory, we produce 10 gallons per day. And this is total product right over here. When we have two people working in our factory, we produce 18 gallons a day. So it's gonna be just like that. And notice, the slope has gone down a little bit. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And this is total product right over here. When we have two people working in our factory, we produce 18 gallons a day. So it's gonna be just like that. And notice, the slope has gone down a little bit. We have a certain slope here, but it's a little less deep there. And that steepness of that line or of that curve, that tells you about the marginal product. So it's a little bit less deep, so our marginal product of labor has gone down a little bit. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
And notice, the slope has gone down a little bit. We have a certain slope here, but it's a little less deep there. And that steepness of that line or of that curve, that tells you about the marginal product. So it's a little bit less deep, so our marginal product of labor has gone down a little bit. We're having diminishing marginal returns. And then last but not least, when we have three people working, we're able to produce 24. So three and 24 might be right over there. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So it's a little bit less deep, so our marginal product of labor has gone down a little bit. We're having diminishing marginal returns. And then last but not least, when we have three people working, we're able to produce 24. So three and 24 might be right over there. And once again, we can see our diminishing returns. It gets even a little bit flatter. We go from zero to one. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
So three and 24 might be right over there. And once again, we can see our diminishing returns. It gets even a little bit flatter. We go from zero to one. We added plus 10. And you can see that there in the marginal product of labor. And then as we add one more person, it goes plus eight. | Total product, marginal product and average product APⓇ Microeconomics Khan Academy.mp3 |
In the last video, we introduced ourselves to the law of supply. And it was a fairly common sense idea that if we hold all else equal, that if the price of something goes up, there's more incentive for more producers to produce it, or a given producer to produce more of it. And we saw that. As the price goes up, we moved along the supply curve, and the quantity produced went up. Now, what I want to talk about in this video is all of the things we held equal in the last video. And the first of these, I'll call this the price of inputs. Or another way to think about it is the cost of production. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
As the price goes up, we moved along the supply curve, and the quantity produced went up. Now, what I want to talk about in this video is all of the things we held equal in the last video. And the first of these, I'll call this the price of inputs. Or another way to think about it is the cost of production. So if the price of inputs may be the price of labor, the people who would have to pick the grapes, or our fuel that we need to transport the grapes, or the land, if any of that increased, then at a given price point, we would make less money. There's less incentive for us to do it, especially if this is true only for grapes. Maybe we'll say, OK, if it's now more expensive to get grape seeds, maybe I'll start planting something else, because I'm not getting as much profit per pound of grape. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Or another way to think about it is the cost of production. So if the price of inputs may be the price of labor, the people who would have to pick the grapes, or our fuel that we need to transport the grapes, or the land, if any of that increased, then at a given price point, we would make less money. There's less incentive for us to do it, especially if this is true only for grapes. Maybe we'll say, OK, if it's now more expensive to get grape seeds, maybe I'll start planting something else, because I'm not getting as much profit per pound of grape. So if the price of my inputs, or if the size of my costs go up, at any given price point, I'd want to produce less. So if the price of inputs go up, the supply would go down. So if this becomes at this price point, I'd make less money, so I would produce less. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Maybe we'll say, OK, if it's now more expensive to get grape seeds, maybe I'll start planting something else, because I'm not getting as much profit per pound of grape. So if the price of my inputs, or if the size of my costs go up, at any given price point, I'd want to produce less. So if the price of inputs go up, the supply would go down. So if this becomes at this price point, I'd make less money, so I would produce less. Or maybe I would produce other things. So the whole supply curve would shift to the left. And also, even the minimum price I would need to supply any of it would also go up when you shift the curve to the left, because now all of a sudden, it costs me more to produce even that first unit. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So if this becomes at this price point, I'd make less money, so I would produce less. Or maybe I would produce other things. So the whole supply curve would shift to the left. And also, even the minimum price I would need to supply any of it would also go up when you shift the curve to the left, because now all of a sudden, it costs me more to produce even that first unit. And likewise, if my price of my inputs went down, now all of a sudden, at any given price point, producing grapes would become more profitable, and I would have more incentive to maybe produce grapes relative to other things, and use more land for grapes than other things. And then you would have the whole curve shift to the right. Now let's think about related goods. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And also, even the minimum price I would need to supply any of it would also go up when you shift the curve to the left, because now all of a sudden, it costs me more to produce even that first unit. And likewise, if my price of my inputs went down, now all of a sudden, at any given price point, producing grapes would become more profitable, and I would have more incentive to maybe produce grapes relative to other things, and use more land for grapes than other things. And then you would have the whole curve shift to the right. Now let's think about related goods. So what happens with the price of related goods? And when we think about this, we don't want to think of it from a demand point of view, because we're talking about supply. You want to think about it from the producer's point of view. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Now let's think about related goods. So what happens with the price of related goods? And when we think about this, we don't want to think of it from a demand point of view, because we're talking about supply. You want to think about it from the producer's point of view. So when we think about related goods here, we want to think about substitutes for production. So maybe I'm a farmer, and I know very little bit about farming, so I don't know if this is possible. But maybe on my land, I'm saying, well, some of my land is going to be for grapes, and some of it is going to be for blueberries. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
You want to think about it from the producer's point of view. So when we think about related goods here, we want to think about substitutes for production. So maybe I'm a farmer, and I know very little bit about farming, so I don't know if this is possible. But maybe on my land, I'm saying, well, some of my land is going to be for grapes, and some of it is going to be for blueberries. And so what would happen if the price of a related good, in particular, blueberries, what would happen if the price of blueberries went up? Well, if the price of blueberries went up, then I would say, wow, maybe I can do better with blueberries, and I would allocate more of my land to blueberries than to grapes. And so once again, if the price of related goods, well, it depends which related goods, but if the price of productive substitutes, so price of other things I could produce, if the price of other things I can produce goes up, then my supply of grapes, once again, would go down. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
But maybe on my land, I'm saying, well, some of my land is going to be for grapes, and some of it is going to be for blueberries. And so what would happen if the price of a related good, in particular, blueberries, what would happen if the price of blueberries went up? Well, if the price of blueberries went up, then I would say, wow, maybe I can do better with blueberries, and I would allocate more of my land to blueberries than to grapes. And so once again, if the price of related goods, well, it depends which related goods, but if the price of productive substitutes, so price of other things I could produce, if the price of other things I can produce goes up, then my supply of grapes, once again, would go down. And the important thing is, in any of these circumstances, literally just think it through. Do not just look at what I'm writing here and just try to memorize it in some form, way, shape, or form. This is really just a way to think about things. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And so once again, if the price of related goods, well, it depends which related goods, but if the price of productive substitutes, so price of other things I could produce, if the price of other things I can produce goes up, then my supply of grapes, once again, would go down. And the important thing is, in any of these circumstances, literally just think it through. Do not just look at what I'm writing here and just try to memorize it in some form, way, shape, or form. This is really just a way to think about things. Hey, obviously, if I can make more money off of blueberries, now all of a sudden, I'm going to allocate more of my land to blueberries than to grapes, supply of grapes will go down. Now let's think about what happens with the number of suppliers. And this one is pretty common sense. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
This is really just a way to think about things. Hey, obviously, if I can make more money off of blueberries, now all of a sudden, I'm going to allocate more of my land to blueberries than to grapes, supply of grapes will go down. Now let's think about what happens with the number of suppliers. And this one is pretty common sense. The more people they are supplying, the higher the supply would be. So if the number of suppliers goes up, and now you wouldn't imagine this is a curve maybe for the aggregate supply. So if the number of suppliers go up, then the aggregate supply would go up at any given price point. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And this one is pretty common sense. The more people they are supplying, the higher the supply would be. So if the number of suppliers goes up, and now you wouldn't imagine this is a curve maybe for the aggregate supply. So if the number of suppliers go up, then the aggregate supply would go up at any given price point. If the number of suppliers were to go down, then the aggregate supply would go down at any given price point. So this one, hopefully, is somewhat obvious. Then we could think about things like technology. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So if the number of suppliers go up, then the aggregate supply would go up at any given price point. If the number of suppliers were to go down, then the aggregate supply would go down at any given price point. So this one, hopefully, is somewhat obvious. Then we could think about things like technology. And so this is just maybe there's some innovation, some new type of seed that with the same amount of work, the same amount of land, can produce that many more grapes. So if you have technological improvements, I'm assuming we're not going to go into some type of dark ages. If we have technological improvements, then that will also make the supply go up. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Then we could think about things like technology. And so this is just maybe there's some innovation, some new type of seed that with the same amount of work, the same amount of land, can produce that many more grapes. So if you have technological improvements, I'm assuming we're not going to go into some type of dark ages. If we have technological improvements, then that will also make the supply go up. You can also think of it as it might make it cheaper to produce. So it's kind of the same thing here. The price of inputs might go down. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
