1 00:00:00,000 --> 00:00:01,464 [SQUEAKING] 2 00:00:01,464 --> 00:00:02,928 [RUSTLING] 3 00:00:02,928 --> 00:00:04,392 [CLICKING] 4 00:00:11,730 --> 00:00:14,990 JONATHAN GRUBER: OK, why don't we get started? 5 00:00:14,990 --> 00:00:16,910 Today, we're going to come full circle back 6 00:00:16,910 --> 00:00:18,380 to the first lecture. 7 00:00:18,380 --> 00:00:20,750 So in the first lecture, we talked 8 00:00:20,750 --> 00:00:24,470 by-- we started by drawing a supply and demand graph. 9 00:00:24,470 --> 00:00:26,330 We've now spent the last few weeks 10 00:00:26,330 --> 00:00:29,127 explaining where supply and demand curves come from. 11 00:00:29,127 --> 00:00:31,460 And now, we're going to talk about the supply and demand 12 00:00:31,460 --> 00:00:33,200 curves. 13 00:00:33,200 --> 00:00:33,980 What do they know? 14 00:00:33,980 --> 00:00:34,813 Do they know things? 15 00:00:34,813 --> 00:00:35,990 Let's find out. 16 00:00:35,990 --> 00:00:37,975 So, no one? 17 00:00:37,975 --> 00:00:38,600 No one on that? 18 00:00:38,600 --> 00:00:39,648 AUDIENCE: [INAUDIBLE] 19 00:00:39,648 --> 00:00:40,940 JONATHAN GRUBER: OK, thank you. 20 00:00:40,940 --> 00:00:41,540 All right. 21 00:00:41,540 --> 00:00:46,560 So let's start by talking about shocking the supply and demand 22 00:00:46,560 --> 00:00:47,060 curves. 23 00:00:50,767 --> 00:00:52,350 Shocking the supply and demand curves. 24 00:00:52,350 --> 00:00:54,558 That was a BoJack Horseman reference for those of you 25 00:00:54,558 --> 00:00:55,380 who missed that. 26 00:00:55,380 --> 00:00:59,380 OK, let's talk about shocking the supply and demand curves. 27 00:00:59,380 --> 00:01:05,489 So let's start with a review of the supply and demand framework 28 00:01:05,489 --> 00:01:07,900 that we introduced in the first lecture. 29 00:01:07,900 --> 00:01:10,750 So let's go back to figure 9-1. 30 00:01:10,750 --> 00:01:14,130 We've got the market for gasoline, OK? 31 00:01:14,130 --> 00:01:16,670 On the x-axis is big Q. Quantity of gas 32 00:01:16,670 --> 00:01:18,720 is the market-level diagram. 33 00:01:18,720 --> 00:01:21,120 On the y-axis-- the price of gas. 34 00:01:21,120 --> 00:01:23,310 And as we said, the first lecture-- the supply curve 35 00:01:23,310 --> 00:01:25,830 that's upward sloping, representing the fact 36 00:01:25,830 --> 00:01:28,440 that higher prices call forth more supply. 37 00:01:28,440 --> 00:01:30,490 We now know where that comes from. 38 00:01:30,490 --> 00:01:33,420 We know that what happens is when there's a higher price, 39 00:01:33,420 --> 00:01:37,800 firms can now afford to move up the marginal cost curve, which 40 00:01:37,800 --> 00:01:39,060 is the supply curve. 41 00:01:39,060 --> 00:01:40,590 So we know where that comes from. 42 00:01:40,590 --> 00:01:43,320 We have demand curve, which is downward sloping. 43 00:01:43,320 --> 00:01:44,820 Higher prices lead to less demand. 44 00:01:44,820 --> 00:01:46,540 We know where that comes from. 45 00:01:46,540 --> 00:01:48,960 We know that as the price of a good rises, 46 00:01:48,960 --> 00:01:50,550 through both income and substitution 47 00:01:50,550 --> 00:01:54,210 effects for normal goods, consumers will want less of it, 48 00:01:54,210 --> 00:01:55,810 so whenever that comes from. 49 00:01:55,810 --> 00:01:57,090 So we now have derived these. 50 00:01:57,090 --> 00:01:59,560 And we're back where we started in equilibrium. 51 00:01:59,560 --> 00:02:03,400 So let's actually start by asking what happens. 52 00:02:03,400 --> 00:02:05,980 Let's start by asking, as we move forward, 53 00:02:05,980 --> 00:02:07,920 how do we want to think about these curves? 54 00:02:07,920 --> 00:02:08,910 And the way we think about them is 55 00:02:08,910 --> 00:02:10,820 we want to think about the demand curve, 56 00:02:10,820 --> 00:02:12,720 want to think about these as willingness 57 00:02:12,720 --> 00:02:16,240 to pay and willingness to supply curves. 58 00:02:16,240 --> 00:02:19,710 So think about the demand curve as a willingness to pay curve. 59 00:02:19,710 --> 00:02:22,415 How much are you willing to pay to get 60 00:02:22,415 --> 00:02:23,540 that next unit of the good? 61 00:02:23,540 --> 00:02:26,430 Or how much is the market willing to pay to get 62 00:02:26,430 --> 00:02:28,250 the next unit of the good? 63 00:02:28,250 --> 00:02:29,370 OK? 64 00:02:29,370 --> 00:02:33,020 And the supply curve is willing to supply, OK? 65 00:02:33,020 --> 00:02:37,020 An equilibrium is the point where consumers' willingness 66 00:02:37,020 --> 00:02:40,080 to pay for the next unit of the good 67 00:02:40,080 --> 00:02:42,070 meets the suppliers willing to supply 68 00:02:42,070 --> 00:02:43,970 the next unit of the good. 69 00:02:43,970 --> 00:02:46,080 When those are equal, we're in equilibrium. 70 00:02:46,080 --> 00:02:49,610 So that's where we start. 71 00:02:49,610 --> 00:02:53,570 Now, let's ask, what happens as these curves shift? 72 00:02:53,570 --> 00:02:56,000 So, for example, let's take this market 73 00:02:56,000 --> 00:02:58,010 and imagine the tastes change. 74 00:02:58,010 --> 00:03:00,830 Suddenly, everyone wants to drive big cars. 75 00:03:00,830 --> 00:03:03,318 Everyone wants to drive SUVs, OK? 76 00:03:03,318 --> 00:03:04,985 What does this do to the market for gas? 77 00:03:07,670 --> 00:03:09,090 Well, so what does this do? 78 00:03:09,090 --> 00:03:11,278 Well, what it does-- yeah, go ahead. 79 00:03:11,278 --> 00:03:13,070 AUDIENCE: SUVs require a lot more gasoline, 80 00:03:13,070 --> 00:03:14,390 so the demand goes up. 81 00:03:14,390 --> 00:03:15,380 JONATHAN GRUBER: Yes. 82 00:03:15,380 --> 00:03:21,200 SUVs are what we call a complement as opposed 83 00:03:21,200 --> 00:03:22,990 to substitute-- 84 00:03:22,990 --> 00:03:25,400 are a complement for gasoline. 85 00:03:25,400 --> 00:03:27,980 When demand for SUVs goes up, demand for gas goes up. 86 00:03:27,980 --> 00:03:30,210 So the demand curve would shift out. 87 00:03:30,210 --> 00:03:35,120 So we would end up in a situation like figure 9-2. 88 00:03:35,120 --> 00:03:37,280 But let's talk through the dynamics. 89 00:03:37,280 --> 00:03:41,510 All you would see in the market is quantity of gas sold 90 00:03:41,510 --> 00:03:44,390 would go up from Q1 to Q2. 91 00:03:44,390 --> 00:03:47,110 And price of gas would go up from P1 to P2. 92 00:03:47,110 --> 00:03:49,580 Well, let's talk about underneath, how we get there. 93 00:03:49,580 --> 00:03:51,763 What happens is demand shifts up. 94 00:03:51,763 --> 00:03:53,180 People want more gas, because they 95 00:03:53,180 --> 00:03:55,280 want to drive these gas-guzzling cars. 96 00:03:55,280 --> 00:03:58,850 So demand shifts from D1 to D2. 97 00:03:58,850 --> 00:04:00,330 What does that mean? 98 00:04:00,330 --> 00:04:04,580 That means at the previous equilibrium price-- 99 00:04:04,580 --> 00:04:07,490 if the price didn't change, if the price 100 00:04:07,490 --> 00:04:09,980 stayed a P1, what would happen? 101 00:04:09,980 --> 00:04:12,290 Well, we'd no longer be in equilibrium. 102 00:04:12,290 --> 00:04:14,720 Because people would-- firms would still 103 00:04:14,720 --> 00:04:18,230 be happy to supply Q1 units of gas. 104 00:04:18,230 --> 00:04:20,690 But people would want way more than that. 105 00:04:20,690 --> 00:04:23,030 We would have excess demand. 106 00:04:23,030 --> 00:04:25,790 If the price didn't change, there would be excess demand. 107 00:04:25,790 --> 00:04:31,150 People would want more than the Q1 units of gas. 108 00:04:31,150 --> 00:04:33,710 Suppliers will recognize this and say, well, 109 00:04:33,710 --> 00:04:37,070 if people want more, we're happy to produce more. 110 00:04:37,070 --> 00:04:39,700 But remember, we have to respect the marginal cost curve 111 00:04:39,700 --> 00:04:41,128 and marginal cost of rising. 112 00:04:41,128 --> 00:04:42,670 If we're going to produce more, we're 113 00:04:42,670 --> 00:04:44,140 going to have to charge more. 114 00:04:44,140 --> 00:04:47,110 We're going to have to move up the supply curve. 115 00:04:47,110 --> 00:04:51,430 So a shift in the demand curve makes firms move along 116 00:04:51,430 --> 00:04:52,480 the supply curve. 117 00:04:52,480 --> 00:04:55,030 Want to keep shifts and movement along curves separate. 118 00:04:55,030 --> 00:04:58,020 A shift in demand curve, meaning people 119 00:04:58,020 --> 00:05:00,380 are saying to gas producers, we want more gas. 120 00:05:00,380 --> 00:05:01,630 Gas producers are like, great. 121 00:05:01,630 --> 00:05:02,980 We want to give you more gas, but we're going 122 00:05:02,980 --> 00:05:04,510 to charge you more to do it. 123 00:05:04,510 --> 00:05:07,150 Because our marginal cost curve is upward sloping, 124 00:05:07,150 --> 00:05:08,980 which is our supply curve, as we learned. 125 00:05:08,980 --> 00:05:10,660 So the price rises. 126 00:05:10,660 --> 00:05:15,030 And we need to reach a new equilibrium at E2. 127 00:05:15,030 --> 00:05:18,092 So we don't see these steps in practice. 128 00:05:18,092 --> 00:05:19,800 In the end, we just see the price change, 129 00:05:19,800 --> 00:05:21,600 but think about it as two steps. 130 00:05:21,600 --> 00:05:24,840 Demand shifts out, creating excess demand. 131 00:05:24,840 --> 00:05:28,130 Providers, to meet that excess demand, have to produce more. 132 00:05:28,130 --> 00:05:30,630 And to produce more, they're going to charge a higher price. 133 00:05:30,630 --> 00:05:33,710 And that moves you from E1 to E2, OK? 134 00:05:33,710 --> 00:05:36,320 So we have a shift in demand, which caused a slide 135 00:05:36,320 --> 00:05:39,870 up the supply curve, OK? 136 00:05:39,870 --> 00:05:41,880 Now, let's think about a different example. 137 00:05:41,880 --> 00:05:43,890 Imagine war breaks out in the Middle East. 138 00:05:43,890 --> 00:05:46,530 Not too hard to imagine, unfortunately. 139 00:05:46,530 --> 00:05:49,440 And as a result, the quantity-- 140 00:05:49,440 --> 00:05:54,570 so suppliers need to pay more to get the oil that they 141 00:05:54,570 --> 00:05:57,030 use to make gasoline, OK? 142 00:05:57,030 --> 00:05:58,110 What does that do? 143 00:05:58,110 --> 00:06:01,110 We see that in figure 9-3. 144 00:06:01,110 --> 00:06:07,490 Now, what happens is for every unit of gas, 145 00:06:07,490 --> 00:06:09,230 suppliers need to charge more. 146 00:06:09,230 --> 00:06:12,695 Their underlying marginal costs have gone up, 147 00:06:12,695 --> 00:06:14,570 because they have to pay more to get the oil. 148 00:06:14,570 --> 00:06:16,880 That's a variable cost of production of gas. 149 00:06:16,880 --> 00:06:19,022 So their marginal costs have gone up. 150 00:06:19,022 --> 00:06:21,230 Their marginal costs going up mean their supply curve 151 00:06:21,230 --> 00:06:23,420 has shifted upwards, OK? 152 00:06:23,420 --> 00:06:27,150 For every unit of production, their marginal cost 153 00:06:27,150 --> 00:06:29,975 is higher, because their variable costs have gone up. 154 00:06:29,975 --> 00:06:32,100 Therefore, they're going to need to charge a higher 155 00:06:32,100 --> 00:06:34,780 price to break even. 156 00:06:34,780 --> 00:06:36,780 OK, we're still in perfectly competitive markets 157 00:06:36,780 --> 00:06:39,420 where nobody is making any profit, OK? 158 00:06:39,420 --> 00:06:41,470 They're going to charge more to break even. 159 00:06:41,470 --> 00:06:43,470 So now, let's once again talk about the dynamics 160 00:06:43,470 --> 00:06:45,280 of what's happening. 