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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. Five rabbits, zero berries. We are right over there. That is scenario A. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Scenario A, five rabbits, zero berries. Five rabbits, zero berries. We are right over there. That is scenario A. Scenario B, four rabbits, 100 berries. Four rabbits, 100 berries. That's right over there, that's 100 berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
That is scenario A. Scenario B, four rabbits, 100 berries. Four rabbits, 100 berries. That's right over there, that's 100 berries. So that is scenario B. Scenario C, three rabbits, 180 berries. Three rabbits, 180. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
That's right over there, that's 100 berries. So that is scenario B. Scenario C, three rabbits, 180 berries. Three rabbits, 180. Let's see, this would be 150. 180 will be like right over there. So if you have time for three rabbits, you have time for about 180 berries on average. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Three rabbits, 180. Let's see, this would be 150. 180 will be like right over there. So if you have time for three rabbits, you have time for about 180 berries on average. So this is scenario C. And then scenario D we have in white. If you have time for two rabbits, you have time for 240 berries. So that is right around there. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So if you have time for three rabbits, you have time for about 180 berries on average. So this is scenario C. And then scenario D we have in white. If you have time for two rabbits, you have time for 240 berries. So that is right around there. So this is scenario D, because this is, actually it'll be a little bit lower. So this would be 250. So 240 is a little bit lower than that. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So that is right around there. So this is scenario D, because this is, actually it'll be a little bit lower. So this would be 250. So 240 is a little bit lower than that. So it'll be like right over there. That is scenario D. Scenario E, if you have time for one rabbit, you have time for 280 berries. So that gets us right about there. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So 240 is a little bit lower than that. So it'll be like right over there. That is scenario D. Scenario E, if you have time for one rabbit, you have time for 280 berries. So that gets us right about there. That is scenario E. And then finally scenario F, you are spending all of your time looking for berries. You have no time for rabbits. So all of your time for berries, no time for rabbits. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So that gets us right about there. That is scenario E. And then finally scenario F, you are spending all of your time looking for berries. You have no time for rabbits. So all of your time for berries, no time for rabbits. Zero rabbits, 300 berries. That's right over there. So this is scenario F. So what all of these points represent, these are all points, and now this is going to be a fancy word, but it's a very simple idea. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So all of your time for berries, no time for rabbits. Zero rabbits, 300 berries. That's right over there. So this is scenario F. So what all of these points represent, these are all points, and now this is going to be a fancy word, but it's a very simple idea. These are all points on you as a hunter-gatherer on your production possibilities frontier. Because if we draw a line, I just arbitrarily picked these scenarios, although I guess you could on average get four and a half rabbits on average, on average get three and a half rabbits, and then you'd have a different number of berries. So these are all points on the different combinations between the trade-offs of rabbits and berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So this is scenario F. So what all of these points represent, these are all points, and now this is going to be a fancy word, but it's a very simple idea. These are all points on you as a hunter-gatherer on your production possibilities frontier. Because if we draw a line, I just arbitrarily picked these scenarios, although I guess you could on average get four and a half rabbits on average, on average get three and a half rabbits, and then you'd have a different number of berries. So these are all points on the different combinations between the trade-offs of rabbits and berries. So let me connect all of these. Let me connect them in a color that I haven't used yet. So let me connect them. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So these are all points on the different combinations between the trade-offs of rabbits and berries. So let me connect all of these. Let me connect them in a color that I haven't used yet. So let me connect them. And what you see should just be one curve. So I'll do it as a dotted line. It's easier for me to draw a dotted curve than a straight curve. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So let me connect them. And what you see should just be one curve. So I'll do it as a dotted line. It's easier for me to draw a dotted curve than a straight curve. So this right over here, this curve right over here represents all the possibilities of combinations of rabbits and berries. I've only picked certain of them, but you could have a scenario right over here. Maybe we could call that scenario G, where on average, the amount of time you've allocated, on average you would get four and a half rabbits, so some days you'd get four rabbits, and every other day you'd get five rabbits, so maybe it averages out to four and a half rabbits, and then maybe it looks like you would get about 50 berries in that situation. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
It's easier for me to draw a dotted curve than a straight curve. So this right over here, this curve right over here represents all the possibilities of combinations of rabbits and berries. I've only picked certain of them, but you could have a scenario right over here. Maybe we could call that scenario G, where on average, the amount of time you've allocated, on average you would get four and a half rabbits, so some days you'd get four rabbits, and every other day you'd get five rabbits, so maybe it averages out to four and a half rabbits, and then maybe it looks like you would get about 50 berries in that situation. So all of these are possibilities. You don't have to just jump from four rabbits to five rabbits or maybe you're spending, maybe in this scenario you're spending seven hours, and in this scenario you spend eight hours, but you could spend seven hours in a minute or seven hours in a second. So anything in between is possible, and all of those possibilities, all of those possibilities are on this curve. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Maybe we could call that scenario G, where on average, the amount of time you've allocated, on average you would get four and a half rabbits, so some days you'd get four rabbits, and every other day you'd get five rabbits, so maybe it averages out to four and a half rabbits, and then maybe it looks like you would get about 50 berries in that situation. So all of these are possibilities. You don't have to just jump from four rabbits to five rabbits or maybe you're spending, maybe in this scenario you're spending seven hours, and in this scenario you spend eight hours, but you could spend seven hours in a minute or seven hours in a second. So anything in between is possible, and all of those possibilities, all of those possibilities are on this curve. So these five scenarios, actually these six scenarios that we've talked about so far, these are just scenarios on this curve, and that curve we call, once again, fancy term, simple idea, are production possibilities, possibilities, I put two I's in there by accident, possibilities, possibilities frontier, because it shows all of the different possibilities we can do, we can get. Three rabbits and 180 berries, two rabbits and 240 berries. What we cannot do is something that's beyond this. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So anything in between is possible, and all of those possibilities, all of those possibilities are on this curve. So these five scenarios, actually these six scenarios that we've talked about so far, these are just scenarios on this curve, and that curve we call, once again, fancy term, simple idea, are production possibilities, possibilities, I put two I's in there by accident, possibilities, possibilities frontier, because it shows all of the different possibilities we can do, we can get. Three rabbits and 180 berries, two rabbits and 240 berries. What we cannot do is something that's beyond this. So for example, we can't get a scenario like this. So this right over here would be impossible, impossible. Let me scroll over to the right a little bit. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
What we cannot do is something that's beyond this. So for example, we can't get a scenario like this. So this right over here would be impossible, impossible. Let me scroll over to the right a little bit. Let me scroll, see my scrolling thing, okay. So this right over here is impossible, this point right over here, where I'm getting five rabbits and 200 berries. If I'm getting five rabbits, I'm spending all my time on rabbits, I have no time for berries, or another way to think of it, if I'm getting 200 berries, I don't have enough time to get five rabbits. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
