[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:00.00,0:00:05.80,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.74,0:00:12.17,Default,,0000,0000,0000,,- [Alex] We learned last time\Nthat a firm
Dialogue: 0,0:00:12.17,0:00:15.01,Default,,0000,0000,0000,,in a competitive market\Ndoesn't have much control
Dialogue: 0,0:00:15.01,0:00:16.42,Default,,0000,0000,0000,,over it's price.
Dialogue: 0,0:00:16.42,0:00:19.14,Default,,0000,0000,0000,,It must accept the market price.
Dialogue: 0,0:00:19.14,0:00:23.38,Default,,0000,0000,0000,,So its decision about profit\Nmaximization turns into a decision
Dialogue: 0,0:00:23.38,0:00:26.12,Default,,0000,0000,0000,,about what quantity to choose,
Dialogue: 0,0:00:26.12,0:00:28.63,Default,,0000,0000,0000,,and that's what we're going\Nto be focusing on now.
Dialogue: 0,0:00:33.93,0:00:35.59,Default,,0000,0000,0000,,So what is profit?
Dialogue: 0,0:00:35.59,0:00:38.61,Default,,0000,0000,0000,,Profit is total revenue\Nminus total cost.
Dialogue: 0,0:00:38.61,0:00:42.02,Default,,0000,0000,0000,,Total revenue is just price\Ntimes the quantity sold.
Dialogue: 0,0:00:42.02,0:00:44.72,Default,,0000,0000,0000,,Total cost has two parts.
Dialogue: 0,0:00:45.39,0:00:47.45,Default,,0000,0000,0000,,First are the fixed costs.
Dialogue: 0,0:00:47.45,0:00:50.96,Default,,0000,0000,0000,,These are costs\Nthat do not vary with output.
Dialogue: 0,0:00:50.97,0:00:53.94,Default,,0000,0000,0000,,So, for example, suppose you\Nare the owner
Dialogue: 0,0:00:53.94,0:00:57.81,Default,,0000,0000,0000,,of this small oil well\Nand you have to pay rent
Dialogue: 0,0:00:57.81,0:01:00.60,Default,,0000,0000,0000,,for the land\Non which the oil well sits.
Dialogue: 0,0:01:01.04,0:01:03.66,Default,,0000,0000,0000,,Those rental costs --\Nyou have to pay them
Dialogue: 0,0:01:03.66,0:01:07.96,Default,,0000,0000,0000,,regardless of how much\Nthe oil well is producing.
Dialogue: 0,0:01:08.37,0:01:10.94,Default,,0000,0000,0000,,Every month you have to pay\Nsome rental cost
Dialogue: 0,0:01:10.94,0:01:14.49,Default,,0000,0000,0000,,whether you're producing\None barrel of oil per month,
Dialogue: 0,0:01:14.49,0:01:17.73,Default,,0000,0000,0000,,10 barrels of oil per month,\N11 barrels of oil per month.
Dialogue: 0,0:01:17.73,0:01:18.84,Default,,0000,0000,0000,,It doesn't matter.
Dialogue: 0,0:01:18.84,0:01:21.24,Default,,0000,0000,0000,,You still have to pay\Nthe same rental cost.
Dialogue: 0,0:01:21.24,0:01:24.56,Default,,0000,0000,0000,,Indeed, even if you don't produce\Nany oil that month,
Dialogue: 0,0:01:24.56,0:01:27.61,Default,,0000,0000,0000,,if your oil well breaks down,\Nyou still have to pay
Dialogue: 0,0:01:27.61,0:01:29.16,Default,,0000,0000,0000,,those rental costs.
Dialogue: 0,0:01:29.16,0:01:31.63,Default,,0000,0000,0000,,So the rental costs\Nare fixed costs.
Dialogue: 0,0:01:31.63,0:01:34.30,Default,,0000,0000,0000,,They don't vary\Nwith the quantity produced.
Dialogue: 0,0:01:34.92,0:01:38.87,Default,,0000,0000,0000,,By the way, notice\Nthat even if you owned the land,
Dialogue: 0,0:01:38.87,0:01:42.15,Default,,0000,0000,0000,,if you could have rented it\Nto someone else,
Dialogue: 0,0:01:42.15,0:01:44.87,Default,,0000,0000,0000,,then that would be\Nan opportunity cost.
