[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.88,0:00:03.66,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:13.00,0:00:15.94,Default,,0000,0000,0000,,To get a better understanding\Nof how we make choices,
Dialogue: 0,0:00:15.94,0:00:18.87,Default,,0000,0000,0000,,we first need to understand \Nthe elements
Dialogue: 0,0:00:18.87,0:00:20.67,Default,,0000,0000,0000,,that go into making a decision.
Dialogue: 0,0:00:20.67,0:00:23.36,Default,,0000,0000,0000,,And not all of them\Nare within our control.
Dialogue: 0,0:00:23.36,0:00:28.00,Default,,0000,0000,0000,,The world is constantly, \Ninvisibly determining the prices
Dialogue: 0,0:00:28.00,0:00:29.52,Default,,0000,0000,0000,,of goods and services.
Dialogue: 0,0:00:29.65,0:00:32.06,Default,,0000,0000,0000,,Take the price of a cup of coffee.
Dialogue: 0,0:00:32.06,0:00:34.95,Default,,0000,0000,0000,,It depends on so many variables.
Dialogue: 0,0:00:34.95,0:00:39.40,Default,,0000,0000,0000,,Think culture, demographics, \Nthe cost of beans, the weather,
Dialogue: 0,0:00:39.40,0:00:41.14,Default,,0000,0000,0000,,the supply and demand for oil,
Dialogue: 0,0:00:41.14,0:00:44.60,Default,,0000,0000,0000,,even the high rent at your hip \Nneighborhood coffee shop.
Dialogue: 0,0:00:44.82,0:00:46.48,Default,,0000,0000,0000,,You get the idea.
Dialogue: 0,0:00:46.92,0:00:50.16,Default,,0000,0000,0000,,All of this economic activity\Nis magically being simplified
Dialogue: 0,0:00:50.16,0:00:52.89,Default,,0000,0000,0000,,into a price for a cup of coffee.
Dialogue: 0,0:00:52.89,0:00:56.94,Default,,0000,0000,0000,,How about your salary -- the price \Nof one hour of your labor?
Dialogue: 0,0:00:57.20,0:01:01.75,Default,,0000,0000,0000,,It depends on you, of course,\Non your skills and effort,
Dialogue: 0,0:01:01.75,0:01:04.31,Default,,0000,0000,0000,,but it also depends on many factors\Noutside of your control --
Dialogue: 0,0:01:04.31,0:01:08.57,Default,,0000,0000,0000,,for example, \Nthe demand for your services,
Dialogue: 0,0:01:08.57,0:01:12.94,Default,,0000,0000,0000,,nearby competition, \Neven how fun your job is.
Dialogue: 0,0:01:13.25,0:01:18.84,Default,,0000,0000,0000,,Every day you make decision \Nafter decision about what to buy,
Dialogue: 0,0:01:18.84,0:01:22.41,Default,,0000,0000,0000,,comparing hundreds \Nof different goods and services.
Dialogue: 0,0:01:22.41,0:01:25.26,Default,,0000,0000,0000,,There are so many choices.
Dialogue: 0,0:01:25.26,0:01:28.99,Default,,0000,0000,0000,,To simplify things, let's think \Nabout what you would do
Dialogue: 0,0:01:28.99,0:01:33.47,Default,,0000,0000,0000,,if you had a weekly budget of $50\Nto spend on just two goods:
Dialogue: 0,0:01:33.47,0:01:35.36,Default,,0000,0000,0000,,coffee and pizza.
Dialogue: 0,0:01:35.85,0:01:40.65,Default,,0000,0000,0000,,Coffee costs $5,\Nand pizza costs $10.
Dialogue: 0,0:01:40.65,0:01:43.72,Default,,0000,0000,0000,,So pizza is twice \Nas expensive as coffee.
Dialogue: 0,0:01:44.41,0:01:47.74,Default,,0000,0000,0000,,There are several different \Ncombinations of coffee and pizza
Dialogue: 0,0:01:47.74,0:01:49.65,Default,,0000,0000,0000,,you could buy with this money.
Dialogue: 0,0:01:49.65,0:01:52.55,Default,,0000,0000,0000,,Let's plot a few \Nof your options on a graph.
Dialogue: 0,0:01:53.05,0:01:56.97,Default,,0000,0000,0000,,On the x-axis, we have the number\Nof pizzas per week.
