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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. So in country A, eight basketballs, and I'll just say B for short, cost six, six S. S is shoes for short. Or another way to think about it, if you divide both of these by eight, one basketball costs six over eight shoes. All I did is eight basketballs cost six shoes, and one basketball is gonna cost six divided by eight pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Let me write that down. So in country A, eight basketballs, and I'll just say B for short, cost six, six S. S is shoes for short. Or another way to think about it, if you divide both of these by eight, one basketball costs six over eight shoes. All I did is eight basketballs cost six shoes, and one basketball is gonna cost six divided by eight pairs of shoes. And so what is that going to be? Well, six over eight is the same thing as 3 4ths, or 3 4ths of a pair of shoes. So one basketball costs 3 4ths of a pair of shoes, or we could say that is 0.75 S, where S is a pair of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
All I did is eight basketballs cost six shoes, and one basketball is gonna cost six divided by eight pairs of shoes. And so what is that going to be? Well, six over eight is the same thing as 3 4ths, or 3 4ths of a pair of shoes. So one basketball costs 3 4ths of a pair of shoes, or we could say that is 0.75 S, where S is a pair of shoes. This is my simplified notation. And what about in country B? Well, in country B, if I go from no basketballs to four basketballs, then I would have given up four pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
So one basketball costs 3 4ths of a pair of shoes, or we could say that is 0.75 S, where S is a pair of shoes. This is my simplified notation. And what about in country B? Well, in country B, if I go from no basketballs to four basketballs, then I would have given up four pairs of shoes. I would have given up four pairs of shoes. So in country B, so in B, four basketballs cost four pairs of shoes, four pairs of shoes, or divide both by four, you could have a basketball, one basketball costs one pair of shoes. So a basketball here in country B costs one pair of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Well, in country B, if I go from no basketballs to four basketballs, then I would have given up four pairs of shoes. I would have given up four pairs of shoes. So in country B, so in B, four basketballs cost four pairs of shoes, four pairs of shoes, or divide both by four, you could have a basketball, one basketball costs one pair of shoes. So a basketball here in country B costs one pair of shoes. So one pair of shoes. S, once again, is a pair of shoes. And you could have also gotten it from this information here. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
So a basketball here in country B costs one pair of shoes. So one pair of shoes. S, once again, is a pair of shoes. And you could have also gotten it from this information here. You could set up an equation. You could say, look, if I put all of, in country A, if I put, so let's look at this part right over here, you could say in country A, if I put all of my energy into basketballs, I could produce eight basketballs. But if I put that same energy into shoes, I could produce six pairs of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And you could have also gotten it from this information here. You could set up an equation. You could say, look, if I put all of, in country A, if I put, so let's look at this part right over here, you could say in country A, if I put all of my energy into basketballs, I could produce eight basketballs. But if I put that same energy into shoes, I could produce six pairs of shoes. So with the same energy, I could produce either one of these. And then if I want the opportunity cost for basketballs, I divide both by eight, and that's essentially what I did over here. And I get a basketball. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
But if I put that same energy into shoes, I could produce six pairs of shoes. So with the same energy, I could produce either one of these. And then if I want the opportunity cost for basketballs, I divide both by eight, and that's essentially what I did over here. And I get a basketball. It costs 6 8ths of a pair of shoes, or 3 4ths of a pair of shoes, which is exactly what I have over here. Now let's do the opportunity cost for a pair of shoes in either country. 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 I get a basketball. It costs 6 8ths of a pair of shoes, or 3 4ths of a pair of shoes, which is exactly what I have over here. Now let's do the opportunity cost for a pair of shoes in either country. Well, there's a couple of ways to think about it. You could just view it as the reciprocal, or you could even go back to this equation right over here. If we are in country A, we would say six shoes. If we put all our energy in shoes, we could produce six of them, or six pairs of shoes, I should say. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Well, there's a couple of ways to think about it. You could just view it as the reciprocal, or you could even go back to this equation right over here. If we are in country A, we would say six shoes. If we put all our energy in shoes, we could produce six of them, or six pairs of shoes, I should say. And if we put all of our energy into basketballs, we could produce eight basketballs. But if you divide by six, you get per pair of shoes. And so per each pair of shoes, the energy to produce one pair of shoes is equivalent to the energy to produce 8 6ths of a basketball. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
If we put all our energy in shoes, we could produce six of them, or six pairs of shoes, I should say. And if we put all of our energy into basketballs, we could produce eight basketballs. But if you divide by six, you get per pair of shoes. And so per each pair of shoes, the energy to produce one pair of shoes is equivalent to the energy to produce 8 6ths of a basketball. And 8 6ths is the same thing as 4 3rds of a basketball. And if we wanted to write it as a decimal, just for simplicity, or maybe to make it easier to compare, we would say that this is approximately 1.33. Obviously the threes just keep going on, it repeats forever. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And so per each pair of shoes, the energy to produce one pair of shoes is equivalent to the energy to produce 8 6ths of a basketball. And 8 6ths is the same thing as 4 3rds of a basketball. And if we wanted to write it as a decimal, just for simplicity, or maybe to make it easier to compare, we would say that this is approximately 1.33. Obviously the threes just keep going on, it repeats forever. But approximately 1.33 basketballs is the cost of producing a shoe, and the opportunity cost of producing a shoe in country A. 1.33 basketballs. And what about in country B? | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Obviously the threes just keep going on, it repeats forever. But approximately 1.33 basketballs is the cost of producing a shoe, and the opportunity cost of producing a shoe in country A. 1.33 basketballs. And what about in country B? Well, in country B, we could set up a similar type of equation, where the same energy for four shoes, I could produce four basketballs, and that's essentially what we set up right over here on the left. You divide both sides by four, the energy of a shoe is equal to the energy of a basketball. Or I should say the energy of a pair of shoes is equal to the energy of making a basketball. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And what about in country B? Well, in country B, we could set up a similar type of equation, where the same energy for four shoes, I could produce four basketballs, and that's essentially what we set up right over here on the left. You divide both sides by four, the energy of a shoe is equal to the energy of a basketball. Or I should say the energy of a pair of shoes is equal to the energy of making a basketball. So the opportunity cost of making a pair of shoes is equal to one basketball. So now we're ready to draw the connection. Given the opportunity cost that we have calculated, what country has the comparative advantage in basketballs? | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Or I should say the energy of a pair of shoes is equal to the energy of making a basketball. So the opportunity cost of making a pair of shoes is equal to one basketball. So now we're ready to draw the connection. Given the opportunity cost that we have calculated, what country has the comparative advantage in basketballs? Pause this video and try to figure it out. So now let's look at the opportunity cost of producing a basketball in either country. In country A, it's each basketball costs a worker 3 4ths of a pair of shoes, while in country B, it costs them a whole pair of shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Given the opportunity cost that we have calculated, what country has the comparative advantage in basketballs? Pause this video and try to figure it out. So now let's look at the opportunity cost of producing a basketball in either country. In country A, it's each basketball costs a worker 3 4ths of a pair of shoes, while in country B, it costs them a whole pair of shoes. So country A actually has a lower opportunity cost of producing basketballs. And so it has the comparative advantage here. Comparative, comparative advantage. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
In country A, it's each basketball costs a worker 3 4ths of a pair of shoes, while in country B, it costs them a whole pair of shoes. So country A actually has a lower opportunity cost of producing basketballs. And so it has the comparative advantage here. Comparative, comparative advantage. And then if we look at shoes, it goes the other way around. Country A has an opportunity cost of 1 1 3rd basketballs for every pair of shoes, while country B has an opportunity cost of only one basketball per pair of shoes. So it has a lower opportunity cost. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
Comparative, comparative advantage. And then if we look at shoes, it goes the other way around. Country A has an opportunity cost of 1 1 3rd basketballs for every pair of shoes, while country B has an opportunity cost of only one basketball per pair of shoes. So it has a lower opportunity cost. And this one actually might be a little bit counterintuitive because if you look on the shoe axis right over here, country A has the absolute advantage in producing shoes. A worker per day in country A can produce six pairs of shoes while a worker in country B can only produce four pairs of shoes. But even though country A has the absolute advantage, it would actually make sense for country A to focus on basketballs while country B focuses on shoes. | Opportunity cost and comparative advantage using an output table AP Macroeconomics Khan Academy.mp3 |
And this is what we got right over here. It was aligned with a slope twice as steep as the slope of the demand curve. And we'll see that that's actually generalizable. There's an optional video that I'll do very shortly where I prove it with a little bit of calculus. But it's very important to realize that this marginal revenue curve looks very different than the marginal revenue curve if we were dealing with perfect competition. If we were dealing with perfect competition, there would be some equilibrium price in the market. And all of the competitors would essentially just have to take that price. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
There's an optional video that I'll do very shortly where I prove it with a little bit of calculus. But it's very important to realize that this marginal revenue curve looks very different than the marginal revenue curve if we were dealing with perfect competition. If we were dealing with perfect competition, there would be some equilibrium price in the market. And all of the competitors would essentially just have to take that price. So let's say that that equilibrium price was $3 per pound. Then our marginal revenue curve would look like this. If we were not a monopolist, if we were one of the many perfect competitors, I guess you could view it that way, because we would just have to take that price. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
And all of the competitors would essentially just have to take that price. So let's say that that equilibrium price was $3 per pound. Then our marginal revenue curve would look like this. If we were not a monopolist, if we were one of the many perfect competitors, I guess you could view it that way, because we would just have to take that price. If we wanted to sell 1,000 pounds, each of those pounds, we would get $3 per pound. And then if we want to sell 1,001, we'll just get $3 per pound for the next one. It doesn't change. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
If we were not a monopolist, if we were one of the many perfect competitors, I guess you could view it that way, because we would just have to take that price. If we wanted to sell 1,000 pounds, each of those pounds, we would get $3 per pound. And then if we want to sell 1,001, we'll just get $3 per pound for the next one. It doesn't change. We're just taking that price. With a monopolist, things do change, because we are the only producer in the market. The price at which we can get changes depending on what we produce, because we are the entire supply for the market. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
It doesn't change. We're just taking that price. With a monopolist, things do change, because we are the only producer in the market. The price at which we can get changes depending on what we produce, because we are the entire supply for the market. And we have this downward sloping marginal revenue curve. Now, with that out of the way, let's think about what will be the optimal quantity for us to produce if we wanted to maximize profit. And if we think in pure economic terms, that's what firms try to do. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
The price at which we can get changes depending on what we produce, because we are the entire supply for the market. And we have this downward sloping marginal revenue curve. Now, with that out of the way, let's think about what will be the optimal quantity for us to produce if we wanted to maximize profit. And if we think in pure economic terms, that's what firms try to do. They exist to maximize profit. And to do that, we're going to have to think about, and remember, it's not to maximize revenue. To maximize revenue, we would have said, oh, well, they should just produce 3,000 pounds. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