161 00:06:45,280 --> 00:06:48,160 The dynamics are the costs and the input 162 00:06:48,160 --> 00:06:50,230 to the suppliers went up-- 163 00:06:50,230 --> 00:06:52,390 oil, OK? 164 00:06:52,390 --> 00:06:55,810 Their marginal costs shifts up to S2. 165 00:06:55,810 --> 00:06:58,190 So they want to charge a higher price. 166 00:06:58,190 --> 00:07:01,150 So if we kept the price the same as it 167 00:07:01,150 --> 00:07:02,980 was before, suppliers would say, we 168 00:07:02,980 --> 00:07:04,920 don't want to sell Q1 anymore. 169 00:07:04,920 --> 00:07:08,330 We're not interested in selling Q1 anymore at that old price. 170 00:07:08,330 --> 00:07:08,830 OK? 171 00:07:08,830 --> 00:07:10,540 That doesn't interest us. 172 00:07:10,540 --> 00:07:14,080 Therefore, consumers want more than providers 173 00:07:14,080 --> 00:07:15,280 are willing to sell. 174 00:07:15,280 --> 00:07:18,600 And we once again have excess demand. 175 00:07:18,600 --> 00:07:21,910 So in both cases, we get excess demand. 176 00:07:21,910 --> 00:07:24,110 In the first case, we got excess demand 177 00:07:24,110 --> 00:07:26,120 because consumers wanted more. 178 00:07:26,120 --> 00:07:28,100 The lower-- the consumers' tastes 179 00:07:28,100 --> 00:07:30,800 shifted, so they wanted more gas at every price. 180 00:07:30,800 --> 00:07:33,200 Now, we have excess demand not because taste shift, 181 00:07:33,200 --> 00:07:34,433 but because costs go up. 182 00:07:34,433 --> 00:07:36,350 So providers don't want to provide as much gas 183 00:07:36,350 --> 00:07:38,490 at every price. 184 00:07:38,490 --> 00:07:40,550 So what happens is providers are going to say, 185 00:07:40,550 --> 00:07:44,180 fine, we're going to charge a higher price, OK? 186 00:07:44,180 --> 00:07:46,820 And we'll slide up the demand curve. 187 00:07:46,820 --> 00:07:48,710 Because as providers charge a higher price, 188 00:07:48,710 --> 00:07:50,870 people want less gas. 189 00:07:50,870 --> 00:07:52,370 At a higher price, you want less gas 190 00:07:52,370 --> 00:07:53,810 through the substitution effect. 191 00:07:53,810 --> 00:07:56,390 Because you'll buy other things instead and for the income 192 00:07:56,390 --> 00:07:56,690 effect. 193 00:07:56,690 --> 00:07:58,107 Because you're effectively poorer, 194 00:07:58,107 --> 00:07:59,860 because the price of gas went up. 195 00:07:59,860 --> 00:08:03,940 For those reasons, you're going to shift up the demand curve 196 00:08:03,940 --> 00:08:06,570 and reach a new equilibrium at E2. 197 00:08:06,570 --> 00:08:08,670 So that's the underlying dynamics 198 00:08:08,670 --> 00:08:10,740 of how shifts in supply and demand 199 00:08:10,740 --> 00:08:15,060 lead to changes in quantity and price, OK? 200 00:08:15,060 --> 00:08:17,490 So that's basically what we're seeing. 201 00:08:17,490 --> 00:08:19,620 Questions about that? 202 00:08:19,620 --> 00:08:21,750 Yeah? 203 00:08:21,750 --> 00:08:27,965 AUDIENCE: [INAUDIBLE] 204 00:08:27,965 --> 00:08:29,590 JONATHAN GRUBER: Great, great question. 205 00:08:29,590 --> 00:08:31,240 So what's the answer? 206 00:08:31,240 --> 00:08:33,523 What's the substitution effect with gas? 207 00:08:33,523 --> 00:08:34,940 AUDIENCE: [INAUDIBLE] not driving. 208 00:08:34,940 --> 00:08:36,020 JONATHAN GRUBER: Well, you've answered yourself. 209 00:08:36,020 --> 00:08:37,070 It's not driving. 210 00:08:37,070 --> 00:08:38,179 It's taking the bus. 211 00:08:38,179 --> 00:08:39,740 It's driving less. 212 00:08:39,740 --> 00:08:41,667 It's walking or taking your bike. 213 00:08:41,667 --> 00:08:44,000 So once again, when everything about substitute effects, 214 00:08:44,000 --> 00:08:46,630 you want to think about the next opportunities 215 00:08:46,630 --> 00:08:48,787 you could use instead, OK? 216 00:08:48,787 --> 00:08:49,370 Good question. 217 00:08:49,370 --> 00:08:50,940 Other questions? 218 00:08:50,940 --> 00:08:53,500 OK, so here's an interesting point. 219 00:08:53,500 --> 00:08:56,200 Look at figure 9-2 and 9-3. 220 00:08:56,200 --> 00:09:01,050 In both cases, the price went up, OK? 221 00:09:01,050 --> 00:09:02,670 In both cases, the price went up. 222 00:09:02,670 --> 00:09:05,460 So we can't tell. 223 00:09:05,460 --> 00:09:08,970 If a price goes up, you can't tell from that 224 00:09:08,970 --> 00:09:13,310 alone whether there was a shift in demand or supply. 225 00:09:13,310 --> 00:09:15,750 So if I, for example, asked you on an exam or your mom 226 00:09:15,750 --> 00:09:16,250 came home. 227 00:09:16,250 --> 00:09:19,460 Your mom asked you, hey, if the price goes up, 228 00:09:19,460 --> 00:09:21,680 does that mean demand shift or supply shifted? 229 00:09:21,680 --> 00:09:23,163 You say to your mom, I don't know. 230 00:09:23,163 --> 00:09:24,830 I can't tell with just that information. 231 00:09:24,830 --> 00:09:26,747 I need to know what happened to quantity, too. 232 00:09:26,747 --> 00:09:27,247 OK? 233 00:09:27,247 --> 00:09:29,090 And then you say your mom, good question. 234 00:09:29,090 --> 00:09:32,270 OK, so let's go through the reasons 235 00:09:32,270 --> 00:09:34,580 why the supply and demand curves shift. 236 00:09:34,580 --> 00:09:36,330 So why do curves shift? 237 00:09:36,330 --> 00:09:36,910 OK? 238 00:09:36,910 --> 00:09:38,690 Well, on the demand side, there's 239 00:09:38,690 --> 00:09:42,170 at least six reasons why demand curves would shift. 240 00:09:42,170 --> 00:09:44,150 So why do demand curves shift? 241 00:09:47,060 --> 00:09:50,330 OK, one reason is tastes change. 242 00:09:50,330 --> 00:09:51,830 I just used that reason-- 243 00:09:51,830 --> 00:09:53,920 tastes change. 244 00:09:53,920 --> 00:09:56,260 OK, people want different things. 245 00:09:56,260 --> 00:09:57,080 OK? 246 00:09:57,080 --> 00:09:59,405 A second reason is that income changes. 247 00:10:03,740 --> 00:10:06,320 Second reason-- because people are richer or poorer. 248 00:10:06,320 --> 00:10:08,362 And so that makes them want different quantities, 249 00:10:08,362 --> 00:10:10,200 even with the same tastes. 250 00:10:10,200 --> 00:10:17,580 A third reason is the change in the price 251 00:10:17,580 --> 00:10:27,053 of a complementary or substitutable good, OK? 252 00:10:27,053 --> 00:10:27,970 Now, that's different. 253 00:10:27,970 --> 00:10:28,690 I should separate. 254 00:10:28,690 --> 00:10:30,160 The actual example before was this. 255 00:10:30,160 --> 00:10:31,700 Taste change is slightly different. 256 00:10:31,700 --> 00:10:34,720 So change in price [INAUDIBLE] is what I talked about. 257 00:10:34,720 --> 00:10:37,680 Taste change would be literally for everything 258 00:10:37,680 --> 00:10:40,540 held being equal, I just wake up one morning psyched to drive. 259 00:10:40,540 --> 00:10:42,490 That'd be a taste change, OK? 260 00:10:42,490 --> 00:10:45,370 So really, the example I used was a change 261 00:10:45,370 --> 00:10:47,070 in the price of complimentary-- 262 00:10:47,070 --> 00:10:49,640 no, no, price didn't change. 263 00:10:49,640 --> 00:10:50,450 No, I go back. 264 00:10:50,450 --> 00:10:51,140 I go back. 265 00:10:51,140 --> 00:10:52,860 The example I used was a taste change. 266 00:10:52,860 --> 00:10:54,950 People wanted more SUVs. 267 00:10:54,950 --> 00:10:57,870 But at the same time, imagine a different change. 268 00:10:57,870 --> 00:11:03,080 Imagine that we're looking at the demand for babysitters. 269 00:11:03,080 --> 00:11:06,420 And the price of movies goes up, OK? 270 00:11:06,420 --> 00:11:08,800 Well, movies are complementary with babysitters. 271 00:11:08,800 --> 00:11:09,560 You guys don't worry about this. 272 00:11:09,560 --> 00:11:11,143 You don't have kids yet, but trust me. 273 00:11:11,143 --> 00:11:12,790 Movies are complement to babysitters, 274 00:11:12,790 --> 00:11:15,250 that basically the more you go to the movies, 275 00:11:15,250 --> 00:11:17,020 the more you need babysitters. 276 00:11:17,020 --> 00:11:18,910 So if the price of movies goes up, 277 00:11:18,910 --> 00:11:22,690 that's going to lower my demand for babysitters or vice versa. 278 00:11:22,690 --> 00:11:26,800 Imagine that how a change in the price of movies 279 00:11:26,800 --> 00:11:33,882 affects the demand for Netflix, while those are substitutable. 280 00:11:33,882 --> 00:11:35,340 As the price of movies goes up, I'm 281 00:11:35,340 --> 00:11:38,550 going to want more Netflix and less babysitters. 282 00:11:38,550 --> 00:11:40,710 So change in price of complementary substitutable 283 00:11:40,710 --> 00:11:47,130 goods will also affect my demand curve. 284 00:11:47,130 --> 00:11:49,470 Another thing that could affect the demand curve 285 00:11:49,470 --> 00:11:53,490 is a change in the market size. 286 00:11:53,490 --> 00:11:55,200 So we will talk in a couple lectures 287 00:11:55,200 --> 00:11:57,580 about international trade. 288 00:11:57,580 --> 00:12:00,760 If suddenly you're selling goods to a much larger market, 289 00:12:00,760 --> 00:12:02,720 that will affect the demand for your good. 290 00:12:02,720 --> 00:12:03,970 So preference haven't changed. 291 00:12:03,970 --> 00:12:04,600 Price haven't changed. 292 00:12:04,600 --> 00:12:06,820 You just suddenly got a bunch of new customers. 293 00:12:06,820 --> 00:12:09,945 That will affect demand for your good, OK? 294 00:12:09,945 --> 00:12:12,320 And the last thing that could change, the most subtle way 295 00:12:12,320 --> 00:12:19,300 demand could change is expectations of the future. 296 00:12:19,300 --> 00:12:22,630 So for example, imagine you expect the price of gas 297 00:12:22,630 --> 00:12:24,100 to go up tomorrow. 298 00:12:24,100 --> 00:12:26,577 You might buy more gas today. 299 00:12:26,577 --> 00:12:27,410 And that'd be weird. 300 00:12:27,410 --> 00:12:29,325 [INAUDIBLE] look, nothing changed today. 301 00:12:29,325 --> 00:12:31,450 Your taste didn't change, prices-- nothing changed, 302 00:12:31,450 --> 00:12:32,450 but people buy more gas. 303 00:12:32,450 --> 00:12:33,160 What's going on? 304 00:12:33,160 --> 00:12:35,550 It's that they expect the price to change in the future. 