[Script Info]
Title: 
[Events]
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: 0,0:00:09.17,0:00:11.01,Default,,0000,0000,0000,,- [Alex] Now that we know \Nhow to find the profit
Dialogue: 0,0:00:11.01,0:00:14.01,Default,,0000,0000,0000,,maximization point, \Nwe're going to show
Dialogue: 0,0:00:14.01,0:00:18.81,Default,,0000,0000,0000,,the amount of profit on the diagram \Nusing the average cost curve.
Dialogue: 0,0:00:23.96,0:00:25.59,Default,,0000,0000,0000,,So as I said in the last lecture,
Dialogue: 0,0:00:25.59,0:00:28.09,Default,,0000,0000,0000,,average cost is the cost \Nper unit of output.
Dialogue: 0,0:00:28.09,0:00:32.78,Default,,0000,0000,0000,,That is, average cost is\Ntotal cost divided by Q.
Dialogue: 0,0:00:32.78,0:00:36.11,Default,,0000,0000,0000,,Now remember also \Nthat total cost can be broken down
Dialogue: 0,0:00:36.11,0:00:39.02,Default,,0000,0000,0000,,into fixed costs plus \Nvariable costs.
Dialogue: 0,0:00:39.02,0:00:42.55,Default,,0000,0000,0000,,So we can also write average cost\Nin a slightly longer format.
Dialogue: 0,0:00:42.55,0:00:45.77,Default,,0000,0000,0000,,Average cost is equal \Nto fixed cost divided by Q
Dialogue: 0,0:00:45.77,0:00:50.23,Default,,0000,0000,0000,,plus the variable cost divided \Nby Q, the units of output.
Dialogue: 0,0:00:50.23,0:00:53.79,Default,,0000,0000,0000,,That's a little bit useful \Nbecause we're able to see,
Dialogue: 0,0:00:53.79,0:00:57.66,Default,,0000,0000,0000,,get some intuition, for the shape \Nof a typical average cost curve.
Dialogue: 0,0:00:57.66,0:01:02.46,Default,,0000,0000,0000,,Notice that the fixed costs \Ndon't change with Q.
Dialogue: 0,0:01:02.46,0:01:04.08,Default,,0000,0000,0000,,That's why they're fixed.
Dialogue: 0,0:01:04.08,0:01:07.33,Default,,0000,0000,0000,,So when Q is small -- this number,
Dialogue: 0,0:01:07.33,0:01:09.26,Default,,0000,0000,0000,,suppose fixed cost is 100,
Dialogue: 0,0:01:09.26,0:01:11.98,Default,,0000,0000,0000,,and Q is small -- then this number \Nis going to be big
Dialogue: 0,0:01:11.98,0:01:14.70,Default,,0000,0000,0000,,like 100 divided by 1.
Dialogue: 0,0:01:14.70,0:01:18.26,Default,,0000,0000,0000,,As Q gets larger, however,\Nthis number --
Dialogue: 0,0:01:18.26,0:01:20.85,Default,,0000,0000,0000,,fixed cost divided by Q -- \Nis going to get smaller,
Dialogue: 0,0:01:20.85,0:01:25.63,Default,,0000,0000,0000,,So when Q is 10, this number \N100 divided by 10 becomes 10.
Dialogue: 0,0:01:25.63,0:01:29.22,Default,,0000,0000,0000,,So it goes from 100,\Nand it goes down, down, down, down,
Dialogue: 0,0:01:29.22,0:01:31.89,Default,,0000,0000,0000,,get's lower and lower and lower\Nall the time as you divide
Dialogue: 0,0:01:31.89,0:01:33.37,Default,,0000,0000,0000,,by a bigger quantity.
Dialogue: 0,0:01:33.37,0:01:38.41,Default,,0000,0000,0000,,On the other hand, the variable \Ncosts increase with quantity.
Dialogue: 0,0:01:38.41,0:01:41.76,Default,,0000,0000,0000,,Moreover, what we saw \Nwith the marginal cost curve
Dialogue: 0,0:01:41.76,0:01:44.87,Default,,0000,0000,0000,,is that at some point,\Nyour variable costs are going
Dialogue: 0,0:01:44.87,0:01:47.32,Default,,0000,0000,0000,,to increase faster than quantity.