Dialogue: 0,0:01:57.01,0:02:00.100,Default,,0000,0000,0000,,And on the y-axis, we have\Nthe cups of coffee per week.
Dialogue: 0,0:02:01.84,0:02:05.16,Default,,0000,0000,0000,,You could buy two cups of coffee\Nand four pizzas,
Dialogue: 0,0:02:05.16,0:02:08.30,Default,,0000,0000,0000,,four cups of coffee \Nand three pizzas,
Dialogue: 0,0:02:08.30,0:02:11.40,Default,,0000,0000,0000,,five pizzas but no coffee,
Dialogue: 0,0:02:11.40,0:02:14.38,Default,,0000,0000,0000,,or 10 cups of coffee but no pizza.
Dialogue: 0,0:02:14.38,0:02:17.78,Default,,0000,0000,0000,,When you connect \Nto different options that represent
Dialogue: 0,0:02:17.78,0:02:22.12,Default,,0000,0000,0000,,the ways you can spend your $50,\Nyou get a straight line.
Dialogue: 0,0:02:22.28,0:02:25.36,Default,,0000,0000,0000,,This is your budget constraint.
Dialogue: 0,0:02:25.60,0:02:29.88,Default,,0000,0000,0000,,And it represents all possible \Ncombinations of coffee and pizza
Dialogue: 0,0:02:29.88,0:02:35.48,Default,,0000,0000,0000,,you can buy, given your budget\Nand the prices of coffee and pizza.
Dialogue: 0,0:02:35.67,0:02:39.20,Default,,0000,0000,0000,,This budget line also separates \Nwhat you can afford
Dialogue: 0,0:02:39.20,0:02:41.85,Default,,0000,0000,0000,,from what you cannot afford.
Dialogue: 0,0:02:42.04,0:02:46.81,Default,,0000,0000,0000,,Maybe you wish you could buy\Ntwo cups of coffee and six pizzas,
Dialogue: 0,0:02:46.81,0:02:49.40,Default,,0000,0000,0000,,or four cups of coffee \Nand 10 pizzas.
Dialogue: 0,0:02:49.40,0:02:52.84,Default,,0000,0000,0000,,But these are not in your budget.
Dialogue: 0,0:02:52.84,0:02:54.01,Default,,0000,0000,0000,,Sorry.
Dialogue: 0,0:02:54.01,0:02:56.97,Default,,0000,0000,0000,,All these different combinations\Ncost more than you have.
Dialogue: 0,0:02:57.12,0:02:59.41,Default,,0000,0000,0000,,So they're unaffordable,
Dialogue: 0,0:02:59.41,0:03:01.40,Default,,0000,0000,0000,,given your budget\Nand the prices of these two goods.
Dialogue: 0,0:03:01.76,0:03:05.11,Default,,0000,0000,0000,,Combinations of coffee and pizza\Nbelow the budget line,
Dialogue: 0,0:03:05.11,0:03:07.91,Default,,0000,0000,0000,,on the other hand, \Nare within your means.
Dialogue: 0,0:03:07.91,0:03:09.42,Default,,0000,0000,0000,,So they're affordable,
Dialogue: 0,0:03:09.43,0:03:11.23,Default,,0000,0000,0000,,and you could buy them\Nif you wanted.
Dialogue: 0,0:03:11.53,0:03:15.21,Default,,0000,0000,0000,,The budget constraint also reflects\Nhow the market substitutes
Dialogue: 0,0:03:15.21,0:03:16.99,Default,,0000,0000,0000,,between the two goods.
Dialogue: 0,0:03:16.99,0:03:21.13,Default,,0000,0000,0000,,Remember, pizzas are twice\Nas expensive as coffee.
Dialogue: 0,0:03:21.13,0:03:23.51,Default,,0000,0000,0000,,And this simply means \Nthat the relative price
Dialogue: 0,0:03:23.51,0:03:27.52,Default,,0000,0000,0000,,of one pizza is two cups of coffee.
Dialogue: 0,0:03:27.52,0:03:30.73,Default,,0000,0000,0000,,You see this on the slope\Nof the budget constraint,
Dialogue: 0,0:03:30.73,0:03:32.32,Default,,0000,0000,0000,,which is 2.
