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Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:03.00,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.47,0:00:12.17,Default,,0000,0000,0000,,- [Alex Tabarrok] Now that \Nwe understand a firm's cos tcurves,
Dialogue: 0,0:00:12.17,0:00:13.87,Default,,0000,0000,0000,,and its entry and exit decisions,
Dialogue: 0,0:00:13.87,0:00:17.26,Default,,0000,0000,0000,,we're able to show how \Nsupply curves are actually
Dialogue: 0,0:00:17.26,0:00:20.74,Default,,0000,0000,0000,,derived from these more \Nfundamental considerations.
Dialogue: 0,0:00:21.18,0:00:22.62,Default,,0000,0000,0000,,Let's take a closer look.
Dialogue: 0,0:00:27.90,0:00:31.89,Default,,0000,0000,0000,,The supply curve is built upon \Nfirm entry and exit decisions
Dialogue: 0,0:00:31.89,0:00:35.44,Default,,0000,0000,0000,,and the effect of these decisions \Non industry costs.
Dialogue: 0,0:00:35.44,0:00:39.51,Default,,0000,0000,0000,,And the key question is this, \Nas industry output increases,
Dialogue: 0,0:00:39.51,0:00:41.94,Default,,0000,0000,0000,,what happens to costs?
Dialogue: 0,0:00:41.94,0:00:45.55,Default,,0000,0000,0000,,There are three possibilities.\NFirst, an increase in cost industry.
Dialogue: 0,0:00:45.55,0:00:49.46,Default,,0000,0000,0000,,That is industry costs increase \Nwith greater output.
Dialogue: 0,0:00:49.46,0:00:51.85,Default,,0000,0000,0000,,Second, constant cost industry.
Dialogue: 0,0:00:51.85,0:00:53.10,Default,,0000,0000,0000,,Industry costs are flat, \N
Dialogue: 0,0:00:53.10,0:00:56.51,Default,,0000,0000,0000,,they don't change \Nwith greater or lesser output.
Dialogue: 0,0:00:56.51,0:00:59.09,Default,,0000,0000,0000,,And finally a decreasing \Ncost industry,
Dialogue: 0,0:00:59.09,0:01:01.74,Default,,0000,0000,0000,,industry cost falls \Nwith greater output.
Dialogue: 0,0:01:01.74,0:01:04.40,Default,,0000,0000,0000,,As we'll see, the first and second \Nare quite common,
Dialogue: 0,0:01:04.40,0:01:06.26,Default,,0000,0000,0000,,the third is quite uncommon,
Dialogue: 0,0:01:06.26,0:01:09.30,Default,,0000,0000,0000,,but is nevertheless important \Nand interesting
Dialogue: 0,0:01:09.30,0:01:11.44,Default,,0000,0000,0000,,in order to understand \Neconomic geography,
Dialogue: 0,0:01:11.44,0:01:13.23,Default,,0000,0000,0000,,which we'll come to a bit later.
Dialogue: 0,0:01:13.23,0:01:14.37,Default,,0000,0000,0000,,Let's show how the industry \N
Dialogue: 0,0:01:14.37,0:01:17.59,Default,,0000,0000,0000,,supply curve is derived \Nfrom the entry and exit
Dialogue: 0,0:01:17.59,0:01:20.39,Default,,0000,0000,0000,,and cost curves \Nof individual firms.
Dialogue: 0,0:01:20.39,0:01:23.40,Default,,0000,0000,0000,,We can do this for an increase \Nin cost industry very easily
Dialogue: 0,0:01:23.40,0:01:25.39,Default,,0000,0000,0000,,with just a two firm example.
Dialogue: 0,0:01:25.39,0:01:28.33,Default,,0000,0000,0000,,Suppose that Firm one\Nis a producer of oil,
Dialogue: 0,0:01:28.33,0:01:30.31,Default,,0000,0000,0000,,where its oil is very \Nclose to the surface,
Dialogue: 0,0:01:30.31,0:01:33.25,Default,,0000,0000,0000,,so it has a quite \Nlow average cost curve.
Dialogue: 0,0:01:33.25,0:01:35.82,Default,,0000,0000,0000,,It's pretty cheap \Nfor this firm to produce oil.