Dialogue: 0,0:01:44.87,0:01:49.90,Default,,0000,0000,0000,,So your calculation of profit\Nshould also include
Dialogue: 0,0:01:49.90,0:01:51.70,Default,,0000,0000,0000,,opportunity costs.
Dialogue: 0,0:01:51.70,0:01:55.88,Default,,0000,0000,0000,,That's what makes the economic\Ncalculation of profit, by the way,
Dialogue: 0,0:01:55.88,0:01:58.85,Default,,0000,0000,0000,,differ from the accounting\Ndefinition of profit.
Dialogue: 0,0:01:58.85,0:02:02.58,Default,,0000,0000,0000,,The economic notion of profit\Nincludes opportunity costs.
Dialogue: 0,0:02:02.58,0:02:03.99,Default,,0000,0000,0000,,Okay, what else?
Dialogue: 0,0:02:04.52,0:02:07.31,Default,,0000,0000,0000,,Well, variable costs --\Nthese are the cost
Dialogue: 0,0:02:07.31,0:02:09.85,Default,,0000,0000,0000,,that do vary with output.
Dialogue: 0,0:02:09.85,0:02:13.60,Default,,0000,0000,0000,,So for example, the electricity cost\Nfor pumping oil --
Dialogue: 0,0:02:13.60,0:02:17.36,Default,,0000,0000,0000,,the more oil you pump,\Nthe faster you get your rig to go,
Dialogue: 0,0:02:17.36,0:02:20.51,Default,,0000,0000,0000,,the more electricity\Nyou're going to use up.
Dialogue: 0,0:02:20.51,0:02:22.93,Default,,0000,0000,0000,,If you run it 24 hours a day,\Nyou're going to use
Dialogue: 0,0:02:22.93,0:02:25.61,Default,,0000,0000,0000,,more electricity\Nthan if you only run the pump
Dialogue: 0,0:02:25.61,0:02:27.28,Default,,0000,0000,0000,,12 hours a day.
Dialogue: 0,0:02:27.28,0:02:30.13,Default,,0000,0000,0000,,Transportation cost --\Nyou got to go and get the oil,
Dialogue: 0,0:02:30.13,0:02:32.51,Default,,0000,0000,0000,,truck it out of there,\Nmove it and so forth.
Dialogue: 0,0:02:32.51,0:02:36.89,Default,,0000,0000,0000,,So these costs are all costs\Nwhich vary with output,
Dialogue: 0,0:02:36.89,0:02:40.90,Default,,0000,0000,0000,,which typically will increase\Nthe more output that you produce.
Dialogue: 0,0:02:40.90,0:02:42.84,Default,,0000,0000,0000,,Those are your variable costs.
Dialogue: 0,0:02:42.84,0:02:47.04,Default,,0000,0000,0000,,So just to summarize on cost,\Ntotal cost is equal
Dialogue: 0,0:02:47.04,0:02:50.08,Default,,0000,0000,0000,,to your fixed costs\Nplus your variable costs
Dialogue: 0,0:02:50.08,0:02:52.85,Default,,0000,0000,0000,,and these depend upon output.
Dialogue: 0,0:02:53.66,0:02:56.35,Default,,0000,0000,0000,,Okay, so how do we maximize profit?
Dialogue: 0,0:02:56.35,0:02:58.87,Default,,0000,0000,0000,,Well, we're not going\Nto use calculus in this class,
Dialogue: 0,0:02:58.87,0:03:01.08,Default,,0000,0000,0000,,but for those of you\Nwho do know calculus,
Dialogue: 0,0:03:01.08,0:03:03.91,Default,,0000,0000,0000,,I want to do a quick aside --\Nshow you actually how useful
Dialogue: 0,0:03:03.91,0:03:06.12,Default,,0000,0000,0000,,calculus is and show you\Nan easy way
Dialogue: 0,0:03:06.12,0:03:07.94,Default,,0000,0000,0000,,of answering this problem.
Dialogue: 0,0:03:07.94,0:03:11.71,Default,,0000,0000,0000,,So we know the profit\Nis total revenue minus total cost
Dialogue: 0,0:03:11.71,0:03:15.15,Default,,0000,0000,0000,,and both of these are functions\Nof the quantity produced.
