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Ok, good...however renounce which.
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First ...imaging, you know, the people who sell those slides.
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That we're using for lecture they said if anyone still wants to
00:00:19.650
buy one please call in advance because they've run out of...all
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and make your special group but if you just show up there they won't have them there are available
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for-you so-if you want-to still if you have about the sly jet you still want to call
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fast imaging before you go and tell them you want they'll have it ready for-you okay.
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Today we're going to talk about monetary gains and
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losses.
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This actually goes down below the demanded
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supply curves peeling off more layers on top to get more of
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...the essence underneath.
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This is extremely important for most policies
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that we enact would like to know whether they benefit society and one of the
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ways to do this is to count up the benefits in monetary terms.
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Of the policy.
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And, then also count up the cost to society
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of the policy and if the benefits exceed the cost than we think yes
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...good policy let's go ahead and do it if the benefits are less than
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the cost then we shouldn't do it from a social perspective so it's a very useful
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rubric for determining whether to engage in a policy, for example,
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whether to rebuild the bay bridge after the earthquake building the way bridges extremely
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expensive operation and we want to counter that against the benefits of having the bridge
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...can collapse...next earthquake and measure those benefits
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that's a relatively physical one but a lot of times there are policies that are
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simply manipulations and price changes in the way markets work,
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for example, when airlines were deregulated many years ago
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there was a big issue about whether we should allow the continuation of regulation of
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...airline prices or we should allow them to be determined by a market system
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and there the issue was whether the gains to be obtained
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from allowing the market system to work and what are the losses from
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losing the protections that the regulation provides so we wanted to measure but
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the gains and losses one of my old buddies cliff winston
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examined this after the fact that before the fact found...games greatly exceeded the
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losses but this is a basic way from determining for yourself and for us
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as a society whether we want to engage in a particular policy so the question is how do we
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measure these monetary gains and losses
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and to do that we go underneath the demand and supply curves?
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So, let's first look at the demand curve the demand curve for the market which is what
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we've been discussing so far is made up of demand curves
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for each individual person each person at a given prices going-to by a certain amount of the
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good you add that up over all the people in the economy and that's the
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...market demand for the good so to be able to understand market demand we need
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to understand consumer demand so now let's look at one individual person
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and what motivates their own demand curve what determines that
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persons choice process for that underlies...demand curve?
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And, do that we're going to utilize a concept called marginal willingness to pay?
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For a particular good.
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You have an amount that you willing to pay for the good for
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...one unit of the good like if you're buying blue...
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How much are is it worth to you to have appear blue jeans as the maximum you'd be
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willing to pay so willingness to pay as a relatively straightforward concept that you can think of
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its a negotiation free maximum amount that
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you willing to pay so it's not like you say you willing to pay eight dollars but you really
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whaling to pay ten because you're hoping to get for nine or something like that is truly
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if you were forced to pay this price what is the maximum price...you would
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pay anything beyond that you just walk away...so that's what willingness to pay
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is the maximum amount you're willing to pay marginal is a
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term that we will use constantly in this course?
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It's one of the most important contributions of economics
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to society in general the idea of looking at things on the margin.
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What is marginal...marginal means as you increase one thing how much
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to something else change in the current context?
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If you are consuming a certain amount of a good you ask the question how much
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my willing to pay for one extra unit.
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That your marginal willingness to pay
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that-you willingness to pay for one extra unit given whatever your consuming so, for example,
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blue jeans.
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If you've already got one pair of blue jeans how much you willing to pay for your second pair and then if you
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got to...how much you willing to pay for your third...that's the marginal willingness to pay
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is not your total willingness to pay for all the blue jeans that you want
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...the amount that you willing to pay for one extra given what you've already got as
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we'll see throughout this course decisions
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are made by examining things on the margin what is already brought
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us to a certain point where should we go from here should we move forward or go back and that
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depends on what are the valuations at the margin for one extra good one less
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good and.
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So, I'm going to use a running example here that.
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When I was going over this yesterday
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it seemed a little hokey but you'll get the idea suppose you had to pay for
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long-distance calls is good because most of you don't pay for long-distance calls you've
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got free messaging plans but still there is
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the hypothetical question of if you had to pay for it what is the maximum you'd be willing
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to pay and we will want to look at a person's demand
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oprah period of time so let's say a month if you could only make one call
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...so the first question is if you don't make any calls and you're
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deciding how much you willing to pay for one call and you can only make one call during the month how much
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you want to pay for it was probably a considerable amount because you know,
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if you're only...make one call a month you're probably going to want to make it someone
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that's really important to you or you really want to convey a lot of information
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...might be calling your parents or your partner or something and it's really
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important connect with them and talk to them so you're willing to pay maybe eight
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dollars obviously you're not going to have to pay that at least in the real world we live in but
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as a hypothetical situation if you were required to pay it
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...pay eight dollars to make one call a month to the person that you thinks most important
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...talk to then given that you made one
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call how much would you be willing to pay for making a second call
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one extra and it's going to be less because obviously if you
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make one call you made it to the most important person to talk to and the next one by
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definition is less valuable in fact it was more valuable to call that second person
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you would call them first so the value for that second call is going to be less than the first
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one and then you go for the third call it goes down data and it keeps on going like this?