Dialogue: 0,0:01:47.32,0:01:50.49,Default,,0000,0000,0000,,So what's going to happen is \Nthat this number at some point --
Dialogue: 0,0:01:50.49,0:01:52.95,Default,,0000,0000,0000,,variable cost divided by quantity --\Nis going to get bigger
Dialogue: 0,0:01:52.95,0:01:54.34,Default,,0000,0000,0000,,and bigger and bigger.
Dialogue: 0,0:01:54.34,0:01:59.52,Default,,0000,0000,0000,,So you have two things, one force \Nis driving average cost down.
Dialogue: 0,0:01:59.52,0:02:03.14,Default,,0000,0000,0000,,That's going to be particularly \Nstrong at the beginning.
Dialogue: 0,0:02:03.14,0:02:06.77,Default,,0000,0000,0000,,Eventually, however, \Nthe second force here is going
Dialogue: 0,0:02:06.77,0:02:09.30,Default,,0000,0000,0000,,to drive average cost up.
Dialogue: 0,0:02:09.30,0:02:12.34,Default,,0000,0000,0000,,So that's going to be our typical \Nshape of an average cost curve --
Dialogue: 0,0:02:12.34,0:02:14.75,Default,,0000,0000,0000,,falling, reaches a minimum,\Nand then rising.
Dialogue: 0,0:02:14.75,0:02:16.56,Default,,0000,0000,0000,,So let's draw it like that.
Dialogue: 0,0:02:16.56,0:02:19.03,Default,,0000,0000,0000,,Okay, here's our typical\Nmarginal cost curve,
Dialogue: 0,0:02:19.03,0:02:22.77,Default,,0000,0000,0000,,and here is our marginal \Nrevenue curve, equal to price.
Dialogue: 0,0:02:22.77,0:02:26.39,Default,,0000,0000,0000,,We know that the profit maximizing \Npoint is where marginal revenue
Dialogue: 0,0:02:26.39,0:02:28.19,Default,,0000,0000,0000,,is equal to marginal cost.
Dialogue: 0,0:02:28.19,0:02:31.90,Default,,0000,0000,0000,,Here is our average cost curve \Nand notice it has the shape
Dialogue: 0,0:02:31.90,0:02:35.01,Default,,0000,0000,0000,,which I described --\Nit starts off high, it falls,
Dialogue: 0,0:02:35.01,0:02:37.89,Default,,0000,0000,0000,,reaches a minimum, \Nand then goes right back up again.
Dialogue: 0,0:02:37.89,0:02:42.77,Default,,0000,0000,0000,,Couple of other points to notice\Nis that the minimum point,
Dialogue: 0,0:02:42.77,0:02:46.34,Default,,0000,0000,0000,,the marginal cost curve goes \Nthrough the minimum point
Dialogue: 0,0:02:46.34,0:02:48.40,Default,,0000,0000,0000,,of the average cost curve.
Dialogue: 0,0:02:48.40,0:02:52.53,Default,,0000,0000,0000,,Now that's just a mathematical fact, \Nbut let me give you some intuition.
Dialogue: 0,0:02:52.53,0:02:57.11,Default,,0000,0000,0000,,Instead of cost I want \Nto talk about average grade
Dialogue: 0,0:02:57.11,0:02:58.11,Default,,0000,0000,0000,,and marginal grade.
Dialogue: 0,0:02:58.11,0:03:00.11,Default,,0000,0000,0000,,So suppose that your \Naverage grade is 80%.
Dialogue: 0,0:03:00.11,0:03:05.64,Default,,0000,0000,0000,,You're doing really pretty good,\Nbut then on your next test
Dialogue: 0,0:03:05.82,0:03:08.60,Default,,0000,0000,0000,,you only get 60% -- lower.
Dialogue: 0,0:03:08.60,0:03:09.60,Default,,0000,0000,0000,,What is that going to do \Nto your average?
Dialogue: 0,0:03:09.60,0:03:11.60,Default,,0000,0000,0000,,Well, it's going to drive \Nyour average down.
Dialogue: 0,0:03:11.60,0:03:18.64,Default,,0000,0000,0000,,Indeed whenever your marginal \Nis below your average,
Dialogue: 0,0:03:18.82,0:03:21.91,Default,,0000,0000,0000,,the average must be falling.