Dialogue: 0,0:03:15.30,0:03:18.17,Default,,0000,0000,0000,,Now in calculus\Nhow do we maximize a function?
Dialogue: 0,0:03:18.39,0:03:20.18,Default,,0000,0000,0000,,Think back to your calculus class.
Dialogue: 0,0:03:20.73,0:03:23.72,Default,,0000,0000,0000,,You take the derivative\Nof that function
Dialogue: 0,0:03:23.72,0:03:26.55,Default,,0000,0000,0000,,and you set it equal to zero.
Dialogue: 0,0:03:26.55,0:03:28.65,Default,,0000,0000,0000,,So in this case,\Nwe want to take the derivative
Dialogue: 0,0:03:28.65,0:03:31.19,Default,,0000,0000,0000,,of profit with respect\Nto quantity and set that
Dialogue: 0,0:03:31.19,0:03:32.96,Default,,0000,0000,0000,,equal to zero.
Dialogue: 0,0:03:32.96,0:03:35.50,Default,,0000,0000,0000,,So derivative of profit \Nwith respect to quantity --
Dialogue: 0,0:03:35.50,0:03:38.34,Default,,0000,0000,0000,,that's just the derivative\Nof total revenue
Dialogue: 0,0:03:38.34,0:03:42.81,Default,,0000,0000,0000,,with respect to quantity\Nminus the derivative of total cost
Dialogue: 0,0:03:42.81,0:03:44.55,Default,,0000,0000,0000,,with respect to quantity.
Dialogue: 0,0:03:44.55,0:03:46.31,Default,,0000,0000,0000,,Now in economics,\Nwe have special names
Dialogue: 0,0:03:46.31,0:03:48.20,Default,,0000,0000,0000,,for these two derivatives.
Dialogue: 0,0:03:48.20,0:03:51.29,Default,,0000,0000,0000,,The derivative of total revenue\Nwith respect to quantity
Dialogue: 0,0:03:51.29,0:03:53.96,Default,,0000,0000,0000,,is simply called marginal revenue.
Dialogue: 0,0:03:53.96,0:03:57.56,Default,,0000,0000,0000,,And the derivative of total cost\Nwith respect to quantity
Dialogue: 0,0:03:57.56,0:03:59.64,Default,,0000,0000,0000,,is called marginal cost.
Dialogue: 0,0:03:59.64,0:04:03.09,Default,,0000,0000,0000,,So we want to find the quantity\Nsuch that marginal revenue
Dialogue: 0,0:04:03.09,0:04:06.85,Default,,0000,0000,0000,,minus marginal cost is zero,\Nor in other words,
Dialogue: 0,0:04:06.85,0:04:10.10,Default,,0000,0000,0000,,we want to find the quantity\Nsuch that marginal revenue
Dialogue: 0,0:04:10.10,0:04:12.19,Default,,0000,0000,0000,,is equal to marginal cost.
Dialogue: 0,0:04:12.19,0:04:16.36,Default,,0000,0000,0000,,In other words, the quantity,\Nwhich maximizes profit,
Dialogue: 0,0:04:16.36,0:04:21.21,Default,,0000,0000,0000,,is the one where marginal revenue \Nis equal to marginal cost.
Dialogue: 0,0:04:21.74,0:04:24.69,Default,,0000,0000,0000,,Now I'm about to give you\Na more intuitive explanation,
Dialogue: 0,0:04:24.69,0:04:28.36,Default,,0000,0000,0000,,especially for those of you\Nwho don't get no calculus,
Dialogue: 0,0:04:28.36,0:04:31.35,Default,,0000,0000,0000,,but for those of you who do,\Nthis is just exactly
Dialogue: 0,0:04:31.35,0:04:33.75,Default,,0000,0000,0000,,what you were to do in calculus --\Nyou take the derivative,
Dialogue: 0,0:04:33.75,0:04:35.38,Default,,0000,0000,0000,,set it equal to zero.
Dialogue: 0,0:04:35.38,0:04:37.67,Default,,0000,0000,0000,,Okay let's get to more intuition.