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what you have is the marginal willingness to pay is the willingness to pay that
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if you were forced to pay at how much as the maximum...be willing to pay for one extra good given
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which are already consuming as I've drawn that is
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I've given the numbers that gives...decrease as the quantity that
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...consuming increases?
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And, that is codified by the law of diminishing marginal willingness
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to pay this is true for practically all goods when there's a law and
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economics.
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It means nearly always the cut type we live here
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...no you could break laws so you know, it doesn't always occur...practically
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...does it it's easier to think of it is always occurring and,
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...mainly it's just saying that if as you get more and more of
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...unit is less valuable your per first
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...you gotta have a pair of jeans and so-you willing to pay a lot for that your second one your less willing to pay
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for third when you're even less willing to pay for you might be something else so,
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it's a general characteristic of goods.
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Now...graph it...with the quantity in
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this direction on the horizontal axis price on the
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are willingness to pay on the vertical axis and each of these
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points is just one of the numbers that I had in the previous chart so I'm doing is
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giving that chart you have one ...your first unit that you consume willingness to pay for that is
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...the second unit given that you've got one already you're only willing to pay six and
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you continue on down.
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...as you can imagine we would combine
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all those points and all the points in between them.
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And, that is are marginal willingness to pay curve.
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How do you get a point in-between one-in-two?
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You either.
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If you want to stay as a purist in theory you stay with
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a graph like this that doesn't have anything between one-in-two you'll get the same results
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we're getting today with the continuous curve just easier to think about
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with continuous or the other way to think
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about is that what the quantity is here is actually an average so you can
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have something between one and two you can have one-and-a-half which means you
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make on average one-and-a-half calls a month one you make one call the next month to make
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...that averages to one-and-a-half so the fractions in-between represent a flow
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concept an average over a period of time so you can look at it neither of those two ways whichever
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one you find more helpful for your analysis...a particular situation.
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You hear me say ok I watch the video of myself yesterday of last
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lecture.
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And, I say okay all the time.
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I'm going to have to stop that so some holler out no okay every time I say it
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or something like that...how many of you see south park.
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With that's stupid teacher that says okay.
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It looked like me I couldn't believe it.
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I mean I...no idea anyway that's
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one advantage of these videos you get a little feedback.
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That the marginal willingness to pay curve is
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lo and behold the demand curve per person the reason we went through
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this analysis is because it actually motivates demand curve for
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an individual person so now I want to convince you that this marginal willingness to pay
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curve that we obtained by asking those hypothetical questions was the maximum you'd
00:11:40.090
be willing to pay is actually the same as the
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...demand curve demand curve tells you add any price how much is the
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person willing to buy at that price so let's suppose just
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as an example that the person...a price of three-dollar what if the price
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were three dollars how much with this person decide by
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while they would step through it did say okay well do I want to buy one unit in the answer's
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yes I'm willing to pay eight dollars and yet I only have to pay three so
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I'm willing to pay more than the price so I'll buy it...to buy to units in the answer's yes
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I'm willing to pay six data three.
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For my willingness to pay is exactly three
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dollars given that that's my willingness to pay I buy it okay and,
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by for units but then after that I don't buy the fifth one because my fifth
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the fifth unit the willingness to pay is less than the price so if you read from
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the price over to the marking willingness to pay curve.
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...priceline intersects the marginal willingness to pay curve that tells you the
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quantity...person's going to demand at that price.
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Any quantity less than this their willingness to pay is greater than the price.
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And, any quantity that's more than that...willingness to pay is less than the price so they don't buy it.
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That's why we want to look...willingness to pay gives us
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the demand curve and as we'll see it gives us a way of reading new information from
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the demand curve that is vital for determining costs and benefits.
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So, the demand curve is the marginal willingness to pay curve...not to separate
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concepts are two ways of looking at exactly the same information so,
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you can read the demand curve by the traditional way that we had
00:13:32.190
first which is at a given price how much will a person by a starting in the
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y axis reading over the ex or at any quantity what is the
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persons marginal willingness to pay now...go back to this how
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many of you remember from your math classes.
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That when you define a function.
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The traditional way to describe this is the if its y is a function of x you
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put x here and the function of x going up this direction right,
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yeah, well, when we originally defined are demand curves we did the
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...way we let the variable that was varying here and then read
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over instead of up that was backwards of normal math this explains why we
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...it the way you look at the demand curve in the way we originally drew it
00:14:22.340
is actually not the most fundamental way of looking at a demand curve
00:14:27.050
demand curve is more fundamentally seen as at any given quantity the
00:14:31.760
...consuming what is their willingness to pay on the margin which
00:14:38.760
their marginal willingness to pay and that just happens to be it's also the demand curve read
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the other direction so this now makes
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are demand curve which is are marginal willingness to pay curve consistent with
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two-way normally mathematics is done where you put the thing that
00:14:53.020
you're varying down here and read up to the value of the function?