Dialogue: 0,0:03:32.32,0:03:36.07,Default,,0000,0000,0000,,Well, actually it's -2,\Nbut we're less concerned
Dialogue: 0,0:03:36.07,0:03:37.46,Default,,0000,0000,0000,,about the sign.
Dialogue: 0,0:03:37.46,0:03:41.20,Default,,0000,0000,0000,,Although, it does remind us that\Nhaving more of one good requires
Dialogue: 0,0:03:41.20,0:03:44.39,Default,,0000,0000,0000,,giving up some of the other.
Dialogue: 0,0:03:44.55,0:03:49.24,Default,,0000,0000,0000,,When coffee costs $5,\Nand pizzas cost $10,
Dialogue: 0,0:03:49.24,0:03:52.39,Default,,0000,0000,0000,,if you want an additional pizza,
Dialogue: 0,0:03:52.39,0:03:54.58,Default,,0000,0000,0000,,you have to give up\Ntwo cups of coffee.
Dialogue: 0,0:03:54.83,0:03:58.94,Default,,0000,0000,0000,,If this made you think \Nabout opportunity cost,
Dialogue: 0,0:03:58.94,0:04:00.30,Default,,0000,0000,0000,,you're right!
Dialogue: 0,0:04:00.30,0:04:04.77,Default,,0000,0000,0000,,The slope of the budget constraint \Nis the opportunity cost of pizza.
Dialogue: 0,0:04:04.97,0:04:08.65,Default,,0000,0000,0000,,Will this tradeoff change\Nif your budget increases --
Dialogue: 0,0:04:08.65,0:04:12.70,Default,,0000,0000,0000,,say, if you find a $20 bill\Nin the pocket of your winter jacket
Dialogue: 0,0:04:12.70,0:04:16.16,Default,,0000,0000,0000,,and now have $70 to spend\Non these two goods?
Dialogue: 0,0:04:16.48,0:04:20.93,Default,,0000,0000,0000,,No -- the tradeoff is given \Nby the market's prices.
Dialogue: 0,0:04:21.08,0:04:25.44,Default,,0000,0000,0000,,So changes in your income \Ndo not affect
Dialogue: 0,0:04:25.44,0:04:26.70,Default,,0000,0000,0000,,the relative price of goods.
Dialogue: 0,0:04:27.04,0:04:30.10,Default,,0000,0000,0000,,Sure -- you'll be able\Nto afford and choose
Dialogue: 0,0:04:30.10,0:04:34.48,Default,,0000,0000,0000,,between all of the consumption\Ncombinations that total $70.
Dialogue: 0,0:04:34.48,0:04:37.15,Default,,0000,0000,0000,,And you can see how this makes \Nyour budget constraint
Dialogue: 0,0:04:37.15,0:04:38.40,Default,,0000,0000,0000,,shift outward.
Dialogue: 0,0:04:38.46,0:04:42.26,Default,,0000,0000,0000,,But, the two cups of coffee
Dialogue: 0,0:04:42.26,0:04:43.96,Default,,0000,0000,0000,,for one pizza tradeoff\Nremains the same.
Dialogue: 0,0:04:44.19,0:04:47.51,Default,,0000,0000,0000,,And that is because the market\Nstill values these two goods
Dialogue: 0,0:04:47.52,0:04:51.03,Default,,0000,0000,0000,,relative to one another\Njust like it did before.
Dialogue: 0,0:04:51.32,0:04:55.56,Default,,0000,0000,0000,,This tradeoff does change
Dialogue: 0,0:04:55.56,0:04:57.48,Default,,0000,0000,0000,,if the relative price\Nof the two goods changes.
Dialogue: 0,0:04:57.48,0:05:00.24,Default,,0000,0000,0000,,Think of what will happen if,
Dialogue: 0,0:05:00.24,0:05:03.68,Default,,0000,0000,0000,,maybe because\Nof unusually good weather,
Dialogue: 0,0:05:03.68,0:05:05.83,Default,,0000,0000,0000,,the price of coffee falls\Nfrom $5 to $2.50.
Dialogue: 0,0:05:05.94,0:05:09.70,Default,,0000,0000,0000,,Does the market tradeoff \Nremain the same?
Dialogue: 0,0:05:09.98,0:05:11.06,Default,,0000,0000,0000,,No.
