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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: 0,0:02:14.19,0:02:18.86,Default,,0000,0000,0000,,Well, the product that the firm\Nsells is similar across many different
Dialogue: 0,0:02:19.04,0:02:25.05,Default,,0000,0000,0000,,sellers. So think about this stripper oil\Nwell. This small oil well, it produces
Dialogue: 0,0:02:25.23,0:02:30.03,Default,,0000,0000,0000,,oil, which is pretty much the same as the\Noil produced by the well next door, which
Dialogue: 0,0:02:30.21,0:02:34.81,Default,,0000,0000,0000,,is pretty much the same as the oil\Nproduced by a well in Saudi Arabia, which
Dialogue: 0,0:02:34.99,0:02:38.90,Default,,0000,0000,0000,,is pretty much the same as the oil\Nproduced from Mexico or from the North Sea
Dialogue: 0,0:02:38.90,0:02:43.53,Default,,0000,0000,0000,,and so forth. Oil is pretty much the same\Nacross all over the world. Or think about
Dialogue: 0,0:02:43.53,0:02:49.24,Default,,0000,0000,0000,,wheat, or soy beans, or steel, or\Nconcrete, or paper. All of these are
Dialogue: 0,0:02:49.24,0:02:54.35,Default,,0000,0000,0000,,competitive markets - the product is\Nsimilar across sellers. In addition, in
Dialogue: 0,0:02:54.35,0:02:58.67,Default,,0000,0000,0000,,all of these markets there are many buyers\Nand sellers and they're each small
Dialogue: 0,0:02:58.67,0:03:00.59,Default,,0000,0000,0000,,relative to the\Ntotal 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 of the
Dialogue: 0,0:03:04.79,0:03:11.92,Default,,0000,0000,0000,,world's total production of oil. A wheat\Nfarm, any given wheat farm produces only a
Dialogue: 0,0:03:11.92,0:03:17.53,Default,,0000,0000,0000,,small fraction of the total production of\Nwheat. Alternatively, we may have the case
Dialogue: 0,0:03:17.53,0:03:23.88,Default,,0000,0000,0000,,where there are many potential sellers. So\Neven if a firm, a grocery store in a small
Dialogue: 0,0:03:23.88,0:03:28.15,Default,,0000,0000,0000,,town, is the only grocery store in the\Nsmall town, it's still in a competitive
Dialogue: 0,0:03:28.15,0:03:33.31,Default,,0000,0000,0000,,market, because if it were to raise its\Nprice, there are many potential sellers who
Dialogue: 0,0:03:33.49,0:03:38.00,Default,,0000,0000,0000,,in the long run could sell in that same\Ntown. So that's a competitive firm. It's
Dialogue: 0,0:03:38.18,0:03:41.65,Default,,0000,0000,0000,,producing a product which is similar\Nacross sellers, there are many buyers and
Dialogue: 0,0:03:41.83,0:03:45.89,Default,,0000,0000,0000,,sellers, each small relative to the total\Nmarket, or there are many potential
Dialogue: 0,0:03:46.07,0:03:50.48,Default,,0000,0000,0000,,sellers. So let's suppose you own one of\Nthose stripper oil wells I showed in the
Dialogue: 0,0:03:50.66,0:03:55.72,Default,,0000,0000,0000,,previous slide. What price are you going\Nto set? Well, fortunately your problem is
Dialogue: 0,0:03:55.90,0:04:01.77,Default,,0000,0000,0000,,going to be really easy because a firm in\Na competitive market has no control over
Dialogue: 0,0:04:01.95,0:04:07.23,Default,,0000,0000,0000,,its price. The market\Ndetermines each firm's price. So
Dialogue: 0,0:04:07.41,0:04:11.07,Default,,0000,0000,0000,,let's take a look at the market for oil,\Nand suppose that the world demand and
Dialogue: 0,0:04:11.25,0:04:15.45,Default,,0000,0000,0000,,supply are such that quantity demanded is\Nequal to quantity supplied at a price of
Dialogue: 0,0:04:15.63,0:04:23.35,Default,,0000,0000,0000,,$52, at which point 82 million barrels of\Noil a day are bought and sold. Now let's
Dialogue: 0,0:04:23.53,0:04:29.84,Default,,0000,0000,0000,,think about the demand for your oil. The\Noil produce by your stripper oil well. The
Dialogue: 0,0:04:30.02,0:04:36.65,Default,,0000,0000,0000,,demand for your oil is going to be\Nperfectly elastic at the market price. Now
Dialogue: 0,0:04:36.83,0:04:41.52,Default,,0000,0000,0000,,what does that mean? What that means is\Nsuppose that you tried to sell your oil at
Dialogue: 0,0:04:41.70,0:04:48.14,Default,,0000,0000,0000,,a price above the market price, let's say\N$55 per barrel. Are you going to sell any
Dialogue: 0,0:04:48.32,0:04:56.59,Default,,0000,0000,0000,,oil? No! Not even your mother thinks that\Nthe oil from your well is so special that
Dialogue: 0,0:04:56.77,0:05:02.49,Default,,0000,0000,0000,,she would be willing to pay more for it.\NShe can get oil which is identical or
Dialogue: 0,0:05:02.67,0:05:08.20,Default,,0000,0000,0000,,virtually identical at a price of $50 per\Nbarrel, so she's unlikely to be want to pay
Dialogue: 0,0:05:08.38,0:05:13.91,Default,,0000,0000,0000,,$55. And if your mother won't pay extra\Nthen nobody will. So if you try to set a
Dialogue: 0,0:05:14.09,0:05:20.63,Default,,0000,0000,0000,,price higher than the market price, you're\Nnot going to sell any 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 as you want\Nbelow the market price, but why would you
Dialogue: 0,0:05:25.19,0:05:31.33,Default,,0000,0000,0000,,want to do that? Because in fact you could\Nsell all the oil you want at the market
Dialogue: 0,0:05:31.51,0:05:37.05,Default,,0000,0000,0000,,price. Now why can you sell all the oil\Nthat you want at the market price? Simply
Dialogue: 0,0:05:37.23,0:05:44.55,Default,,0000,0000,0000,,because your production, let's say 10\Nbarrels a day, or 20 or 30, it's so small
Dialogue: 0,0:05:44.73,0:05:50.22,Default,,0000,0000,0000,,relative to the world production of 82\Nmillion barrels of oil per day, that
Dialogue: 0,0:05:50.40,0:05:54.92,Default,,0000,0000,0000,,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] ♪