00:15:00.410
we'll see that makes it actually much more useful and more consistent with all other forms of
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variation all analysis that we do within this class that were actually the consumer
00:15:10.850
walking them through the decision of how many units to buy and
00:15:14.270
varying this comparing the marginal willingness to pay the price
00:15:19.610
at every step and that's the way we figure out how much...going to buy.
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Okay.
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...the marginal willingness to pay curve and the demand curve.
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Are one of the same provides us some information
00:15:39.700
about?
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The value to the customer of consuming in this market.
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Essentially for all units that
00:15:53.410
the consumer buys the consumer is willing to pay at least.
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The price.
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...he or she wouldn't buy them.
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So, we can walk through and find out for each
00:16:04.780
unit what's going on and how much the...willing to pay compared to what they have to pay and what they get
00:16:08.620
as a kind of bonus so for the first call they're willing to this
00:16:13.490
person's willing to pay eight dollars for that call if the price is a dollar-fifty but suppose
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...prices dollar-fifty
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...actually getting a surplus they're getting a benefit from buying that
00:16:23.670
call in excess of what they actually have to pay the difference between what
00:16:28.200
their maximum willingness to pay is and what they actually have to pay this is the amount of
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other goods and services that they would willingly give up to make an extra
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...call but they only have to give up this amount so this is a
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since the excess value that they get from making the call?
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They get more value from that call in terms
00:16:48.560
of goods and services that they'd be willing to give up if they had to then they have
00:16:55.010
to so they're getting this benefit...a benefit or surpluses we call it.
00:16:59.140
...the second call the person's willing to pay six dollars only has to
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payout dollar-fifty so ends up with
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four fifty is willingness to pay I'm sorry sir plus four fifty minus
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...dollar-fifty sthree the...on down until the very last unit
00:17:18.290
...not willing to pay you any more than the price so there's a bright...surplus of zero.
00:17:20.590
If you add these up.
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That's the total benefit that
00:17:27.270
the person gets from consuming the good the market
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its sixteen dollars in this case the sum of all the surpluses.
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Benefit the person obtains is not the
00:17:43.340
sum of their willingness to pay there's so much they're willing to pay but they do have to
00:17:48.480
pay something so you could think of the total benefit
00:17:53.390
is the sum of the willingness to pay minus the sum of what they actually
00:17:57.710
have to pay gives you the total consumer surplus that they
00:18:03.770
...in the market this idea that consumers obtain surplus...market.
00:18:06.480
It through consumption is.
00:18:10.760
Exceedingly important I don't know-how many times I get upset you probably
00:18:13.730
do to that you think you're getting screwed, you know,
00:18:18.190
you think you paying too high of a price that the suppliers unfair you
00:18:22.440
...seemingly angry about it.
00:18:32.050
You have to keep remembering if you're buying the good.
00:18:35.080
Who are...complying?
00:18:38.830
...complaining because you wish you could have gotten the bigger benefit.
00:18:44.700
But, you don't want that ever to cloud the fact that you actually are getting a benefit so,
00:18:49.900
for example, there was this was the recent hurricane but couple years ago there's a
00:18:54.680
hurricane in florida and they didn't have any possible water and some people brought in water
00:18:58.420
and sold astronomical prices that was perhaps, you know,
00:19:02.890
really bad but the people we bought it benefited even at
00:19:07.700
those high prices because it was worth it to them or they want to...
00:19:12.350
The fact that you're buying...good evidences or the fact that the consumer buys a good
00:19:17.120
evidence is that the willingness to pay for it exceeds the price and hence
00:19:22.980
the there's a benefit from it this is also important when you look at the difference between private markets
00:19:28.100
and government intervention now I don't want you...from my statement about this
00:19:31.270
but I'm opposed to government intervention we're going to spend lots of time in
00:19:35.940
this class about how you should have government intervention in various ways but one thing about a
00:19:42.500
private market is you don't have to buy the good you don't have to spend your money on it.
00:19:47.210
And, when the government taxes you you're required to pay that money and then the government
00:19:50.790
spent on what it thinks maybe you want or should want or
00:19:55.490
will want but it might not be what you really want?
00:19:56.060
So, for
00:20:02.080
...so for the goods the government buys do not have a guarantee that
00:20:07.450
the that you willingness to pay exceeds how much you're having to pay for it whereas in
00:20:12.440
a private market is by definition the case if you didn't weren't willing to pay more and get
00:20:20.690
some benefit from it you wouldn't buy it and if nobody was those companies go out of business.
00:20:25.920
Now there's a graphical way to show this consumer surplus and,
00:20:30.060
this becomes very important because I find graphical analysis
00:20:34.660
really clarifies things a lot...so this is not new information is just another
00:20:38.380
way of charting information we already have.
00:20:42.920
What I want to prove to you is that the area underneath the demand curve
00:20:48.670
above the price is equal to the consumer surplus?
00:20:53.500
What to do this is again I want to just march through one good at a time the first good the
00:20:57.820
person's willing to pay eight dollars only have to pay a dollar fifty so gets this
00:21:02.960
...area here and surplus of six dollars and fifty cents the
00:21:07.860
next unit you get the next goal area which is four dollars
00:21:11.950
and fifty cents next unit continue on up and you combine
00:21:16.790
them all now what I did here was for individual units?