Dialogue: 0,0:04:37.79,0:04:40.97,Default,,0000,0000,0000,,When the firm produces\Nan additional unit of output,
Dialogue: 0,0:04:40.97,0:04:44.67,Default,,0000,0000,0000,,there are additional revenues\Nand additional costs.
Dialogue: 0,0:04:45.25,0:04:48.51,Default,,0000,0000,0000,,Profit maximization\Nis all about comparing
Dialogue: 0,0:04:48.51,0:04:50.83,Default,,0000,0000,0000,,these additional\Nrevenues and costs,
Dialogue: 0,0:04:50.83,0:04:52.76,Default,,0000,0000,0000,,and we have names for these.
Dialogue: 0,0:04:52.79,0:04:57.05,Default,,0000,0000,0000,,Marginal revenue is the addition\Nto total revenue
Dialogue: 0,0:04:57.05,0:04:59.100,Default,,0000,0000,0000,,from selling an additional\Nunit of output.
Dialogue: 0,0:05:00.01,0:05:04.50,Default,,0000,0000,0000,,Marginal cost is the addition\Nto total cost from producing
Dialogue: 0,0:05:04.50,0:05:06.66,Default,,0000,0000,0000,,an additional unit of output.
Dialogue: 0,0:05:06.83,0:05:10.61,Default,,0000,0000,0000,,Profits are maximized at the level\Nof output where marginal revenue
Dialogue: 0,0:05:10.61,0:05:12.48,Default,,0000,0000,0000,,is equal to marginal cost.
Dialogue: 0,0:05:12.48,0:05:13.100,Default,,0000,0000,0000,,Now why is this?
Dialogue: 0,0:05:13.100,0:05:15.79,Default,,0000,0000,0000,,Well, let's suppose\Nthat marginal revenue
Dialogue: 0,0:05:15.79,0:05:19.03,Default,,0000,0000,0000,,is not equal to marginal cost\Nand let’s show
Dialogue: 0,0:05:19.03,0:05:22.16,Default,,0000,0000,0000,,that you can't be profit maximizing\Nif that's the case.
Dialogue: 0,0:05:22.16,0:05:26.37,Default,,0000,0000,0000,,For example, if marginal revenue\Nis bigger than marginal cost,
Dialogue: 0,0:05:26.37,0:05:29.00,Default,,0000,0000,0000,,you're not profit maximizing --\Nproducing more
Dialogue: 0,0:05:29.00,0:05:30.76,Default,,0000,0000,0000,,will add to your profit.
Dialogue: 0,0:05:30.76,0:05:35.93,Default,,0000,0000,0000,,Why? Well, remember marginal\Nrevenue is the addition
Dialogue: 0,0:05:35.93,0:05:38.95,Default,,0000,0000,0000,,to revenue from producing\Nanother unit.
Dialogue: 0,0:05:38.95,0:05:41.50,Default,,0000,0000,0000,,Marginal cost\Nis the addition to cost
Dialogue: 0,0:05:41.50,0:05:43.24,Default,,0000,0000,0000,,from producing another unit.
Dialogue: 0,0:05:43.24,0:05:45.97,Default,,0000,0000,0000,,If marginal revenue is bigger\Nthan marginal cost,
Dialogue: 0,0:05:45.97,0:05:50.17,Default,,0000,0000,0000,,that says producing that unit\Nadds more to your revenues
Dialogue: 0,0:05:50.17,0:05:52.01,Default,,0000,0000,0000,,than it does to your costs.
Dialogue: 0,0:05:52.01,0:05:54.52,Default,,0000,0000,0000,,In other words,\Nyou could increase profit
Dialogue: 0,0:05:54.52,0:05:56.43,Default,,0000,0000,0000,,by producing more.
Dialogue: 0,0:05:56.43,0:05:58.86,Default,,0000,0000,0000,,So if marginal revenue\Nis ever bigger
Dialogue: 0,0:05:58.86,0:06:01.96,Default,,0000,0000,0000,,than marginal cost,\Nyou want to produce more.
Dialogue: 0,0:06:02.52,0:06:04.82,Default,,0000,0000,0000,,On the other hand,\Nsuppose marginal revenue
Dialogue: 0,0:06:04.82,0:06:09.00,Default,,0000,0000,0000,,is less than marginal cost,\Nor to put it the other way,
Dialogue: 0,0:06:09.00,0:06:12.97,Default,,0000,0000,0000,,suppose marginal cost is bigger\Nthan marginal revenue.