305 00:12:35,550 --> 00:12:37,300 So expectations of the future can actually 306 00:12:37,300 --> 00:12:39,430 drive demand today, OK? 307 00:12:39,430 --> 00:12:42,670 We've all-- experiences in various aspects of our lives, 308 00:12:42,670 --> 00:12:43,390 OK? 309 00:12:43,390 --> 00:12:46,110 So those are the reasons why the demand curve can shift. 310 00:12:46,110 --> 00:12:48,580 There's a lot of reasons why the demand curve can shift. 311 00:12:48,580 --> 00:12:53,080 For the supply curve, why the supply curve shifts 312 00:12:53,080 --> 00:12:55,300 is much simpler. 313 00:12:55,300 --> 00:12:58,040 There's really only two reasons, OK? 314 00:12:58,040 --> 00:13:01,930 One reason is changes in input costs. 315 00:13:08,440 --> 00:13:11,744 And the second is a shift in the technology and production. 316 00:13:14,470 --> 00:13:17,810 So the production function changes or input costs change. 317 00:13:17,810 --> 00:13:22,090 That's pretty much why supply curves shift, OK? 318 00:13:22,090 --> 00:13:24,910 So that gives you a catalog of how to think 319 00:13:24,910 --> 00:13:26,620 about these curves shifting. 320 00:13:26,620 --> 00:13:28,270 I have a fun example in the videos that 321 00:13:28,270 --> 00:13:33,730 go with this class, which is that we all 322 00:13:33,730 --> 00:13:35,440 know Kim Kardashian is-- 323 00:13:35,440 --> 00:13:37,630 you may or may not know she has more Instagram 324 00:13:37,630 --> 00:13:39,790 followers than there are people in France. 325 00:13:39,790 --> 00:13:40,940 She got 80 million. 326 00:13:40,940 --> 00:13:43,900 It's up to about 100-plus million Instagram followers. 327 00:13:43,900 --> 00:13:46,420 Kim Kardashian, a few years ago, tweeted out 328 00:13:46,420 --> 00:13:50,230 a picture of herself in an exercise corset, she called it. 329 00:13:50,230 --> 00:13:52,300 She basically claimed-- a corset is 330 00:13:52,300 --> 00:13:55,600 this thing they used to wear back when we didn't 331 00:13:55,600 --> 00:13:57,220 care about women much at all. 332 00:13:57,220 --> 00:14:00,910 And we just made them wear these incredibly constrictive things 333 00:14:00,910 --> 00:14:02,560 to make them look skinnier, OK? 334 00:14:02,560 --> 00:14:04,563 They're basically like a brace you'd 335 00:14:04,563 --> 00:14:06,730 wear to make you look skinnier back in the old days. 336 00:14:06,730 --> 00:14:08,735 And Kim Kardashian said, actually, 337 00:14:08,735 --> 00:14:10,360 if you wear a corset when you exercise, 338 00:14:10,360 --> 00:14:11,500 it helps you lose weight. 339 00:14:11,500 --> 00:14:14,260 Well, actually, she's totally fucking wrong, OK? 340 00:14:14,260 --> 00:14:16,030 It doesn't, OK? 341 00:14:16,030 --> 00:14:19,840 There is no-- it does not help you lose weight, 342 00:14:19,840 --> 00:14:21,530 but she tweeted this out. 343 00:14:21,530 --> 00:14:25,130 And there was a massive increase in demand for exercise corsets, 344 00:14:25,130 --> 00:14:25,630 OK? 345 00:14:25,630 --> 00:14:29,180 And the one company that made them made scads of money. 346 00:14:29,180 --> 00:14:32,500 There was a huge demand shift based on this Kim Kardashian 347 00:14:32,500 --> 00:14:34,540 tweet, OK? 348 00:14:34,540 --> 00:14:37,980 So tell me what happened next. 349 00:14:37,980 --> 00:14:38,480 Yeah? 350 00:14:38,480 --> 00:14:40,000 AUDIENCE: [INAUDIBLE] 351 00:14:40,000 --> 00:14:42,490 JONATHAN GRUBER: More companies entered, OK? 352 00:14:42,490 --> 00:14:43,930 So what happened was profits were 353 00:14:43,930 --> 00:14:47,050 being made on exercise corsets. 354 00:14:47,050 --> 00:14:49,480 So more companies started making exercise corsets. 355 00:14:49,480 --> 00:14:52,690 And they came in and drove those profits down, OK? 356 00:14:52,690 --> 00:14:55,053 So that's a classic example of how demand shift 357 00:14:55,053 --> 00:14:56,470 and how the market in the long run 358 00:14:56,470 --> 00:14:58,430 will respond to return us to zero profits. 359 00:14:58,430 --> 00:15:00,430 Zero profits in the long run-- in the short run, 360 00:15:00,430 --> 00:15:02,530 some corset companies made a lot of money. 361 00:15:02,530 --> 00:15:04,510 They should-- they owe, Kim, OK? 362 00:15:04,510 --> 00:15:06,240 But in the long run, profits go to zero. 363 00:15:06,240 --> 00:15:07,560 Yeah? 364 00:15:07,560 --> 00:15:10,430 AUDIENCE: With the expectations where the demand curve shifts, 365 00:15:10,430 --> 00:15:12,560 is that when companies-- you're like, oh, 366 00:15:12,560 --> 00:15:15,292 there's these coupons for limited kind of sales? 367 00:15:15,292 --> 00:15:16,750 Would that be an example of demand? 368 00:15:16,750 --> 00:15:16,870 JONATHAN GRUBER: Yeah. 369 00:15:16,870 --> 00:15:19,240 And anything where you basically-- well, no. 370 00:15:19,240 --> 00:15:21,910 But once that's on, that's a price change. 371 00:15:21,910 --> 00:15:24,340 A limited time sale for good is literally just a standard 372 00:15:24,340 --> 00:15:25,812 to price changed, OK? 373 00:15:25,812 --> 00:15:28,270 It's you think the sales are going to happen in the future, 374 00:15:28,270 --> 00:15:30,260 so you buy less today. 375 00:15:30,260 --> 00:15:32,530 That's the expectations, OK? 376 00:15:32,530 --> 00:15:34,690 So that shifts in demand supply curves. 377 00:15:34,690 --> 00:15:39,370 Let's now talk about what determines the shapes of supply 378 00:15:39,370 --> 00:15:40,090 and demand curve. 379 00:15:45,480 --> 00:15:50,240 Now, what determines the shapes of supply and demand curves? 380 00:15:50,240 --> 00:15:51,730 OK? 381 00:15:51,730 --> 00:15:54,958 So basically, the effect-- 382 00:15:54,958 --> 00:15:56,250 not what determines the shapes. 383 00:15:56,250 --> 00:15:57,270 We already talked about what determines the shapes. 384 00:15:57,270 --> 00:15:58,890 We want to talk about the role, the shapes the supply 385 00:15:58,890 --> 00:15:59,460 and demand curves play. 386 00:15:59,460 --> 00:16:00,450 Let me rephrase that. 387 00:16:00,450 --> 00:16:01,710 We already know what determines the shapes. 388 00:16:01,710 --> 00:16:03,990 We covered that in the last 10 lectures or whatever. 389 00:16:03,990 --> 00:16:05,365 Now, we're talking about the role 390 00:16:05,365 --> 00:16:07,770 that shapes play as demand curves shift. 391 00:16:07,770 --> 00:16:10,980 So for example, let's think about a [INAUDIBLE].. 392 00:16:10,980 --> 00:16:15,030 Figure 9-3 shows what happens with a supply, 393 00:16:15,030 --> 00:16:17,250 the figure we're just looking at, OK? 394 00:16:17,250 --> 00:16:18,990 Figure we're just looking at, figure 9-3, 395 00:16:18,990 --> 00:16:21,300 shows what happens when the supply shift 396 00:16:21,300 --> 00:16:24,740 with a standard downward, sloping demand curve, OK? 397 00:16:24,740 --> 00:16:29,380 Which is that the price goes up, quantity falls. 398 00:16:29,380 --> 00:16:34,120 However, imagine, instead, we had perfectly inelastic demand. 399 00:16:34,120 --> 00:16:35,962 So, for example, for insulin. 400 00:16:35,962 --> 00:16:36,920 Then what would happen? 401 00:16:36,920 --> 00:16:41,200 Well, figure 9-4 shows if demand is perfectly inelastic, 402 00:16:41,200 --> 00:16:43,730 quantity won't change. 403 00:16:43,730 --> 00:16:45,190 So if there's a supply-- 404 00:16:45,190 --> 00:16:47,560 if there's a shock that shifts up the supply curve 405 00:16:47,560 --> 00:16:48,910 like war in the Middle East. 406 00:16:48,910 --> 00:16:49,810 So this is the question here. 407 00:16:49,810 --> 00:16:51,227 Why wouldn't gas just be perfectly 408 00:16:51,227 --> 00:16:52,400 inelastically demanded? 409 00:16:52,400 --> 00:16:54,150 In fact, in the short run, gas is actually 410 00:16:54,150 --> 00:16:55,810 pretty inelastically demanded, OK? 411 00:16:55,810 --> 00:16:59,140 It's not perfectly inelastic, but is pretty inelastic, OK? 412 00:16:59,140 --> 00:17:02,520 So in that case, you would see just prices going up, 413 00:17:02,520 --> 00:17:04,810 and quantities wouldn't change. 414 00:17:04,810 --> 00:17:08,410 Now, in the long run, do we think the elasticity for gas 415 00:17:08,410 --> 00:17:10,599 will be higher or lower in the short run, the demand 416 00:17:10,599 --> 00:17:11,710 elasticity for gas? 417 00:17:11,710 --> 00:17:12,560 AUDIENCE: Higher. 418 00:17:12,560 --> 00:17:12,849 JONATHAN GRUBER: Higher. 419 00:17:12,849 --> 00:17:15,069 Somebody raise their hand and tell me why. 420 00:17:15,069 --> 00:17:15,960 Somebody raise their hand and tell me why. 421 00:17:15,960 --> 00:17:17,680 Somebody else besides people who always answer questions. 422 00:17:17,680 --> 00:17:18,180 Yeah? 423 00:17:18,180 --> 00:17:20,238 AUDIENCE: People can shift towards electric cars. 424 00:17:20,238 --> 00:17:21,280 JONATHAN GRUBER: Exactly. 425 00:17:21,280 --> 00:17:22,900 In the short run, all you can do is drive less. 426 00:17:22,900 --> 00:17:24,400 And we got to drive to work and stuff like that. 427 00:17:24,400 --> 00:17:25,980 And in the long run, I can buy a different car. 428 00:17:25,980 --> 00:17:27,355 So this is an example of long run 429 00:17:27,355 --> 00:17:31,030 versus short run, how it can affect these elasticities, OK? 430 00:17:31,030 --> 00:17:34,430 Now, let's think instead about a perfectly elastic demand, 431 00:17:34,430 --> 00:17:35,470 the demand for-- 432 00:17:35,470 --> 00:17:38,710 I don't know-- chachkies in a market or something like that, 433 00:17:38,710 --> 00:17:39,280 OK? 434 00:17:39,280 --> 00:17:41,820 Perfectly elastic demand in figure 9. 435 00:17:41,820 --> 00:17:43,333 It's always hard to think of markets 436 00:17:43,333 --> 00:17:44,500 with perfect elastic demand. 437 00:17:44,500 --> 00:17:45,670 It's easier think about firms that 438 00:17:45,670 --> 00:17:46,850 have perfectly elastic demand. 439 00:17:46,850 --> 00:17:48,225 It's hard to think about markets. 440 00:17:48,225 --> 00:17:51,000 But think about a market for a certain kind of candy 441 00:17:51,000 --> 00:17:54,160 with another kind of candy that's just as good, OK? 442 00:17:54,160 --> 00:17:57,760 So those are markets, which are fairly elastically demanded, 443 00:17:57,760 --> 00:17:58,840 OK? 444 00:17:58,840 --> 00:18:02,290 There you see when the supply shifts, price doesn't change, 445 00:18:02,290 --> 00:18:03,910 only quantity does. 446 00:18:03,910 --> 00:18:04,810 And why is that? 447 00:18:04,810 --> 00:18:06,560 That's because demand is probably elastic. 448 00:18:06,560 --> 00:18:07,750 You can change the price. 449 00:18:07,750 --> 00:18:10,720 If you try to raise price by one penny, 450 00:18:10,720 --> 00:18:12,170 you'll lose the entire market. 451 00:18:12,170 --> 00:18:13,670 If you lower the price by one penny, 452 00:18:13,670 --> 00:18:14,795 you gain the entire market. 453 00:18:14,795 --> 00:18:16,420 And then your profits will go away, 454 00:18:16,420 --> 00:18:19,600 because your marginal cost will be through the roof, OK? 455 00:18:19,600 --> 00:18:22,360 So with perfectly elastic demand, 456 00:18:22,360 --> 00:18:25,120 you're going to get prices fixed, but only quantity 457 00:18:25,120 --> 00:18:27,610 changes, OK? 458 00:18:27,610 --> 00:18:31,368 So basically, that's how we think about these extremes. 