00:21:22.020
And, if you really do want to stick with your analysis that you can only make integer
00:21:27.230
number of calls in a month then that is your willingness to pay and that will be equal to the
00:21:31.130
sixteen dollars I gave however under continuous demand curve
00:21:33.310
...fractions are allowed and we're talking in
00:21:38.250
a flow concept is an average over numerous months you can get fractions
00:21:42.280
so what if we did exactly the same thing using have
00:21:48.190
...of whole units well we get that the sought tooth notice that the saw tooth now
00:21:52.990
has gotten finer and there's less of the little blue parts left.
00:21:57.790
As you go from here to here you're filling in more
00:22:02.470
...if you want to recorders you'd fill in the even more if you want to and...should be filling any
00:22:08.010
...more eventually for continuous changes.
00:22:12.500
Infinitesimal small changes it's the entire area under the demand curve
00:22:14.250
above the price.
00:22:18.440
That the consumer surplus from consumption in that
00:22:19.920
market.
00:22:24.530
And, notice it can't be negative there's no way you can draw the curve
00:22:29.750
however be negative...positive...
00:22:32.520
Now in many cases we want to see what is the effect on
00:22:37.150
consumers the monetary value of a change in the market the change in price
00:22:42.780
...you can...tax on a...something else...going to be a change in a deregulate airlines
00:22:46.350
...going to be change in prices so we want to know what is the change in consumer
00:22:52.940
surplus as a result of the change in prices if we start out.
00:22:56.730
What I want to convince you of is that it's this area here between the two
00:22:57.230
prices?
00:23:03.150
And, the way to think about ideas you start out at a given price.
00:23:05.540
And, you raise the price.
00:23:08.820
Then consumer surpluses the...area here.
00:23:10.980
You raise the price you reduce consumer
00:23:15.910
surplus now it's the area above the new price.
00:23:17.810
Below the demand curve.
00:23:21.810
And, what's the difference between the two we originally had this amount now with
00:23:27.460
the higher price we have that amount so the difference is this amount right here the
00:23:30.560
loss in consumer surplus.
00:23:36.490
From a change in the price from an increase in the price.
00:23:37.730
There.
00:23:41.310
So, if you increase the price from pone ptwo.
00:23:44.800
The monetary value of the
00:23:48.440
...to consumer the amount they.
00:23:52.490
Are hurt by price increase in dollar terms?
00:23:54.760
Is given graphically
00:24:01.220
as the area to the left of the demand curve between the two prices?
00:24:05.470
It's important to remember directions in this case.
00:24:10.460
Though it might be clear your mind as you start saying it can become confusing
00:24:14.720
that the consumer surplus is the area below the demand curve
00:24:16.730
and above price.
00:24:22.180
the changing consumer surplus in this case the lawson consumer surplus as you raise the price
00:24:25.660
is the area to the left of the demand curve between the two prices.
00:24:31.090
How you talk about?
00:24:35.640
And, obviously if you lowered the price...be that's if you went from ptwo you started there and went
00:24:44.880
down to pone this would be the monetary value of the gain to consumers of dropping the price.
00:24:48.140
Now we can apply this remember we had our gas tax.
00:24:51.490
Last lecture we talked about the
00:24:54.530
...price the gas tax raising the price of the
00:24:56.980
...twenty cents.
00:25:02.890
And, that we labeled as the consumers burden that is a burden
00:25:05.960
...to noted in since per gallon.
00:25:10.720
Is a twenty cent per gallon burden borne by the consumers but it's not a
00:25:15.650
dollar amount is not a how many millions of dollars
00:25:20.390
to consumers loses result of that it's not the quantity that were actually interested in if
00:25:26.490
...to consumer surplus I'm sorry benefits against costs but,
00:25:30.900
we now know-how to do that the?
00:25:35.810
A map...consumers.
00:25:40.220
The monetary value of the loss to consumers from raising
00:25:44.730
from putting on this tax is this area right here.
00:25:47.520
Which now that I've got straight demand curves
00:25:51.450
history the demand curve it's very easy to calculate
00:25:55.950
...to be you break it up into two parts this part is
00:25:59.580
a rectangle which is the change in price twenty cents
00:26:06.210
times the quantity that's being consume that the new price just eight billion?
00:26:08.980
That's this rectangle and then you have
00:26:13.780
the triangle here which is which...of a triangle.
00:26:18.080
Height times width divided by two so the height is point-two the
00:26:22.380
whipped here is the difference between ten billion an eight billion so it's two billion
00:26:27.370
...divide by two so...to consumers
00:26:30.490
is sixteen billion plus.
00:26:35.640
Point-two billion one-point-eight billion so now we
00:26:39.260
have a measure of how much this tax is hurting consumers.
00:26:42.500
And, we can compare that against other things
00:26:48.210
we'll talk about later that might be the benefits of the...
00:26:55.200
Notice that the loss to consumers is made up of two parts, yeah.
00:26:57.050
This is.
00:26:59.510
What did I say this is billions?
00:27:02.620
Billions of barrels let's...
00:27:09.020
Blah-blah-blah.