Let me scroll over to the right a little bit. Let me scroll, see my scrolling thing, okay. So this right over here is impossible, this point right over here, where I'm getting five rabbits and 200 berries. If I'm getting five rabbits, I'm spending all my time on rabbits, I have no time for berries, or another way to think of it, if I'm getting 200 berries, I don't have enough time to get five rabbits. So this point is impossible, this point would be impossible, any point that's on this side of the curve is impossible. Now, any point that's on this side of the curve, you can kind of view it as inside the curve, or below the curve, or to the left of the curve, all of these points right over here are possible. All of these points right over here are, these points, for example, it is very easy for me to get one rabbit and 200 berries. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
If I'm getting five rabbits, I'm spending all my time on rabbits, I have no time for berries, or another way to think of it, if I'm getting 200 berries, I don't have enough time to get five rabbits. So this point is impossible, this point would be impossible, any point that's on this side of the curve is impossible. Now, any point that's on this side of the curve, you can kind of view it as inside the curve, or below the curve, or to the left of the curve, all of these points right over here are possible. All of these points right over here are, these points, for example, it is very easy for me to get one rabbit and 200 berries. So that right over there is possible. Now, is that optimal? No, because if I were to really work properly, I could get many more berries, or I could get more rabbits. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
All of these points right over here are, these points, for example, it is very easy for me to get one rabbit and 200 berries. So that right over there is possible. Now, is that optimal? No, because if I were to really work properly, I could get many more berries, or I could get more rabbits. If I have 200 berries, I could get more rabbits, or if I'm concerned, if I only want one rabbit, I can get more berries. So this is possible, all of the points down here are possible, but they aren't optimal, they are not efficient. So the points in here, the points in here will say that they are not efficient. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
No, because if I were to really work properly, I could get many more berries, or I could get more rabbits. If I have 200 berries, I could get more rabbits, or if I'm concerned, if I only want one rabbit, I can get more berries. So this is possible, all of the points down here are possible, but they aren't optimal, they are not efficient. So the points in here, the points in here will say that they are not efficient. Maybe somehow I'm not using my resources optimally to do this type of thing when I'm over here, maybe I'm just not being optimally focused, or whatever it might be. If you're talking about a factory setting, when you're talking about maybe deciding to make one thing or another, then maybe you just aren't using the resources in an optimal way. Now, all the points on the frontier, these are efficient. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
So the points in here, the points in here will say that they are not efficient. Maybe somehow I'm not using my resources optimally to do this type of thing when I'm over here, maybe I'm just not being optimally focused, or whatever it might be. If you're talking about a factory setting, when you're talking about maybe deciding to make one thing or another, then maybe you just aren't using the resources in an optimal way. Now, all the points on the frontier, these are efficient. You're doing the most you can do. Right now, we're not making any judgment between whether any of these possibilities are better than any other possibility. All we are saying is that you are doing the most that you can do. | Production possibilities frontier Microeconomics Khan Academy.mp3 |
And so to help us appreciate that, let's think about the spectrum on which firms can be. So this is going to be my spectrum right over here. Now at the left end, we can imagine this idealized perfect competition. Perfect competition. And we've talked about that in other videos, but just as a review, this is where you have many firms. This is where they are selling an undifferentiated product or service, undifferentiated product. The firms over here, well, they have no barriers to entry or exit. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
Perfect competition. And we've talked about that in other videos, but just as a review, this is where you have many firms. This is where they are selling an undifferentiated product or service, undifferentiated product. The firms over here, well, they have no barriers to entry or exit. So no barriers to entry or exit. These firms that we've talked about in other videos, they need to be price takers. Why do they need to be price takers? | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
The firms over here, well, they have no barriers to entry or exit. So no barriers to entry or exit. These firms that we've talked about in other videos, they need to be price takers. Why do they need to be price takers? Well, whatever the market price is, since no one cares which of these firms, which of these many firms they get the product from, none of those firms can really set their own price. If they were to go above the market price, well, then no one will buy from them. And so they will just be price takers. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
Why do they need to be price takers? Well, whatever the market price is, since no one cares which of these firms, which of these many firms they get the product from, none of those firms can really set their own price. If they were to go above the market price, well, then no one will buy from them. And so they will just be price takers. And other things that we assume about perfect competition is that all of the actors in the market, both the buyers, the many buyers, and the many sellers, they all know what the transactions are going on for. They know who's selling to whom for what amount. Now, the other extreme, this is where we have the monopoly. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
And so they will just be price takers. And other things that we assume about perfect competition is that all of the actors in the market, both the buyers, the many buyers, and the many sellers, they all know what the transactions are going on for. They know who's selling to whom for what amount. Now, the other extreme, this is where we have the monopoly. Monopoly. Here, instead of many firms selling or many firms producing, you have exactly one firm producing. Instead of an undifferentiated product, well, it's differentiated because it's the only firm. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
Now, the other extreme, this is where we have the monopoly. Monopoly. Here, instead of many firms selling or many firms producing, you have exactly one firm producing. Instead of an undifferentiated product, well, it's differentiated because it's the only firm. Instead of no barriers to entry or exit, here we're at the exact opposite. So you could say insurmountable. Insurmountable. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
Instead of an undifferentiated product, well, it's differentiated because it's the only firm. Instead of no barriers to entry or exit, here we're at the exact opposite. So you could say insurmountable. Insurmountable. Mountable, I'll just abbreviate it, barriers, especially to enter. And instead of being a price taker, you are a price setter. Price setter. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
Insurmountable. Mountable, I'll just abbreviate it, barriers, especially to enter. And instead of being a price taker, you are a price setter. Price setter. You're the only player, you're the only actor who is selling anything, so you can decide what price to sell it at. Now, perfect competition, as I talked about, it's a bit of a theoretical idea. It's hard to say any market that is absolutely perfect, but we can imagine markets that are on this spectrum, some closer to perfect competition, some closer to a monopoly. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
Price setter. You're the only player, you're the only actor who is selling anything, so you can decide what price to sell it at. Now, perfect competition, as I talked about, it's a bit of a theoretical idea. It's hard to say any market that is absolutely perfect, but we can imagine markets that are on this spectrum, some closer to perfect competition, some closer to a monopoly. Things that I can imagine that are closer to perfect competition might be, let's say, agriculture or a certain type of agriculture. Let's say you're buying pistachios, and you might be, most people are indifferent as to where their pistachios come from, although some people might beg to differ that certain types of pistachios are better than others, but for the most part, that'd be closer to perfect competition. There will be just a price in the market for pistachios. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