Dialogue: 0,0:06:12.97,0:06:15.80,Default,,0000,0000,0000,,Well then, you're not\Nprofit maximizing
Dialogue: 0,0:06:15.80,0:06:19.34,Default,,0000,0000,0000,,because producing less\Nwill add to your profit.
Dialogue: 0,0:06:19.74,0:06:21.17,Default,,0000,0000,0000,,Why is this?
Dialogue: 0,0:06:21.17,0:06:24.01,Default,,0000,0000,0000,,Well, think about marginal cost.
Dialogue: 0,0:06:24.01,0:06:29.84,Default,,0000,0000,0000,,If you were to produce\None unit less your costs would fall
Dialogue: 0,0:06:30.25,0:06:34.32,Default,,0000,0000,0000,,by marginal cost,\Nyour revenues would also fall
Dialogue: 0,0:06:34.32,0:06:38.46,Default,,0000,0000,0000,,by marginal revenue,\Nbut since marginal cost is bigger
Dialogue: 0,0:06:38.46,0:06:41.61,Default,,0000,0000,0000,,than marginal revenue,\Nyour costs by producing
Dialogue: 0,0:06:41.61,0:06:45.90,Default,,0000,0000,0000,,one unit less fall by more\Nthan your revenues fall.
Dialogue: 0,0:06:46.17,0:06:49.61,Default,,0000,0000,0000,,So if your costs are going down\Nby more than your revenues
Dialogue: 0,0:06:49.61,0:06:53.66,Default,,0000,0000,0000,,are going down,\Nyou're again increasing profit.
Dialogue: 0,0:06:53.97,0:06:58.07,Default,,0000,0000,0000,,So if marginal revenue\Nis ever less than marginal cost,
Dialogue: 0,0:06:58.07,0:07:02.16,Default,,0000,0000,0000,,you want to produce less --\Nyou'll be increasing your profit
Dialogue: 0,0:07:02.16,0:07:04.18,Default,,0000,0000,0000,,by producing less.
Dialogue: 0,0:07:04.37,0:07:08.41,Default,,0000,0000,0000,,So, if marginal revenue\Nis bigger than marginal cost,
Dialogue: 0,0:07:08.41,0:07:10.36,Default,,0000,0000,0000,,you're not profit maximizing.
Dialogue: 0,0:07:10.36,0:07:13.16,Default,,0000,0000,0000,,If marginal revenue is less\Nthan marginal cost
Dialogue: 0,0:07:13.16,0:07:15.03,Default,,0000,0000,0000,,you're not profit maximizing.
Dialogue: 0,0:07:15.03,0:07:19.54,Default,,0000,0000,0000,,You can only profit maximize\Nif marginal revenue
Dialogue: 0,0:07:19.54,0:07:22.13,Default,,0000,0000,0000,,is equal to marginal cost.
Dialogue: 0,0:07:23.05,0:07:26.96,Default,,0000,0000,0000,,Now let's put all this in a diagram\Nbeginning with marginal revenue.
Dialogue: 0,0:07:26.96,0:07:29.39,Default,,0000,0000,0000,,Now for a competitive firm,\Nthis is going to be easy
Dialogue: 0,0:07:29.39,0:07:32.05,Default,,0000,0000,0000,,because remember,\Nthat a competitive firm
Dialogue: 0,0:07:32.05,0:07:35.65,Default,,0000,0000,0000,,is small relative\Nto the total market.
Dialogue: 0,0:07:35.65,0:07:39.93,Default,,0000,0000,0000,,That means it can double\Nits production easily
Dialogue: 0,0:07:39.93,0:07:43.25,Default,,0000,0000,0000,,and not push down the market price.
Dialogue: 0,0:07:43.25,0:07:45.67,Default,,0000,0000,0000,,As a result,\Nfor a competitive firm,
Dialogue: 0,0:07:45.67,0:07:49.29,Default,,0000,0000,0000,,marginal revenue is equal\Nto the market price.
