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Dialogue: 0,0:00:00.00,0:00:03.00,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.64,0:00:13.63,Default,,0000,0000,0000,,- [Alex Taborrok] In the next \Nset of videos,
Dialogue: 0,0:00:13.81,0:00:17.01,Default,,0000,0000,0000,,we'll be looking at costs \Nand how to describe a firm's costs.
Dialogue: 0,0:00:17.01,0:00:20.01,Default,,0000,0000,0000,,We'll also take a look at how\Na firm maximizes its profit.
Dialogue: 0,0:00:20.01,0:00:21.03,Default,,0000,0000,0000,,In this section, we're looking at
Dialogue: 0,0:00:21.03,0:00:24.03,Default,,0000,0000,0000,,profit maximization \Nunder competition.
Dialogue: 0,0:00:24.03,0:00:25.58,Default,,0000,0000,0000,,In a later section, we'll cover
Dialogue: 0,0:00:25.58,0:00:28.58,Default,,0000,0000,0000,,profit maximization \Nunder monopoly.
Dialogue: 0,0:00:28.58,0:00:35.84,Default,,0000,0000,0000,,Let's get going.
Dialogue: 0,0:00:35.84,0:00:36.84,Default,,0000,0000,0000,,So the key question that \Nwe want to answer is this,
Dialogue: 0,0:00:36.84,0:00:38.84,Default,,0000,0000,0000,,"How do firms behave?"
Dialogue: 0,0:00:38.84,0:00:40.13,Default,,0000,0000,0000,,And a guiding assumption is \Ngoing to be that
Dialogue: 0,0:00:40.13,0:00:43.13,Default,,0000,0000,0000,,profit is the main motivation \Nfor a firm's actions.
Dialogue: 0,0:00:43.13,0:00:49.03,Default,,0000,0000,0000,,Now this is not literally 100% true.
Dialogue: 0,0:00:49.21,0:00:51.45,Default,,0000,0000,0000,,Nevertheless, for most firms, \Nmost of the time,
Dialogue: 0,0:00:51.45,0:00:54.45,Default,,0000,0000,0000,,profit is going to be \Na key motivator.
Dialogue: 0,0:00:54.45,0:00:57.58,Default,,0000,0000,0000,,For firms with a lot of competitors,\Ncompetition alone is going
Dialogue: 0,0:00:57.58,0:01:00.58,Default,,0000,0000,0000,,to compel them to maximize profit
Dialogue: 0,0:01:00.58,0:01:01.68,Default,,0000,0000,0000,,because firms with \Na lot of competitors
Dialogue: 0,0:01:01.68,0:01:04.68,Default,,0000,0000,0000,,that don't maximize profit, \N
Dialogue: 0,0:01:04.68,0:01:06.51,Default,,0000,0000,0000,,they're going to be \Nout of business pretty quickly.
Dialogue: 0,0:01:06.51,0:01:09.51,Default,,0000,0000,0000,,For firms with more market power \Nor monopoly power --
Dialogue: 0,0:01:09.51,0:01:11.26,Default,,0000,0000,0000,,they're not compelled \Nto maximize profit.
Dialogue: 0,0:01:11.26,0:01:14.26,Default,,0000,0000,0000,,Nevertheless, the owners \Nare still going to want profit.
Dialogue: 0,0:01:14.26,0:01:16.11,Default,,0000,0000,0000,,Who doesn't like profit?
Dialogue: 0,0:01:16.11,0:01:19.11,Default,,0000,0000,0000,,So for most firms, \Nmost of the time,
Dialogue: 0,0:01:19.11,0:01:22.93,Default,,0000,0000,0000,,this is going to be \Na good assumption.
Dialogue: 0,0:01:22.93,0:01:25.93,Default,,0000,0000,0000,,The key question then becomes, how?\NHow do firms maximize profit?
Dialogue: 0,0:01:25.93,0:01:31.19,Default,,0000,0000,0000,,And the basic answer is\Nby choosing price and quantity.
Dialogue: 0,0:01:31.37,0:01:35.82,Default,,0000,0000,0000,,By choosing what price is set \Nand what quantity to set.
Dialogue: 0,0:01:36.00,0:01:40.06,Default,,0000,0000,0000,,Now some firms have more control \Nover their price than others.
Dialogue: 0,0:01:40.24,0:01:44.42,Default,,0000,0000,0000,,In the next chapter, we're going \Nto be looking at a monopoly,
Dialogue: 0,0:01:44.42,0:01:47.42,Default,,0000,0000,0000,,which can choose price and quantity\Nwith some restrictions.
