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Dialogue: 0,0:00:00.00,0:00:03.00,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.29,0:00:10.63,Default,,0000,0000,0000,,- [Alex Taborrok] In the next \Nset of videos,
Dialogue: 0,0:00:10.63,0:00:15.00,Default,,0000,0000,0000,,we'll be looking at costs \Nand how to describe a firm's costs.
Dialogue: 0,0:00:15.00,0:00:18.78,Default,,0000,0000,0000,,We'll also take a look at how\Na firm maximizes its profit.
Dialogue: 0,0:00:19.33,0:00:21.03,Default,,0000,0000,0000,,In this section, we're looking at
Dialogue: 0,0:00:21.03,0:00:23.43,Default,,0000,0000,0000,,profit maximization \Nunder competition.
Dialogue: 0,0:00:23.43,0:00:25.58,Default,,0000,0000,0000,,In a later section, we'll cover
Dialogue: 0,0:00:25.58,0:00:28.14,Default,,0000,0000,0000,,profit maximization \Nunder monopoly.
Dialogue: 0,0:00:28.14,0:00:29.90,Default,,0000,0000,0000,,Let's get going.
Dialogue: 0,0:00:33.71,0:00:36.20,Default,,0000,0000,0000,,So the key question that \Nwe want to answer is this,
Dialogue: 0,0:00:36.20,0:00:38.33,Default,,0000,0000,0000,,"How do firms behave?"
Dialogue: 0,0:00:38.33,0:00:40.13,Default,,0000,0000,0000,,And a guiding assumption is \Ngoing to be that
Dialogue: 0,0:00:40.13,0:00:43.72,Default,,0000,0000,0000,,profit is the main motivation \Nfor a firm's actions.
Dialogue: 0,0:00:43.72,0:00:47.05,Default,,0000,0000,0000,,Now this is not literally 100% true.
Dialogue: 0,0:00:47.05,0:00:49.83,Default,,0000,0000,0000,,Nevertheless, for most firms, \Nmost of the time,
Dialogue: 0,0:00:49.83,0:00:53.35,Default,,0000,0000,0000,,profit is going to be \Na key motivator.
Dialogue: 0,0:00:53.35,0:00:57.04,Default,,0000,0000,0000,,For firms with a lot of competitors,\Ncompetition alone is going
Dialogue: 0,0:00:57.04,0:01:00.08,Default,,0000,0000,0000,,to compel them to maximize profit
Dialogue: 0,0:01:00.08,0:01:02.19,Default,,0000,0000,0000,,because firms with \Na lot of competitors
Dialogue: 0,0:01:02.19,0:01:03.95,Default,,0000,0000,0000,,that don't maximize profit, \N
Dialogue: 0,0:01:03.95,0:01:06.51,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: 0,0:01:09.51,0:01:11.88,Default,,0000,0000,0000,,they're not compelled \Nto maximize profit.
Dialogue: 0,0:01:11.88,0:01:15.06,Default,,0000,0000,0000,,Nevertheless, the owners \Nare still going to want profit.
Dialogue: 0,0:01:15.06,0:01:16.72,Default,,0000,0000,0000,,Who doesn't like profit?
Dialogue: 0,0:01:16.72,0:01:18.59,Default,,0000,0000,0000,,So for most firms, \Nmost of the time,
Dialogue: 0,0:01:18.59,0:01:20.61,Default,,0000,0000,0000,,this is going to be \Na good assumption.
Dialogue: 0,0:01:21.14,0:01:26.97,Default,,0000,0000,0000,,The key question then becomes, how?\NHow do firms maximize profit?
Dialogue: 0,0:01:27.49,0:01:31.09,Default,,0000,0000,0000,,And the basic answer is\Nby choosing price and quantity.
Dialogue: 0,0:01:31.09,0:01:34.37,Default,,0000,0000,0000,,By choosing what price is set \Nand what quantity to set.
Dialogue: 0,0:01:34.37,0:01:38.42,Default,,0000,0000,0000,,Now some firms have more control \Nover their price than others.
Dialogue: 0,0:01:38.42,0:01:41.89,Default,,0000,0000,0000,,In the next chapter, we're going \Nto be looking at a monopoly,
Dialogue: 0,0:01:41.89,0:01:46.62,Default,,0000,0000,0000,,which can choose price and quantity\Nwith some restrictions.