It's hard to say any market that is absolutely perfect, but we can imagine markets that are on this spectrum, some closer to perfect competition, some closer to a monopoly. Things that I can imagine that are closer to perfect competition might be, let's say, agriculture or a certain type of agriculture. Let's say you're buying pistachios, and you might be, most people are indifferent as to where their pistachios come from, although some people might beg to differ that certain types of pistachios are better than others, but for the most part, that'd be closer to perfect competition. There will be just a price in the market for pistachios. If someone wants to grow pistachios, I'm not familiar with what it takes to grow pistachios, and I apologize to any offense to any pistachio growers out there, but maybe they can just get enough land, and there's very close to low barriers to entry, and they can start producing pistachios. As I mentioned, many would perceive it as undifferentiated, and there might be many firms in, say, the pistachio market. I actually don't know if that's the case, but let's just assume if that were the case, it would be closer to perfect competition. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
There will be just a price in the market for pistachios. If someone wants to grow pistachios, I'm not familiar with what it takes to grow pistachios, and I apologize to any offense to any pistachio growers out there, but maybe they can just get enough land, and there's very close to low barriers to entry, and they can start producing pistachios. As I mentioned, many would perceive it as undifferentiated, and there might be many firms in, say, the pistachio market. I actually don't know if that's the case, but let's just assume if that were the case, it would be closer to perfect competition. Now, a monopoly, you can imagine things like, things that take a lot of infrastructure in order to do that service. So I can imagine things like, over here close to monopoly or at monopoly, you can imagine things like utilities providers, utilities, where it's hard for multiple people to run power lines to the various houses. You can imagine things like this telecom, telecom providers might be close, although in most geographies, you have more than one telecom providers, although in some parts of the world, you're getting pretty close to one, because once again, there's very, very, very high barriers to entry in either one of those. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
I actually don't know if that's the case, but let's just assume if that were the case, it would be closer to perfect competition. Now, a monopoly, you can imagine things like, things that take a lot of infrastructure in order to do that service. So I can imagine things like, over here close to monopoly or at monopoly, you can imagine things like utilities providers, utilities, where it's hard for multiple people to run power lines to the various houses. You can imagine things like this telecom, telecom providers might be close, although in most geographies, you have more than one telecom providers, although in some parts of the world, you're getting pretty close to one, because once again, there's very, very, very high barriers to entry in either one of those. You gotta launch satellites, and put cable under the ground, and dig up roads, and whatever, and so you could get closer and closer to this notion of maybe there's one firm. If you're in a situation like telecom in a lot of the places where you have only a handful of firms, that's known as an oligopoly. But let's just think about the extreme, when you're in a monopoly situation. | Monopolies vs. perfect competition Microeconomics Khan Academy.mp3 |
And we're going to make sure we understand what both of these ideas are. So first of all, minimum efficient scale, you can view it as the smallest scale at which we stop getting economies of scale. Or another way of thinking about it is the minimum scale at which we are no longer our long run average total cost curve is declining. So in this example, let's see, when we talk about our taco trucks, when we were at about 80 units, we're not at minimum efficient scale yet because our long run average total cost curve is still declining as we add more and more and more units. We're getting economies of scale all the way until, at least in this example, it looks like our long run average total cost curve stops declining around 200 units. So in this example, that would be our minimum efficient scale, which is sometimes abbreviated as MES. And one way to think about it is, this is the minimum scale at which an operation needs to run at in order to be very competitive, in order to be truly efficient out there in the market. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
So in this example, let's see, when we talk about our taco trucks, when we were at about 80 units, we're not at minimum efficient scale yet because our long run average total cost curve is still declining as we add more and more and more units. We're getting economies of scale all the way until, at least in this example, it looks like our long run average total cost curve stops declining around 200 units. So in this example, that would be our minimum efficient scale, which is sometimes abbreviated as MES. And one way to think about it is, this is the minimum scale at which an operation needs to run at in order to be very competitive, in order to be truly efficient out there in the market. Because you can imagine if some operators are able to achieve minimum efficient scale of let's say getting to the 200 tacos a day, while others are not, let's say they're only able to stay at 100 tacos per day, and if the market were to get very competitive and the price of a taco were to go down to say 55 cents per taco, the people who are at minimum efficient scale could still operate and still make money, while the people who are not at minimum efficient scale, well, they're not going to be able to participate in the market. And most well-functioning markets, it gets quite competitive. And so economists like to think about what the minimum efficient scale is and compare that to the entire market size. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
And one way to think about it is, this is the minimum scale at which an operation needs to run at in order to be very competitive, in order to be truly efficient out there in the market. Because you can imagine if some operators are able to achieve minimum efficient scale of let's say getting to the 200 tacos a day, while others are not, let's say they're only able to stay at 100 tacos per day, and if the market were to get very competitive and the price of a taco were to go down to say 55 cents per taco, the people who are at minimum efficient scale could still operate and still make money, while the people who are not at minimum efficient scale, well, they're not going to be able to participate in the market. And most well-functioning markets, it gets quite competitive. And so economists like to think about what the minimum efficient scale is and compare that to the entire market size. Now what do we mean by market size? Well, it depends on how you are defining the market. In our example of our taco trucks, it might be the market for tacos, market for tacos in our city. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
And so economists like to think about what the minimum efficient scale is and compare that to the entire market size. Now what do we mean by market size? Well, it depends on how you are defining the market. In our example of our taco trucks, it might be the market for tacos, market for tacos in our city. And of course, you can define different markets. You could define it as the market for food trucks in our city. You could define it as the market for tacos in our state or our country. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
In our example of our taco trucks, it might be the market for tacos, market for tacos in our city. And of course, you can define different markets. You could define it as the market for food trucks in our city. You could define it as the market for tacos in our state or our country. But let's say if we were to say the market for tacos in our city, and let's say that that market is 10,000, 10,000 tacos per day. Well, in this reality, our minimum efficient scale is 200 tacos per day, and it's a very small fraction of the total market. And so that means that you could have many different competitors, each at that minimum efficient scale. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
You could define it as the market for tacos in our state or our country. But let's say if we were to say the market for tacos in our city, and let's say that that market is 10,000, 10,000 tacos per day. Well, in this reality, our minimum efficient scale is 200 tacos per day, and it's a very small fraction of the total market. And so that means that you could have many different competitors, each at that minimum efficient scale. So they're able to produce tacos at that 50 cents per taco. And because of that, you are likely to have many competitors. So when this, when our minimum efficient scale is a small fraction of the total market, that is going to lead to fragmentation. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