Dialogue: 0,0:03:21.91,0:03:24.91,Default,,0000,0000,0000,,On the other hand, suppose \Nthat you're getting 80%,
Dialogue: 0,0:03:24.91,0:03:25.91,Default,,0000,0000,0000,,and on your next test you get 90%.
Dialogue: 0,0:03:25.91,0:03:28.78,Default,,0000,0000,0000,,Great, but what does \Nthat do to your average?
Dialogue: 0,0:03:28.78,0:03:30.78,Default,,0000,0000,0000,,It drives your average up.
Dialogue: 0,0:03:30.78,0:03:36.71,Default,,0000,0000,0000,,Indeed whenever your marginal\Nis above the average,
Dialogue: 0,0:03:36.89,0:03:39.52,Default,,0000,0000,0000,,the average must be rising.
Dialogue: 0,0:03:39.52,0:03:40.52,Default,,0000,0000,0000,,Now suppose what happens \Nwhen you're getting let's say 80%,
Dialogue: 0,0:03:40.52,0:03:42.52,Default,,0000,0000,0000,,and on your next test,\Nyou also get 80%.
Dialogue: 0,0:03:42.52,0:03:49.63,Default,,0000,0000,0000,,Well then your marginal is equal \Nto your average grade,
Dialogue: 0,0:03:49.81,0:03:55.70,Default,,0000,0000,0000,,and your average grade is flat -- \Nit doesn't change, it's flat.
Dialogue: 0,0:03:55.88,0:03:58.42,Default,,0000,0000,0000,,But what is true for average \Nand marginal grades is also true
Dialogue: 0,0:03:58.42,0:04:01.42,Default,,0000,0000,0000,,for average cost and marginal cost.
Dialogue: 0,0:04:01.42,0:04:06.36,Default,,0000,0000,0000,,Whenever the marginal cost is \Nbelow the average,
Dialogue: 0,0:04:06.36,0:04:09.36,Default,,0000,0000,0000,,the average is falling.
Dialogue: 0,0:04:09.36,0:04:10.36,Default,,0000,0000,0000,,Whenever the marginal cost is \Nabove the average,
Dialogue: 0,0:04:10.36,0:04:12.27,Default,,0000,0000,0000,,the average is rising.
Dialogue: 0,0:04:12.27,0:04:15.27,Default,,0000,0000,0000,,And where marginal is \Njust equal to average,
Dialogue: 0,0:04:15.27,0:04:18.39,Default,,0000,0000,0000,,the average is flat.
Dialogue: 0,0:04:18.39,0:04:21.39,Default,,0000,0000,0000,,In other words, we are \Nat the minimum point
Dialogue: 0,0:04:21.39,0:04:23.78,Default,,0000,0000,0000,,of the average cost curve.
Dialogue: 0,0:04:23.78,0:04:26.78,Default,,0000,0000,0000,,Okay, now I said we could use \Nthe average cost curve
Dialogue: 0,0:04:26.78,0:04:27.98,Default,,0000,0000,0000,,to figure out profit -- \Nshow profit on the diagram.
Dialogue: 0,0:04:27.98,0:04:30.98,Default,,0000,0000,0000,,We can do that with just \Na little bit of rearranging.
Dialogue: 0,0:04:30.98,0:04:36.40,Default,,0000,0000,0000,,Remember that profit is equal \Nto total revenue minus total cost
Dialogue: 0,0:04:36.58,0:04:41.72,Default,,0000,0000,0000,,and total revenue is \Nprice times quantity -- P times Q.
Dialogue: 0,0:04:41.90,0:04:44.01,Default,,0000,0000,0000,,We also know \Nthat average cost is equal
Dialogue: 0,0:04:44.01,0:04:47.01,Default,,0000,0000,0000,,to total cost divided by quantity.
Dialogue: 0,0:04:47.01,0:04:49.07,Default,,0000,0000,0000,,Let's just rearrange that \Nto tell us that total cost is equal
Dialogue: 0,0:04:49.07,0:04:52.07,Default,,0000,0000,0000,,to average cost times quantity.
Dialogue: 0,0:04:52.07,0:04:55.60,Default,,0000,0000,0000,,So just take this one \Nand multiply both sides by Q.