If we have technological improvements, then that will also make the supply go up. You can also think of it as it might make it cheaper to produce. So it's kind of the same thing here. The price of inputs might go down. So that would make your supply go up. Or you could just say, hey, look, there's just going to be more grapes popping off of these new types of vines that we got. So we're just going to produce more grapes. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
The price of inputs might go down. So that would make your supply go up. Or you could just say, hey, look, there's just going to be more grapes popping off of these new types of vines that we got. So we're just going to produce more grapes. And then the last one I'll cover, and it's a little bit strange in the grape analogy, is the expected future prices. Price expectations. And let's go away from the grapes because grapes are perishable goods. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
So we're just going to produce more grapes. And then the last one I'll cover, and it's a little bit strange in the grape analogy, is the expected future prices. Price expectations. And let's go away from the grapes because grapes are perishable goods. They go bad. It's not like you can save goods to use them later. But if, let's say, you are an oil producer, and oil is something that you can store and you can use it later. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And let's go away from the grapes because grapes are perishable goods. They go bad. It's not like you can save goods to use them later. But if, let's say, you are an oil producer, and oil is something that you can store and you can use it later. If you expected oil prices to be neutral today, and then tomorrow, all of a sudden, you are sure that oil prices are going to go up in the future, you're sure that a year from now, oil prices are just going to go through the roof, what's your incentive? Well, you should hoard all of your oil. Do not sell it today and wait to sell it in the future if you're sure that's what's going to happen. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
But if, let's say, you are an oil producer, and oil is something that you can store and you can use it later. If you expected oil prices to be neutral today, and then tomorrow, all of a sudden, you are sure that oil prices are going to go up in the future, you're sure that a year from now, oil prices are just going to go through the roof, what's your incentive? Well, you should hoard all of your oil. Do not sell it today and wait to sell it in the future if you're sure that's what's going to happen. So if there's a change in expected future prices, so if you go from neutral to expecting prices go up in the future, then you're going to hoard your goods. You can't hoard grapes because the grapes will just go bad. You might be able to turn them into wine or something. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
Do not sell it today and wait to sell it in the future if you're sure that's what's going to happen. So if there's a change in expected future prices, so if you go from neutral to expecting prices go up in the future, then you're going to hoard your goods. You can't hoard grapes because the grapes will just go bad. You might be able to turn them into wine or something. But if we're talking about something like oil, you would say, hey, why should I pump all of the fixed amount of oil in the ground today to sell it at today's lower prices? I'm going to lower the supply today so I can sell it in the future. So if the expected future prices go from neutral to you expect future prices to go up dramatically, then current supply, and I'm just going to emphasize by writing the word current, current supply will go down so you can hoard it to sell it in the future. | Factors affecting supply Supply, demand, and market equilibrium Microeconomics Khan Academy.mp3 |
And as we see in many economic models, this is a, I would argue, oversimplified model, but it helps us get some insights, where in each country, workers can only produce some combination of sneakers and basketballs. And to help us understand this and to appreciate that you can see this information in multiple ways, let's present this also as an output table. Output table, which you will sometimes see, and from either the production possibility curves or from the output table, we can calculate the opportunity cost of shoes and the opportunity cost of basketballs and then try to deduce some things about comparative advantage. So in an output table, we would look at country A and we would look at country B, and we would think about, well, what is the max, and I'll just draw it, what is the max basketballs, and this is all per worker per day, and we would also think, what is the max shoes? Shoes, those look like socks, but you get the idea. Once again, per worker per day, and so let me draw a little chart here so we can do that. And so what I'd like you to do is pause this video and see if you can fill in this chart. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