And if we think in pure economic terms, that's what firms try to do. They exist to maximize profit. And to do that, we're going to have to think about, and remember, it's not to maximize revenue. To maximize revenue, we would have said, oh, well, they should just produce 3,000 pounds. But it's not about maximizing revenue. It's about maximizing profit. We have to take the cost into consideration. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
To maximize revenue, we would have said, oh, well, they should just produce 3,000 pounds. But it's not about maximizing revenue. It's about maximizing profit. We have to take the cost into consideration. And to do that, we'll have to draw a marginal cost curve. And so let's say I did the research. Let's say we're the owners of this firm. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
We have to take the cost into consideration. And to do that, we'll have to draw a marginal cost curve. And so let's say I did the research. Let's say we're the owners of this firm. And we have a marginal cost curve that looks something like this. Let's say our marginal cost curve looks like this. It's important to realize we are the market. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
Let's say we're the owners of this firm. And we have a marginal cost curve that looks something like this. Let's say our marginal cost curve looks like this. It's important to realize we are the market. We are the only producers here. So this isn't just our marginal cost curve. This is a marginal cost curve for the market. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
It's important to realize we are the market. We are the only producers here. So this isn't just our marginal cost curve. This is a marginal cost curve for the market. Or another way to think about it, this is the supply curve for the market. It tells you at any given price how much the market is willing to supply. You could view it as a marginal cost, or you could view it as a supply curve. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
This is a marginal cost curve for the market. Or another way to think about it, this is the supply curve for the market. It tells you at any given price how much the market is willing to supply. You could view it as a marginal cost, or you could view it as a supply curve. And we've talked about it before. We could view a supply curve as a marginal cost curve. If you want the market to produce one extra pound, what's the minimum price you would have to give? | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
You could view it as a marginal cost, or you could view it as a supply curve. And we've talked about it before. We could view a supply curve as a marginal cost curve. If you want the market to produce one extra pound, what's the minimum price you would have to give? That is the marginal cost. Now, with this out of the way, let's think about what you would produce. Well, you would definitely want to produce something. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
If you want the market to produce one extra pound, what's the minimum price you would have to give? That is the marginal cost. Now, with this out of the way, let's think about what you would produce. Well, you would definitely want to produce something. You'd definitely start to produce a few pounds right over here, because the marginal revenue you're getting is way above your marginal cost. Each incremental pound you're producing right over here, you're getting much more revenue. You're getting $5 or $6 of revenue, and it's only costing you a little over $1. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
Well, you would definitely want to produce something. You'd definitely start to produce a few pounds right over here, because the marginal revenue you're getting is way above your marginal cost. Each incremental pound you're producing right over here, you're getting much more revenue. You're getting $5 or $6 of revenue, and it's only costing you a little over $1. So you're saying, OK, I'm going to keep producing. I'm going to keep producing. Over here, each incremental unit you're getting, you're still getting more revenue than the cost of that incremental unit. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
You're getting $5 or $6 of revenue, and it's only costing you a little over $1. So you're saying, OK, I'm going to keep producing. I'm going to keep producing. Over here, each incremental unit you're getting, you're still getting more revenue than the cost of that incremental unit. And that keeps being true all the way until you get to 2,000 pounds right over here. At this point right over here, you don't want to produce an incremental unit, because if you produce one more unit, if you produce that 2,001st pound right over here, then for that 2,001st pound, your cost is going to be slightly higher than the revenue you get in. So you will actually take a slight loss on that. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
Over here, each incremental unit you're getting, you're still getting more revenue than the cost of that incremental unit. And that keeps being true all the way until you get to 2,000 pounds right over here. At this point right over here, you don't want to produce an incremental unit, because if you produce one more unit, if you produce that 2,001st pound right over here, then for that 2,001st pound, your cost is going to be slightly higher than the revenue you get in. So you will actually take a slight loss on that. So your total profit will start to go down. And you don't want to produce less than this, because you'll be leaving a little money on the table. You'll be leaving that little incremental pound where the marginal revenue on that incremental pound was just slightly higher than your marginal cost on that incremental pound. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
So you will actually take a slight loss on that. So your total profit will start to go down. And you don't want to produce less than this, because you'll be leaving a little money on the table. You'll be leaving that little incremental pound where the marginal revenue on that incremental pound was just slightly higher than your marginal cost on that incremental pound. So you will produce right over there. Now, this is interesting, because this is a different equilibrium, or I guess we say this is a different price, or this is a different price and quantity than we would get if we were dealing with perfect competition. If we were dealing with perfect competition, our equilibrium price and quantity would be where our supply and demand curves intersect. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
You'll be leaving that little incremental pound where the marginal revenue on that incremental pound was just slightly higher than your marginal cost on that incremental pound. So you will produce right over there. Now, this is interesting, because this is a different equilibrium, or I guess we say this is a different price, or this is a different price and quantity than we would get if we were dealing with perfect competition. If we were dealing with perfect competition, our equilibrium price and quantity would be where our supply and demand curves intersect. It would be right over here. It would be a price of $3 per pound and a quantity of 3,000 pounds. Now, in order to maximize profit, we are intersecting between the marginal revenue curve and our quantity that we want to produce as a monopolist is the intersection between our marginal revenue curve and our marginal cost curve, which is right over here. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