Dialogue: 0,0:04:55.60,0:04:58.60,Default,,0000,0000,0000,,Let's now make these substitutions \Ninto our profit equation.
Dialogue: 0,0:04:58.60,0:05:04.28,Default,,0000,0000,0000,,If we do that, then profit is equal \Nto total revenue --
Dialogue: 0,0:05:04.28,0:05:05.28,Default,,0000,0000,0000,,price times quantity --\Nminus total cost --
Dialogue: 0,0:05:05.28,0:05:07.73,Default,,0000,0000,0000,,average cost times quantity.
Dialogue: 0,0:05:07.73,0:05:10.73,Default,,0000,0000,0000,,Now let's take Q out \Nof both parts of this equation,
Dialogue: 0,0:05:10.73,0:05:16.52,Default,,0000,0000,0000,,and we find that profit \Ncan also be written as price
Dialogue: 0,0:05:16.70,0:05:19.99,Default,,0000,0000,0000,,minus average cost, \Nall of that times quantity.
Dialogue: 0,0:05:19.99,0:05:22.99,Default,,0000,0000,0000,,That's nice because we can find
Dialogue: 0,0:05:22.99,0:05:27.75,Default,,0000,0000,0000,,all of these elements \Non our diagram.
Dialogue: 0,0:05:27.75,0:05:30.75,Default,,0000,0000,0000,,Here's the price.
Dialogue: 0,0:05:30.75,0:05:33.60,Default,,0000,0000,0000,,Here's the average cost\Nat the profit maximizing quantity.
Dialogue: 0,0:05:33.60,0:05:36.60,Default,,0000,0000,0000,,Let's just show that. \NThere's the price.
Dialogue: 0,0:05:36.60,0:05:42.19,Default,,0000,0000,0000,,There's the average cost \Nat the profit maximizing quantity.
Dialogue: 0,0:05:42.37,0:05:45.29,Default,,0000,0000,0000,,So profit at the profit \Nmaximizing quantity is
Dialogue: 0,0:05:45.29,0:05:48.29,Default,,0000,0000,0000,,this green area right here --
Dialogue: 0,0:05:48.29,0:05:51.29,Default,,0000,0000,0000,,price minus average cost \Ntimes quantity.
Dialogue: 0,0:05:51.29,0:05:56.26,Default,,0000,0000,0000,,So now we have a nice way \Nof showing in a diagram
Dialogue: 0,0:05:56.44,0:05:59.27,Default,,0000,0000,0000,,exactly how much profit is.
Dialogue: 0,0:05:59.27,0:06:00.27,Default,,0000,0000,0000,,Let's use this tool some more.
Dialogue: 0,0:06:00.27,0:06:02.27,Default,,0000,0000,0000,,Here's another example \Nof the average cost curve in action.
Dialogue: 0,0:06:02.27,0:06:06.71,Default,,0000,0000,0000,,Remember, I said that profit \Nmaximization doesn't necessarily
Dialogue: 0,0:06:06.89,0:06:08.63,Default,,0000,0000,0000,,mean the firm is making \Na positive profit.
Dialogue: 0,0:06:08.63,0:06:11.63,Default,,0000,0000,0000,,Sometimes the best you can do \Nis to minimize your losses.
Dialogue: 0,0:06:11.63,0:06:16.63,Default,,0000,0000,0000,,You may have to take a loss.
Dialogue: 0,0:06:16.81,0:06:19.90,Default,,0000,0000,0000,,For example, suppose \Nthat the price is below $17.
Dialogue: 0,0:06:19.90,0:06:22.90,Default,,0000,0000,0000,,That is, here's the market price, \Nwhich is equal to the firm's
Dialogue: 0,0:06:22.90,0:06:24.93,Default,,0000,0000,0000,,marginal revenue curve.
Dialogue: 0,0:06:24.93,0:06:25.93,Default,,0000,0000,0000,,How does the firm profit maximize?
Dialogue: 0,0:06:25.93,0:06:27.93,Default,,0000,0000,0000,,It chooses the quantity \Nwhere marginal revenue is
Dialogue: 0,0:06:27.93,0:06:30.57,Default,,0000,0000,0000,,equal to marginal cost.
Dialogue: 0,0:06:30.57,0:06:33.57,Default,,0000,0000,0000,,In that case, this quantity is one.