00:27:13.450
So, there is a tax of fifty since placed on every barrel
00:27:17.240
and the total amount that people lose is.
00:27:21.200
Eight billion barrels times twenty cents each.
00:27:24.510
Is one-point-six billion dollars that
00:27:32.280
Anything else there's two parts of this consumer
00:27:38.380
One is an actual expenditure of money consumers are now
00:27:42.290
paying instead of a dollar they're paying a dollar twenty.
00:27:47.750
So, this area right here is the amount that they're actually
00:27:53.590
paying higher prices for their current consumption they are currently consuming this amount
00:27:58.370
...applied and they're paying twenty since more than they used to be
00:28:03.270
paying so that's what this is so...a sense that part of the laws is money that
00:28:08.000
consumers are actually paying out but there's also a laws.
00:28:12.500
That is not a transactors loss it's not a
00:28:15.900
lost that is going anywhere is just in a
00:28:17.680
...a lost.
00:28:21.060
Compared to what could have been.
00:28:25.150
That's because consumers are now consuming less than they used
00:28:28.510
to be consuming at the new price.
00:28:34.740
And, losing the benefits of that.
00:28:38.670
If the price...original level they were consume this amount when
00:28:43.590
the price rises consumers decide to forego some of that consumption that
00:28:47.400
consumption had some value to them what is the value.
00:28:51.320
Is given by their marginal willingness to pay its that amount here and
00:28:55.870
they're giving up that amount of value by consuming less
00:29:00.570
...and the value of it is the area below the demand curve?
00:29:01.760
Above the price this low
00:29:06.700
triangle right here so this is a transactors laws this is a
00:29:11.220
loss that comes from the fact that we're giving up consumption of something that add value
00:29:16.890
to us it doesn't have enough value to pay the higher price but
00:29:29.390
...still had value that was higher than the old price...new price we got a kelp...
00:29:40.700
The total area is the consumer lawson surplus...
00:29:41.200
No.
00:29:46.790
Actually that's an interesting question the question was is that small...
00:29:51.510
triangle the decreased martian willingness to pay and the
00:29:54.320
...no but it's very close.
00:29:59.170
...but raised an important point notice that the person's marginal willingness to pay a
00:30:03.970
ten billion is here consumers willingness to pay as a dollar.
00:30:08.370
They continue consuming until...marginal willingness to pay drops...
00:30:13.300
they quit consuming anymore if you add the if the price is now a dollar twenty
00:30:16.670
there now willingness to pay is a dollar twenty.
00:30:21.450
They've quit consuming all the goods that were valued at less than a dollar
00:30:27.140
twenty so all this is actually represents an increase in the
00:30:29.970
persons marginal willingness to pay.
00:30:34.730
As you move from this point to this point the person is consuming less.
00:30:38.150
Moving backwards on their willingness to pay curve.
00:30:42.030
To a higher marginal willingness to pay what this is the
00:30:51.630
las in surplus from those units the person has foregone.
00:30:53.190
That's right.
00:30:57.510
The more steep the demand curve the smaller this
00:31:03.550
triangle will be in fact if the demand curve is totally.
00:31:07.580
...meaning that you're going to buy it matter what the prices.
00:31:10.120
Then there is no area of triangle
00:31:12.840
...still this area here because.
00:31:18.780
This represents the lost benefit from reducing consumption and
00:31:23.970
if it's a vertical demand curve there is no reduction...consumption.
00:31:28.430
This important to recognize though because it's often the case you think about how much does this
00:31:32.660
tax hurt me you think about how much my consuming and how much...the tax higher of
00:31:37.270
the price higher because of the tax and that's what it is...you're leaving out this and that could be,
00:31:41.970
you know, over the economy can be huge amount of money and make-or-break
00:31:48.360
whether prop policies worthwhile?
00:31:50.220
Supply curve.
00:31:55.080
We're going to do essentially the same thing on the supply side but instead of talking
00:31:59.710
about benefits to the consumer...going to talk about cost.
00:32:00.550
To the supplier.
00:32:04.470
...exact flipped.
00:32:08.860
The buyers you're buying things because it provides the benefits and the question is how much
00:32:12.850
you're willing to pay for those benefits the supplier supplying things
00:32:18.830
...it cost them money to provide.
00:32:24.130
Now on the supply side the same thing goes we've got the market supply curve and
00:32:29.040
every firm that is supplying in the market has its own supply curve how much that
00:32:33.930
form would supply given the price for the good so the market supply curve is
00:32:38.520
simply the some the aggregation of all these individuals bikers we want to look at
00:32:44.030
each individual firm...to go below the market look at the individual firms do that we
00:32:48.770
look at marginal cost it's the flip of marginal
00:32:54.210
willingness to pay how much does it cost the firm to produce the good
00:32:58.950
so the cost is concept you obviously understand is how much does it cost the firm to produce
00:33:03.830
the good marginal is given that you're already producing giving that the
00:33:07.300
firms already producing a certain quantity how much does it cost to
00:33:11.640
produce one more unit so we're still talking about marginal changing
00:33:17.330
and one unit which the change in cost associated with one extra unit so suppose
00:33:23.030
the firm is providing a million long-distance calls?