If we were dealing with perfect competition, our equilibrium price and quantity would be where our supply and demand curves intersect. It would be right over here. It would be a price of $3 per pound and a quantity of 3,000 pounds. Now, in order to maximize profit, we are intersecting between the marginal revenue curve and our quantity that we want to produce as a monopolist is the intersection between our marginal revenue curve and our marginal cost curve, which is right over here. And so we can see that there is a deadweight loss. There is a deadweight loss by being a monopoly, although it's good for us. It's good for the monopolist. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
Now, in order to maximize profit, we are intersecting between the marginal revenue curve and our quantity that we want to produce as a monopolist is the intersection between our marginal revenue curve and our marginal cost curve, which is right over here. And so we can see that there is a deadweight loss. There is a deadweight loss by being a monopoly, although it's good for us. It's good for the monopolist. It's not good for society, at least in this example. And there's very few where I can imagine it being good. But I guess there are a few if you're trying to protect a national industry or something like that. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
It's good for the monopolist. It's not good for society, at least in this example. And there's very few where I can imagine it being good. But I guess there are a few if you're trying to protect a national industry or something like that. Over here, this is the quantity that we are deciding to produce. The consumer surplus is the area above the price and below the demand curve. So this right over here is the consumer surplus. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
But I guess there are a few if you're trying to protect a national industry or something like that. Over here, this is the quantity that we are deciding to produce. The consumer surplus is the area above the price and below the demand curve. So this right over here is the consumer surplus. The producer surplus is looking pretty good. And this is essentially what we're trying to optimize. Our producer surplus is this whole area right over here. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
So this right over here is the consumer surplus. The producer surplus is looking pretty good. And this is essentially what we're trying to optimize. Our producer surplus is this whole area right over here. But we have a deadweight cost. There's a total surplus that society would have gotten if we were dealing with perfect competition right over here that's now being lost. But as we lose that, we were able to increase the producer surplus and decrease the consumer surplus. | Monopolist optimizing price Dead weight loss Microeconomics Khan Academy.mp3 |
Let's say that I am a producer of wine. And in this axis, vertical axis, this is dollars per bottle. So 10, 20, 30, 40 dollars per bottle. And on this axis right over here, I'll have quantity of bottles I produce per week. So let's say that this is 100, this is 200, 300, and then 400. This is quantity of bottles per week, and this is dollars per bottle. So let's think about the demand curve here. | Price discrimination Microeconomics Khan Academy.mp3 |
And on this axis right over here, I'll have quantity of bottles I produce per week. So let's say that this is 100, this is 200, 300, and then 400. This is quantity of bottles per week, and this is dollars per bottle. So let's think about the demand curve here. The demand curve for my type of wine, we're going to assume this is highly differentiated wine. The demand curve looks something like that. I'm doing it as a straight line for simplicity. | Price discrimination Microeconomics Khan Academy.mp3 |
So let's think about the demand curve here. The demand curve for my type of wine, we're going to assume this is highly differentiated wine. The demand curve looks something like that. I'm doing it as a straight line for simplicity. The demand curve looks like that. And since I said differentiated, this is not going to be perfect competition. I have a monopoly in my type of wine. | Price discrimination Microeconomics Khan Academy.mp3 |
I'm doing it as a straight line for simplicity. The demand curve looks like that. And since I said differentiated, this is not going to be perfect competition. I have a monopoly in my type of wine. So this isn't the market for wine generally, this is a market for my wine. My wine has won some taste tests, it has this unique flavor and whatever else. And so you can view me as a monopolistic competitor. | Price discrimination Microeconomics Khan Academy.mp3 |
I have a monopoly in my type of wine. So this isn't the market for wine generally, this is a market for my wine. My wine has won some taste tests, it has this unique flavor and whatever else. And so you can view me as a monopolistic competitor. There's obviously competition from other wine labels, from other wine producers, but my wine is differentiated, and I have a monopoly in my particular type of wine. And we've done this multiple times. If I have a monopoly in my type of wine, we're talking about the market in my wine, then my marginal revenue curve will have twice the slope of this. | Price discrimination Microeconomics Khan Academy.mp3 |
And so you can view me as a monopolistic competitor. There's obviously competition from other wine labels, from other wine producers, but my wine is differentiated, and I have a monopoly in my particular type of wine. And we've done this multiple times. If I have a monopoly in my type of wine, we're talking about the market in my wine, then my marginal revenue curve will have twice the slope of this. So it will look something like that. And I'll actually keep going negative after that. So that is my marginal revenue curve. | Price discrimination Microeconomics Khan Academy.mp3 |
If I have a monopoly in my type of wine, we're talking about the market in my wine, then my marginal revenue curve will have twice the slope of this. So it will look something like that. And I'll actually keep going negative after that. So that is my marginal revenue curve. And then we can think about the cost side. The cost side of things, my marginal cost might look something like this. Marginal cost, or you could even view that as a supply curve for my wine. | Price discrimination Microeconomics Khan Academy.mp3 |
So that is my marginal revenue curve. And then we can think about the cost side. The cost side of things, my marginal cost might look something like this. Marginal cost, or you could even view that as a supply curve for my wine. And then we can also do average total cost. So the average total cost starts off high, we have a fixed cost divided by a small quantity. But the marginal costs are lower than the average, so the average keeps going down and down and down and down. | Price discrimination Microeconomics Khan Academy.mp3 |