Dialogue: 0,0:06:33.57,0:06:37.18,Default,,0000,0000,0000,,Now what's the profit \Nfor the firm?
Dialogue: 0,0:06:37.18,0:06:40.18,Default,,0000,0000,0000,,Well, as usual we measure \Nprofit as price minus
Dialogue: 0,0:06:40.18,0:06:45.09,Default,,0000,0000,0000,,average cost times quantity.
Dialogue: 0,0:06:45.09,0:06:48.09,Default,,0000,0000,0000,,But notice that price is \Nbelow the average cost
Dialogue: 0,0:06:48.09,0:06:54.98,Default,,0000,0000,0000,,at the profit maximizing \Nquantity of one.
Dialogue: 0,0:06:55.16,0:06:58.10,Default,,0000,0000,0000,,Since price is below average cost, \Nthis is a loss.
Dialogue: 0,0:06:58.10,0:07:01.10,Default,,0000,0000,0000,,It's a negative quantity.
Dialogue: 0,0:07:01.10,0:07:04.10,Default,,0000,0000,0000,,It is a loss. In fact, notice \Nthat the breakeven price is $17,
Dialogue: 0,0:07:04.10,0:07:10.68,Default,,0000,0000,0000,,which is the minimum \Nof the average cost curve.
Dialogue: 0,0:07:10.86,0:07:15.10,Default,,0000,0000,0000,,In order to make a profit, \Nthe firm at least has to meet
Dialogue: 0,0:07:15.10,0:07:18.10,Default,,0000,0000,0000,,the minimum of its \Naverage cost curve.
Dialogue: 0,0:07:18.10,0:07:20.44,Default,,0000,0000,0000,,So at any price below $17,\Nwe'll be profit maximizing
Dialogue: 0,0:07:20.44,0:07:23.44,Default,,0000,0000,0000,,at a point where price is equal\Nto marginal cost,
Dialogue: 0,0:07:23.44,0:07:29.05,Default,,0000,0000,0000,,and notice that all of these \Nprices are below average cost.
Dialogue: 0,0:07:29.23,0:07:32.55,Default,,0000,0000,0000,,So all of this area down here,
Dialogue: 0,0:07:32.55,0:07:35.55,Default,,0000,0000,0000,,even the profit maximizing \Nquantity, will mean a loss.
Dialogue: 0,0:07:35.55,0:07:39.12,Default,,0000,0000,0000,,On the other hand, once we get \Nabove $17, above the minimum
Dialogue: 0,0:07:39.12,0:07:42.12,Default,,0000,0000,0000,,of the average cost curve, then we \Ncan price equal to marginal cost.
Dialogue: 0,0:07:42.12,0:07:47.60,Default,,0000,0000,0000,,We can chose the quantities such \Nthe price is equal to marginal cost.
Dialogue: 0,0:07:47.78,0:07:52.64,Default,,0000,0000,0000,,That price will be above average \Ncost, so we'll be taking a profit.
Dialogue: 0,0:07:52.82,0:08:00.36,Default,,0000,0000,0000,,Therefore, $17, the minimum\Nof the average cost curve,
Dialogue: 0,0:08:00.54,0:08:01.54,Default,,0000,0000,0000,,is the breakeven point.
Dialogue: 0,0:08:01.54,0:08:02.54,Default,,0000,0000,0000,,If the price is less \Nthan the minimum
Dialogue: 0,0:08:02.54,0:08:04.37,Default,,0000,0000,0000,,of the average cost curve, \Nwe're going to be taking a loss.
Dialogue: 0,0:08:04.37,0:08:08.97,Default,,0000,0000,0000,,If the price is bigger \Nthan the minimum
Dialogue: 0,0:08:09.15,0:08:13.49,Default,,0000,0000,0000,,of the average cost curve, \Nthen we can make a profit.
Dialogue: 0,0:08:13.67,0:08:16.55,Default,,0000,0000,0000,,So when should a firm enter \Nor exit an industry?
Dialogue: 0,0:08:16.55,0:08:19.55,Default,,0000,0000,0000,,In the long run, the firms will \Nenter when price
Dialogue: 0,0:08:19.55,0:08:21.04,Default,,0000,0000,0000,,is above average cost.