Dialogue: 0,0:01:35.82,0:01:40.07,Default,,0000,0000,0000,,On the other hand, Firm two has \Na much higher average cost curve
Dialogue: 0,0:01:40.07,0:01:43.32,Default,,0000,0000,0000,,because for Firm two is located \Nin a part of the world
Dialogue: 0,0:01:43.32,0:01:47.21,Default,,0000,0000,0000,,where it has to drill much deeper \Nin order to get the oil.
Dialogue: 0,0:01:48.09,0:01:49.93,Default,,0000,0000,0000,,Now, given these figures
Dialogue: 0,0:01:49.93,0:01:53.33,Default,,0000,0000,0000,,what's the industry \Nsupply curve of oil
Dialogue: 0,0:01:53.33,0:01:57.24,Default,,0000,0000,0000,,if the price of oil is below $17?
Dialogue: 0,0:01:58.68,0:02:01.70,Default,,0000,0000,0000,,Well, if the price of oil \Nis below $17,
Dialogue: 0,0:02:01.70,0:02:04.84,Default,,0000,0000,0000,,neither of these firms \Ncan make a profit.
Dialogue: 0,0:02:04.84,0:02:07.10,Default,,0000,0000,0000,,That's below the minimum point \Nof the average cost curve
Dialogue: 0,0:02:07.10,0:02:08.94,Default,,0000,0000,0000,,for both of these firms.
Dialogue: 0,0:02:08.94,0:02:09.98,Default,,0000,0000,0000,,So neither of these firms
Dialogue: 0,0:02:09.98,0:02:11.92,Default,,0000,0000,0000,,is going to want \Nto be in the industry.
Dialogue: 0,0:02:11.92,0:02:14.86,Default,,0000,0000,0000,,So if the price of oil \Nis below $17,
Dialogue: 0,0:02:14.86,0:02:19.56,Default,,0000,0000,0000,,the industry supply is just \Ngoing to be zero, right here, zero.
Dialogue: 0,0:02:20.30,0:02:23.49,Default,,0000,0000,0000,,Now what happens at $17?
Dialogue: 0,0:02:23.49,0:02:27.53,Default,,0000,0000,0000,,Well at $17, Firm one just breaks even.
Dialogue: 0,0:02:27.53,0:02:30.89,Default,,0000,0000,0000,,So we'll say Firm one \Nwill just enter the industry.
Dialogue: 0,0:02:30.89,0:02:35.19,Default,,0000,0000,0000,,So at $17, the industry output\Nis the same as
Dialogue: 0,0:02:35.19,0:02:38.82,Default,,0000,0000,0000,,the output of Firm one,\Nnamely four units.
Dialogue: 0,0:02:39.13,0:02:43.16,Default,,0000,0000,0000,,Notice that at $17, Firm two \Ndoesn't enter the industry
Dialogue: 0,0:02:43.16,0:02:46.42,Default,,0000,0000,0000,,because the price is still too low.
Dialogue: 0,0:02:46.42,0:02:48.52,Default,,0000,0000,0000,,Firm two is not going \Nto make a profit,
Dialogue: 0,0:02:48.52,0:02:50.95,Default,,0000,0000,0000,,will take a loss at that price.
Dialogue: 0,0:02:50.95,0:02:54.43,Default,,0000,0000,0000,,Indeed as the price of oil \Nincreases,
Dialogue: 0,0:02:54.43,0:02:59.59,Default,,0000,0000,0000,,the output from Firm two \Nwill increase as it moves along
Dialogue: 0,0:02:59.59,0:03:01.61,Default,,0000,0000,0000,,its marginal cost curve.
Dialogue: 0,0:03:01.61,0:03:05.46,Default,,0000,0000,0000,,That will continue to happen\Nso industry output will increase
Dialogue: 0,0:03:05.46,0:03:07.42,Default,,0000,0000,0000,,along with the output of Firm one
Dialogue: 0,0:03:07.42,0:03:10.61,Default,,0000,0000,0000,,until we reach a price of $29.
Dialogue: 0,0:03:10.61,0:03:13.00,Default,,0000,0000,0000,,At the price of $29,
Dialogue: 0,0:03:13.00,0:03:16.53,Default,,0000,0000,0000,,Firm two just breaks even \Nand it enters the industry.