Marginal cost, or you could even view that as a supply curve for my wine. And then we can also do average total cost. So the average total cost starts off high, we have a fixed cost divided by a small quantity. But the marginal costs are lower than the average, so the average keeps going down and down and down and down. Then they're equal, now each incremental unit is bringing up the average in cost. So then the average total cost might look something like that. Average total cost. | Price discrimination Microeconomics Khan Academy.mp3 |
But the marginal costs are lower than the average, so the average keeps going down and down and down and down. Then they're equal, now each incremental unit is bringing up the average in cost. So then the average total cost might look something like that. Average total cost. And we've seen this show multiple times. If in the near term, I do have a monopoly here, so I will just produce the quantity where my marginal revenue is equal to my marginal cost. Before that quantity, for every unit, I'm getting economic profit, economic profit, economic profit. | Price discrimination Microeconomics Khan Academy.mp3 |
Average total cost. And we've seen this show multiple times. If in the near term, I do have a monopoly here, so I will just produce the quantity where my marginal revenue is equal to my marginal cost. Before that quantity, for every unit, I'm getting economic profit, economic profit, economic profit. If I produce more than that, I'm not getting any economic profit anymore. So I'm going to produce this quantity, which looks like about 160 units. And I'm going to sell it for, let me be careful here, the price I'm going to be able to sell it. | Price discrimination Microeconomics Khan Academy.mp3 |
Before that quantity, for every unit, I'm getting economic profit, economic profit, economic profit. If I produce more than that, I'm not getting any economic profit anymore. So I'm going to produce this quantity, which looks like about 160 units. And I'm going to sell it for, let me be careful here, the price I'm going to be able to sell it. So this is the quantity that I'm going to be able to sell, the price I'm going to sell it at. Go up to the demand curve, that point of the demand curve, and it looks like I'll be able to sell it for about, I don't know, $33 a bottle. And if we want to think about economic profit, this is the average revenue per bottle, this is the average cost per bottle, so this is the average economic profit per bottle. | Price discrimination Microeconomics Khan Academy.mp3 |
And I'm going to sell it for, let me be careful here, the price I'm going to be able to sell it. So this is the quantity that I'm going to be able to sell, the price I'm going to sell it at. Go up to the demand curve, that point of the demand curve, and it looks like I'll be able to sell it for about, I don't know, $33 a bottle. And if we want to think about economic profit, this is the average revenue per bottle, this is the average cost per bottle, so this is the average economic profit per bottle. And I multiply that times the total number of bottles, and I'm going to get my economic profit. So this area right over here is my total economic profit. And we can think about how much are the consumers benefiting from it, how much benefit are they getting excess of what they're paying for it. | Price discrimination Microeconomics Khan Academy.mp3 |
And if we want to think about economic profit, this is the average revenue per bottle, this is the average cost per bottle, so this is the average economic profit per bottle. And I multiply that times the total number of bottles, and I'm going to get my economic profit. So this area right over here is my total economic profit. And we can think about how much are the consumers benefiting from it, how much benefit are they getting excess of what they're paying for it. And that would be this area right over here. That is the consumer surplus. Now let's say I'm just not happy with this. | Price discrimination Microeconomics Khan Academy.mp3 |
And we can think about how much are the consumers benefiting from it, how much benefit are they getting excess of what they're paying for it. And that would be this area right over here. That is the consumer surplus. Now let's say I'm just not happy with this. I see that there's an opportunity here to get even more economic profit, because after all, and we've been talking about this from the beginning, there are people here who are getting over $40 of benefit from my wine, but I'm selling it to them for only $33. Everything we've assumed so far is that all of the consumers are buying something at the exact same price. But I'm a crafty wine producer, and I say, well, let me call that into question. | Price discrimination Microeconomics Khan Academy.mp3 |
Now let's say I'm just not happy with this. I see that there's an opportunity here to get even more economic profit, because after all, and we've been talking about this from the beginning, there are people here who are getting over $40 of benefit from my wine, but I'm selling it to them for only $33. Everything we've assumed so far is that all of the consumers are buying something at the exact same price. But I'm a crafty wine producer, and I say, well, let me call that into question. Why can't I just put a different label on my exact same wine and sell it to these people for a different price? And so I do that exact thing. I still produce this exact same quantity, but the first 100 units of my quantity, I put a different label on it. | Price discrimination Microeconomics Khan Academy.mp3 |
But I'm a crafty wine producer, and I say, well, let me call that into question. Why can't I just put a different label on my exact same wine and sell it to these people for a different price? And so I do that exact thing. I still produce this exact same quantity, but the first 100 units of my quantity, I put a different label on it. This label says Super Fancy Wine, Super Fancy Premium, the best wine you ever drank. Super Fancy Premium Wine. It has all of the awards, all of the fancy people who like it. | Price discrimination Microeconomics Khan Academy.mp3 |
I still produce this exact same quantity, but the first 100 units of my quantity, I put a different label on it. This label says Super Fancy Wine, Super Fancy Premium, the best wine you ever drank. Super Fancy Premium Wine. It has all of the awards, all of the fancy people who like it. I put it in the best wine boutiques and the best restaurants with that label, all this exact same stuff in the bottle, and I sell that one at $40 a bottle. So the first 100 units I sell at $40 a bottle. So now my economic profit on those units, remember, I'm producing 150, so my average total cost is down here. | Price discrimination Microeconomics Khan Academy.mp3 |
It has all of the awards, all of the fancy people who like it. I put it in the best wine boutiques and the best restaurants with that label, all this exact same stuff in the bottle, and I sell that one at $40 a bottle. So the first 100 units I sell at $40 a bottle. So now my economic profit on those units, remember, I'm producing 150, so my average total cost is down here. My average total cost is this line right over here. So on those bottles, I'm getting this much economic profit per bottle times these 100 units. I've now increased my economic profit. | Price discrimination Microeconomics Khan Academy.mp3 |