459 00:18:31,368 --> 00:18:33,910 The bottom line is that's how the shapes of supply and demand 460 00:18:33,910 --> 00:18:39,250 will affect the response to shocks, OK? 461 00:18:39,250 --> 00:18:42,940 The more elastic is demand, the more price shock 462 00:18:42,940 --> 00:18:46,150 will come through in quantity and less in prices. 463 00:18:46,150 --> 00:18:49,150 The more inelastic is demand, the more supply shock 464 00:18:49,150 --> 00:18:53,310 will come through in prices and not in quantity, OK? 465 00:18:53,310 --> 00:18:56,460 Any questions about that? 466 00:18:56,460 --> 00:18:57,160 OK. 467 00:18:57,160 --> 00:18:59,990 So now, let's go on to what we can do with these supply 468 00:18:59,990 --> 00:19:00,740 and demand curves. 469 00:19:00,740 --> 00:19:03,190 So now, we're the masters of supply and demand curves. 470 00:19:03,190 --> 00:19:05,090 We know where they come from. 471 00:19:05,090 --> 00:19:06,790 We know why they shape the way they do. 472 00:19:06,790 --> 00:19:08,372 We know what happens when they shift. 473 00:19:08,372 --> 00:19:10,330 And we know what happens how that shift depends 474 00:19:10,330 --> 00:19:11,560 on their shapes. 475 00:19:11,560 --> 00:19:13,870 So we own supply and demand curves. 476 00:19:13,870 --> 00:19:15,830 Now let's go, what can we do with them? 477 00:19:15,830 --> 00:19:17,800 And what we can do with them is use 478 00:19:17,800 --> 00:19:20,920 them to take the next step in this class 479 00:19:20,920 --> 00:19:23,953 from positive to normative economics. 480 00:19:23,953 --> 00:19:25,870 So far, this class has been completely focused 481 00:19:25,870 --> 00:19:27,590 on positive economics. 482 00:19:27,590 --> 00:19:29,620 Why do firms behave the way they do? 483 00:19:29,620 --> 00:19:31,390 Why do consumers behave the way they do? 484 00:19:31,390 --> 00:19:33,348 And we haven't talked at all about whether it's 485 00:19:33,348 --> 00:19:35,150 a good thing or a bad thing. 486 00:19:35,150 --> 00:19:37,840 Well, we need a new set of tools if we're 487 00:19:37,840 --> 00:19:40,540 going to move from positive economics 488 00:19:40,540 --> 00:19:42,130 about why things-- the way things are 489 00:19:42,130 --> 00:19:45,790 to normative economics about the way they should be, OK? 490 00:19:45,790 --> 00:19:47,590 And those set of tools-- 491 00:19:47,590 --> 00:19:50,350 we're going to derive from supply and demand curves. 492 00:19:50,350 --> 00:19:52,450 And this is critically important. 493 00:19:52,450 --> 00:19:54,700 Because, for example, let's take where 494 00:19:54,700 --> 00:19:56,230 we ended the last lecture-- 495 00:19:56,230 --> 00:19:58,000 or the last lecture, I think, talking 496 00:19:58,000 --> 00:20:00,790 about how with perfectly-- or in the middle of last lecture, 497 00:20:00,790 --> 00:20:03,640 talking about in a perfectly competitive market under a set 498 00:20:03,640 --> 00:20:07,950 of assumptions, all firms-- a zero profit in the long run, 499 00:20:07,950 --> 00:20:08,450 OK? 500 00:20:08,450 --> 00:20:10,027 So you buy that. 501 00:20:10,027 --> 00:20:12,110 But you have to ask yourself, is that a good thing 502 00:20:12,110 --> 00:20:13,257 or a bad thing? 503 00:20:13,257 --> 00:20:15,090 Is zero profits in the long run good or bad? 504 00:20:15,090 --> 00:20:18,080 Well, on the one hand, firms are cost minimizing. 505 00:20:18,080 --> 00:20:19,500 That's good. 506 00:20:19,500 --> 00:20:21,800 On the other hand, why would anyone start a business? 507 00:20:21,800 --> 00:20:23,800 In the long run, they're going to make no money. 508 00:20:23,800 --> 00:20:24,607 That's bad. 509 00:20:24,607 --> 00:20:26,690 So how do we think about trading those things off? 510 00:20:26,690 --> 00:20:29,950 How do we think about whether it's 511 00:20:29,950 --> 00:20:32,470 good or bad to have long run zero profits? 512 00:20:32,470 --> 00:20:33,010 OK? 513 00:20:33,010 --> 00:20:35,210 This is the question. 514 00:20:35,210 --> 00:20:38,020 This set of questions is what we turn to 515 00:20:38,020 --> 00:20:41,230 with the notion of welfare economics. 516 00:20:45,100 --> 00:20:47,920 Welfare is going to be used in two senses in this class. 517 00:20:47,920 --> 00:20:50,170 Mostly when I say welfare, I'll mean 518 00:20:50,170 --> 00:20:52,690 as a measure of well-being. 519 00:20:52,690 --> 00:20:55,188 Mostly when I say welfare, I mean welfare is well-being. 520 00:20:55,188 --> 00:20:56,230 Sometimes we say welfare. 521 00:20:56,230 --> 00:20:58,570 We mean cash payments to poor people. 522 00:20:58,570 --> 00:20:59,583 That's welfare payments. 523 00:20:59,583 --> 00:21:01,750 That's not what I mean, usually, when I say welfare. 524 00:21:01,750 --> 00:21:03,580 I'll try to distinguish when I mean the other thing. 525 00:21:03,580 --> 00:21:04,810 When I say welfare, I don't mean the way 526 00:21:04,810 --> 00:21:06,227 it's used in the political debate, 527 00:21:06,227 --> 00:21:07,960 meaning cash payments to poor people. 528 00:21:07,960 --> 00:21:10,330 I mean welfare is a measure of well-being. 529 00:21:10,330 --> 00:21:14,350 And welfare economics is the tools of normative analysis. 530 00:21:14,350 --> 00:21:16,240 The tools of welfare economics are the tools 531 00:21:16,240 --> 00:21:20,392 of measuring well-being. 532 00:21:20,392 --> 00:21:21,850 And we're going to start by talking 533 00:21:21,850 --> 00:21:25,637 about the concept of consumer surplus. 534 00:21:25,637 --> 00:21:27,220 It's going to be the first thing we're 535 00:21:27,220 --> 00:21:29,920 going to use when we talk about welfare economics is consumer 536 00:21:29,920 --> 00:21:33,340 surplus, OK? 537 00:21:33,340 --> 00:21:36,550 Now, if we want to measure well-being, 538 00:21:36,550 --> 00:21:39,940 however, we have a problem, which is, how do you 539 00:21:39,940 --> 00:21:41,530 measure how happy I am? 540 00:21:41,530 --> 00:21:45,370 My utils But utils don't exist. 541 00:21:45,370 --> 00:21:47,740 So we've got a fundamental challenge here, 542 00:21:47,740 --> 00:21:49,480 which is our indicator of well-being 543 00:21:49,480 --> 00:21:53,350 is utility function, which isn't a real thing, OK? 544 00:21:53,350 --> 00:21:56,535 We use it to derive decisions, but we don't actually 545 00:21:56,535 --> 00:21:57,910 have a measure of well-being that 546 00:21:57,910 --> 00:22:00,400 gives real meaningful inputs. 547 00:22:00,400 --> 00:22:02,060 So what do we do? 548 00:22:02,060 --> 00:22:04,390 We do a clever thing economists thought of a long time 549 00:22:04,390 --> 00:22:09,990 ago, which is to use the concept of compensating variation. 550 00:22:12,790 --> 00:22:15,160 The concept of compensating variation. 551 00:22:15,160 --> 00:22:16,810 What does that concept-- means? 552 00:22:16,810 --> 00:22:22,000 That means instead of asking you how happy you are, I ask you, 553 00:22:22,000 --> 00:22:26,010 how much would I have to pay you to become less-- 554 00:22:26,010 --> 00:22:27,360 to become sadder? 555 00:22:27,360 --> 00:22:31,030 Or how much would you be willing to pay to be happier? 556 00:22:31,030 --> 00:22:33,690 So I can't measure margin utility in dollars. 557 00:22:33,690 --> 00:22:36,390 But I can measure how many dollars 558 00:22:36,390 --> 00:22:40,230 you would pay to buy the next good or how many dollars 559 00:22:40,230 --> 00:22:44,220 you'd pay me not to be punched or whatever, OK? 560 00:22:44,220 --> 00:22:47,040 I can basically measure those things 561 00:22:47,040 --> 00:22:51,330 by essentially asking you, how much would you 562 00:22:51,330 --> 00:22:54,320 pay to be better off? 563 00:22:54,320 --> 00:22:58,390 Or how much would you be willing to pay not to be worse off? 564 00:22:58,390 --> 00:23:01,540 And those are what we called a compensating variation. 565 00:23:01,540 --> 00:23:04,720 We measure your well-being by the money equivalent 566 00:23:04,720 --> 00:23:10,340 that you give to us in expressing your preferences. 567 00:23:10,340 --> 00:23:13,820 And what we can then define consumer surplus-- 568 00:23:13,820 --> 00:23:15,400 we'll define consumer surplus, which 569 00:23:15,400 --> 00:23:18,590 is our first measure of normative welfare economics, 570 00:23:18,590 --> 00:23:23,180 as the benefit that a consumer gets from consuming a good, 571 00:23:23,180 --> 00:23:26,850 above and beyond the price of that good. 572 00:23:26,850 --> 00:23:31,830 The benefit that a consumer gets from consuming a good, above 573 00:23:31,830 --> 00:23:35,400 and beyond what they paid for that good. 574 00:23:35,400 --> 00:23:36,780 That's consumer surplus. 575 00:23:36,780 --> 00:23:39,210 Surplus means extra, right? 576 00:23:39,210 --> 00:23:40,410 So it's your extra. 577 00:23:40,410 --> 00:23:43,080 It's how much more you get than what you actually 578 00:23:43,080 --> 00:23:46,560 pay to get the good in the first place, OK? 579 00:23:46,560 --> 00:23:50,400 So basically, consider my daughter's demand for songs 580 00:23:50,400 --> 00:23:53,760 by Kendrick Lamar, OK? 581 00:23:53,760 --> 00:23:56,860 And to make life easy, let's say this is pre-streaming 582 00:23:56,860 --> 00:23:59,350 and songs cost $1, OK? 583 00:23:59,350 --> 00:24:01,478 So she wants songs by Kendrick Lamar. 584 00:24:01,478 --> 00:24:04,020 So that's actually-- yeah, she wants songs by Kendrick Lamar, 585 00:24:04,020 --> 00:24:06,120 and there's no streaming. 586 00:24:06,120 --> 00:24:07,560 And the songs cost $1. 587 00:24:07,560 --> 00:24:10,530 So if my daughter is willing to pay $1 for a Kendrick Lamar 588 00:24:10,530 --> 00:24:15,750 song and it costs $1, then her consumer surplus is zero. 589 00:24:18,660 --> 00:24:21,540 The benefit she gets from the song is $1. 590 00:24:21,540 --> 00:24:23,430 It costs $1 to hit zero. 591 00:24:23,430 --> 00:24:27,990 But if she was willing to pay $2 for a Kendrick Lamar song 592 00:24:27,990 --> 00:24:33,830 and it only cost a $1, then she's got $1 in surplus, OK? 593 00:24:33,830 --> 00:24:38,090 So basically, the key thing is to define consumer surplus, 594 00:24:38,090 --> 00:24:39,140 we need two things-- 595 00:24:39,140 --> 00:24:43,010 the price and the willingness to pay. 596 00:24:43,010 --> 00:24:45,350 Well, how the hell do we get willingness to pay? 597 00:24:45,350 --> 00:24:48,200 Where does that come from? 598 00:24:48,200 --> 00:24:50,000 Someone raise their hand and tell me. 599 00:24:50,000 --> 00:24:50,180 Yeah? 600 00:24:50,180 --> 00:24:50,810 AUDIENCE: Demand. 601 00:24:50,810 --> 00:24:52,227 JONATHAN GRUBER: The demand curve. 