Dialogue: 0,0:03:16.53,0:03:22.07,Default,,0000,0000,0000,,So at $29, total industry output \Nis six units from Firm one
Dialogue: 0,0:03:22.07,0:03:24.71,Default,,0000,0000,0000,,and five units from Firm two
Dialogue: 0,0:03:24.71,0:03:28.64,Default,,0000,0000,0000,,for a total of 11 units \Nfrom the industry.
Dialogue: 0,0:03:29.52,0:03:34.95,Default,,0000,0000,0000,,As the price goes above $29 \Nboth Firm one and Firm two
Dialogue: 0,0:03:34.95,0:03:37.40,Default,,0000,0000,0000,,expand along \Ntheir marginal cost curves
Dialogue: 0,0:03:37.40,0:03:39.81,Default,,0000,0000,0000,,so the industry output is then
Dialogue: 0,0:03:39.81,0:03:43.74,Default,,0000,0000,0000,,the sum of the output \Nfrom both firms.
Dialogue: 0,0:03:43.74,0:03:49.78,Default,,0000,0000,0000,,So what we see here \Nis that the industry supply curve
Dialogue: 0,0:03:49.78,0:03:51.58,Default,,0000,0000,0000,,is upward sloping \N
Dialogue: 0,0:03:51.58,0:03:56.82,Default,,0000,0000,0000,,because the cost curves \Nof these firms are different.
Dialogue: 0,0:03:56.82,0:04:01.39,Default,,0000,0000,0000,,Because in order to attract \Nmore firms into this industry,
Dialogue: 0,0:04:01.39,0:04:06.11,Default,,0000,0000,0000,,the only way we can do that \Nis by attracting higher cost firms.
Dialogue: 0,0:04:06.11,0:04:10.72,Default,,0000,0000,0000,,So the industry supply curve \Nis upward sloping.
Dialogue: 0,0:04:11.93,0:04:15.02,Default,,0000,0000,0000,,Any industry where \Nit's difficult to exactly duplicate
Dialogue: 0,0:04:15.02,0:04:18.78,Default,,0000,0000,0000,,the productive inputs is going \Nto be an increase in cost industry.
Dialogue: 0,0:04:18.78,0:04:22.49,Default,,0000,0000,0000,,I've already mentioned oil, \Nbut copper, gold, silver,
Dialogue: 0,0:04:22.49,0:04:24.94,Default,,0000,0000,0000,,all the mining industries\Nare very similar.
Dialogue: 0,0:04:24.94,0:04:27.59,Default,,0000,0000,0000,,We can't just duplicate \Nanother gold mine.
Dialogue: 0,0:04:27.59,0:04:29.71,Default,,0000,0000,0000,,If we want another gold mine \Nwe're going to have to dig deeper,
Dialogue: 0,0:04:29.71,0:04:30.95,Default,,0000,0000,0000,,we're going to have \Nto look elsewhere,
Dialogue: 0,0:04:30.95,0:04:34.42,Default,,0000,0000,0000,,it's going to be more expensive \Nto produce it than it is now.
Dialogue: 0,0:04:34.42,0:04:36.97,Default,,0000,0000,0000,,Coffee is another example,\Nbecause there's really only
Dialogue: 0,0:04:36.97,0:04:38.99,Default,,0000,0000,0000,,a limited number \Nof places in the world
Dialogue: 0,0:04:38.99,0:04:41.31,Default,,0000,0000,0000,,where we could produce \Ngreat coffee.
Dialogue: 0,0:04:41.31,0:04:44.91,Default,,0000,0000,0000,,If we want coffee from other places\Nthan Brazil or Guatemala,
Dialogue: 0,0:04:44.91,0:04:46.57,Default,,0000,0000,0000,,it's going to be lower quality.
Dialogue: 0,0:04:46.57,0:04:49.79,Default,,0000,0000,0000,,We're going to have to go\Ndown further on the mountain.
Dialogue: 0,0:04:49.79,0:04:52.36,Default,,0000,0000,0000,,It's going to require more inputs.
Dialogue: 0,0:04:52.36,0:04:53.84,Default,,0000,0000,0000,,Nuclear engineers --
Dialogue: 0,0:04:53.84,0:04:56.66,Default,,0000,0000,0000,,very hard to expand \Nthe supply of nuclear engineers.