Dialogue: 0,0:07:49.29,0:07:53.72,Default,,0000,0000,0000,,So for example, suppose the firm\Nis producing two units of output
Dialogue: 0,0:07:53.72,0:07:56.18,Default,,0000,0000,0000,,and it decides to produce\Na third unit,
Dialogue: 0,0:07:56.18,0:07:59.50,Default,,0000,0000,0000,,what's the additional revenue\Nfrom that third unit?
Dialogue: 0,0:07:59.50,0:08:00.79,Default,,0000,0000,0000,,It's the price.
Dialogue: 0,0:08:00.79,0:08:03.32,Default,,0000,0000,0000,,It's the price it gets\Nfor that barrel of oil.
Dialogue: 0,0:08:03.32,0:08:06.18,Default,,0000,0000,0000,,What about if it produces\Na fourth barrel of oil?
Dialogue: 0,0:08:06.18,0:08:08.55,Default,,0000,0000,0000,,What does it get?\NWhat's the addition to revenue?
Dialogue: 0,0:08:08.55,0:08:10.80,Default,,0000,0000,0000,,It's the price of a barrel of oil.
Dialogue: 0,0:08:10.80,0:08:12.31,Default,,0000,0000,0000,,What about the fifth unit?
Dialogue: 0,0:08:12.31,0:08:17.37,Default,,0000,0000,0000,,Again, the price is the addition\Nto revenue, is marginal revenue.
Dialogue: 0,0:08:17.82,0:08:20.58,Default,,0000,0000,0000,,So, marginal revenue\Nfor a competitive firm
Dialogue: 0,0:08:20.58,0:08:22.73,Default,,0000,0000,0000,,is equal to the price\Nand it's flat --
Dialogue: 0,0:08:22.73,0:08:26.39,Default,,0000,0000,0000,,it doesn't change when the firm\Nchanges its output
Dialogue: 0,0:08:26.39,0:08:29.38,Default,,0000,0000,0000,,because the firm is small\Nrelative to the market.
Dialogue: 0,0:08:29.38,0:08:31.41,Default,,0000,0000,0000,,Now what about marginal cost?
Dialogue: 0,0:08:31.41,0:08:33.66,Default,,0000,0000,0000,,Well, a typical shape\Nof a marginal cost curve
Dialogue: 0,0:08:33.66,0:08:36.08,Default,,0000,0000,0000,,would be upward sloping like this.
Dialogue: 0,0:08:36.08,0:08:38.68,Default,,0000,0000,0000,,Again, think about\Nour stripper oil well.
Dialogue: 0,0:08:38.68,0:08:42.75,Default,,0000,0000,0000,,We can produce more\Nfrom that oil well,
Dialogue: 0,0:08:42.75,0:08:44.02,Default,,0000,0000,0000,,but there's a limit.
Dialogue: 0,0:08:44.02,0:08:46.08,Default,,0000,0000,0000,,We can only run it so quickly.
Dialogue: 0,0:08:46.08,0:08:50.09,Default,,0000,0000,0000,,We have to push it really hard\Nwhen we start to produce more.
Dialogue: 0,0:08:50.09,0:08:53.67,Default,,0000,0000,0000,,So we can easily produce,\Nyou know, three, or four units,
Dialogue: 0,0:08:53.67,0:08:57.67,Default,,0000,0000,0000,,but in order to produce six,\Nseven, eight, or nine barrels of oil
Dialogue: 0,0:08:57.67,0:09:00.03,Default,,0000,0000,0000,,from that oil well,\Nwe're going to have to run it
Dialogue: 0,0:09:00.03,0:09:01.80,Default,,0000,0000,0000,,really quickly, we're going\Nto have to put in
Dialogue: 0,0:09:01.80,0:09:04.34,Default,,0000,0000,0000,,a lot of electricity,\Nwe're going to have to do
Dialogue: 0,0:09:04.34,0:09:06.40,Default,,0000,0000,0000,,a lot of maintenance and so forth.
Dialogue: 0,0:09:06.40,0:09:10.15,Default,,0000,0000,0000,,So our costs will tend to increase.
Dialogue: 0,0:09:10.15,0:09:13.70,Default,,0000,0000,0000,,We can't produce\Nan unlimited amount of oil
Dialogue: 0,0:09:13.70,0:09:16.08,Default,,0000,0000,0000,,at the same cost\Nfrom this oil well.