602 00:24:52,227 --> 00:24:53,263 We already defined it. 603 00:24:53,263 --> 00:24:55,180 We already defined what willingness to pay is. 604 00:24:55,180 --> 00:24:56,660 It's the demand curve. 605 00:24:56,660 --> 00:25:00,940 So consumer surplus is simply defined as the area 606 00:25:00,940 --> 00:25:05,540 below the demand curve, above the price. 607 00:25:05,540 --> 00:25:06,940 Because that tells you. 608 00:25:06,940 --> 00:25:08,690 The demand curve tells you how much you're 609 00:25:08,690 --> 00:25:10,940 willing to pay for each unit. 610 00:25:10,940 --> 00:25:14,030 The price you face tells you how much you had to pay. 611 00:25:14,030 --> 00:25:19,100 So any gap between them is consumer surplus, OK? 612 00:25:19,100 --> 00:25:22,130 So let's go to figure 9-6. 613 00:25:22,130 --> 00:25:26,110 Let's do my daughter's demand for Kendrick Lamar songs, OK? 614 00:25:28,760 --> 00:25:33,180 Let's say that her demand is such that-- 615 00:25:33,180 --> 00:25:35,480 now, once again, the trick here is 616 00:25:35,480 --> 00:25:37,080 we've drawn a continuous demand curve. 617 00:25:37,080 --> 00:25:39,830 It's a discrete decision, so bear with me-- the numbers. 618 00:25:39,830 --> 00:25:41,330 Bear with me, just think about this. 619 00:25:41,330 --> 00:25:44,420 But roughly speaking, she's willing to pay 620 00:25:44,420 --> 00:25:50,455 for the first Kendrick Lamar song between $4 and $5, OK? 621 00:25:50,455 --> 00:25:51,830 For the next Kendrick Lamar song, 622 00:25:51,830 --> 00:25:57,090 she's willing to pay between $3 and $4 and so on. 623 00:25:57,090 --> 00:26:00,130 So this gives you-- so to make life easy, 624 00:26:00,130 --> 00:26:02,630 let's imagine she's willing to pay $4 for the first Kendrick 625 00:26:02,630 --> 00:26:06,030 Lamar song, $3 for the second Kendrick Lamar song, 626 00:26:06,030 --> 00:26:08,570 $2 for the third Kendrick Lamar song, 627 00:26:08,570 --> 00:26:10,490 and $4 for the first Kendrick, and-- 628 00:26:10,490 --> 00:26:14,720 I'm sorry-- $1 bucket for the fourth Kendrick Lamar song, OK? 629 00:26:14,720 --> 00:26:16,595 So imagine that's basically her demand curve. 630 00:26:16,595 --> 00:26:18,970 It's not quite that discrete, but we can make it stepwise 631 00:26:18,970 --> 00:26:19,710 if you want-- 632 00:26:19,710 --> 00:26:21,680 just be ugly looking, OK? 633 00:26:21,680 --> 00:26:23,492 So that's her demand curve. 634 00:26:23,492 --> 00:26:24,450 So what does that mean? 635 00:26:24,450 --> 00:26:28,580 That means when she buys the fourth Kendrick Lamar song, 636 00:26:28,580 --> 00:26:31,760 when she buys King Kunta or whatever, that is 637 00:26:31,760 --> 00:26:34,490 zero surplus, OK? 638 00:26:34,490 --> 00:26:35,270 Zero surplus. 639 00:26:35,270 --> 00:26:39,800 She was willing to pay $1 for "King Kunta," and it cost $1, 640 00:26:39,800 --> 00:26:42,550 so she's done, OK? 641 00:26:42,550 --> 00:26:45,540 However, what does that mean? 642 00:26:45,540 --> 00:26:47,040 That means when she bought "Humble," 643 00:26:47,040 --> 00:26:51,570 which was her first choice song, she gained a surplus. 644 00:26:51,570 --> 00:26:53,760 Because she paid $1 for that. 645 00:26:53,760 --> 00:26:56,740 But she was willing to pay $4 for it. 646 00:26:56,740 --> 00:26:58,570 So she gained a surplus. 647 00:26:58,570 --> 00:27:00,550 And the surplus is the difference 648 00:27:00,550 --> 00:27:03,070 between what she paid, which is represented 649 00:27:03,070 --> 00:27:04,768 by the horizontal line and a dollar, 650 00:27:04,768 --> 00:27:06,310 and what she was willing to pay which 651 00:27:06,310 --> 00:27:09,040 is the main curve, which is $4. 652 00:27:09,040 --> 00:27:10,480 So she gained that surplus. 653 00:27:10,480 --> 00:27:11,195 Yeah? 654 00:27:11,195 --> 00:27:13,610 AUDIENCE: Let's say as her father, 655 00:27:13,610 --> 00:27:15,010 you want to get her a gift-- 656 00:27:15,010 --> 00:27:16,930 all these Kendrick Lamar songs. 657 00:27:16,930 --> 00:27:18,460 And let's say it's special. 658 00:27:18,460 --> 00:27:20,190 I don't know-- $2, something like that. 659 00:27:20,190 --> 00:27:23,450 Would the consumer surplus be what you think 660 00:27:23,450 --> 00:27:25,320 she would want out of it or what she-- 661 00:27:25,320 --> 00:27:26,070 JONATHAN GRUBER: Let me come back to that. 662 00:27:26,070 --> 00:27:26,970 It's a great question. 663 00:27:26,970 --> 00:27:28,160 There's a famous article about that. 664 00:27:28,160 --> 00:27:29,868 And I'll come back to that in one minute. 665 00:27:29,868 --> 00:27:30,780 Let me finish this. 666 00:27:30,780 --> 00:27:32,600 The bottom line is the surplus there 667 00:27:32,600 --> 00:27:35,810 is between what she was willing to pay and what she had to pay, 668 00:27:35,810 --> 00:27:39,570 which in a continuous example is this entire triangle. 669 00:27:39,570 --> 00:27:43,140 Think of being able to buy fractions of songs-- 670 00:27:43,140 --> 00:27:45,470 little bits, ringtones or whatever, OK? 671 00:27:45,470 --> 00:27:47,450 Fractures of songs, OK? 672 00:27:47,450 --> 00:27:51,230 Then this entire area under the curve, above the price 673 00:27:51,230 --> 00:27:52,430 is her surplus. 674 00:27:52,430 --> 00:27:55,340 She was willing to pay the points on the curve. 675 00:27:55,340 --> 00:27:57,710 She only had to pay the flat line at $1. 676 00:27:57,710 --> 00:28:02,420 So the entire difference is her surplus, OK? 677 00:28:02,420 --> 00:28:04,970 The key point is this is all driven 678 00:28:04,970 --> 00:28:07,590 by diminishing margin utility. 679 00:28:07,590 --> 00:28:12,420 That is the reason her surplus goes to zero eventually-- 680 00:28:12,420 --> 00:28:14,850 is eventually gets tired of Kendrick Lamar songs, 681 00:28:14,850 --> 00:28:15,570 so it goes down. 682 00:28:15,570 --> 00:28:17,880 We have diminishing margin utility for the songs. 683 00:28:17,880 --> 00:28:20,358 And that's why we get consumer surplus as a triangle. 684 00:28:20,358 --> 00:28:22,650 It's the difference between the downward sloping demand 685 00:28:22,650 --> 00:28:27,340 curve and the flat price line that the consumer faces, OK? 686 00:28:27,340 --> 00:28:30,000 So the individual consumer surplus-- individual consumer 687 00:28:30,000 --> 00:28:31,350 surplus, OK? 688 00:28:31,350 --> 00:28:34,210 It's her demands-- that individual graph, OK? 689 00:28:34,210 --> 00:28:35,160 Individual graph. 690 00:28:35,160 --> 00:28:36,840 Her demand is downward sloping. 691 00:28:36,840 --> 00:28:38,790 And therefore, her surplus difference between 692 00:28:38,790 --> 00:28:42,120 is the area under the demand curve, above the price line. 693 00:28:42,120 --> 00:28:42,620 Yeah? 694 00:28:42,620 --> 00:28:44,649 AUDIENCE: If demand is perfectly inelastic, is 695 00:28:44,649 --> 00:28:46,175 it infinite consumer circle? 696 00:28:46,175 --> 00:28:47,800 JONATHAN GRUBER: Let's talk about that. 697 00:28:47,800 --> 00:28:53,380 Let's talk about-- actually, I don't have it here. 698 00:28:53,380 --> 00:28:55,500 If demand was perfectly inelastic, 699 00:28:55,500 --> 00:28:56,500 you're absolutely right. 700 00:28:56,500 --> 00:28:58,540 The consumer surplus would be infinite. 701 00:28:58,540 --> 00:28:59,945 Because the area under the demand 702 00:28:59,945 --> 00:29:01,820 curve above the price line would be infinity. 703 00:29:01,820 --> 00:29:03,680 It'd be a rectangle going up to infinity. 704 00:29:03,680 --> 00:29:04,720 Why is that? 705 00:29:04,720 --> 00:29:06,220 Why is the consumer surplus infinite 706 00:29:06,220 --> 00:29:06,985 if demand is inelastic? 707 00:29:06,985 --> 00:29:08,580 AUDIENCE: Because they'd pay anything for it. 708 00:29:08,580 --> 00:29:10,747 JONATHAN GRUBER: Because they'd pay anything for it. 709 00:29:10,747 --> 00:29:12,600 So at any price, it's a bargain. 710 00:29:12,600 --> 00:29:15,720 In theory, if you're an incredibly rich diabetic, 711 00:29:15,720 --> 00:29:18,605 you would pay an infinite amount to have insulin. 712 00:29:18,605 --> 00:29:20,480 So at any price, you're getting huge surplus. 713 00:29:20,480 --> 00:29:21,813 You're getting infinite surplus. 714 00:29:21,813 --> 00:29:24,220 Infinitely minus anything is infinity. 715 00:29:24,220 --> 00:29:25,810 Likewise, what's the consumer surplus 716 00:29:25,810 --> 00:29:27,160 if demand is perfectly elastic? 717 00:29:27,160 --> 00:29:27,700 Same person. 718 00:29:27,700 --> 00:29:28,000 AUDIENCE: Zero. 719 00:29:28,000 --> 00:29:28,450 JONATHAN GRUBER: What? 720 00:29:28,450 --> 00:29:28,760 Zero. 721 00:29:28,760 --> 00:29:29,260 Why? 722 00:29:29,260 --> 00:29:30,923 AUDIENCE: [INAUDIBLE] 723 00:29:30,923 --> 00:29:32,590 JONATHAN GRUBER: That's graphically why. 724 00:29:32,590 --> 00:29:33,490 But intuitively, why? 725 00:29:33,490 --> 00:29:35,770 Why do you get no surplus from a good 726 00:29:35,770 --> 00:29:37,932 where demand is fairly elastic? 727 00:29:37,932 --> 00:29:39,478 AUDIENCE: [INAUDIBLE] 728 00:29:39,478 --> 00:29:42,020 JONATHAN GRUBER: What makes a perfectly elastic demand curve? 729 00:29:42,020 --> 00:29:44,570 AUDIENCE: [INAUDIBLE] 730 00:29:44,570 --> 00:29:47,210 JONATHAN GRUBER: Because-- why? 731 00:29:47,210 --> 00:29:50,593 Because there's substitutes that you're indifferent towards. 732 00:29:50,593 --> 00:29:52,510 That's what gets the perfectly elastic demand. 733 00:29:52,510 --> 00:29:55,295 So if I'm indifferent between Jujyfruits-- 734 00:29:55,295 --> 00:29:57,170 god, you guys probably don't know Jujyfruits. 735 00:29:57,170 --> 00:29:59,120 If I'm indifferent between-- 736 00:29:59,120 --> 00:30:01,620 God, I don't even know what candy is anymore. 737 00:30:01,620 --> 00:30:02,120 Whatever. 738 00:30:02,120 --> 00:30:07,160 If I'm ever eating candy A and candy B, and then 739 00:30:07,160 --> 00:30:10,550 I get no surplus for consuming candy A, why? 740 00:30:10,550 --> 00:30:13,040 Because I'm equally happy with candy B. So 741 00:30:13,040 --> 00:30:14,600 candy A gives me no surplus. 742 00:30:14,600 --> 00:30:15,900 What does the candy people eat? 743 00:30:15,900 --> 00:30:16,400 What do people eat? 744 00:30:16,400 --> 00:30:17,570 AUDIENCE: Jolly Rancher. 745 00:30:17,570 --> 00:30:17,810 JONATHAN GRUBER: What? 746 00:30:17,810 --> 00:30:18,440 AUDIENCE: Jolly Rancher. 747 00:30:18,440 --> 00:30:19,010 JONATHAN GRUBER: Jolly Rancher. 748 00:30:19,010 --> 00:30:19,910 I love Jolly Ranchers. 749 00:30:19,910 --> 00:30:20,970 AUDIENCE: M&M's and Skittles. 750 00:30:20,970 --> 00:30:21,590 JONATHAN GRUBER: OK. 751 00:30:21,590 --> 00:30:22,090 Well, no. 752 00:30:22,090 --> 00:30:24,920 But that's irrelevant, 'cause Skittles are just disappointing 753 00:30:24,920 --> 00:30:25,790 M&M's. 754 00:30:25,790 --> 00:30:26,690 Let's be honest. 755 00:30:26,690 --> 00:30:28,600 When you get Skittles, you're just pissed off they're not 756 00:30:28,600 --> 00:30:29,100 M&M's. 757 00:30:29,100 --> 00:30:29,733 Am I right? 