So in an output table, we would look at country A and we would look at country B, and we would think about, well, what is the max, and I'll just draw it, what is the max basketballs, and this is all per worker per day, and we would also think, what is the max shoes? Shoes, those look like socks, but you get the idea. Once again, per worker per day, and so let me draw a little chart here so we can do that. And so what I'd like you to do is pause this video and see if you can fill in this chart. What is the maximum basketballs per worker per day in country A, then in country B, and then do the same thing for shoes. All right, now let's work this together. So first in country A, what is the maximum number of basketballs? | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And so what I'd like you to do is pause this video and see if you can fill in this chart. What is the maximum basketballs per worker per day in country A, then in country B, and then do the same thing for shoes. All right, now let's work this together. So first in country A, what is the maximum number of basketballs? Well, if in country A they put all of their energy into basketballs, we are right over here on the production possibilities curve. They can produce eight basketballs. And if on the other end of the curve they put all of their energy into shoes, they would produce no basketballs and six pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
So first in country A, what is the maximum number of basketballs? Well, if in country A they put all of their energy into basketballs, we are right over here on the production possibilities curve. They can produce eight basketballs. And if on the other end of the curve they put all of their energy into shoes, they would produce no basketballs and six pairs of shoes. We're assuming that these are pairs of shoes that we're talking about, six pairs of shoes. And similarly, if we go to country B, I keep saying company instead of country, if we go to country B, if we say what's the maximum number of basketballs? Well, if they put all their energy into basketballs, we get four basketballs and no pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And if on the other end of the curve they put all of their energy into shoes, they would produce no basketballs and six pairs of shoes. We're assuming that these are pairs of shoes that we're talking about, six pairs of shoes. And similarly, if we go to country B, I keep saying company instead of country, if we go to country B, if we say what's the maximum number of basketballs? Well, if they put all their energy into basketballs, we get four basketballs and no pairs of shoes. So that's four basketballs. But then if they put all of the energy into pairs of shoes, they produce no basketballs. They could produce four pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Well, if they put all their energy into basketballs, we get four basketballs and no pairs of shoes. So that's four basketballs. But then if they put all of the energy into pairs of shoes, they produce no basketballs. They could produce four pairs of shoes. And so it's as simple as that. This output table is just showing the extremes from the production possibility curves for these countries. Now with the information in both the output table and these production possibility curves, let's calculate the opportunity cost. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
They could produce four pairs of shoes. And so it's as simple as that. This output table is just showing the extremes from the production possibility curves for these countries. Now with the information in both the output table and these production possibility curves, let's calculate the opportunity cost. So let me set up another table. And let me just say this is going to be our opportunity cost table, OC, not Orange County, opportunity costs. And once again, it's going to be for country A and country B. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Now with the information in both the output table and these production possibility curves, let's calculate the opportunity cost. So let me set up another table. And let me just say this is going to be our opportunity cost table, OC, not Orange County, opportunity costs. And once again, it's going to be for country A and country B. And we're gonna think about the opportunity costs of producing basketballs. And that's going to be in terms of pairs of shoes. And then the opportunity costs for producing pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And once again, it's going to be for country A and country B. And we're gonna think about the opportunity costs of producing basketballs. And that's going to be in terms of pairs of shoes. And then the opportunity costs for producing pairs of shoes. And that's going to be in terms of basketballs. And so let me set up another table. And so I encourage you, once again, pause this video and see if you can fill in this table. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And then the opportunity costs for producing pairs of shoes. And that's going to be in terms of basketballs. And so let me set up another table. And so I encourage you, once again, pause this video and see if you can fill in this table. What is the opportunity cost? We'll start with what's the opportunity cost for producing basketballs in terms of shoes in country A? All right, well, there's a couple of ways to think about it. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And so I encourage you, once again, pause this video and see if you can fill in this table. What is the opportunity cost? We'll start with what's the opportunity cost for producing basketballs in terms of shoes in country A? All right, well, there's a couple of ways to think about it. Imagine a world in country A where you're producing no basketballs, and you're producing six pairs of shoes. But then if you were to increase the number of basketballs you produce by eight, so if you add eight basketballs, well, you're gonna give up six pairs of shoes. You see that right over here. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
All right, well, there's a couple of ways to think about it. Imagine a world in country A where you're producing no basketballs, and you're producing six pairs of shoes. But then if you were to increase the number of basketballs you produce by eight, so if you add eight basketballs, well, you're gonna give up six pairs of shoes. You see that right over here. You give up six pairs of shoes. And so in country A, eight basketballs cost six shoes. Let me write that down. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
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