Dialogue: 0,0:09:16.08,0:09:19.83,Default,,0000,0000,0000,,Our costs are going to go up,\Nare going to rise,
Dialogue: 0,0:09:19.83,0:09:22.53,Default,,0000,0000,0000,,our additional costs\Nare going to rise
Dialogue: 0,0:09:22.53,0:09:25.20,Default,,0000,0000,0000,,the more we want to produce\Nfrom that oil well.
Dialogue: 0,0:09:25.20,0:09:28.99,Default,,0000,0000,0000,,So this is a typical shape\Nof a marginal cost curve.
Dialogue: 0,0:09:29.35,0:09:32.72,Default,,0000,0000,0000,,Now, where's profit maximization?
Dialogue: 0,0:09:32.72,0:09:35.02,Default,,0000,0000,0000,,Well, profit is maximized\Nwhere marginal revenue
Dialogue: 0,0:09:35.02,0:09:36.90,Default,,0000,0000,0000,,is equal to marginal cost.
Dialogue: 0,0:09:36.90,0:09:38.82,Default,,0000,0000,0000,,In this case,\Nfor a competitive firm,
Dialogue: 0,0:09:38.82,0:09:40.79,Default,,0000,0000,0000,,marginal revenue is equal to price.
Dialogue: 0,0:09:40.79,0:09:43.60,Default,,0000,0000,0000,,So profit is maximized\Nwhere price is equal
Dialogue: 0,0:09:43.60,0:09:47.16,Default,,0000,0000,0000,,to marginal cost\Nor at this point right here.
Dialogue: 0,0:09:47.52,0:09:49.97,Default,,0000,0000,0000,,Now let's think\Nabout that intuitively.
Dialogue: 0,0:09:50.93,0:09:55.73,Default,,0000,0000,0000,,On the left hand side,\Nthis is the additional revenues
Dialogue: 0,0:09:55.73,0:09:57.76,Default,,0000,0000,0000,,from selling a barrel of oil.
Dialogue: 0,0:09:57.76,0:10:01.20,Default,,0000,0000,0000,,These are the additional costs\Nfrom selling a barrel of oil.
Dialogue: 0,0:10:01.20,0:10:04.73,Default,,0000,0000,0000,,So you want to compare --\Nrevenues bigger than costs,
Dialogue: 0,0:10:04.73,0:10:06.24,Default,,0000,0000,0000,,therefore sell more.
Dialogue: 0,0:10:06.24,0:10:09.02,Default,,0000,0000,0000,,Revenues bigger than costs,\Ntherefore sell more.
Dialogue: 0,0:10:09.02,0:10:10.61,Default,,0000,0000,0000,,Revenues bigger than costs.
Dialogue: 0,0:10:10.61,0:10:13.70,Default,,0000,0000,0000,,You keep selling more\Nuntil you reach this point.
Dialogue: 0,0:10:13.70,0:10:15.92,Default,,0000,0000,0000,,Do you want to go further? No.
Dialogue: 0,0:10:15.92,0:10:18.74,Default,,0000,0000,0000,,Here, costs are bigger\Nthan revenues.
Dialogue: 0,0:10:18.74,0:10:22.53,Default,,0000,0000,0000,,So by selling less,\Nyou can reduce your costs
Dialogue: 0,0:10:22.53,0:10:25.04,Default,,0000,0000,0000,,by more than you'd reduce\Nyour revenues
Dialogue: 0,0:10:25.04,0:10:27.98,Default,,0000,0000,0000,,and therefore profit goes up\Ngoing this way
Dialogue: 0,0:10:27.98,0:10:30.71,Default,,0000,0000,0000,,and that's why this point,\Nwhere marginal revenue
Dialogue: 0,0:10:30.71,0:10:35.27,Default,,0000,0000,0000,,is equal to marginal cost,\Nor price is equal to marginal cost,
Dialogue: 0,0:10:35.27,0:10:37.99,Default,,0000,0000,0000,,that's the point where profit\Nis maximized.
Dialogue: 0,0:10:37.99,0:10:40.84,Default,,0000,0000,0000,,Now remember way back\Nin the first talk,
Dialogue: 0,0:10:40.84,0:10:44.11,Default,,0000,0000,0000,,we wanted to explain\Na firm’s behavior.