758 00:30:29,733 --> 00:30:31,650 I mean, Skittles are just disappointing M&M's, 759 00:30:31,650 --> 00:30:32,720 so we can't do that one. 760 00:30:32,720 --> 00:30:34,877 Let's do Jolly Ranchers versus Skittles, maybe. 761 00:30:34,877 --> 00:30:35,960 Those are more comparable. 762 00:30:35,960 --> 00:30:37,668 Because M&M's are better than everything. 763 00:30:37,668 --> 00:30:41,008 So basically, Jolly Ranchers and Skittles-- since I'm 764 00:30:41,008 --> 00:30:42,800 indifferent to Jolly Ranchers and Skittles, 765 00:30:42,800 --> 00:30:44,240 I get no surplus eating the Skittles. 766 00:30:44,240 --> 00:30:46,448 Because I would equally happy having a Jolly Rancher. 767 00:30:46,448 --> 00:30:48,780 So surplus is zero for a perfectly elastic demand 768 00:30:48,780 --> 00:30:49,280 and good. 769 00:30:49,280 --> 00:30:51,447 It's infinite for a perfectly inelastically demanded 770 00:30:51,447 --> 00:30:52,322 good, OK? 771 00:30:52,322 --> 00:30:53,780 Now, let's go back to the question. 772 00:30:53,780 --> 00:30:56,060 There's a famous article in economics called 773 00:30:56,060 --> 00:30:57,730 the "Deadweight Loss of Christmas--" 774 00:30:57,730 --> 00:30:59,600 we're such an awful profession-- 775 00:30:59,600 --> 00:31:02,450 based about how terrible gift-giving is. 776 00:31:02,450 --> 00:31:04,550 And why is gift-giving terrible? 777 00:31:04,550 --> 00:31:07,970 Because if you gave people cash, they 778 00:31:07,970 --> 00:31:10,140 could get what they want the most. 779 00:31:10,140 --> 00:31:11,930 But if you give them a gift, it's 780 00:31:11,930 --> 00:31:14,750 by definition, lower surplus than the cash. 781 00:31:14,750 --> 00:31:17,780 Because they could always go out and buy that good 782 00:31:17,780 --> 00:31:18,555 with the cash. 783 00:31:18,555 --> 00:31:20,180 So by definition, giving someone a gift 784 00:31:20,180 --> 00:31:22,930 makes them worse off than giving them that same amount of cash. 785 00:31:22,930 --> 00:31:24,972 So this guy-- is he interviewed all the students. 786 00:31:24,972 --> 00:31:26,180 I think was at Penn State. 787 00:31:26,180 --> 00:31:28,940 And he asked them how much their parents' presents really worth 788 00:31:28,940 --> 00:31:29,710 to them. 789 00:31:29,710 --> 00:31:31,585 And he found the deadweight loss of Christmas 790 00:31:31,585 --> 00:31:33,170 is hundreds of billions of dollars. 791 00:31:33,170 --> 00:31:35,570 People would way rather have cash than the parents-- 792 00:31:35,570 --> 00:31:38,210 but what did he get wrong? 793 00:31:38,210 --> 00:31:40,160 What did he get wrong? 794 00:31:40,160 --> 00:31:42,040 Why is that not necessarily a bad thing? 795 00:31:42,040 --> 00:31:44,040 Yeah, you asked the first question, so go ahead. 796 00:31:44,040 --> 00:31:46,732 AUDIENCE: You like the surprise of opening a present. 797 00:31:46,732 --> 00:31:47,690 JONATHAN GRUBER: Maybe. 798 00:31:47,690 --> 00:31:50,070 But even ignoring that, what else did he get wrong? 799 00:31:50,070 --> 00:31:50,310 Yeah? 800 00:31:50,310 --> 00:31:52,440 AUDIENCE: It's an emotional connect if something my grandma 801 00:31:52,440 --> 00:31:53,240 bought me a-- 802 00:31:53,240 --> 00:31:54,590 JONATHAN GRUBER: That's like the surprise. 803 00:31:54,590 --> 00:31:55,890 There's emotional connections. 804 00:31:55,890 --> 00:31:58,595 That's all well and good, but that's not very big, OK? 805 00:31:58,595 --> 00:31:59,970 What's really big that he missed? 806 00:31:59,970 --> 00:32:02,180 AUDIENCE: Because the person who buys it-- they 807 00:32:02,180 --> 00:32:03,323 saw what they get from it. 808 00:32:03,323 --> 00:32:05,490 JONATHAN GRUBER: Yeah, he missed the fact the person 809 00:32:05,490 --> 00:32:08,590 who gave it gets utility from giving it. 810 00:32:08,590 --> 00:32:11,010 So in fact, the package may be efficient, 811 00:32:11,010 --> 00:32:13,680 because you like the surprise and the person gets utility. 812 00:32:13,680 --> 00:32:15,638 But if compare it to dollars, it's inefficient. 813 00:32:15,638 --> 00:32:18,870 So it's a clever, clever little exercise he did. 814 00:32:18,870 --> 00:32:22,622 OK, so basically, that's individual consumer surplus. 815 00:32:22,622 --> 00:32:25,080 But in this course, we don't care about individual consumer 816 00:32:25,080 --> 00:32:25,580 surplus. 817 00:32:25,580 --> 00:32:27,700 We care about market consumer surplus. 818 00:32:27,700 --> 00:32:31,200 So let's turn to figures 9-7 and think about a market. 819 00:32:31,200 --> 00:32:33,450 Let's see about the market for gas. 820 00:32:33,450 --> 00:32:35,250 Now, the mechanics is the same here. 821 00:32:35,250 --> 00:32:36,720 But we're actually now thinking not 822 00:32:36,720 --> 00:32:40,680 about the individual buying 1 gallon versus 2 gallons, 823 00:32:40,680 --> 00:32:42,750 but the market for gas. 824 00:32:42,750 --> 00:32:45,250 How many gallons in aggregate will be bought? 825 00:32:45,250 --> 00:32:50,610 But the analysis is the same, that basically the willingness 826 00:32:50,610 --> 00:32:54,150 to pay for gas is the demand curve for gas, the market 827 00:32:54,150 --> 00:32:55,890 demand curve for gas. 828 00:32:55,890 --> 00:32:57,730 The price is the price. 829 00:32:57,730 --> 00:33:00,480 So the difference is the area under the demand 830 00:33:00,480 --> 00:33:02,100 curve above the price. 831 00:33:02,100 --> 00:33:06,170 The idea here is for consumers all the way to the left, 832 00:33:06,170 --> 00:33:08,378 they have to drive to work. 833 00:33:08,378 --> 00:33:09,170 They have to drive. 834 00:33:09,170 --> 00:33:10,010 They have to drive a lot. 835 00:33:10,010 --> 00:33:11,570 They're truck drivers or whatever. 836 00:33:11,570 --> 00:33:12,720 They have to drive a lot. 837 00:33:12,720 --> 00:33:17,380 So for them, they have a huge willingness to pay for gas. 838 00:33:17,380 --> 00:33:18,715 So they make a huge surplus. 839 00:33:18,715 --> 00:33:20,590 The more you want something at a given price, 840 00:33:20,590 --> 00:33:21,600 the more surplus you get. 841 00:33:21,600 --> 00:33:23,150 Whereas you move to the right, that's 842 00:33:23,150 --> 00:33:24,970 people who need to drive less and less. 843 00:33:24,970 --> 00:33:27,940 Once you pass point A, why does surplus go away? 844 00:33:27,940 --> 00:33:31,216 To the right of point A, why is there no more consumer surplus? 845 00:33:31,216 --> 00:33:32,122 Yeah? 846 00:33:32,122 --> 00:33:33,940 AUDIENCE: [INAUDIBLE] 847 00:33:33,940 --> 00:33:35,910 JONATHAN GRUBER: Didn't happen, because? 848 00:33:35,910 --> 00:33:37,794 AUDIENCE: Because [INAUDIBLE]. 849 00:33:37,794 --> 00:33:38,383 It's beyond. 850 00:33:38,383 --> 00:33:40,050 JONATHAN GRUBER: Your willingness to pay 851 00:33:40,050 --> 00:33:41,550 is below the price, right? 852 00:33:41,550 --> 00:33:44,043 So a transaction-- so consumer surplus can't go negative, 853 00:33:44,043 --> 00:33:45,710 but when negatives just wouldn't buy it, 854 00:33:45,710 --> 00:33:48,140 especially with negative consumer surplus, OK? 855 00:33:48,140 --> 00:33:50,760 When negative, you just wouldn't buy it, OK? 856 00:33:50,760 --> 00:33:54,330 But as you get closer and closer to A, 857 00:33:54,330 --> 00:33:58,470 then you actually do end up with consumer surplus going to zero, 858 00:33:58,470 --> 00:33:59,360 OK? 859 00:33:59,360 --> 00:34:02,590 So that's the market consumer surplus. 860 00:34:02,590 --> 00:34:04,070 So let's ask. 861 00:34:04,070 --> 00:34:08,429 Let's talk about a couple of aspects of market consumer 862 00:34:08,429 --> 00:34:08,929 surplus. 863 00:34:08,929 --> 00:34:11,510 First question-- what happens to consumer surplus 864 00:34:11,510 --> 00:34:12,980 when the price changes? 865 00:34:12,980 --> 00:34:17,830 Let's show that in figure 9-8. 866 00:34:17,830 --> 00:34:22,420 Let's say the price of gas goes up from $3 to $3.50 a gallon. 867 00:34:22,420 --> 00:34:30,310 Consumer surplus shrinks by a trapezoid. 868 00:34:30,310 --> 00:34:34,629 Consumer surplus used to be the entire area below the demand 869 00:34:34,629 --> 00:34:35,129 curve. 870 00:34:35,129 --> 00:34:37,780 It used to be the entire area is below the demand curve 871 00:34:37,780 --> 00:34:39,159 and above $3. 872 00:34:39,159 --> 00:34:40,760 It used to be that whole triangle. 873 00:34:40,760 --> 00:34:43,480 Now, it's just the empty triangle 874 00:34:43,480 --> 00:34:46,940 above the new price curve and below the demand curve. 875 00:34:46,940 --> 00:34:50,409 So the new consumer surplus is just the area above $3.50 876 00:34:50,409 --> 00:34:52,690 on the main curve, so it's the area not shaded in. 877 00:34:52,690 --> 00:34:57,080 What you've lost is the trapezoid, 878 00:34:57,080 --> 00:35:00,545 that on the y-axis goes between $3 and $3.50 and then along 879 00:35:00,545 --> 00:35:01,670 the line, goes from A to B. 880 00:35:01,670 --> 00:35:03,410 You've lost that trapezoid. 881 00:35:03,410 --> 00:35:06,890 Why is it a trapezoid? 882 00:35:06,890 --> 00:35:08,990 Why is the loss-- consumer surplus a trapezoid? 883 00:35:08,990 --> 00:35:10,430 Because two things have happened. 884 00:35:10,430 --> 00:35:12,597 What are the two things that have happened that have 885 00:35:12,597 --> 00:35:14,380 reduced your consumer surplus? 886 00:35:14,380 --> 00:35:16,220 Get some more folks involved. 887 00:35:16,220 --> 00:35:17,380 Folks, go ahead. 888 00:35:17,380 --> 00:35:19,463 AUDIENCE: The quantity supplied goes down as well. 889 00:35:19,463 --> 00:35:21,547 JONATHAN GRUBER: Well, not just quantity supplied. 890 00:35:21,547 --> 00:35:22,960 Quantity sold goes down. 891 00:35:22,960 --> 00:35:26,980 Because you want less supply, because you are-- 892 00:35:26,980 --> 00:35:29,030 so the first thing is because the price gone up, 893 00:35:29,030 --> 00:35:29,710 you want less. 894 00:35:29,710 --> 00:35:31,600 That's the triangle you lost. 895 00:35:31,600 --> 00:35:35,440 You have given up units that you used to get surplus on, 896 00:35:35,440 --> 00:35:38,650 used to derive surplus in all the units from 900 to 1,000. 897 00:35:38,650 --> 00:35:40,840 So what happened here is the price goes up. 898 00:35:40,840 --> 00:35:42,970 And a hundred fewer people buy gas. 899 00:35:42,970 --> 00:35:43,600 That's the way I've labeled this. 900 00:35:43,600 --> 00:35:45,020 That could be people buy less gas. 901 00:35:45,020 --> 00:35:45,850 Let's make it easy. 902 00:35:45,850 --> 00:35:47,008 A hundred people buy gas. 903 00:35:47,008 --> 00:35:49,300 So a hundred people used to buy gas, no longer buy gas. 904 00:35:49,300 --> 00:35:50,550 They're out of the gas market. 