Dialogue: 0,0:01:47.42,0:01:51.60,Default,,0000,0000,0000,,In this chapter, we're going \Nto be looking at a competitive firm,
Dialogue: 0,0:01:51.78,0:01:54.51,Default,,0000,0000,0000,,which takes prices as given --
Dialogue: 0,0:01:54.51,0:01:57.51,Default,,0000,0000,0000,,it doesn't have much control \Nover its price --
Dialogue: 0,0:01:57.51,0:01:58.88,Default,,0000,0000,0000,,we'll explain why in a moment, \Nand it chooses quantities.
Dialogue: 0,0:01:58.88,0:02:01.88,Default,,0000,0000,0000,,So for a competitive firm, \N
Dialogue: 0,0:02:01.88,0:02:03.21,Default,,0000,0000,0000,,quantity is going to be \Nthe key choice
Dialogue: 0,0:02:03.21,0:02:06.21,Default,,0000,0000,0000,,which determines how much profit \Nthe firm makes.
Dialogue: 0,0:02:06.21,0:02:09.72,Default,,0000,0000,0000,,So we're focusing in this chapter \Non one type of firm,
Dialogue: 0,0:02:09.90,0:02:11.19,Default,,0000,0000,0000,,the competitive firm, \Nthe firm in a competitive market.
Dialogue: 0,0:02:11.19,0:02:14.19,Default,,0000,0000,0000,,Now what are the characteristics \Nof this firm and market?
Dialogue: 0,0:02:14.19,0:02:16.04,Default,,0000,0000,0000,,Well, the product that \Nthe firm sells
Dialogue: 0,0:02:16.04,0:02:19.04,Default,,0000,0000,0000,,is similar across \Nmany different sellers.
Dialogue: 0,0:02:19.04,0:02:25.05,Default,,0000,0000,0000,,So think about \Nthis stripper oil well.
Dialogue: 0,0:02:25.23,0:02:27.21,Default,,0000,0000,0000,,This small oil well, \Nit produces oil,
Dialogue: 0,0:02:27.21,0:02:28.21,Default,,0000,0000,0000,,which is pretty much the same
Dialogue: 0,0:02:28.21,0:02:30.21,Default,,0000,0000,0000,,as the oil produced \Nby the well next door,
Dialogue: 0,0:02:30.21,0:02:31.99,Default,,0000,0000,0000,,which is pretty much the same
Dialogue: 0,0:02:31.99,0:02:34.99,Default,,0000,0000,0000,,as the oil produced \Nby a well in Saudi Arabia,
Dialogue: 0,0:02:34.99,0:02:35.99,Default,,0000,0000,0000,,which is pretty much the same \Nas the oil produced from Mexico
Dialogue: 0,0:02:35.99,0:02:38.90,Default,,0000,0000,0000,,or from the North Sea and so forth.
Dialogue: 0,0:02:38.90,0:02:43.53,Default,,0000,0000,0000,,Oil is pretty much the same\Nacross all over the world.
Dialogue: 0,0:02:43.53,0:02:49.24,Default,,0000,0000,0000,,Or think about wheat, or soy beans,\Nor steel, or concrete, or paper.
Dialogue: 0,0:02:49.24,0:02:51.35,Default,,0000,0000,0000,,All of these are \Ncompetitive markets --
Dialogue: 0,0:02:51.35,0:02:54.35,Default,,0000,0000,0000,,the product is similar \Nacross sellers.
Dialogue: 0,0:02:54.35,0:02:55.67,Default,,0000,0000,0000,,In addition, in all \Nof these markets
Dialogue: 0,0:02:55.67,0:02:58.67,Default,,0000,0000,0000,,there are many buyers and sellers
Dialogue: 0,0:02:58.67,0:03:00.59,Default,,0000,0000,0000,,and they're each small relative \Nto the total market.
Dialogue: 0,0:03:00.59,0:03:04.79,Default,,0000,0000,0000,,So this stripper oil well produces\Nonly a small fraction
Dialogue: 0,0:03:04.79,0:03:08.92,Default,,0000,0000,0000,,of the world's \Ntotal production of oil.
Dialogue: 0,0:03:08.92,0:03:11.92,Default,,0000,0000,0000,,A wheat farm, any given wheat farm
Dialogue: 0,0:03:11.92,0:03:17.53,Default,,0000,0000,0000,,produces only a small fraction \Nof the total production of wheat.