And so that means that you could have many different competitors, each at that minimum efficient scale. So they're able to produce tacos at that 50 cents per taco. And because of that, you are likely to have many competitors. So when this, when our minimum efficient scale is a small fraction of the total market, that is going to lead to fragmentation. So here we're going to have a fragmented, fragmented market. So if this circle were to represent the 10,000 tacos that are sold per day, if you're able to have a lot of competitors, each operating at minimum efficient scale, in fact, there's no real advantage to operating above minimum efficient scale, because then you start getting diseconomies to scale. Well, then you're going to have maybe 50 competitors who are splitting this market. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
So when this, when our minimum efficient scale is a small fraction of the total market, that is going to lead to fragmentation. So here we're going to have a fragmented, fragmented market. So if this circle were to represent the 10,000 tacos that are sold per day, if you're able to have a lot of competitors, each operating at minimum efficient scale, in fact, there's no real advantage to operating above minimum efficient scale, because then you start getting diseconomies to scale. Well, then you're going to have maybe 50 competitors who are splitting this market. So I won't take the trouble of making this into 50 different chunks. So one competitor has that part of the market, another competitor has that part of the market, another competitor has that part of the market. And you can imagine we're going to have this market fragmented into maybe 50 different players. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
Well, then you're going to have maybe 50 competitors who are splitting this market. So I won't take the trouble of making this into 50 different chunks. So one competitor has that part of the market, another competitor has that part of the market, another competitor has that part of the market. And you can imagine we're going to have this market fragmented into maybe 50 different players. And so that's why it's called a very fragmented market. But let's say that the minimum efficient scale was pretty close to the market size. So let's say instead of a market for 10,000 tacos per day, let's say that the market in our city is for 400, 400 tacos per day. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
And you can imagine we're going to have this market fragmented into maybe 50 different players. And so that's why it's called a very fragmented market. But let's say that the minimum efficient scale was pretty close to the market size. So let's say instead of a market for 10,000 tacos per day, let's say that the market in our city is for 400, 400 tacos per day. Well, then the market is going to be smaller like this. And so then it makes sense for, if someone's able to get to the minimum efficient scale, they can take up a lot of the market. In fact, they could take up half of the market. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
So let's say instead of a market for 10,000 tacos per day, let's say that the market in our city is for 400, 400 tacos per day. Well, then the market is going to be smaller like this. And so then it makes sense for, if someone's able to get to the minimum efficient scale, they can take up a lot of the market. In fact, they could take up half of the market. So this type of market might only be able to really support two players in this market. So this is considered to be a far more concentrated, concentrated market. And you could go to a reality where your minimum efficient scale is at the market size or is even larger than the market size. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
In fact, they could take up half of the market. So this type of market might only be able to really support two players in this market. So this is considered to be a far more concentrated, concentrated market. And you could go to a reality where your minimum efficient scale is at the market size or is even larger than the market size. So let's say that the market size is not 400 tacos per day, but let's say we had a market, let's say we had a market of 195 tacos per day, per day. Well, in that world, whoever can get to 195 tacos is going to produce most efficiently. They're not even getting to the minimum efficient scale, but the more, the closer that you can get to that number, you're going to have the lowest average total long run, average total cost of production. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
And you could go to a reality where your minimum efficient scale is at the market size or is even larger than the market size. So let's say that the market size is not 400 tacos per day, but let's say we had a market, let's say we had a market of 195 tacos per day, per day. Well, in that world, whoever can get to 195 tacos is going to produce most efficiently. They're not even getting to the minimum efficient scale, but the more, the closer that you can get to that number, you're going to have the lowest average total long run, average total cost of production. And so it's going to be very hard for anyone else to compete with you, especially if you're taking up most of the market, no one else is going to be able to get to scale. So they're going to be operating out here on the long run average total cost curve. And so in that world, you might only have one player. | Minimum efficient scale and market concentration APⓇ Microeconomics Khan Academy.mp3 |
We've talked a little bit about the law of demand, which tells us all else equal, if we raise the price of a product, then the quantity demanded for that product will go down, common sense. If we lower the price, then the quantity demanded will go up and we'll see a few special cases for this. But what I wanna do in this video is focus on these other things that we've been holding equal, the things that allow us to make this statement, that allow us to move along this curve, and think about if we were to change one of those things that we were otherwise considering equal, how does that change the actual curve? How does that actually change the whole quantity demanded price relationship? And so the first of these that I will focus on, the first is the price of competing products. The price of competing products. So if you assume that the price of, actually I shouldn't say competing products, I'll say the price of related products, because we'll see that they're not all competing. | Price of related products and demand Microeconomics Khan Academy.mp3 |
How does that actually change the whole quantity demanded price relationship? And so the first of these that I will focus on, the first is the price of competing products. The price of competing products. So if you assume that the price of, actually I shouldn't say competing products, I'll say the price of related products, because we'll see that they're not all competing. The price of related products is one of the things that we're assuming is constant when we, it's being held equal when we show this relationship. We're assuming that these other things aren't changing. Now, what would happen if these things changed? | Price of related products and demand Microeconomics Khan Academy.mp3 |
So if you assume that the price of, actually I shouldn't say competing products, I'll say the price of related products, because we'll see that they're not all competing. The price of related products is one of the things that we're assuming is constant when we, it's being held equal when we show this relationship. We're assuming that these other things aren't changing. Now, what would happen if these things changed? Well, imagine we have other, say other eBooks, other eBooks' price, price goes up. The price of other eBooks go up. So what will that do to our price quantity demanded relationship? | Price of related products and demand Microeconomics Khan Academy.mp3 |
Now, what would happen if these things changed? Well, imagine we have other, say other eBooks, other eBooks' price, price goes up. The price of other eBooks go up. So what will that do to our price quantity demanded relationship? If other eBooks' prices go up, now all of a sudden my eBook, regardless of what price point we're at, at any of the price points, my eBook is going to look more desirable. At $2, it's more likely that people will want it, more people will want it because the other stuff's more expensive. At $4, more people will want it. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So what will that do to our price quantity demanded relationship? If other eBooks' prices go up, now all of a sudden my eBook, regardless of what price point we're at, at any of the price points, my eBook is going to look more desirable. At $2, it's more likely that people will want it, more people will want it because the other stuff's more expensive. At $4, more people will want it. At $6, more people will want it. $8, more people will want it. $10, more people will want it. | Price of related products and demand Microeconomics Khan Academy.mp3 |