905 00:35:50,550 --> 00:35:52,330 They bike instead, OK? 906 00:35:52,330 --> 00:35:55,555 Now, they clearly were not that sad to bike, 907 00:35:55,555 --> 00:35:57,430 or they would've had a huge surplus from gas. 908 00:35:57,430 --> 00:35:59,380 But they're a little sad to bike. 909 00:35:59,380 --> 00:36:00,790 It's a crappy day out. 910 00:36:00,790 --> 00:36:02,250 They rather be driving. 911 00:36:02,250 --> 00:36:03,910 And so they lost surplus from the fact 912 00:36:03,910 --> 00:36:06,280 that now at the higher price, they have to bike instead, 913 00:36:06,280 --> 00:36:07,655 but it's a little bit of surplus. 914 00:36:07,655 --> 00:36:09,200 It's just a little triangle, OK? 915 00:36:09,200 --> 00:36:10,390 So there's a little bit of surplus lost. 916 00:36:10,390 --> 00:36:12,670 Because some people who were close to indifferent 917 00:36:12,670 --> 00:36:14,770 now have to bike instead of driving. 918 00:36:14,770 --> 00:36:16,060 But why the big-- 919 00:36:16,060 --> 00:36:18,450 what's the big rectangle? 920 00:36:18,450 --> 00:36:18,960 Same person. 921 00:36:18,960 --> 00:36:20,436 What caused the big rectangle? 922 00:36:20,436 --> 00:36:21,950 AUDIENCE: The increase in price. 923 00:36:21,950 --> 00:36:23,900 JONATHAN GRUBER: Increase in price for who? 924 00:36:23,900 --> 00:36:26,840 For the people who were already buying it anyway. 925 00:36:26,840 --> 00:36:28,910 So the big losers are the people who 926 00:36:28,910 --> 00:36:30,830 are going to drive anyway and now just have 927 00:36:30,830 --> 00:36:32,510 to pay more for it. 928 00:36:32,510 --> 00:36:34,610 Because here's the key point. 929 00:36:34,610 --> 00:36:36,470 The people between A and B-- 930 00:36:36,470 --> 00:36:37,920 the last hundred people-- 931 00:36:37,920 --> 00:36:39,680 they were pretty close to indifferent. 932 00:36:39,680 --> 00:36:42,230 They didn't lose that much surplus from not driving. 933 00:36:42,230 --> 00:36:44,810 All the people to the left of person 900-- 934 00:36:44,810 --> 00:36:47,000 they get big surplus from driving. 935 00:36:47,000 --> 00:36:49,267 So their surplus simply went down by this rectangle. 936 00:36:49,267 --> 00:36:51,350 They used to get the difference between the demand 937 00:36:51,350 --> 00:36:52,200 curve and $3. 938 00:36:52,200 --> 00:36:54,450 Now, that's the difference the demand curve and $3.50. 939 00:36:54,450 --> 00:36:56,220 It's just a pure loss. 940 00:36:56,220 --> 00:37:00,380 So when you raise a price, the existing-- the people 941 00:37:00,380 --> 00:37:03,210 whose behavior doesn't change are worse off. 942 00:37:03,210 --> 00:37:04,460 Some of those behavior change. 943 00:37:04,460 --> 00:37:06,478 They're a little worse off, but not that much. 944 00:37:06,478 --> 00:37:07,520 So the triangle is small. 945 00:37:07,520 --> 00:37:08,660 The rectangle is big. 946 00:37:08,660 --> 00:37:12,590 The big loss is the people who like gas a lot, 947 00:37:12,590 --> 00:37:15,380 but now have to pay more for it, OK? 948 00:37:15,380 --> 00:37:16,460 Point one. 949 00:37:16,460 --> 00:37:20,750 Point two-- what determines whether consumer surplus is 950 00:37:20,750 --> 00:37:21,400 large or small? 951 00:37:21,400 --> 00:37:22,580 Well, we cover this. 952 00:37:22,580 --> 00:37:25,160 It's elasticity of demand, determines 953 00:37:25,160 --> 00:37:27,860 whether consumer surplus is large or small. 954 00:37:27,860 --> 00:37:33,565 So, for example, figure 9-9 takes the gas market with 955 00:37:33,565 --> 00:37:37,000 a price of $3.00 and a thousand people buying gas and uses 956 00:37:37,000 --> 00:37:39,550 two-- shows two different demand curves, 957 00:37:39,550 --> 00:37:42,790 both of which go through point A. 958 00:37:42,790 --> 00:37:47,830 So both demand curves yield the equilibrium price of $3.00 959 00:37:47,830 --> 00:37:51,040 and the equilibrium quantity of a thousand, OK? 960 00:37:51,040 --> 00:37:52,540 So these two different demand curves 961 00:37:52,540 --> 00:37:54,915 are just two different sets of preferences, both of which 962 00:37:54,915 --> 00:37:56,380 yield the same equilibrium outcome. 963 00:37:56,380 --> 00:38:00,400 And yet, under the steeper demand curve, 964 00:38:00,400 --> 00:38:03,850 the consumer surplus is larger than under the flatter demand 965 00:38:03,850 --> 00:38:05,530 curve. 966 00:38:05,530 --> 00:38:08,200 And that's for the reason we talked about. 967 00:38:08,200 --> 00:38:09,450 That's for the reason. 968 00:38:09,450 --> 00:38:11,880 That's because with a steeper demand 969 00:38:11,880 --> 00:38:14,370 curve, the more inelastic demand, 970 00:38:14,370 --> 00:38:16,770 people want the good more. 971 00:38:16,770 --> 00:38:18,960 They basically-- they're less willing to give it up 972 00:38:18,960 --> 00:38:20,790 as the price goes up. 973 00:38:20,790 --> 00:38:24,120 Therefore, at any price, they're making more surplus off it. 974 00:38:24,120 --> 00:38:26,730 With a flatter demand curve, people 975 00:38:26,730 --> 00:38:30,000 are basically closer to indifferent 976 00:38:30,000 --> 00:38:31,170 with some other good. 977 00:38:31,170 --> 00:38:32,970 So they're not so sad if the price goes up. 978 00:38:32,970 --> 00:38:35,877 Their surplus is smaller from getting this good. 979 00:38:35,877 --> 00:38:37,710 They're seeing what they were willing to pay 980 00:38:37,710 --> 00:38:42,490 and what they have to pay is smaller, OK? 981 00:38:42,490 --> 00:38:45,610 So that's how we think about consumer surplus. 982 00:38:45,610 --> 00:38:48,460 It's basically the excess of your willingness 983 00:38:48,460 --> 00:38:50,470 to pay above what you have to pay. 984 00:38:50,470 --> 00:38:53,280 So if the price goes up, your surplus goes down. 985 00:38:53,280 --> 00:38:58,510 And surplus is larger, the more inelastic is the demand curve. 986 00:38:58,510 --> 00:38:59,010 Yeah? 987 00:38:59,010 --> 00:39:01,590 AUDIENCE: [INAUDIBLE] producers would want it, 988 00:39:01,590 --> 00:39:04,760 but consumers are having a zero surplus, if that makes sense? 989 00:39:04,760 --> 00:39:07,563 Because they're at the point where not only paying more, 990 00:39:07,563 --> 00:39:09,230 but they're selling as much as they can? 991 00:39:09,230 --> 00:39:09,850 JONATHAN GRUBER: Great question we'll 992 00:39:09,850 --> 00:39:11,558 talk about when we talk about monopolies. 993 00:39:11,558 --> 00:39:13,630 Right now, why can't producers do that? 994 00:39:13,630 --> 00:39:16,930 Why can't producers exploit that? 995 00:39:16,930 --> 00:39:18,040 Because perfectly-- yeah? 996 00:39:18,040 --> 00:39:20,260 AUDIENCE: [INAUDIBLE] 997 00:39:20,260 --> 00:39:21,302 JONATHAN GRUBER: Exactly. 998 00:39:21,302 --> 00:39:23,802 That's a perfect answer to a perfectly competitive question. 999 00:39:23,802 --> 00:39:25,687 Because they're price takers, OK? 1000 00:39:25,687 --> 00:39:27,520 So they can't do an exploiting of consumers. 1001 00:39:27,520 --> 00:39:29,440 They don't have that choice. 1002 00:39:29,440 --> 00:39:32,190 Starting next lecture or one lecture after, 1003 00:39:32,190 --> 00:39:33,385 we'll talk about monopoly. 1004 00:39:33,385 --> 00:39:34,510 Then they're price setters. 1005 00:39:34,510 --> 00:39:35,950 Then they'll start thinking about that. 1006 00:39:35,950 --> 00:39:37,570 But right now, they can't, because their price takers. 1007 00:39:37,570 --> 00:39:39,040 AUDIENCE: [INAUDIBLE] 1008 00:39:39,040 --> 00:39:40,540 JONATHAN GRUBER: I mean, ultimately, that's what-- yeah, 1009 00:39:40,540 --> 00:39:41,707 ultimately, they'd like to-- 1010 00:39:41,707 --> 00:39:43,870 the surplus is just extra money somebody has got. 1011 00:39:43,870 --> 00:39:46,300 If you're a business owner, why should consumers have it? 1012 00:39:46,300 --> 00:39:48,610 You want it, OK? 1013 00:39:48,610 --> 00:39:50,920 So that's consumer surplus. 1014 00:39:50,920 --> 00:39:54,120 Any other question about consumer surplus? 1015 00:39:54,120 --> 00:39:54,810 OK. 1016 00:39:54,810 --> 00:39:56,190 Now, let's move on. 1017 00:39:56,190 --> 00:39:58,905 And let's talk about producer surplus. 1018 00:40:05,510 --> 00:40:09,010 Let's talk about producer surplus, OK? 1019 00:40:09,010 --> 00:40:12,380 Now, the idea here is the same. 1020 00:40:12,380 --> 00:40:14,630 Consumer surplus was the difference 1021 00:40:14,630 --> 00:40:18,520 between the willingness to pay for a good and its price. 1022 00:40:18,520 --> 00:40:20,550 Producer surplus is the difference 1023 00:40:20,550 --> 00:40:24,090 between the willingness to supply a good and its price. 1024 00:40:24,090 --> 00:40:26,460 And how do we measure willingness to supply? 1025 00:40:26,460 --> 00:40:27,780 The supply curve. 1026 00:40:27,780 --> 00:40:33,995 So as figure 9-10 shows, the producer surplus for any given 1027 00:40:33,995 --> 00:40:34,495 firm-- 1028 00:40:39,250 --> 00:40:41,740 firms have an upward sloping supply curve. 1029 00:40:41,740 --> 00:40:44,030 And the market is delivering them some price. 1030 00:40:44,030 --> 00:40:46,230 So let's think about this firm. 1031 00:40:46,230 --> 00:40:49,410 When they produce the first unit-- this is a gas production 1032 00:40:49,410 --> 00:40:50,100 firm, OK? 1033 00:40:50,100 --> 00:40:51,540 A gas refiner, say. 1034 00:40:51,540 --> 00:40:56,130 When they refine that first gallon of gas, 1035 00:40:56,130 --> 00:40:58,340 that costs them almost nothing. 1036 00:40:58,340 --> 00:41:00,110 Because margin cost is upward sloping. 1037 00:41:00,110 --> 00:41:01,190 They've already paid the fixed cost. 1038 00:41:01,190 --> 00:41:02,620 They don't care in the short run. 1039 00:41:02,620 --> 00:41:05,120 So all I care about is variable costs, OK? 1040 00:41:05,120 --> 00:41:07,258 So at the end of the day, this is not expensive. 1041 00:41:07,258 --> 00:41:09,800 They are willing to produce that first gallon really cheaply. 1042 00:41:09,800 --> 00:41:12,260 They've already invested in this giant refinery plant. 1043 00:41:12,260 --> 00:41:13,658 Marginal costs are tiny. 1044 00:41:13,658 --> 00:41:15,950 So they get a huge-- but at the same time you pay them, 1045 00:41:15,950 --> 00:41:18,590 you don't differentiate what you pay per gallons. 1046 00:41:18,590 --> 00:41:21,800 You plug the thing into your car and you get the gas, OK? 1047 00:41:21,800 --> 00:41:24,410 So they're getting $3 a gallon, but they're not paying much 1048 00:41:24,410 --> 00:41:25,820 to make that gallon. 1049 00:41:25,820 --> 00:41:28,260 However, as they make more gallons, 1050 00:41:28,260 --> 00:41:30,710 their marginal cost increases. 1051 00:41:30,710 --> 00:41:35,620 So the surplus they earn on each gallon produced shrinks. 1052 00:41:35,620 --> 00:41:39,900 The surplus they earn at each gallon produced shrinks. 1053 00:41:39,900 --> 00:41:42,000 And so eventually, they get to a point 1054 00:41:42,000 --> 00:41:44,547 where they are essentially indifferent about producing 1055 00:41:44,547 --> 00:41:45,630 the next unit of gasoline. 