Dialogue: 0,0:01:46.62,0:01:50.44,Default,,0000,0000,0000,,In this chapter, we're going \Nto be looking at a competitive firm,
Dialogue: 0,0:01:50.44,0:01:52.54,Default,,0000,0000,0000,,which takes prices as given --
Dialogue: 0,0:01:52.54,0:01:55.17,Default,,0000,0000,0000,,it doesn't have much control \Nover its price --
Dialogue: 0,0:01:55.17,0:01:58.49,Default,,0000,0000,0000,,we'll explain why in a moment, \Nand it chooses quantities.
Dialogue: 0,0:01:58.49,0:02:00.05,Default,,0000,0000,0000,,So for a competitive firm, \N
Dialogue: 0,0:02:00.05,0:02:02.76,Default,,0000,0000,0000,,quantity is going to be \Nthe key choice
Dialogue: 0,0:02:02.76,0:02:06.21,Default,,0000,0000,0000,,which determines how much profit \Nthe firm makes.
Dialogue: 0,0:02:06.21,0:02:09.08,Default,,0000,0000,0000,,So we're focusing in this chapter \Non one type of firm,
Dialogue: 0,0:02:09.08,0:02:11.76,Default,,0000,0000,0000,,the competitive firm, \Nthe firm in a competitive market.
Dialogue: 0,0:02:11.76,0:02:14.73,Default,,0000,0000,0000,,Now what are the characteristics \Nof this firm and market?
Dialogue: 0,0:02:14.73,0:02:16.72,Default,,0000,0000,0000,,Well, the product that \Nthe firm sells
Dialogue: 0,0:02:16.72,0:02:19.78,Default,,0000,0000,0000,,is similar across \Nmany different sellers.
Dialogue: 0,0:02:19.78,0:02:21.95,Default,,0000,0000,0000,,So think about \Nthis stripper oil well.
Dialogue: 0,0:02:22.29,0:02:25.16,Default,,0000,0000,0000,,This small oil well, \Nit produces oil,
Dialogue: 0,0:02:25.16,0:02:26.60,Default,,0000,0000,0000,,which is pretty much the same
Dialogue: 0,0:02:26.60,0:02:29.91,Default,,0000,0000,0000,,as the oil produced \Nby the well next door,
Dialogue: 0,0:02:29.91,0:02:31.10,Default,,0000,0000,0000,,which is pretty much the same
Dialogue: 0,0:02:31.10,0:02:34.55,Default,,0000,0000,0000,,as the oil produced \Nby a well in Saudi Arabia,
Dialogue: 0,0:02:34.55,0:02:37.65,Default,,0000,0000,0000,,which is pretty much the same \Nas the oil produced from Mexico
Dialogue: 0,0:02:37.65,0:02:39.88,Default,,0000,0000,0000,,or from the North Sea and so forth.
Dialogue: 0,0:02:39.88,0:02:43.08,Default,,0000,0000,0000,,Oil is pretty much the same\Nacross all over the world.
Dialogue: 0,0:02:43.08,0:02:48.28,Default,,0000,0000,0000,,Or think about wheat, or soy beans,\Nor steel, or concrete, or paper.
Dialogue: 0,0:02:48.28,0:02:50.32,Default,,0000,0000,0000,,All of these are \Ncompetitive markets --
Dialogue: 0,0:02:50.32,0:02:52.98,Default,,0000,0000,0000,,the product is similar \Nacross sellers.
Dialogue: 0,0:02:52.98,0:02:54.83,Default,,0000,0000,0000,,In addition, in all \Nof these markets
Dialogue: 0,0:02:54.83,0:02:56.90,Default,,0000,0000,0000,,there are many buyers and sellers
Dialogue: 0,0:02:56.90,0:03:00.59,Default,,0000,0000,0000,,and they're each small relative \Nto the total market.
Dialogue: 0,0:03:00.59,0:03:04.42,Default,,0000,0000,0000,,So this stripper oil well produces\Nonly a small fraction
Dialogue: 0,0:03:04.42,0:03:07.89,Default,,0000,0000,0000,,of the world's \Ntotal production of oil.
Dialogue: 0,0:03:08.48,0:03:10.68,Default,,0000,0000,0000,,A wheat farm, any given wheat farm
Dialogue: 0,0:03:10.68,0:03:15.08,Default,,0000,0000,0000,,produces only a small fraction \Nof the total production of wheat.
Dialogue: 0,0:03:15.08,0:03:17.34,Default,,0000,0000,0000,,Alternatively, we may have the case
Dialogue: 0,0:03:17.34,0:03:19.77,Default,,0000,0000,0000,,where there are \Nmany potential sellers.