Dialogue: 0,0:08:21.04,0:08:24.04,Default,,0000,0000,0000,,If price is somewhere \Nabove the average cost curve
Dialogue: 0,0:08:24.04,0:08:25.04,Default,,0000,0000,0000,,then the firm can make \Na profit by entering
Dialogue: 0,0:08:25.04,0:08:28.03,Default,,0000,0000,0000,,and that's what firms want to do.
Dialogue: 0,0:08:28.03,0:08:29.03,Default,,0000,0000,0000,,They want to find profit, \Nso they will want to enter
Dialogue: 0,0:08:29.03,0:08:31.52,Default,,0000,0000,0000,,wherever a profit is possible.
Dialogue: 0,0:08:31.52,0:08:33.77,Default,,0000,0000,0000,,Firms will exit the industry \Nwhen the price is below
Dialogue: 0,0:08:33.77,0:08:36.77,Default,,0000,0000,0000,,the average cost curve.
Dialogue: 0,0:08:36.77,0:08:38.64,Default,,0000,0000,0000,,Then they're going \Nto be taking a loss,
Dialogue: 0,0:08:38.64,0:08:41.64,Default,,0000,0000,0000,,and they're going to want to exit.
Dialogue: 0,0:08:41.64,0:08:42.90,Default,,0000,0000,0000,,Finally, when the price is \Nequal to the minimum
Dialogue: 0,0:08:42.90,0:08:45.90,Default,,0000,0000,0000,,of the average cost --\Nit's just equal to the bottom
Dialogue: 0,0:08:45.90,0:08:50.69,Default,,0000,0000,0000,,of the average cost curve, \Nprofits are zero,
Dialogue: 0,0:08:50.87,0:08:52.87,Default,,0000,0000,0000,,and there's no incentive \Nto either exit or enter the industry.
Dialogue: 0,0:08:52.87,0:08:55.87,Default,,0000,0000,0000,,Now you might ask, why would\Nfirms remain in an industry
Dialogue: 0,0:08:55.87,0:08:59.56,Default,,0000,0000,0000,,if profits are zero?
Dialogue: 0,0:08:59.56,0:09:02.56,Default,,0000,0000,0000,,Zero profits, this is just \Na matter of terminology,
Dialogue: 0,0:09:02.56,0:09:07.37,Default,,0000,0000,0000,,means that at the market price \Nthe firm is covering all of its costs
Dialogue: 0,0:09:07.55,0:09:10.59,Default,,0000,0000,0000,,including enough \Nto pay labor and capital,
Dialogue: 0,0:09:10.59,0:09:13.59,Default,,0000,0000,0000,,their ordinary opportunity cost.
Dialogue: 0,0:09:13.59,0:09:18.22,Default,,0000,0000,0000,,So zero profits means everyone\Nis being paid enough
Dialogue: 0,0:09:18.40,0:09:21.69,Default,,0000,0000,0000,,to make them satisfied.
Dialogue: 0,0:09:21.69,0:09:24.69,Default,,0000,0000,0000,,Zero profits, in other words,\Nis what normal people mean
Dialogue: 0,0:09:24.69,0:09:27.56,Default,,0000,0000,0000,,by normal profits.
Dialogue: 0,0:09:27.56,0:09:28.56,Default,,0000,0000,0000,,So when an economist \Nsays zero profits
Dialogue: 0,0:09:28.56,0:09:30.56,Default,,0000,0000,0000,,just substitute normal profits.
Dialogue: 0,0:09:30.56,0:09:32.22,Default,,0000,0000,0000,,One more point \Nabout entry and exit. \N
Dialogue: 0,0:09:32.22,0:09:35.22,Default,,0000,0000,0000,,It doesn't always make sense \Nto exit an industry immediately
Dialogue: 0,0:09:35.22,0:09:40.89,Default,,0000,0000,0000,,when price falls \Nbelow average cost.
Dialogue: 0,0:09:41.07,0:09:45.50,Default,,0000,0000,0000,,Or to enter immediately \Nwhen price is above average cost.
Dialogue: 0,0:09:45.50,0:09:48.50,Default,,0000,0000,0000,,Why not? Well, there are \Nalso entry and exit costs.