00:33:27.300
And, ask the question if I increase to a million plus one how much would
00:33:35.790
my cosco up and the...say a dollar why does the firms cosco up at all.
00:33:37.970
It might be actually.
00:33:41.390
You will have situations you can examine where it won't go up
00:33:46.200
at all the marginal cost could be zero the per the film has built so much
00:33:51.180
capacity that adding more extra call as cost anything.
00:33:55.720
But, generally there's going to be something that has to increase if...going to provide
00:33:57.720
...call back in the days where we put
00:34:01.800
calls through wires you have to make bigger wires
00:34:05.240
...more aggregation phones so to make one extra call
00:34:09.900
after you've aggregated correctly the million calls you have to make it
00:34:13.990
a little bigger and for cellphones it's even the
00:34:19.050
case that making allowing more called the company has to buy more frequency to be able to
00:34:22.290
...and frequencies not cheap so,
00:34:26.040
generally there's going to be a cost associated with providing one extra
00:34:31.320
unit of the good and then you can ask the same question as the firm increases
00:34:32.920
their units of production.
00:34:38.980
At each put what is the cost of making one extra call of providing want your
00:34:42.910
calls they've got two million three million I've written it so that there is
00:34:43.410
increasing.
00:34:48.260
It need not be just as we don't have a law of upward sloping
00:34:53.810
supply mimics the downward sloping demand it need not be increasing
00:34:58.700
but it usually is for most production processes and there is a way
00:35:02.120
in which you can argue that it always is eventually.
00:35:05.780
That eventually marginal cost will rise.
00:35:11.780
As you produce more and more of...good it might be so eventually that irrelevant to whatever
00:35:15.800
you're analyzing so that for the purposes of at hand you might think marginal cost
00:35:20.010
...but eventually we start running out of resources
00:35:24.940
there's something that is going to be a constraint on further production and to be able to
00:35:29.790
produce more and more you run-up against constraints and the cost...for example,
00:35:33.000
with frequency you just run out of frequency there's,
00:35:36.700
there's going to be some point with wires you run out of copper or their
00:35:41.230
...to be a shortage of...and if nothing else
00:35:44.480
this always occurs with firms the...of the firm gets the more in
00:35:49.630
efficient it is a producing things because there's like layers of management so
00:35:53.810
...costs rise simply from being too large.
00:35:59.040
So, eventually...I would argue that marginal cost always starts
00:36:03.940
to rise eventually now when it starts to rise can be very relevant as we'll
00:36:07.750
see on whether fuhrman's up market ends up being competitive monopolistic or
00:36:13.800
whatever but today I'm just going to let it go up holding
00:36:17.810
...to concept...could be flat for...ways.
00:36:23.670
We chart these in the same way we charted the marginal willingness to pay five units
00:36:26.090
in this quantity here and price
00:36:32.710
in that direction combining all those gives us the marginal cost curve.
00:36:33.990
And, lo and behold.
00:36:44.370
The marginal cost curve is the supply curve for the individual firm.
00:36:49.180
Suppose the price where a dollar twenty.
00:36:51.100
The firm could sell as much as it wanted-to
00:36:54.880
...price of a got dollar twenty negotiation that's what the prices.
00:37:00.910
Of what...the form...the...start out producing very little and say okay well should I produce
00:37:04.310
extra unit the answer's yes the cost...producing
00:37:09.020
...units less than I can sell it for so I'll make a profit by the difference
00:37:14.140
so yes I should so the next unit then ask well how about another one after I've already done that one
00:37:19.080
...the form just steps through the process producing more and more units delegates
00:37:23.540
to two million or whatever the units where you're at that point
00:37:28.280
the extra cost of one extra unit is actually equal to the price so the firm just
00:37:32.990
breaks even doesn't make any money on it and let's just say provides that he or she
00:37:37.990
provides a after that...firm does not go any further because if the firm
00:37:42.890
went further they'd be saying all the marginal cost exceeds the price of the
00:37:46.700
good if I produce that extra unit I'm going to be losing money.
00:37:51.760
On it I'd be better off not producing it.
00:37:53.200
The...we'll start out with a
00:37:56.050
low level of output and continue on out until.
00:38:00.530
They're output their marginal cost is equal to the price.
00:38:04.240
So, you can look at this curve.
00:38:07.830
In either of two ways in the same way you did the demand curve.
00:38:12.030
The traditional supply curve concept is at a given price what is the
00:38:17.570
...supply in this case going to be two million units or you can look at it
00:38:23.340
...a given quantity what is the marginal cost of the firm to produce one extra
00:38:28.090
and those are two equivalent pieces of information that in
00:38:40.550
different context can be different usefully.
00:38:46.480
...actually having your in your book I think.
00:38:50.860
Situations where...marginal cost curve goes down.
00:38:54.700
And, then starts up it could go down and be flatter
00:38:59.530
long ways and then go up all I'm arguing...that eventually goes up and the
00:39:06.190
important thing about that I think your book will have an area where it goes down and starts up.
00:39:09.620
When marginal cost is going down?