Dialogue: 0,0:03:17.53,0:03:20.88,Default,,0000,0000,0000,,Alternatively, we may have the case
Dialogue: 0,0:03:20.88,0:03:23.88,Default,,0000,0000,0000,,where there are \Nmany potential sellers.
Dialogue: 0,0:03:23.88,0:03:25.15,Default,,0000,0000,0000,,So even if a firm, a grocery store \Nin a small town,
Dialogue: 0,0:03:25.15,0:03:28.15,Default,,0000,0000,0000,,is the only grocery store \Nin the small town,
Dialogue: 0,0:03:28.15,0:03:30.49,Default,,0000,0000,0000,,it's still in a competitive market,
Dialogue: 0,0:03:30.49,0:03:33.49,Default,,0000,0000,0000,,because if it were \Nto raise its price,
Dialogue: 0,0:03:33.49,0:03:35.18,Default,,0000,0000,0000,,there are many potential sellers
Dialogue: 0,0:03:35.18,0:03:36.18,Default,,0000,0000,0000,,who in the long run \Ncould sell in that same town.
Dialogue: 0,0:03:36.18,0:03:38.18,Default,,0000,0000,0000,,So that's a competitive firm.
Dialogue: 0,0:03:38.18,0:03:41.65,Default,,0000,0000,0000,,It's producing a product \Nwhich is similar across sellers,
Dialogue: 0,0:03:41.83,0:03:43.07,Default,,0000,0000,0000,,there are many buyers and sellers,
Dialogue: 0,0:03:43.07,0:03:46.07,Default,,0000,0000,0000,,each small relative \Nto the total market,
Dialogue: 0,0:03:46.07,0:03:47.66,Default,,0000,0000,0000,,or there are \Nmany potential sellers.
Dialogue: 0,0:03:47.66,0:03:50.66,Default,,0000,0000,0000,,So let's suppose you own one of\Nthose stripper oil wells
Dialogue: 0,0:03:50.66,0:03:52.90,Default,,0000,0000,0000,,I showed in the previous slide.
Dialogue: 0,0:03:52.90,0:03:55.90,Default,,0000,0000,0000,,What price are you going to set?
Dialogue: 0,0:03:55.90,0:03:58.95,Default,,0000,0000,0000,,Well, fortunately your problem \Nis going to be really easy
Dialogue: 0,0:03:58.95,0:03:59.95,Default,,0000,0000,0000,,because a firm \Nin a competitive market
Dialogue: 0,0:03:59.95,0:04:01.95,Default,,0000,0000,0000,,has no control over its price.
Dialogue: 0,0:04:01.95,0:04:07.23,Default,,0000,0000,0000,,The market determines \Neach firm's price.
Dialogue: 0,0:04:07.41,0:04:08.41,Default,,0000,0000,0000,,So let's take a look at \Nthe market for oil,
Dialogue: 0,0:04:08.41,0:04:11.25,Default,,0000,0000,0000,,and suppose that the world demand \Nand supply
Dialogue: 0,0:04:11.25,0:04:15.45,Default,,0000,0000,0000,,are such that quantity \Ndemanded is equal
Dialogue: 0,0:04:15.63,0:04:20.53,Default,,0000,0000,0000,,to quantity supplied\Nat a price of $52,
Dialogue: 0,0:04:20.53,0:04:23.53,Default,,0000,0000,0000,,at which point 82 million barrels \Nof oil a day are bought and sold.
Dialogue: 0,0:04:23.53,0:04:27.02,Default,,0000,0000,0000,,Now let's think about \Nthe demand for your oil.
Dialogue: 0,0:04:27.02,0:04:30.02,Default,,0000,0000,0000,,The oil produce \Nby your stripper oil well.
Dialogue: 0,0:04:30.02,0:04:33.83,Default,,0000,0000,0000,,The demand for your oil \N
Dialogue: 0,0:04:33.83,0:04:36.83,Default,,0000,0000,0000,,is going to be perfectly elastic \Nat the market price.
Dialogue: 0,0:04:36.83,0:04:38.70,Default,,0000,0000,0000,,Now what does that mean?
Dialogue: 0,0:04:38.70,0:04:41.70,Default,,0000,0000,0000,,What that means is suppose that \Nyou tried to sell your oil
Dialogue: 0,0:04:41.70,0:04:45.32,Default,,0000,0000,0000,,at a price above the market price,
Dialogue: 0,0:04:45.32,0:04:46.32,Default,,0000,0000,0000,,let's say $55 per barrel.