Dialogue: 0,0:05:11.06,0:05:15.12,Default,,0000,0000,0000,,Pizza's just became four times \Nmore expensive than coffee.
Dialogue: 0,0:05:15.12,0:05:19.02,Default,,0000,0000,0000,,So you're able to buy\Nfour cups of coffee
Dialogue: 0,0:05:19.02,0:05:20.52,Default,,0000,0000,0000,,when you give up eating one pizza.
Dialogue: 0,0:05:20.77,0:05:25.11,Default,,0000,0000,0000,,This will make your budget \Nconstraint rotate outward.
Dialogue: 0,0:05:25.51,0:05:29.57,Default,,0000,0000,0000,,Notice how because nothing\Nhappened to the price of pizza,
Dialogue: 0,0:05:29.57,0:05:32.100,Default,,0000,0000,0000,,the number of pizzas you can buy
Dialogue: 0,0:05:32.100,0:05:34.70,Default,,0000,0000,0000,,when you don't buy coffee\Nhasn't changed.
Dialogue: 0,0:05:34.70,0:05:38.16,Default,,0000,0000,0000,,You can still only buy five pizzas.
Dialogue: 0,0:05:38.16,0:05:41.72,Default,,0000,0000,0000,,But, if you spend \Nall of your budget on coffee,
Dialogue: 0,0:05:41.72,0:05:45.75,Default,,0000,0000,0000,,just look at how many more \Ncups of coffee you can buy.
Dialogue: 0,0:05:46.18,0:05:49.98,Default,,0000,0000,0000,,You can now buy \N20 cups of coffee per week.
Dialogue: 0,0:05:49.98,0:05:51.83,Default,,0000,0000,0000,,That's a lot of coffee.
Dialogue: 0,0:05:52.02,0:05:55.63,Default,,0000,0000,0000,,You see -- the new higher \Nrelative price of pizza,
Dialogue: 0,0:05:55.63,0:05:56.63,Default,,0000,0000,0000,,in terms of coffee,
Dialogue: 0,0:05:56.63,0:05:57.72,Default,,0000,0000,0000,,in the slope\Nof the new budget constraint,
Dialogue: 0,0:05:57.72,0:06:01.22,Default,,0000,0000,0000,,which is now 4.
Dialogue: 0,0:06:01.42,0:06:03.88,Default,,0000,0000,0000,,We make choices every day.
Dialogue: 0,0:06:03.88,0:06:06.88,Default,,0000,0000,0000,,The reality of what we can afford,
Dialogue: 0,0:06:06.88,0:06:09.94,Default,,0000,0000,0000,,given by our incomes and the prices\Nof goods and services,
Dialogue: 0,0:06:09.94,0:06:12.94,Default,,0000,0000,0000,,are all very important elements\Nthat affect our decisions.
Dialogue: 0,0:06:14.88,0:06:18.36,Default,,0000,0000,0000,,But there are other elements\Nequally important,
Dialogue: 0,0:06:18.36,0:06:20.46,Default,,0000,0000,0000,,and those are our preferences.
Dialogue: 0,0:06:20.68,0:06:22.55,Default,,0000,0000,0000,,We'll examine these next.
Dialogue: 0,0:06:23.58,0:06:26.22,Default,,0000,0000,0000,,[Narrator] You're on your way\Nto mastering economics.
Dialogue: 0,0:06:26.22,0:06:28.49,Default,,0000,0000,0000,,Make sure this video sticks
Dialogue: 0,0:06:28.49,0:06:29.99,Default,,0000,0000,0000,,by taking a few\Nquick practice questions.
Dialogue: 0,0:06:29.99,0:06:32.20,Default,,0000,0000,0000,,Or, if you're ready\Nfor more microeconomics,
Dialogue: 0,0:06:32.20,0:06:33.93,Default,,0000,0000,0000,,click for the next video.
Dialogue: 0,0:06:35.02,0:06:36.19,Default,,0000,0000,0000,,Still here?
Dialogue: 0,0:06:36.19,0:06:38.18,Default,,0000,0000,0000,,Check out Marginal \NRevolution University's
Dialogue: 0,0:06:38.18,0:06:39.93,Default,,0000,0000,0000,,other popular videos.
Dialogue: 0,0:06:40.18,0:06:41.61,Default,,0000,0000,0000,,♪ [music] ♪