At $4, more people will want it. At $6, more people will want it. $8, more people will want it. $10, more people will want it. So if this were to happen, that would actually shift the entire demand curve to the right. So it would start to look something like this. It would look something like that. | Price of related products and demand Microeconomics Khan Academy.mp3 |
$10, more people will want it. So if this were to happen, that would actually shift the entire demand curve to the right. So it would start to look something like this. It would look something like that. We'll call that scenario, that is scenario one. And these other eBooks, we can call them substitutes for my product. So this right over here, these other eBooks, these are substitutes. | Price of related products and demand Microeconomics Khan Academy.mp3 |
It would look something like that. We'll call that scenario, that is scenario one. And these other eBooks, we can call them substitutes for my product. So this right over here, these other eBooks, these are substitutes. Substitutes. Substitutes. If people might say, oh, you know, that other book looks kind of comparable. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So this right over here, these other eBooks, these are substitutes. Substitutes. Substitutes. If people might say, oh, you know, that other book looks kind of comparable. If one is more expensive, if one is cheaper, maybe I'll read one or the other. So in order to make this statement, in order to stay along this curve, we have to assume that this thing is constant. If this thing changes, this is going to move the curve. | Price of related products and demand Microeconomics Khan Academy.mp3 |
If people might say, oh, you know, that other book looks kind of comparable. If one is more expensive, if one is cheaper, maybe I'll read one or the other. So in order to make this statement, in order to stay along this curve, we have to assume that this thing is constant. If this thing changes, this is going to move the curve. If other eBooks' prices go up, it'll probably shift our curve to the right. If other eBooks' prices go down, that will shift our entire curve to the left. So this is actually changing our demand. | Price of related products and demand Microeconomics Khan Academy.mp3 |
If this thing changes, this is going to move the curve. If other eBooks' prices go up, it'll probably shift our curve to the right. If other eBooks' prices go down, that will shift our entire curve to the left. So this is actually changing our demand. It's changing our whole relationship. So it's shifting demand to the right. So let me write that. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So this is actually changing our demand. It's changing our whole relationship. So it's shifting demand to the right. So let me write that. So this is going to shift demand. Demand. So the entire relationship, demand to the right. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So let me write that. So this is going to shift demand. Demand. So the entire relationship, demand to the right. I really wanna make sure you have this point clear. When we hold everything else equal, we're moving along a given demand curve. We're essentially saying the price-quantity-demanded relationship is held constant, and we can pick a price and we'll get a certain quantity demanded. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So the entire relationship, demand to the right. I really wanna make sure you have this point clear. When we hold everything else equal, we're moving along a given demand curve. We're essentially saying the price-quantity-demanded relationship is held constant, and we can pick a price and we'll get a certain quantity demanded. We're moving along the curve. If we change one of those things, we might actually shift the curve. We'll actually change this demand schedule, or change this curve. | Price of related products and demand Microeconomics Khan Academy.mp3 |
We're essentially saying the price-quantity-demanded relationship is held constant, and we can pick a price and we'll get a certain quantity demanded. We're moving along the curve. If we change one of those things, we might actually shift the curve. We'll actually change this demand schedule, or change this curve. Now, there are other related products. They don't just have to be substitutes. So for example, let's think about scenario two, where maybe the price of a Kindle goes up. | Price of related products and demand Microeconomics Khan Academy.mp3 |
We'll actually change this demand schedule, or change this curve. Now, there are other related products. They don't just have to be substitutes. So for example, let's think about scenario two, where maybe the price of a Kindle goes up. So the price of a Kindle, the price Kindles, let me write this this way, Kindles price, Kindles price goes up. Now, the Kindle is not a substitute. People don't either buy an e-book or, they won't either buy my e-book or buy a Kindle. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So for example, let's think about scenario two, where maybe the price of a Kindle goes up. So the price of a Kindle, the price Kindles, let me write this this way, Kindles price, Kindles price goes up. Now, the Kindle is not a substitute. People don't either buy an e-book or, they won't either buy my e-book or buy a Kindle. Kindle is a complement. You actually need a Kindle or an iPad or something like it in order to consume my e-book. So this right over here, this right over here is a complement. | Price of related products and demand Microeconomics Khan Academy.mp3 |
People don't either buy an e-book or, they won't either buy my e-book or buy a Kindle. Kindle is a complement. You actually need a Kindle or an iPad or something like it in order to consume my e-book. So this right over here, this right over here is a complement. It is a complement. So if a complement's price becomes more expensive, and this is something that's one of the things people might use to buy my book, then it would actually, for any given price, lower the quantity demanded. So in this situation, if my book is $2, since fewer people are going to have Kindles, or maybe they've used some of their money already to buy the Kindle, they're going to have less to buy my book, or they'll just, fewer people will have the Kindle, for any given price, it's going to lower the quantity demanded. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So this right over here, this right over here is a complement. It is a complement. So if a complement's price becomes more expensive, and this is something that's one of the things people might use to buy my book, then it would actually, for any given price, lower the quantity demanded. So in this situation, if my book is $2, since fewer people are going to have Kindles, or maybe they've used some of their money already to buy the Kindle, they're going to have less to buy my book, or they'll just, fewer people will have the Kindle, for any given price, it's going to lower the quantity demanded. For any given price. And so it essentially will shift, it'll change the entire demand curve. It'll shift the demand curve to the left. | Price of related products and demand Microeconomics Khan Academy.mp3 |
So in this situation, if my book is $2, since fewer people are going to have Kindles, or maybe they've used some of their money already to buy the Kindle, they're going to have less to buy my book, or they'll just, fewer people will have the Kindle, for any given price, it's going to lower the quantity demanded. For any given price. And so it essentially will shift, it'll change the entire demand curve. It'll shift the demand curve to the left. So this right over here is scenario two. And you can imagine the other way. If the Kindle's price went down, then that would shift my demand curve to the right. | Price of related products and demand Microeconomics Khan Academy.mp3 |
It'll shift the demand curve to the left. So this right over here is scenario two. And you can imagine the other way. If the Kindle's price went down, then that would shift my demand curve to the right. If the price of substitutes went down, then that would shift my entire curve to the left. So you can think about all the scenarios. And actually, I encourage you to. | Price of related products and demand Microeconomics Khan Academy.mp3 |
If the Kindle's price went down, then that would shift my demand curve to the right. If the price of substitutes went down, then that would shift my entire curve to the left. So you can think about all the scenarios. And actually, I encourage you to. Think about, draw them yourself. Think about, for products, it could be an e-book, or it could be some other type of product. And think about what would happen, well, one, think about what the related products are, the substitutes and potentially complements. | Price of related products and demand Microeconomics Khan Academy.mp3 |
We've already talked about the notion of a monopsony employer in other videos, but now we're going to review it a little bit and we're gonna introduce a twist. And the twist is what happens when they have to deal with a minimum wage? And as we'll see, it's kind of counterintuitive. So first of all, just as a review, a monopsony is a situation where you have one buyer and you have many sellers of something. And when we're talking about a monopsony employer, the buyer is the buyer of labor. We're talking about the buyer in the labor factor markets and the seller are the workers, the people who would sell their labor for a wage. And we have already studied monopsony employers' situations before, but I will redo it. | Monopsony employers and minimum wages.mp3 |