1056 00:41:45,630 --> 00:41:48,090 That's at a price of $3 and a quantity of-- 1057 00:41:48,090 --> 00:41:50,453 should be little q, OK? 1058 00:41:50,453 --> 00:41:51,870 That's the point at which they are 1059 00:41:51,870 --> 00:41:58,970 indifferent between producing gas and not producing gas. 1060 00:41:58,970 --> 00:42:01,500 Therefore, their surplus is zero. 1061 00:42:01,500 --> 00:42:03,990 So producer surplus is the difference 1062 00:42:03,990 --> 00:42:06,360 between the price line. 1063 00:42:06,360 --> 00:42:10,200 And the upward sloping supply curve is produced surplus. 1064 00:42:10,200 --> 00:42:13,420 Now, in the long run, we have a name for that. 1065 00:42:13,420 --> 00:42:15,660 It's called profits, OK? 1066 00:42:15,660 --> 00:42:18,510 So our consumer surplus is this abstract, weird, theoretical 1067 00:42:18,510 --> 00:42:19,080 concept. 1068 00:42:19,080 --> 00:42:20,490 Produced surplus-- you can get your hands around. 1069 00:42:20,490 --> 00:42:21,510 It's profits. 1070 00:42:21,510 --> 00:42:24,900 Basically, remember, in the long run, 1071 00:42:24,900 --> 00:42:27,390 marginal cost equals average cost, right? 1072 00:42:27,390 --> 00:42:30,930 Because in the long run, you produce until marginal cost 1073 00:42:30,930 --> 00:42:32,830 equals average cost. 1074 00:42:32,830 --> 00:42:36,480 Therefore, the supply curve is the average cost curve. 1075 00:42:36,480 --> 00:42:38,880 Price minus average cost is profits. 1076 00:42:38,880 --> 00:42:40,770 Therefore, producer surplus is profits. 1077 00:42:40,770 --> 00:42:43,680 Let me say it again, a little three-line proof for you. 1078 00:42:43,680 --> 00:42:48,920 OK, in the long run, marginal cost equals average cost. 1079 00:42:48,920 --> 00:42:51,530 Second, the supply curve is the marginal cost curve. 1080 00:42:51,530 --> 00:42:54,210 Therefore, it's the average cost curve. 1081 00:42:54,210 --> 00:42:58,380 Third, profits is defined as price minus average cost. 1082 00:42:58,380 --> 00:43:01,050 Fourth, profits is the shaded area. 1083 00:43:01,050 --> 00:43:03,440 Now, in the short run, that's not quite right. 1084 00:43:03,440 --> 00:43:05,960 Because there's the whole shutdown decision, which makes 1085 00:43:05,960 --> 00:43:07,490 things awkward. 1086 00:43:07,490 --> 00:43:10,100 But roughly speaking, it's not terrible to think 1087 00:43:10,100 --> 00:43:12,860 about producer surplus as being profits. 1088 00:43:12,860 --> 00:43:14,750 That's a shorthand that largely works. 1089 00:43:14,750 --> 00:43:16,700 If it ever doesn't work, we'll let you know. 1090 00:43:16,700 --> 00:43:17,742 But that's the shorthand. 1091 00:43:17,742 --> 00:43:20,750 It should largely work, OK? 1092 00:43:20,750 --> 00:43:22,250 Now, of course, once again, we don't 1093 00:43:22,250 --> 00:43:24,167 care about individual firm's producer surplus. 1094 00:43:24,167 --> 00:43:25,980 We care about the market producer surplus, 1095 00:43:25,980 --> 00:43:28,400 so let's go to figure 9-11. 1096 00:43:28,400 --> 00:43:32,390 Figure 9-11 is basically the market surplus curve. 1097 00:43:32,390 --> 00:43:38,940 And the idea here is that essentially to the left, 1098 00:43:38,940 --> 00:43:41,947 you have a market supply curve where basically, remember, 1099 00:43:41,947 --> 00:43:44,030 the individual firm's supply curve is always flat. 1100 00:43:44,030 --> 00:43:46,460 But the market supply curve doesn't have to be. 1101 00:43:46,460 --> 00:43:48,960 It doesn't have to be flat, OK? 1102 00:43:48,960 --> 00:43:50,370 The market supply curve-- 1103 00:43:50,370 --> 00:43:51,478 well, no, let me back up. 1104 00:43:51,478 --> 00:43:53,520 A market supply curve is flat under a certain set 1105 00:43:53,520 --> 00:43:54,600 of conditions. 1106 00:43:54,600 --> 00:43:57,418 But now, let's imagine that those conditions aren't true. 1107 00:43:57,418 --> 00:43:58,710 For example, let's go back to-- 1108 00:43:58,710 --> 00:44:00,390 I talked at the end of last lecture 1109 00:44:00,390 --> 00:44:01,635 about heterogeneous firms. 1110 00:44:01,635 --> 00:44:03,510 Remember, we talked about the cotton example. 1111 00:44:03,510 --> 00:44:05,677 Some firms are more efficient producers than others. 1112 00:44:05,677 --> 00:44:07,290 If all firms are identical and it's 1113 00:44:07,290 --> 00:44:10,060 very competitive, of course, the market supply curve is flat. 1114 00:44:10,060 --> 00:44:12,540 So this graph would be uninteresting. 1115 00:44:12,540 --> 00:44:15,390 But in fact, imagine that firms aren't identical. 1116 00:44:15,390 --> 00:44:18,620 Some firms are more efficient producers than others, OK? 1117 00:44:18,620 --> 00:44:21,410 For example, in that case, what you'll see 1118 00:44:21,410 --> 00:44:24,290 is the most efficient producer will earn 1119 00:44:24,290 --> 00:44:27,220 the most surplus, i.e., the most profit. 1120 00:44:27,220 --> 00:44:29,320 They're all the way to the left. 1121 00:44:29,320 --> 00:44:31,210 As you move to the right, you're getting 1122 00:44:31,210 --> 00:44:34,480 to less and less efficient producers, OK? 1123 00:44:34,480 --> 00:44:37,070 So profit is shrinking. 1124 00:44:37,070 --> 00:44:40,660 So under the conditions we started with last time, 1125 00:44:40,660 --> 00:44:44,010 then price would always equal supply. 1126 00:44:44,010 --> 00:44:45,820 It'd be a flat supply curve at the price 1127 00:44:45,820 --> 00:44:47,530 and therefore, profits are zero. 1128 00:44:47,530 --> 00:44:49,880 That is producer surplus is zero. 1129 00:44:49,880 --> 00:44:52,640 So we derived-- towards the end of the last lecture, we said, 1130 00:44:52,640 --> 00:44:54,770 in the long run, a perfectly competitive market-- 1131 00:44:54,770 --> 00:44:55,615 profit is zero. 1132 00:44:55,615 --> 00:44:57,740 That's the same as saying producer surplus is zero. 1133 00:44:57,740 --> 00:44:58,830 And why is that? 1134 00:44:58,830 --> 00:45:00,950 That's because in that case, the price line 1135 00:45:00,950 --> 00:45:02,480 is on top of the supply curve. 1136 00:45:02,480 --> 00:45:04,843 Therefore, there's no gap between them. 1137 00:45:04,843 --> 00:45:07,010 So in the long run, a perfectly competitive market-- 1138 00:45:07,010 --> 00:45:10,130 there's zero produced of surplus, means zero profit. 1139 00:45:10,130 --> 00:45:12,430 In reality, we talked about conditions 1140 00:45:12,430 --> 00:45:14,930 why there would be an upward sloping, long-run supply curve, 1141 00:45:14,930 --> 00:45:17,360 like firms different, how efficient they are. 1142 00:45:17,360 --> 00:45:18,890 Or there's barriers to entry, which 1143 00:45:18,890 --> 00:45:22,040 means some firms can't come in and drive profits to zero. 1144 00:45:22,040 --> 00:45:24,643 Or there's an upward sloping input price curve, 1145 00:45:24,643 --> 00:45:26,810 meaning that basically the more you want to produce, 1146 00:45:26,810 --> 00:45:28,520 the more you have to pay workers. 1147 00:45:28,520 --> 00:45:30,923 For all those reasons, the supply curve slopes up. 1148 00:45:30,923 --> 00:45:32,840 And therefore, you can get a producer surplus. 1149 00:45:32,840 --> 00:45:36,930 You can get some profits, even the long run, OK? 1150 00:45:36,930 --> 00:45:40,470 So basically, what we have here is 1151 00:45:40,470 --> 00:45:44,370 a situation where as long as the supply curve slopes up, 1152 00:45:44,370 --> 00:45:45,940 you get a long-run producer surplus, 1153 00:45:45,940 --> 00:45:48,580 which is the difference between the price and the supply curve, 1154 00:45:48,580 --> 00:45:49,080 OK? 1155 00:45:49,080 --> 00:45:50,550 And that is the same as profits. 1156 00:45:50,550 --> 00:45:52,810 Questions about that? 1157 00:45:52,810 --> 00:45:54,143 OK, let me cover one last point. 1158 00:45:54,143 --> 00:45:56,102 Going back to last lecture-- going to have time 1159 00:45:56,102 --> 00:45:57,520 to get to your last lecture. 1160 00:45:57,520 --> 00:46:01,660 Remember, we talked about three reasons why, in the long run, 1161 00:46:01,660 --> 00:46:05,230 even in a competitive market, supply can slope up. 1162 00:46:05,230 --> 00:46:06,835 We talked about heterogeneous firms. 1163 00:46:10,170 --> 00:46:11,850 That is firms with different levels 1164 00:46:11,850 --> 00:46:14,040 of efficiency of production. 1165 00:46:14,040 --> 00:46:15,615 We talked about barriers to entry. 1166 00:46:18,750 --> 00:46:21,540 That is reasons why firms can't enter and drive profits 1167 00:46:21,540 --> 00:46:22,320 to zero. 1168 00:46:22,320 --> 00:46:24,120 Because it's not costless to enter. 1169 00:46:24,120 --> 00:46:32,937 And we talked about upward sloping, input supply curves. 1170 00:46:32,937 --> 00:46:35,020 We talked about the fact that as you produce more, 1171 00:46:35,020 --> 00:46:36,940 you might have to pay more for your inputs. 1172 00:46:36,940 --> 00:46:38,440 And therefore, you can't just charge 1173 00:46:38,440 --> 00:46:42,658 when-- you have to charge higher prices as you produce more. 1174 00:46:42,658 --> 00:46:44,950 I want to highlight something I said quickly last time, 1175 00:46:44,950 --> 00:46:48,610 the difference between these two and this one. 1176 00:46:48,610 --> 00:46:52,510 In these two, there are profits. 1177 00:46:52,510 --> 00:46:54,682 In these two, there are profits, OK? 1178 00:46:54,682 --> 00:46:56,140 Because in each of these, there are 1179 00:46:56,140 --> 00:46:58,897 reasons why the market will not drive 1180 00:46:58,897 --> 00:46:59,980 every firm to zero profit. 1181 00:46:59,980 --> 00:47:02,740 Some firms remain in-- much like Pakistan made profits 1182 00:47:02,740 --> 00:47:04,150 on their cotton sales. 1183 00:47:04,150 --> 00:47:05,110 Some firms remain in. 1184 00:47:05,110 --> 00:47:06,850 Likewise, with the barriers to entry, 1185 00:47:06,850 --> 00:47:08,530 the firms that are in the market that 1186 00:47:08,530 --> 00:47:12,260 have gotten over those barriers will make money, OK? 1187 00:47:12,260 --> 00:47:16,450 In this case, the firm doesn't necessarily make money, OK? 1188 00:47:16,450 --> 00:47:18,700 What it does here is it just pays. 1189 00:47:18,700 --> 00:47:23,370 It takes that extra money and pays it out to workers, OK? 1190 00:47:23,370 --> 00:47:25,650 So whether or not an upward sloping supply curve, 1191 00:47:25,650 --> 00:47:28,020 doesn't necessarily mean the firm makes profit. 1192 00:47:28,020 --> 00:47:30,187 It could just be upward sloping, because their input 1193 00:47:30,187 --> 00:47:31,890 costs are rising, OK? 1194 00:47:31,890 --> 00:47:34,350 So that's an important distinction to keep in mind. 1195 00:47:34,350 --> 00:47:37,542 So let's stop there with that mind-blowing insight. 1196 00:47:37,542 --> 00:47:38,250 Let's stop there. 1197 00:47:38,250 --> 00:47:39,240 And we'll come back. 1198 00:47:39,240 --> 00:47:43,880 And we'll talk more about welfare economics.