So now my economic profit on those units, remember, I'm producing 150, so my average total cost is down here. My average total cost is this line right over here. So on those bottles, I'm getting this much economic profit per bottle times these 100 units. I've now increased my economic profit. I've eaten into the consumer surplus. I've taken some of that for myself and turned it into economic profit. And then the other, I don't know, this looks like about 60 or 70 bottles, I just have with the traditional label, and I maybe sell it at the supermarket. | Price discrimination Microeconomics Khan Academy.mp3 |
I've now increased my economic profit. I've eaten into the consumer surplus. I've taken some of that for myself and turned it into economic profit. And then the other, I don't know, this looks like about 60 or 70 bottles, I just have with the traditional label, and I maybe sell it at the supermarket. Traditional label, and I just sell it at the supermarket. I call it just Pretty Good Wine, just so in case someone who bought it at the fancy place doesn't see that the Pretty Good Wine is the exact same thing. And what I've just done here is I've discriminated amongst consumers. | Price discrimination Microeconomics Khan Academy.mp3 |
And then the other, I don't know, this looks like about 60 or 70 bottles, I just have with the traditional label, and I maybe sell it at the supermarket. Traditional label, and I just sell it at the supermarket. I call it just Pretty Good Wine, just so in case someone who bought it at the fancy place doesn't see that the Pretty Good Wine is the exact same thing. And what I've just done here is I've discriminated amongst consumers. Depending on consumers' willingness to pay, I've essentially charged them different prices and also, I guess to some degree, based on where they shop and their gullibility, I am charging them two completely different prices. And this right over here is called price discrimination. And it's a way that a supplier can essentially take some of the consumer surplus for themselves, eat into some of that excess marginal benefit that they're essentially giving to the consumer and turning it into economic profit. | Price discrimination Microeconomics Khan Academy.mp3 |
This is price. This is quantity. That is demand right over there. And I'm going to show that the marginal revenue curve has twice the slope. It is twice as steep as this, and it's really twice the negative slope. So let me just write price as a function of quantity. We know we get price. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
And I'm going to show that the marginal revenue curve has twice the slope. It is twice as steep as this, and it's really twice the negative slope. So let me just write price as a function of quantity. We know we get price. Since this is a line, we can essentially write it in our traditional slope-y-intercept form. In algebra class, you would write if this was y and this was x, you would write y is equal to mx plus b, where m is the slope and b is the y-intercept. I'll do something very similar, but instead of y and x, we have p and q. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
We know we get price. Since this is a line, we can essentially write it in our traditional slope-y-intercept form. In algebra class, you would write if this was y and this was x, you would write y is equal to mx plus b, where m is the slope and b is the y-intercept. I'll do something very similar, but instead of y and x, we have p and q. So if p is equal to m times q, where m is the slope, plus the p-intercept, plus b. So this right over here is b. If you were to take your change in p and divide it by your change in q, you would get m. That is your slope. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
I'll do something very similar, but instead of y and x, we have p and q. So if p is equal to m times q, where m is the slope, plus the p-intercept, plus b. So this right over here is b. If you were to take your change in p and divide it by your change in q, you would get m. That is your slope. Change in p divided by change in q. Now what is going to be our total revenue? We're just kind of almost doing what we've done in the last few videos, but we're doing it in general terms. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
If you were to take your change in p and divide it by your change in q, you would get m. That is your slope. Change in p divided by change in q. Now what is going to be our total revenue? We're just kind of almost doing what we've done in the last few videos, but we're doing it in general terms. So this is total revenue as a function of quantity. Well, total revenue is just price times quantity. We've already written price as a function of quantity right over here, so we could take that and substitute it in right over there. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
We're just kind of almost doing what we've done in the last few videos, but we're doing it in general terms. So this is total revenue as a function of quantity. Well, total revenue is just price times quantity. We've already written price as a function of quantity right over here, so we could take that and substitute it in right over there. So we get total revenue is equal to, and I'll write it all in blue, we have mq plus b, and then we're going to multiply that times q. Or we get total revenue is equal to mq squared plus b times q. This is a parabola, and it's actually going to be a downward-sloping parabola because m is going to be negative. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
We've already written price as a function of quantity right over here, so we could take that and substitute it in right over there. So we get total revenue is equal to, and I'll write it all in blue, we have mq plus b, and then we're going to multiply that times q. Or we get total revenue is equal to mq squared plus b times q. This is a parabola, and it's actually going to be a downward-sloping parabola because m is going to be negative. This is downward-sloping. m has a negative slope, so m is negative. So we know that m is less than 0 over here. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
This is a parabola, and it's actually going to be a downward-sloping parabola because m is going to be negative. This is downward-sloping. m has a negative slope, so m is negative. So we know that m is less than 0 over here. That's one of the assumptions we'll make. If m is less than 0, this is going to be a downward-opening parabola. Total revenue will look something like that. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
So we know that m is less than 0 over here. That's one of the assumptions we'll make. If m is less than 0, this is going to be a downward-opening parabola. Total revenue will look something like that. That is our total revenue. Now, the marginal revenue as a function of quantity is just the derivative, and this is the calculus part. It's the slope of the tangent line at any given point, and that is what the derivative is. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
Total revenue will look something like that. That is our total revenue. Now, the marginal revenue as a function of quantity is just the derivative, and this is the calculus part. It's the slope of the tangent line at any given point, and that is what the derivative is. It's the slope of the tangent line at any point as a function of quantity. So you give me a quantity, I will tell you what the slope of the tangent line of the total revenue function is at that point. So we essentially just have to take the derivative of this with respect to q. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