So first of all, just as a review, a monopsony is a situation where you have one buyer and you have many sellers of something. And when we're talking about a monopsony employer, the buyer is the buyer of labor. We're talking about the buyer in the labor factor markets and the seller are the workers, the people who would sell their labor for a wage. And we have already studied monopsony employers' situations before, but I will redo it. It never hurts to get the practice. In the vertical axis, you have the wage, which is really the price of this factor of labor that we're studying right now. And in the horizontal axis, you have the quantity of the factor that we care about, and this is quantity of labor. | Monopsony employers and minimum wages.mp3 |
And we have already studied monopsony employers' situations before, but I will redo it. It never hurts to get the practice. In the vertical axis, you have the wage, which is really the price of this factor of labor that we're studying right now. And in the horizontal axis, you have the quantity of the factor that we care about, and this is quantity of labor. Now, we have seen this show many times before. You're going to have, or you typically have, a downward-sloping marginal revenue product curve, and that describes a situation where every incremental unit of labor you bring on, the marginal revenue, the incremental revenue you get, goes lower and lower and lower because of arguably diminishing returns in some way. So this is marginal revenue product of labor. | Monopsony employers and minimum wages.mp3 |
And in the horizontal axis, you have the quantity of the factor that we care about, and this is quantity of labor. Now, we have seen this show many times before. You're going to have, or you typically have, a downward-sloping marginal revenue product curve, and that describes a situation where every incremental unit of labor you bring on, the marginal revenue, the incremental revenue you get, goes lower and lower and lower because of arguably diminishing returns in some way. So this is marginal revenue product of labor. You could also have marginal revenue product of capital or of land, other factors. And then we could think about the supply of labor, or actually, really what we're trying to get at is what is the marginal factor cost curve? And if this employer were not a monopsony employer, if they were just operating in a perfectly competitive labor market, the marginal factor cost curve would just be the market wage, so it might look something like that. | Monopsony employers and minimum wages.mp3 |
So this is marginal revenue product of labor. You could also have marginal revenue product of capital or of land, other factors. And then we could think about the supply of labor, or actually, really what we're trying to get at is what is the marginal factor cost curve? And if this employer were not a monopsony employer, if they were just operating in a perfectly competitive labor market, the marginal factor cost curve would just be the market wage, so it might look something like that. But we are dealing with a monopsony employer, and so they don't just take the market wage. They have, you could view it as a supply curve for labor that's specific to them, because remember, they're the only showing down. They are the big employer, maybe in this small town, and so you have this supply curve. | Monopsony employers and minimum wages.mp3 |
And if this employer were not a monopsony employer, if they were just operating in a perfectly competitive labor market, the marginal factor cost curve would just be the market wage, so it might look something like that. But we are dealing with a monopsony employer, and so they don't just take the market wage. They have, you could view it as a supply curve for labor that's specific to them, because remember, they're the only showing down. They are the big employer, maybe in this small town, and so you have this supply curve. This is supply of labor, but this is not the marginal factor cost curve, and we've explained this before, but that's because as you bring on higher and higher quantities of labor, you need to pay more to that incremental person, but what typically happens is if you need to pay one person more, you need to pay everyone the same wage. So as you bring on that incremental labor, not only do you have to pay more for that incremental unit, but you have to raise the wage for everyone, so the marginal factor cost goes up twice as fast as the supply of labor curve. So the marginal factor cost curve might look something like this, and then what's rational is a firm would keep bringing on that factor, in this case labor, would keep hiring folks as long as the incremental revenue that it gets from hiring that next unit is higher than the marginal or the incremental cost, and so they will keep bringing people on as long as the MRP is higher than the MFC, and so we would get to that point right there, and so it'd be rational for this firm to hire this quantity of labor, let's call that Q sub one, and then what wage are they paying? | Monopsony employers and minimum wages.mp3 |
They are the big employer, maybe in this small town, and so you have this supply curve. This is supply of labor, but this is not the marginal factor cost curve, and we've explained this before, but that's because as you bring on higher and higher quantities of labor, you need to pay more to that incremental person, but what typically happens is if you need to pay one person more, you need to pay everyone the same wage. So as you bring on that incremental labor, not only do you have to pay more for that incremental unit, but you have to raise the wage for everyone, so the marginal factor cost goes up twice as fast as the supply of labor curve. So the marginal factor cost curve might look something like this, and then what's rational is a firm would keep bringing on that factor, in this case labor, would keep hiring folks as long as the incremental revenue that it gets from hiring that next unit is higher than the marginal or the incremental cost, and so they will keep bringing people on as long as the MRP is higher than the MFC, and so we would get to that point right there, and so it'd be rational for this firm to hire this quantity of labor, let's call that Q sub one, and then what wage are they paying? Pause this video and think about that because this is always a little bit tricky. Well, you might be tempted to draw a line here, but remember, this doesn't describe the actual wage. The wage of that quantity is described by the supply of labor, so this would be the wage that the firm would pay. | Monopsony employers and minimum wages.mp3 |
So the marginal factor cost curve might look something like this, and then what's rational is a firm would keep bringing on that factor, in this case labor, would keep hiring folks as long as the incremental revenue that it gets from hiring that next unit is higher than the marginal or the incremental cost, and so they will keep bringing people on as long as the MRP is higher than the MFC, and so we would get to that point right there, and so it'd be rational for this firm to hire this quantity of labor, let's call that Q sub one, and then what wage are they paying? Pause this video and think about that because this is always a little bit tricky. Well, you might be tempted to draw a line here, but remember, this doesn't describe the actual wage. The wage of that quantity is described by the supply of labor, so this would be the wage that the firm would pay. So now let's introduce our twist. Let's think about what happens if a minimum wage is employed in this region, that for whatever reason the city council says, hey, that employer needs to be paying more money, and let's say they institute a minimum wage at, I will do this in a bold color. Let's say they institute a minimum wage right over here. | Monopsony employers and minimum wages.mp3 |
The wage of that quantity is described by the supply of labor, so this would be the wage that the firm would pay. So now let's introduce our twist. Let's think about what happens if a minimum wage is employed in this region, that for whatever reason the city council says, hey, that employer needs to be paying more money, and let's say they institute a minimum wage at, I will do this in a bold color. Let's say they institute a minimum wage right over here. Let's call this wage sub M. Pause the video and think about what would then happen. What would the marginal factor cost curve look like, and then what would be the rational quantity for the firm to hire? All right, so now that the town has instituted a minimum wage and it's higher than the rational wage that the firm would have otherwise paid for labor, what it does is it, at least at a certain range of quantities of labor being employed, it essentially makes this monopsony employer, have to think a little bit like an employer in a competitive labor market where you just have to accept a wage. | Monopsony employers and minimum wages.mp3 |