Dialogue: 0,0:04:46.32,0:04:48.32,Default,,0000,0000,0000,,Are you going to sell any oil?\NNo!
Dialogue: 0,0:04:48.32,0:04:56.59,Default,,0000,0000,0000,,Not even your mother thinks that\Nthe oil from your well
Dialogue: 0,0:04:56.77,0:05:02.49,Default,,0000,0000,0000,,is so special that she would be \Nwilling to pay more for it.
Dialogue: 0,0:05:02.67,0:05:05.38,Default,,0000,0000,0000,,She can get oil which is identical \Nor virtually identical
Dialogue: 0,0:05:05.38,0:05:06.38,Default,,0000,0000,0000,,at a price of $50 per barrel,
Dialogue: 0,0:05:06.38,0:05:08.38,Default,,0000,0000,0000,,so she's unlikely \Nto be want to pay $55.
Dialogue: 0,0:05:08.38,0:05:13.91,Default,,0000,0000,0000,,And if your mother won't \Npay extra then nobody will.
Dialogue: 0,0:05:14.09,0:05:17.81,Default,,0000,0000,0000,,So if you try to set a price higher\Nthan the market price,
Dialogue: 0,0:05:17.81,0:05:20.81,Default,,0000,0000,0000,,you're not going to sell \Nany oil at all, zero.
Dialogue: 0,0:05:20.81,0:05:25.01,Default,,0000,0000,0000,,Now you can sell as much oil \Nas you want below the market price,
Dialogue: 0,0:05:25.19,0:05:28.51,Default,,0000,0000,0000,,but why would you want to do that?
Dialogue: 0,0:05:28.51,0:05:29.51,Default,,0000,0000,0000,,Because in fact you could sell
Dialogue: 0,0:05:29.51,0:05:31.51,Default,,0000,0000,0000,,all the oil you want \Nat the market price.
Dialogue: 0,0:05:31.51,0:05:37.05,Default,,0000,0000,0000,,Now why can you sell all the oil\Nthat you want at the market price?
Dialogue: 0,0:05:37.23,0:05:41.73,Default,,0000,0000,0000,,Simply because your production,
Dialogue: 0,0:05:41.73,0:05:44.73,Default,,0000,0000,0000,,let's say 10 barrels a day, \Nor 20 or 30,
Dialogue: 0,0:05:44.73,0:05:50.22,Default,,0000,0000,0000,,it's so small relative \Nto the world production \Nof 82 million barrels of oil per day,
Dialogue: 0,0:05:50.40,0:05:54.92,Default,,0000,0000,0000,,that however much you produce from your single\Nwell, that's not going to influence the
Dialogue: 0,0:05:55.10,0:05:59.98,Default,,0000,0000,0000,,price of oil. So you can double, triple\Nyour production, the price of oil is still
Dialogue: 0,0:06:00.16,0:06:08.27,Default,,0000,0000,0000,,going to $50 per barrel.\NSo your only choice, then, to maximize
Dialogue: 0,0:06:08.45,0:06:12.75,Default,,0000,0000,0000,,profit is going to be a choice over\Nquantity. You look at the market price, you
Dialogue: 0,0:06:12.93,0:06:18.11,Default,,0000,0000,0000,,see, "Oh, the price of oil today is $50\Nper barrel," and your decision is going to
Dialogue: 0,0:06:18.29,0:06:23.89,Default,,0000,0000,0000,,be how much do I want to produce at that\Nprice? Do I want to produce 2 barrels,
Dialogue: 0,0:06:24.07,0:06:28.74,Default,,0000,0000,0000,,3 barrels, 4, 10, 20, how\Nmuch? That is going to be your key
Dialogue: 0,0:06:28.92,0:06:34.74,Default,,0000,0000,0000,,question, and that's the key question we'll\Ntake up next time when we also add into
Dialogue: 0,0:06:34.92,0:06:37.37,Default,,0000,0000,0000,,this diagram your costs.
Dialogue: 0,0:06:39.40,0:06:43.38,Default,,0000,0000,0000,,- [Announcer] If you want to test\Nyourself, click "Practice Questions." Or,
Dialogue: 0,0:06:43.56,0:06:46.56,Default,,0000,0000,0000,,if you're ready to move on,\Njust click, "Next Video."
Dialogue: 0,0:06:46.56,0:06:49.50,Default,,0000,0000,0000,,♪ [music] ♪