It's the slope of the tangent line at any given point, and that is what the derivative is. It's the slope of the tangent line at any point as a function of quantity. So you give me a quantity, I will tell you what the slope of the tangent line of the total revenue function is at that point. So we essentially just have to take the derivative of this with respect to q. So we get d total revenue over dq. So how much does total revenue change with a very, very small change in quantity, an infinitely small, infinitesimal change in quantity? And this comes straight out of calculus. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
So we essentially just have to take the derivative of this with respect to q. So we get d total revenue over dq. So how much does total revenue change with a very, very small change in quantity, an infinitely small, infinitesimal change in quantity? And this comes straight out of calculus. m is a constant. q squared, the derivative of q squared with respect to q, is 2q. So it's going to be 2q times the constant, so it's going to be 2mq. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
And this comes straight out of calculus. m is a constant. q squared, the derivative of q squared with respect to q, is 2q. So it's going to be 2q times the constant, so it's going to be 2mq. And then b is a constant. We're assuming it's given. b is a constant. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
So it's going to be 2q times the constant, so it's going to be 2mq. And then b is a constant. We're assuming it's given. b is a constant. So the derivative of bq with respect to q is just going to be b. And so right over here, this is our marginal revenue curve, or I should say our marginal revenue line. It is 2mq plus b. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
b is a constant. So the derivative of bq with respect to q is just going to be b. And so right over here, this is our marginal revenue curve, or I should say our marginal revenue line. It is 2mq plus b. So notice it has the same y-intercept as our demand curve, so it definitely starts right over there, but it has twice the slope. The slope of our demand curve is m. The slope of our marginal revenue curve is 2m. And this is a negative slope, so this will be twice as negative. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
It is 2mq plus b. So notice it has the same y-intercept as our demand curve, so it definitely starts right over there, but it has twice the slope. The slope of our demand curve is m. The slope of our marginal revenue curve is 2m. And this is a negative slope, so this will be twice as negative. So it will look something like this. It will look something like this, just like that. So no matter what your demand curve is, if you assume it's a line like this, the marginal revenue curve will be a line with twice the slope, and in this case, it's twice the negative slope, which is kind of what's going to be generally true. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
And this is a negative slope, so this will be twice as negative. So it will look something like this. It will look something like this, just like that. So no matter what your demand curve is, if you assume it's a line like this, the marginal revenue curve will be a line with twice the slope, and in this case, it's twice the negative slope, which is kind of what's going to be generally true. Anyway, if you understood that, great. You now feel good that this is always the case for a linear demand curve like this. If you did not understand it, don't worry. | Optional calculus proof to show that MR has twice slope of demand Khan Academy.mp3 |
Let's say you're some type of a hunter-gatherer and you're trying to figure out how much of your time to spend hunting and how much of your time to spend gathering. So let's think about the different scenarios here and the trade-offs that they involve. And just for simplicity, we're gonna assume that when you're talking about hunting, the only animal around you to hunt for are these little rabbits. And when we talk about gathering, the only thing that you can gather are some type of berries. That'll keep our conversation a little bit simpler. So let's think about all of the scenarios. So first, let's call this first scenario, Scenario A. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
And when we talk about gathering, the only thing that you can gather are some type of berries. That'll keep our conversation a little bit simpler. So let's think about all of the scenarios. So first, let's call this first scenario, Scenario A. And let's say, so let's call this the number of rabbits, the number of rabbits you can get. And then let's call this the number of berries. Let's do this column is the number of berries that you can get. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So first, let's call this first scenario, Scenario A. And let's say, so let's call this the number of rabbits, the number of rabbits you can get. And then let's call this the number of berries. Let's do this column is the number of berries that you can get. So if you were to spend your entire day going after rabbits, all your free time, out, you know, making sure you have time to sleep and get dressed and all of those type of things, let's say that you can actually get five rabbits on average in a given day. But if you spend all your time getting rabbits, you're not going to have any time to get berries. So you're going to be able to get zero berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Let's do this column is the number of berries that you can get. So if you were to spend your entire day going after rabbits, all your free time, out, you know, making sure you have time to sleep and get dressed and all of those type of things, let's say that you can actually get five rabbits on average in a given day. But if you spend all your time getting rabbits, you're not going to have any time to get berries. So you're going to be able to get zero berries. Now let's say that you were to only try to, let's say you were to allocate a little bit more time to get berries and a little bit less time to get rabbits. So we'll call that Scenario B. We'll call Scenario B the reality where you have enough time to get four rabbits on average. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So you're going to be able to get zero berries. Now let's say that you were to only try to, let's say you were to allocate a little bit more time to get berries and a little bit less time to get rabbits. So we'll call that Scenario B. We'll call Scenario B the reality where you have enough time to get four rabbits on average. And when you do that, all of a sudden, you're able to get 100 berries. And when we do these different scenarios, we're assuming that everything else is equal. You're not changing the amount of time you have either hunting or gathering. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
We'll call Scenario B the reality where you have enough time to get four rabbits on average. And when you do that, all of a sudden, you're able to get 100 berries. And when we do these different scenarios, we're assuming that everything else is equal. You're not changing the amount of time you have either hunting or gathering. You're not changing the amount of sleep. You're not changing your techniques for hunting rabbits or hunting berries, or you're not somehow looking to do other things with your time. So all other things are equal. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