Let's say they institute a minimum wage right over here. Let's call this wage sub M. Pause the video and think about what would then happen. What would the marginal factor cost curve look like, and then what would be the rational quantity for the firm to hire? All right, so now that the town has instituted a minimum wage and it's higher than the rational wage that the firm would have otherwise paid for labor, what it does is it, at least at a certain range of quantities of labor being employed, it essentially makes this monopsony employer, have to think a little bit like an employer in a competitive labor market where you just have to accept a wage. Now this wage isn't being set by some market. It's being set by a government. So as long as this wage is higher than the supply of labor, well then this is going to be, or higher than our old supply curve, well this is going to be, from the firm's point of view, the new supply curve. | Monopsony employers and minimum wages.mp3 |
All right, so now that the town has instituted a minimum wage and it's higher than the rational wage that the firm would have otherwise paid for labor, what it does is it, at least at a certain range of quantities of labor being employed, it essentially makes this monopsony employer, have to think a little bit like an employer in a competitive labor market where you just have to accept a wage. Now this wage isn't being set by some market. It's being set by a government. So as long as this wage is higher than the supply of labor, well then this is going to be, or higher than our old supply curve, well this is going to be, from the firm's point of view, the new supply curve. So it's going to look something like this. But then when the supply curve, when the wages that the supply curve describes go higher than that minimum wage, well then it will track that. So this is our new supply curve right over here. | Monopsony employers and minimum wages.mp3 |
So as long as this wage is higher than the supply of labor, well then this is going to be, or higher than our old supply curve, well this is going to be, from the firm's point of view, the new supply curve. So it's going to look something like this. But then when the supply curve, when the wages that the supply curve describes go higher than that minimum wage, well then it will track that. So this is our new supply curve right over here. So new supply curve, and we're talking about supply of labor, and it's this whole red thing. And what would be our new marginal factor cost curve? Well, we said that it has twice the slope, but when the slope is just flat here, I'm gonna do this in a new color, so the marginal factor cost curve, it's going to track this horizontal line right over here. | Monopsony employers and minimum wages.mp3 |
So this is our new supply curve right over here. So new supply curve, and we're talking about supply of labor, and it's this whole red thing. And what would be our new marginal factor cost curve? Well, we said that it has twice the slope, but when the slope is just flat here, I'm gonna do this in a new color, so the marginal factor cost curve, it's going to track this horizontal line right over here. And then all of a sudden when the supply curve starts to go up, well then it's going to jump back to the old marginal factor cost curve. So it's going to look something like this. So MFC, I'll call it two, that's in blue. | Monopsony employers and minimum wages.mp3 |
Well, we said that it has twice the slope, but when the slope is just flat here, I'm gonna do this in a new color, so the marginal factor cost curve, it's going to track this horizontal line right over here. And then all of a sudden when the supply curve starts to go up, well then it's going to jump back to the old marginal factor cost curve. So it's going to look something like this. So MFC, I'll call it two, that's in blue. So it tracks the supply curve here when it's horizontal, and it is really just analogous to when we just have to accept a wage, and then it jumps, we have a bit of a discontinuity, and then you get up there. But what's rational as always is a firm to keep hiring as long as the marginal revenue product is higher than the marginal factor cost. So it's going to keep hiring, it's as long as this yellow line is above the blue line, it would keep hiring, keep hiring, all the way until this point right over here. | Monopsony employers and minimum wages.mp3 |
So MFC, I'll call it two, that's in blue. So it tracks the supply curve here when it's horizontal, and it is really just analogous to when we just have to accept a wage, and then it jumps, we have a bit of a discontinuity, and then you get up there. But what's rational as always is a firm to keep hiring as long as the marginal revenue product is higher than the marginal factor cost. So it's going to keep hiring, it's as long as this yellow line is above the blue line, it would keep hiring, keep hiring, all the way until this point right over here. So notice what just happened. It is now rational for the firm to hire more people. And that is counterintuitive. | Monopsony employers and minimum wages.mp3 |
So it's going to keep hiring, it's as long as this yellow line is above the blue line, it would keep hiring, keep hiring, all the way until this point right over here. So notice what just happened. It is now rational for the firm to hire more people. And that is counterintuitive. An everyday thought, if I thought I was running some type of a business, if I was running a burger joint, and all of a sudden if there was a higher minimum wage, then it feels like, hey, I might not have enough money to hire people, I might lower the number of people I hired. But we just showed, at least with some, with a very simplified economics model, that theoretically when you're dealing with a monopsony employer, it actually might get them to hire more people. So an interesting question is why did this counterintuitive thing happen? | Monopsony employers and minimum wages.mp3 |
And that is counterintuitive. An everyday thought, if I thought I was running some type of a business, if I was running a burger joint, and all of a sudden if there was a higher minimum wage, then it feels like, hey, I might not have enough money to hire people, I might lower the number of people I hired. But we just showed, at least with some, with a very simplified economics model, that theoretically when you're dealing with a monopsony employer, it actually might get them to hire more people. So an interesting question is why did this counterintuitive thing happen? And one hand-wavy argument, but I encourage you to ponder it, is to realize that in the old world, every time they brought on an incremental person, they had to raise the salary of everyone, and that's what made the marginal factor cost go up so quickly. But now, since you have this whole flat part of your supply curve, because regardless of how many people you hire in this range right over here, you're paying the same amount, that incremental person does not increase the wage for everyone else. So that is what made it rational for the firm to go and keep hiring. | Monopsony employers and minimum wages.mp3 |
So an interesting question is why did this counterintuitive thing happen? And one hand-wavy argument, but I encourage you to ponder it, is to realize that in the old world, every time they brought on an incremental person, they had to raise the salary of everyone, and that's what made the marginal factor cost go up so quickly. But now, since you have this whole flat part of your supply curve, because regardless of how many people you hire in this range right over here, you're paying the same amount, that incremental person does not increase the wage for everyone else. So that is what made it rational for the firm to go and keep hiring. Now the community, the government, the city council, would have to be very careful about what this minimum wage is, because it's very possible that they could overshoot, and actually end up in a situation where the firm hires less. So for example, if they made this the minimum wage, right over here, let's call that W2, or W3, well, now all of a sudden, you would have a marginal factor cost curve that is going like this for at least a good bit. We can think about it a little bit later as what happens as you go further and further to the right. | Monopsony employers and minimum wages.mp3 |
So that is what made it rational for the firm to go and keep hiring. Now the community, the government, the city council, would have to be very careful about what this minimum wage is, because it's very possible that they could overshoot, and actually end up in a situation where the firm hires less. So for example, if they made this the minimum wage, right over here, let's call that W2, or W3, well, now all of a sudden, you would have a marginal factor cost curve that is going like this for at least a good bit. We can think about it a little bit later as what happens as you go further and further to the right. But then it would only be rational for the firm to hire that much. And so then you would have a decrease in employment. But if we go back to the original situation, another thing that you might be thinking about, well, hey, this seems too good to be true. | Monopsony employers and minimum wages.mp3 |