00:39:14.140
You never need to consider that part of the demand curve...that part of marginal cost
00:39:15.240
curve.
00:39:18.760
Because if the...finding it profitable to produce one
00:39:24.030
point they will always find...to produce one more.
00:39:26.380
So, the firm will if it produces at all
00:39:31.050
what always ride through the downward sloping part and the question
00:39:35.950
is how far up the upward sloping part they'll go so the only relevant
00:39:46.440
question is on the upward sloping part good very important point.
00:39:51.910
Okay.
00:39:55.740
Another price you have the higher quantity or at
00:40:03.610
four million consumed produced marginal cost is two dollars.
00:40:07.990
So, that's what I've already said.
00:40:12.850
profits of the firm can be shown on this graph at least
00:40:17.670
...operating profits.
00:40:19.130
Recall of the producer surplus.
00:40:23.970
could also call it the operating profits of the firm.
00:40:28.990
I want to convince you that this area below the price above the
00:40:33.260
marginal cost curve is the profits that the firm makes independent of his
00:40:38.120
...of operation the first unit it has to pay this amount to produce it
00:40:41.260
...for that amount so the differences the price
00:40:45.600
second unit has it pays this amount to produce it that's what gets
00:40:50.470
is price you just some that all up and this is what get as the total
00:40:55.510
profit the firm makes from producing those units so the
00:41:00.750
on producer surplus is the area above the marginal cost and
00:41:05.730
below price the only caviar on this is that often usually
00:41:10.050
the cost money for the firm to set-up business before they can even produce the
00:41:14.360
first unit of so this and this doesn't this graph
00:41:17.560
...all marginal doesn't account for those
00:41:20.890
...show them so the profits of the
00:41:25.430
firm total profits of the firm is actually this area minus
00:41:30.620
whatever costly were to set up the operation now that doesn't really matter to
00:41:34.960
as much in our most of our analyses because usually were only
00:41:42.170
looking at changes in profit in which case...there no matter what.
00:41:47.850
The change in profit for the firm if the price goes down from pone
00:41:51.890
This-is their profit before the price change
00:41:56.180
this area minus fixed-cost this is the profit at the lower-price so
00:42:00.480
they're getting less profit minus fixed-cost the difference is
00:42:04.950
the loss to the firm in operating profits or in total
00:42:09.610
profits actually notice that the fixed-cost is here
00:42:13.140
...subtracted off originally...subtracted off at the
00:42:17.350
new price so it nets out it doesn't matter.
00:42:22.230
So, the fact that this area here is operating profits
00:42:26.100
and yet this difference is the change in total profits
00:42:31.530
and those statements are consistent with each other.
00:42:35.570
That's a five is supposed to be...thank you that's
00:42:43.060
a typo god knows how I got there the marginal cost is equal to the supply curve.
00:42:46.810
Now one thing you should be asking yourself it's nice to have
00:42:50.680
this symmetry we've got the demand curve is
00:42:54.510
martian willingness to pay supply curve is marginal cost...got the area under the
00:42:59.260
demand curve above prices consumer surplus area above marginal cost
00:43:04.770
blow price is the operating profits of the firm there's one seeming
00:43:12.140
lack of symmetry on these two sides.
00:43:17.040
Notice that the producer surplus is this area here.
00:43:20.630
Minus the fixed-cost.
00:43:20.920
Whereas
00:43:25.640
when we're talking about consumer surplus we didn't have anything like that we
00:43:32.920
didn't have a area under the demand curve plus or minus something.
00:43:37.150
In reality we do and I simply neglected say it because
00:43:38.390
it's confusion that
00:43:43.390
is totally irrelevant but I like it for the purpose of symmetry.
00:43:47.960
The area under the supply curve under the demand curve tells you the
00:43:53.650
benefits you received from this good you add that up over all goods the
00:43:56.430
persons consuming that's their total benefits but.
00:44:01.960
We get happiness just from being alive.
00:44:09.340
Independent of consumption and that some amount that's a fixed amount.
00:44:14.300
in a sense...predict your consumer surplus is the area
00:44:18.090
under the demand curve plus some unknown constant.
00:44:20.380
In the same way that
00:44:25.140
this is the profits of the firm or the area above the marginal cost
00:44:37.110
curve minus some constant so it actually is totally symmetric.
00:44:43.120
It could be it's...it's...
00:44:47.480
If you don't consume anything you really unhappy job.
00:44:51.550
Not clear how do we even interpret that constable from a mathematical perspective it's
00:44:56.660
...the...of integration.
00:45:03.180
Now I want to use these things always liked you know.
00:45:08.850
Show you how to look at things and show you why matters or an example of how it matters I
00:45:13.710
want to show you now is using these tools that we've described I'm going to show very
00:45:14.210
fundamental
00:45:19.740
...namely that.
00:45:27.840
Catches necessarily.
00:45:30.700
The tax revenue that the government games which
00:45:34.450
is the gained from the tax is necessarily less.
00:45:38.300
Than the laws to consumers and producers from the
00:45:41.920
tax this-is irish darling and fundamental
00:45:47.420
issue consumers and producers lose more.