Dialogue: 0,0:09:48.50,0:09:53.40,Default,,0000,0000,0000,,For example, suppose that that the price\Nof oil is currently above the average cost
Dialogue: 0,0:09:53.58,0:09:59.26,Default,,0000,0000,0000,,of pumping oil, if you've already got a\Nwell. Should you enter the industry? Well,
Dialogue: 0,0:09:59.44,0:10:05.25,Default,,0000,0000,0000,,maybe not necessarily. Because entry\Nrequires you to drill an oil well, and
Dialogue: 0,0:10:05.43,0:10:08.98,Default,,0000,0000,0000,,drilling an oil well is a sunk cost -\Nliterally in this case.
Dialogue: 0,0:10:09.16,0:10:15.78,Default,,0000,0000,0000,,A sunk cost is a cost that once incurred\Ncan never be recovered. So if you enter
Dialogue: 0,0:10:15.96,0:10:20.69,Default,,0000,0000,0000,,the industry and drill the oil well, you\Ndon't get that money back when you later
Dialogue: 0,0:10:20.87,0:10:28.16,Default,,0000,0000,0000,,exit the industry. What this means is you\Ndon't want to enter unless you expect the
Dialogue: 0,0:10:28.34,0:10:35.86,Default,,0000,0000,0000,,price of oil to stay above the minimum of\Nthe average cost curve long enough so
Dialogue: 0,0:10:36.04,0:10:41.68,Default,,0000,0000,0000,,that you can also recover your entry\Ncosts. So just because the price goes
Dialogue: 0,0:10:41.86,0:10:45.77,Default,,0000,0000,0000,,above the average cost a little bit, you\Ndon't immediately want to jump into that
Dialogue: 0,0:10:45.95,0:10:52.12,Default,,0000,0000,0000,,industry. You have to expect that that\Nprice is going to stay above average cost
Dialogue: 0,0:10:52.30,0:10:58.90,Default,,0000,0000,0000,,long enough for you to recover your entry\Ncosts. For the same reasons, if there are
Dialogue: 0,0:10:59.08,0:11:03.48,Default,,0000,0000,0000,,exit costs, for example, if you have to\Nshutter up the well or fill the well with
Dialogue: 0,0:11:03.66,0:11:07.85,Default,,0000,0000,0000,,cement when you exit the industry as you\Ndo in the United States, then when price
Dialogue: 0,0:11:08.03,0:11:13.46,Default,,0000,0000,0000,,falls below average cost, it may be best to\Nweather the storm at least for sometime
Dialogue: 0,0:11:13.64,0:11:21.06,Default,,0000,0000,0000,,before you exit. Only if you expect the\Nprice of oil to stay below your minimum of
Dialogue: 0,0:11:21.24,0:11:26.55,Default,,0000,0000,0000,,average cost for an extended period of\Ntime will you want to exit the industry.
Dialogue: 0,0:11:26.73,0:11:31.67,Default,,0000,0000,0000,,After all, if the price of oil falls below\Nthe average cost just for a little bit, and
Dialogue: 0,0:11:31.85,0:11:37.32,Default,,0000,0000,0000,,then it goes back up, the lifetime\Nprofits can still be possible. So, entry
Dialogue: 0,0:11:37.50,0:11:40.81,Default,,0000,0000,0000,,and exit could be quite complicated\Nbecause you've got to be thinking about
Dialogue: 0,0:11:40.99,0:11:46.94,Default,,0000,0000,0000,,the lifetime profits, not just your\Nimmediate profits. However, the bottom
Dialogue: 0,0:11:46.94,0:11:53.11,Default,,0000,0000,0000,,line is pretty simple. Firms seek profits\Nand they want to avoid losses. As a
Dialogue: 0,0:11:53.11,0:11:57.64,Default,,0000,0000,0000,,result, firms will enter industries when\Nthe price is above the average cost and
Dialogue: 0,0:11:57.64,0:12:02.13,Default,,0000,0000,0000,,they can make a profit, and they will exit\Nwhen the price is below the average cost.
Dialogue: 0,0:12:02.13,0:12:03.89,Default,,0000,0000,0000,,Thanks.
Dialogue: 0,0:12:04.42,0:12:09.41,Default,,0000,0000,0000,,- [Announcer] If you want to test yourself,\Nclick, "Practice Questions," or if you're
Dialogue: 0,0:12:09.59,0:12:12.18,Default,,0000,0000,0000,,ready to move on,\Njust click, "Next Video."
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