We can think about it a little bit later as what happens as you go further and further to the right. But then it would only be rational for the firm to hire that much. And so then you would have a decrease in employment. But if we go back to the original situation, another thing that you might be thinking about, well, hey, this seems too good to be true. It's now rational for the firm to hire more folks, and those folks are getting more income. Surely someone must be losing. And it is the case that the firm is now going to lose more of, I guess you could say, the surplus that it was having in the old world. | Monopsony employers and minimum wages.mp3 |
If we were talking about price elasticity of demand, it would be the percent change in quantity demanded over the percent change in price, and if we're talking about price elasticity of supply, it would be our percent change in quantity supplied over percent change in price, and as we talked about in many videos, this is a way of measuring how sensitive is quantity demanded or supplied to a change in price. What we're going to see in this video is that this is not the only type of elasticity that economists will look at. There are many types of elasticity where they want to see how sensitive is one thing to another. For example, you could look at the percent change, percent change in labor supply, so you could say quantity of labor, that'd be our labor supply, divided by our percent change in wages. I'll just write it out, wages, and you could view that as our percent change in the price of labor. So you might say, hey, this is just a price elasticity of supply being particular to the labor market, but you can even see things, and we'll have a whole video about this, probably my next video that I will make, where you could have the percent change in, let's say, quantity demanded of one good divided by, so let me call it good one, divided by the percent change in price of not that good, not that good, then we would have price elasticity, but of good two. And so this is actually thinking about how good one is a substitute for the other, and we'll go into a lot more depth there. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
For example, you could look at the percent change, percent change in labor supply, so you could say quantity of labor, that'd be our labor supply, divided by our percent change in wages. I'll just write it out, wages, and you could view that as our percent change in the price of labor. So you might say, hey, this is just a price elasticity of supply being particular to the labor market, but you can even see things, and we'll have a whole video about this, probably my next video that I will make, where you could have the percent change in, let's say, quantity demanded of one good divided by, so let me call it good one, divided by the percent change in price of not that good, not that good, then we would have price elasticity, but of good two. And so this is actually thinking about how good one is a substitute for the other, and we'll go into a lot more depth there. But the focus of this video, as you can imagine, because it was already written down in a clean font right over here, is income elasticity. And here, we're gonna think about the income elasticity of demand. And you could imagine what that would be. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
And so this is actually thinking about how good one is a substitute for the other, and we'll go into a lot more depth there. But the focus of this video, as you can imagine, because it was already written down in a clean font right over here, is income elasticity. And here, we're gonna think about the income elasticity of demand. And you could imagine what that would be. This is going to be our percent change in quantity demanded, demanded, divided by, instead of thinking about the percent change in price of that good or the service, we're gonna think about the percent change, change in income of the people who might be in the market for that good. So normally, you would expect that when our percent change in income goes up, that the same thing would happen to our percent change in quantity demanded. For example, let's say we're talking about the market for vacations. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
And you could imagine what that would be. This is going to be our percent change in quantity demanded, demanded, divided by, instead of thinking about the percent change in price of that good or the service, we're gonna think about the percent change, change in income of the people who might be in the market for that good. So normally, you would expect that when our percent change in income goes up, that the same thing would happen to our percent change in quantity demanded. For example, let's say we're talking about the market for vacations. Well, as my income goes up, as most people's income goes up, they might be able to afford larger or better vacations. And that would be a normal good. So this is a situation of a normal good, normal good, just as what you would expect. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
For example, let's say we're talking about the market for vacations. Well, as my income goes up, as most people's income goes up, they might be able to afford larger or better vacations. And that would be a normal good. So this is a situation of a normal good, normal good, just as what you would expect. But you could actually have the other way around. You could imagine a situation where even though you have an increase in your percent change in income, that does not lead to an increase in your percent change in quantity demanded. In fact, it could lead to a decrease in the percent change in quantity demanded, or another way of thinking about it, your quantity demanded could actually go down. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
So this is a situation of a normal good, normal good, just as what you would expect. But you could actually have the other way around. You could imagine a situation where even though you have an increase in your percent change in income, that does not lead to an increase in your percent change in quantity demanded. In fact, it could lead to a decrease in the percent change in quantity demanded, or another way of thinking about it, your quantity demanded could actually go down. So you would have a negative, a negative percent change right over here. Now, can you imagine any situations like that? Well, imagine if we're talking about the market for car mechanic services. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
In fact, it could lead to a decrease in the percent change in quantity demanded, or another way of thinking about it, your quantity demanded could actually go down. So you would have a negative, a negative percent change right over here. Now, can you imagine any situations like that? Well, imagine if we're talking about the market for car mechanic services. As people have more income, they might be able to afford better cars that are more reliable, that break down less, and then they would have to go to the car mechanic less. And so that situation where our demand would actually go down when our income goes up, or our percent change will become negative when we have a positive percent change in income, that would be, that is known as an inferior good. Inferior good. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
Well, imagine if we're talking about the market for car mechanic services. As people have more income, they might be able to afford better cars that are more reliable, that break down less, and then they would have to go to the car mechanic less. And so that situation where our demand would actually go down when our income goes up, or our percent change will become negative when we have a positive percent change in income, that would be, that is known as an inferior good. Inferior good. So there's two big things to take away. One, you don't just have to think about price elasticity of supply or demand. There are other types of elasticities. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
Inferior good. So there's two big things to take away. One, you don't just have to think about price elasticity of supply or demand. There are other types of elasticities. But just to hit the point home on income elasticity, let's look at a few examples. So we're told, suppose that when people's income increases by 20%, they buy 10% less fast food. In this situation, what type of good would fast food be? | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
There are other types of elasticities. But just to hit the point home on income elasticity, let's look at a few examples. So we're told, suppose that when people's income increases by 20%, they buy 10% less fast food. In this situation, what type of good would fast food be? Pause this video and think about it. Well, their income is increasing, but their demand is decreasing. So that's the situation we just talked about. | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
In this situation, what type of good would fast food be? Pause this video and think about it. Well, their income is increasing, but their demand is decreasing. So that's the situation we just talked about. This is an inferior good. Inferior good. And for kicks, what is the income elasticity of demand right over here? | Income elasticity of demand APⓇ Microeconomics Khan Academy.mp3 |
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