00:45:54.460
From the placing on of attacks...the government gains in revenue.
00:45:58.780
This is like a primakov posse case that you shouldn't do taxes.
00:46:00.560
Unless you have a good really good reason and
00:46:05.470
we'll discuss those reasons later but the first step is to recognize placing attacks on
00:46:10.450
a market necessarily hurts the economy as a whole in terms
00:46:16.850
of the benefits being less than the cost.
00:46:19.110
How do we show this with our graphs
00:46:24.980
...exceedingly easy at this point you should be able to do-it-yourself you could probably already...
00:46:27.910
Suppose we have a market without attacks
00:46:30.150
that has equilibrium pone.
00:46:32.210
And, replaces excise tax and
00:46:37.260
the price goes to ptwo I'm not going to draw the extra supply curve just because I don't want too much going
00:46:39.880
on this graph new prices appear ptwo.
00:46:46.430
What is the gain to the government what does the government get as revenue?
00:46:49.380
The government gets revenue the level of
00:46:53.510
the tax times the quantity that's being sold.
00:46:58.080
At the new price after the taxes been levied.
00:47:01.440
So, here's the quantity that was being sold originally after
00:47:05.310
the taxes placed the supply curves shifts up by the full
00:47:09.010
amount of attacks you get a new equilibrium at a new price with
00:47:13.380
a smaller quantity that's being produced d government gets.
00:47:15.090
This difference this is the amount of
00:47:18.860
...that's the map of the supply curve ships up you can imagine
00:47:23.840
a new supply curve going through your that's the amount of attacks per unit times whatever
00:47:30.270
units are being sold at this new price so it's this big rectangle there.
00:47:32.700
That's the gained that's the gain
00:47:39.520
to the government in terms of extra revenue that they get to spend.
00:47:40.390
Now the parties that
00:47:44.000
lose from this are the consumers and producers.
00:47:48.310
How much to the consumers...
00:47:53.280
Consumers lose the area to the left of the demand curve between the two prices the original price the
00:47:56.700
new prices that purple areas...shown.
00:47:59.110
And, consumer ends producers lose.
00:48:04.940
The area to the left of the supply curve.
00:48:09.980
Between the original price.
00:48:14.980
the new price that they can...that the supplier is now receiving this is the new
00:48:19.810
price that is in the market you take tax out of it because the government get some this
00:48:24.610
is the price that the from receives so from the first perspective they've
00:48:30.280
had a diminution in price from here to here this...difference in price is the
00:48:34.910
...burden of the tax and this area right here the kind of
00:48:38.040
buffer area is there...
00:48:40.280
In monetary terms.
00:48:43.670
If you put them all together that's the total loss
00:48:47.320
consumers and producers combined compare that with the gain.
00:48:53.840
To the government this is the total loss here this is the...
00:48:58.450
to the government as you can see the total laws.
00:49:02.040
Exceeds the...to the government.
00:49:08.370
Hang on a...close to the our but I want to finish this.
00:49:10.100
Area right here.
00:49:12.460
Is the amount by which?
00:49:15.580
The...to consumers and producers exceeds the
00:49:20.170
...to the government that's called just by tradition deadweight loss.
00:49:25.390
It's I don't know where that term ever came up but it's important to recognize that it's a
00:49:26.250
Again,
00:49:31.030
that is not ever transactors it's not money that changes hands.
00:49:33.380
In anyway hang on.
00:49:36.850
What happens is since consumption moves back from
00:49:40.420
...was consumers lose?
00:49:42.770
By consuming less of the good.
00:49:46.690
They are now not getting the benefits of the units that they would have consumed
00:49:52.270
otherwise and producers you're losing because they're selling less of the good and not
00:49:57.090
making profit on those goods they could've sold...the original price so both of those
00:50:00.990
parties are losing relative to what could have been.
00:50:05.560
And, that's the amount that the revenue is less than the
00:50:11.350
pain of the tax hang on one last question for you then why do we
00:50:18.120
tracks?
00:50:22.360
Well, the answer is.
00:50:26.780
If the tax revenue we're going to be used only to provide one dollar of
00:50:31.690
benefit for each dollar of tax revenue the government's going to spend to do
00:50:36.540
something with it if there's only one dollar of benefit obtain from every dollar
00:50:41.110
of tax revenue that was stent then you would never want to
00:50:46.830
place attacks however the government should be spending its money in the same way
00:50:49.830
the firms do spinning the money in a way
00:50:54.770
that provides more benefit more than a dollar's worth of benefit for a dollar's
00:50:58.820
worth of expenditure education is a great example there's
00:51:04.050
far more benefit per dollar spent on education than the dollar.
00:51:07.270
So, if you can prove that the tax you're planning to
00:51:12.260
levine the revenues from it we're going to be spent in a way that generates
00:51:16.760
enough extra benefit that's outside of this graph how the government's going to
00:51:20.810
...the money to over compensate for this then the taxes
00:51:24.990
a good idea but if you think the government only going to get one dollar
00:51:28.650
...from one dollar of tax or maybe if you think they're even going
00:51:33.700
to get less you should be opposed to any tax.
00:51:36.370
Thank you see you next time.