Dialogue: 0,0:03:19.77,0:03:24.17,Default,,0000,0000,0000,,So even if a firm, a grocery store \Nin a small town,
Dialogue: 0,0:03:24.17,0:03:26.67,Default,,0000,0000,0000,,is the only grocery store \Nin the small town,
Dialogue: 0,0:03:26.67,0:03:28.72,Default,,0000,0000,0000,,it's still in a competitive market,
Dialogue: 0,0:03:28.72,0:03:31.17,Default,,0000,0000,0000,,because if it were \Nto raise its price,
Dialogue: 0,0:03:31.17,0:03:33.18,Default,,0000,0000,0000,,there are many potential sellers
Dialogue: 0,0:03:33.18,0:03:36.55,Default,,0000,0000,0000,,who in the long run \Ncould sell in that same town.
Dialogue: 0,0:03:36.55,0:03:38.18,Default,,0000,0000,0000,,So that's a competitive firm.
Dialogue: 0,0:03:38.18,0:03:40.75,Default,,0000,0000,0000,,It's producing a product \Nwhich is similar across sellers,
Dialogue: 0,0:03:40.75,0:03:42.63,Default,,0000,0000,0000,,there are many buyers and sellers,
Dialogue: 0,0:03:42.63,0:03:44.63,Default,,0000,0000,0000,,each small relative \Nto the total market,
Dialogue: 0,0:03:44.63,0:03:46.72,Default,,0000,0000,0000,,or there are \Nmany potential sellers.
Dialogue: 0,0:03:46.72,0:03:49.96,Default,,0000,0000,0000,,So let's suppose you own one of\Nthose stripper oil wells
Dialogue: 0,0:03:49.96,0:03:52.33,Default,,0000,0000,0000,,I showed in the previous slide.
Dialogue: 0,0:03:52.33,0:03:54.61,Default,,0000,0000,0000,,What price are you going to set?
Dialogue: 0,0:03:54.61,0:03:56.96,Default,,0000,0000,0000,,Well, fortunately your problem \Nis going to be really easy
Dialogue: 0,0:03:56.96,0:03:59.95,Default,,0000,0000,0000,,because a firm \Nin a competitive market
Dialogue: 0,0:03:59.95,0:04:02.86,Default,,0000,0000,0000,,has no control over its price.
Dialogue: 0,0:04:02.86,0:04:06.93,Default,,0000,0000,0000,,The market determines \Neach firm's price.
Dialogue: 0,0:04:06.93,0:04:09.25,Default,,0000,0000,0000,,So let's take a look at \Nthe market for oil,
Dialogue: 0,0:04:09.25,0:04:11.65,Default,,0000,0000,0000,,and suppose that the world demand \Nand supply
Dialogue: 0,0:04:11.65,0:04:13.42,Default,,0000,0000,0000,,are such that quantity \Ndemanded is equal
Dialogue: 0,0:04:13.42,0:04:16.94,Default,,0000,0000,0000,,to quantity supplied\Nat a price of $52,
Dialogue: 0,0:04:16.94,0:04:22.89,Default,,0000,0000,0000,,at which point 82 million barrels \Nof oil a day are bought and sold.
Dialogue: 0,0:04:22.89,0:04:27.02,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: 0,0:04:30.02,0:04:31.55,Default,,0000,0000,0000,,The demand for your oil \N
Dialogue: 0,0:04:31.55,0:04:36.41,Default,,0000,0000,0000,,is going to be perfectly elastic \Nat the market price.
Dialogue: 0,0:04:36.41,0:04:37.93,Default,,0000,0000,0000,,Now what does that mean?
Dialogue: 0,0:04:37.93,0:04:41.70,Default,,0000,0000,0000,,What that means is suppose that \Nyou tried to sell your oil
Dialogue: 0,0:04:41.70,0:04:44.05,Default,,0000,0000,0000,,at a price above the market price,
Dialogue: 0,0:04:44.05,0:04:47.16,Default,,0000,0000,0000,,let's say $55 per barrel.
Dialogue: 0,0:04:47.16,0:04:49.94,Default,,0000,0000,0000,,Are you going to sell any oil?\NNo!
Dialogue: 0,0:04:50.47,0:04:54.95,Default,,0000,0000,0000,,Not even your mother thinks that\Nthe oil from your well
Dialogue: 0,0:04:54.95,0:04:58.99,Default,,0000,0000,0000,,is so special that she would be \Nwilling to pay more for it.