Dialogue: 0,0:04:56.66,0:05:00.24,Default,,0000,0000,0000,,There's a limited number of people \Nwho can be a nuclear engineer.
Dialogue: 0,0:05:00.24,0:05:03.13,Default,,0000,0000,0000,,If we want more nuclear engineers,\Nwe're really going to have
Dialogue: 0,0:05:03.13,0:05:05.65,Default,,0000,0000,0000,,to pull them from other industries \N
Dialogue: 0,0:05:05.65,0:05:07.92,Default,,0000,0000,0000,,where they have \Nvery high opportunity cost.
Dialogue: 0,0:05:07.92,0:05:11.48,Default,,0000,0000,0000,,So it's hard to expand the supply \Nof nuclear engineers
Dialogue: 0,0:05:11.48,0:05:15.53,Default,,0000,0000,0000,,without pushing up the wages \Nof nuclear engineers.
Dialogue: 0,0:05:15.53,0:05:17.53,Default,,0000,0000,0000,,That's an increasing cost industry.\N
Dialogue: 0,0:05:18.20,0:05:23.60,Default,,0000,0000,0000,,Moreover, any industry that buys \Na large fraction of the output
Dialogue: 0,0:05:23.60,0:05:25.66,Default,,0000,0000,0000,,of an increasing cost industry \N
Dialogue: 0,0:05:25.66,0:05:28.65,Default,,0000,0000,0000,,will also be an increasing \Ncost industry.
Dialogue: 0,0:05:28.65,0:05:32.75,Default,,0000,0000,0000,,So pretty obviously gasoline \Nis an increasing cost industry
Dialogue: 0,0:05:32.75,0:05:37.04,Default,,0000,0000,0000,,because if we want more gasoline \Nthat requires more oil,
Dialogue: 0,0:05:37.04,0:05:40.37,Default,,0000,0000,0000,,and oil is an increasing \Ncost industry.
Dialogue: 0,0:05:40.37,0:05:43.63,Default,,0000,0000,0000,,Electricity will primarily be \Nan increasing cost industry
Dialogue: 0,0:05:43.63,0:05:47.22,Default,,0000,0000,0000,,to the extent that we generate \Nour electricity from coal.
Dialogue: 0,0:05:47.22,0:05:50.57,Default,,0000,0000,0000,,So if we want a lot more electricity \Nwe're going to require more coal
Dialogue: 0,0:05:50.57,0:05:53.02,Default,,0000,0000,0000,,and that's going to push \Nthe price of coal up,
Dialogue: 0,0:05:53.02,0:05:56.64,Default,,0000,0000,0000,,which is going to push the cost \Nof producing electricity up.
Dialogue: 0,0:05:57.56,0:06:01.16,Default,,0000,0000,0000,,So what we just showed is that \Nfor an increasing cost industry,
Dialogue: 0,0:06:01.16,0:06:04.90,Default,,0000,0000,0000,,you can derive a upward sloped \Nsupply curve.
Dialogue: 0,0:06:04.90,0:06:06.92,Default,,0000,0000,0000,,We're now going to do a constant \Ncost industry
Dialogue: 0,0:06:06.92,0:06:09.89,Default,,0000,0000,0000,,for which we'll show you actually \Nget a flat supply curve,
Dialogue: 0,0:06:09.89,0:06:12.26,Default,,0000,0000,0000,,and then a decreasing cost industry,
Dialogue: 0,0:06:12.26,0:06:13.63,Default,,0000,0000,0000,,which as you might expect, \N
Dialogue: 0,0:06:13.63,0:06:16.60,Default,,0000,0000,0000,,will give you now a \Ndownward-sloped supply curve.
Dialogue: 0,0:06:16.60,0:06:19.10,Default,,0000,0000,0000,,We'll do these in separate lectures.\NThanks.
Dialogue: 0,0:06:20.10,0:06:21.55,Default,,0000,0000,0000,,- [Announcer] If you want to test yourself,\N
Dialogue: 0,0:06:21.55,0:06:23.01,Default,,0000,0000,0000,,click, "Practice Questions,"
Dialogue: 0,0:06:24.00,0:06:27.43,Default,,0000,0000,0000,,or if you're ready to move on,\Njust click, "Next Video."
Dialogue: 0,0:06:27.43,0:06:30.40,Default,,0000,0000,0000,,♪ [music] ♪