You're not changing the amount of time you have either hunting or gathering. You're not changing the amount of sleep. You're not changing your techniques for hunting rabbits or hunting berries, or you're not somehow looking to do other things with your time. So all other things are equal. And the general term for this, and it sounds very fancy if you were to say it in a conversation, is Ceteris Paribus. Ceteris Paribus. Which literally means, so anytime someone says, oh, and Ceteris Paribus, we assume this variable changes or whatever else, they're saying we're assuming everything else is being held equal. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So all other things are equal. And the general term for this, and it sounds very fancy if you were to say it in a conversation, is Ceteris Paribus. Ceteris Paribus. Which literally means, so anytime someone says, oh, and Ceteris Paribus, we assume this variable changes or whatever else, they're saying we're assuming everything else is being held equal. So Ceteris means all other things. You're probably familiar with et cetera. It's the same word, essentially. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Which literally means, so anytime someone says, oh, and Ceteris Paribus, we assume this variable changes or whatever else, they're saying we're assuming everything else is being held equal. So Ceteris means all other things. You're probably familiar with et cetera. It's the same word, essentially. Other things and Paribus, other things equal. So you're not, when you're going from scenario A to scenario B, you're not changing the amount of time you're sleeping, you're not changing somehow the geography where you are in a dramatic way. You're not changing the tools you use or the technology. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
It's the same word, essentially. Other things and Paribus, other things equal. So you're not, when you're going from scenario A to scenario B, you're not changing the amount of time you're sleeping, you're not changing somehow the geography where you are in a dramatic way. You're not changing the tools you use or the technology. Everything else is equal. The only variable you're changing is how much time you allocate to finding rabbits versus finding berries. So let's do some more scenarios assuming Ceteris Paribus. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
You're not changing the tools you use or the technology. Everything else is equal. The only variable you're changing is how much time you allocate to finding rabbits versus finding berries. So let's do some more scenarios assuming Ceteris Paribus. So let me do scenario C. You could, on average, have enough time to get three rabbits but if you get three rabbits, then all of a sudden, you will only be able to get, or you will be able to get, or if you're only getting three rabbits, you're not only gonna get 180 berries. And let's do a couple more. I'm gonna do two more scenarios. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So let's do some more scenarios assuming Ceteris Paribus. So let me do scenario C. You could, on average, have enough time to get three rabbits but if you get three rabbits, then all of a sudden, you will only be able to get, or you will be able to get, or if you're only getting three rabbits, you're not only gonna get 180 berries. And let's do a couple more. I'm gonna do two more scenarios. So let's say scenario D. If you reduce the amount of time you spend getting rabbits, so you get two rabbits, now all of a sudden, you have enough time, on average, to get 240 berries. And then, let's say you spend even less time, let's say you spend even less time getting, hunting for rabbits, on average, then you have even more time for berries and so you're able to get 280 berries. And then I'll do one more scenario here. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
I'm gonna do two more scenarios. So let's say scenario D. If you reduce the amount of time you spend getting rabbits, so you get two rabbits, now all of a sudden, you have enough time, on average, to get 240 berries. And then, let's say you spend even less time, let's say you spend even less time getting, hunting for rabbits, on average, then you have even more time for berries and so you're able to get 280 berries. And then I'll do one more scenario here. So let's say scenario F. And let's call these the scenarios. Scenarios. Scenario A through F. So scenario F is you spend all your time looking for berries, in which case, on average, you're going to be able to get 300 berries a day. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
And then I'll do one more scenario here. So let's say scenario F. And let's call these the scenarios. Scenarios. Scenario A through F. So scenario F is you spend all your time looking for berries, in which case, on average, you're going to be able to get 300 berries a day. But since you have no time for rabbits, you aren't going to get any rabbits. So what I wanna do is plot these. And on one axis, I'll have the number of rabbits. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Scenario A through F. So scenario F is you spend all your time looking for berries, in which case, on average, you're going to be able to get 300 berries a day. But since you have no time for rabbits, you aren't going to get any rabbits. So what I wanna do is plot these. And on one axis, I'll have the number of rabbits. And on the other axis, I'll have the number of berries. So let me do it right over here. So this axis, I will call this my rabbit axis. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
And on one axis, I'll have the number of rabbits. And on the other axis, I'll have the number of berries. So let me do it right over here. So this axis, I will call this my rabbit axis. Rabbits, and we'll start, that'll be zero. And then this will be one, two, three, four, and then that will be five rabbits. And then in this axis, this axis, I will do the berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So this axis, I will call this my rabbit axis. Rabbits, and we'll start, that'll be zero. And then this will be one, two, three, four, and then that will be five rabbits. And then in this axis, this axis, I will do the berries. I will do the berries. So this right over here, let's make this 100 berries. This is 200 berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
And then in this axis, this axis, I will do the berries. I will do the berries. So this right over here, let's make this 100 berries. This is 200 berries. 200 berries, and then this is 300 berries. And so this is my berries, my berries axis. Now let's plot these points, these different scenarios. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
This is 200 berries. 200 berries, and then this is 300 berries. And so this is my berries, my berries axis. Now let's plot these points, these different scenarios. So first we have scenario A. Scenario A, maybe I should have done all of these colors in that scenario A color. Scenario A, five rabbits, zero berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
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