Dialogue: 0,0:04:58.99,0:05:03.98,Default,,0000,0000,0000,,She can get oil which is identical \Nor virtually identical
Dialogue: 0,0:05:03.98,0:05:06.38,Default,,0000,0000,0000,,at a price of $50 per barrel,
Dialogue: 0,0:05:06.38,0:05:09.28,Default,,0000,0000,0000,,so she's unlikely \Nto be want to pay $55.
Dialogue: 0,0:05:09.28,0:05:12.45,Default,,0000,0000,0000,,And if your mother won't \Npay extra then nobody will.
Dialogue: 0,0:05:12.69,0:05:16.73,Default,,0000,0000,0000,,So if you try to set a price higher\Nthan the market price,
Dialogue: 0,0:05:16.73,0:05:20.01,Default,,0000,0000,0000,,you're not going to sell \Nany oil at all, zero.
Dialogue: 0,0:05:20.68,0:05:24.49,Default,,0000,0000,0000,,Now you can sell as much oil \Nas you want below the market price,
Dialogue: 0,0:05:24.49,0:05:26.16,Default,,0000,0000,0000,,but why would you want to do that?
Dialogue: 0,0:05:26.16,0:05:27.89,Default,,0000,0000,0000,,Because in fact you could sell
Dialogue: 0,0:05:27.89,0:05:32.27,Default,,0000,0000,0000,,all the oil you want \Nat the market price.
Dialogue: 0,0:05:32.84,0:05:36.43,Default,,0000,0000,0000,,Now why can you sell all the oil\Nthat you want at the market price?
Dialogue: 0,0:05:36.43,0:05:39.36,Default,,0000,0000,0000,,Simply because your production,
Dialogue: 0,0:05:39.36,0:05:42.67,Default,,0000,0000,0000,,let's say 10 barrels a day, \Nor 20 or 30,
Dialogue: 0,0:05:42.67,0:05:46.41,Default,,0000,0000,0000,,it's so small relative \Nto the world production
Dialogue: 0,0:05:46.41,0:05:49.73,Default,,0000,0000,0000,,of 82 million barrels of oil per day,
Dialogue: 0,0:05:49.73,0:05:53.50,Default,,0000,0000,0000,,that however much you produce \Nfrom your single well,
Dialogue: 0,0:05:53.50,0:05:56.35,Default,,0000,0000,0000,,that's not going to influence \Nthe price of oil.
Dialogue: 0,0:05:56.35,0:05:58.70,Default,,0000,0000,0000,,So you can double, triple \Nyour production,
Dialogue: 0,0:05:58.70,0:06:03.50,Default,,0000,0000,0000,,the price of oil is still going \Nto $50 per barrel.
Dialogue: 0,0:06:04.53,0:06:09.06,Default,,0000,0000,0000,,So your only choice, \Nthen to maximize profit
Dialogue: 0,0:06:09.06,0:06:11.31,Default,,0000,0000,0000,,is going to be a choice over quantity.
Dialogue: 0,0:06:11.31,0:06:12.78,Default,,0000,0000,0000,,You look at the market price, \N
Dialogue: 0,0:06:12.78,0:06:16.96,Default,,0000,0000,0000,,you see, "Oh the price of oil today\Nis $50 per barrel,"
Dialogue: 0,0:06:16.96,0:06:18.39,Default,,0000,0000,0000,,and your decision is going to be
Dialogue: 0,0:06:18.39,0:06:21.66,Default,,0000,0000,0000,,how much do I want to produce \Nat that price?
Dialogue: 0,0:06:21.66,0:06:27.12,Default,,0000,0000,0000,,Do I want to produce 2 barrels, \N3 barrels, 4, 10, 20, how much?
Dialogue: 0,0:06:27.12,0:06:29.81,Default,,0000,0000,0000,,That is going to be \Nyour key question,
Dialogue: 0,0:06:29.81,0:06:33.30,Default,,0000,0000,0000,,and that's the key question \Nwe'll take up next time
Dialogue: 0,0:06:33.30,0:06:37.37,Default,,0000,0000,0000,,when we also add into this diagram \Nyour costs.
Dialogue: 0,0:06:39.01,0:06:40.56,Default,,0000,0000,0000,,- [Announcer] If you want to test\Nyourself,
Dialogue: 0,0:06:40.56,0:06:42.28,Default,,0000,0000,0000,,click "Practice Questions."
Dialogue: 0,0:06:42.89,0:06:46.18,Default,,0000,0000,0000,,Or if you're ready to move on,\Njust click, "Next Video."
Dialogue: 0,0:06:46.18,0:06:49.50,Default,,0000,0000,0000,,♪ [music] ♪