Dialogue: 0,0:10:44.11,0:10:48.63,Default,,0000,0000,0000,,So let's look how maximizing profit\Nexplains the firm’s behavior.
Dialogue: 0,0:10:48.100,0:10:52.48,Default,,0000,0000,0000,,Suppose the market price\Nis $50 per barrel.
Dialogue: 0,0:10:52.48,0:10:55.04,Default,,0000,0000,0000,,Well, then in order\Nto maximize profit,
Dialogue: 0,0:10:55.04,0:10:58.64,Default,,0000,0000,0000,,the firm chooses the quantity --\Nin this case,
Dialogue: 0,0:10:58.64,0:11:02.01,Default,,0000,0000,0000,,about eight barrels of oil --\Nsuch that marginal revenue
Dialogue: 0,0:11:02.01,0:11:04.29,Default,,0000,0000,0000,,is equal to marginal cost,\Nbearing in mind
Dialogue: 0,0:11:04.29,0:11:07.95,Default,,0000,0000,0000,,that for the competitive firm,\Nmarginal revenue is equal to price.
Dialogue: 0,0:11:08.26,0:11:11.44,Default,,0000,0000,0000,,So to profit maximize\Nthe firm produces a quantity
Dialogue: 0,0:11:11.44,0:11:13.64,Default,,0000,0000,0000,,of about eight barrels of oil.
Dialogue: 0,0:11:13.64,0:11:17.32,Default,,0000,0000,0000,,Now suppose that the market price\Ngoes up to $100.
Dialogue: 0,0:11:17.32,0:11:23.54,Default,,0000,0000,0000,,Now in order to profit maximize,\Nthe firm increases its production
Dialogue: 0,0:11:23.54,0:11:28.55,Default,,0000,0000,0000,,along its marginal cost curve\Nkeeping this relationship the same
Dialogue: 0,0:11:28.55,0:11:31.67,Default,,0000,0000,0000,,so price is still equal\Nto marginal cost.
Dialogue: 0,0:11:31.67,0:11:35.76,Default,,0000,0000,0000,,Price has gone up to 100,\Nbut because the firm has expanded
Dialogue: 0,0:11:35.76,0:11:39.87,Default,,0000,0000,0000,,along its marginal cost curve,\Nmarginal cost has gone up as well.
Dialogue: 0,0:11:39.87,0:11:43.51,Default,,0000,0000,0000,,So this again is the profit\Nmaximizing point
Dialogue: 0,0:11:43.51,0:11:46.52,Default,,0000,0000,0000,,when the price is equal to 100.
Dialogue: 0,0:11:46.52,0:11:49.90,Default,,0000,0000,0000,,When the price is equal to 100,\Nthe profit maximizing quantity
Dialogue: 0,0:11:49.90,0:11:52.63,Default,,0000,0000,0000,,is just under 10 barrels of oil.
Dialogue: 0,0:11:52.63,0:11:58.08,Default,,0000,0000,0000,,So profit maximization explains\Nwhat the firm does when the price,
Dialogue: 0,0:11:58.08,0:12:00.61,Default,,0000,0000,0000,,when the market price, changes.
Dialogue: 0,0:12:01.26,0:12:05.01,Default,,0000,0000,0000,,We now know how to find\Nthe profit maximizing quantity --
Dialogue: 0,0:12:05.01,0:12:06.75,Default,,0000,0000,0000,,look for the quantity\Nwhere marginal revenue
Dialogue: 0,0:12:06.75,0:12:09.72,Default,,0000,0000,0000,,is equal to marginal cost,\Nwhich is the same
Dialogue: 0,0:12:09.72,0:12:11.86,Default,,0000,0000,0000,,for the competitive firm\Nwhere price is equal
Dialogue: 0,0:12:11.86,0:12:13.57,Default,,0000,0000,0000,,to marginal cost.
Dialogue: 0,0:12:13.57,0:12:17.54,Default,,0000,0000,0000,,Now we want to ask,\Nwhat is the size of the profit?
Dialogue: 0,0:12:17.54,0:12:19.39,Default,,0000,0000,0000,,This raises a subtle point.
Dialogue: 0,0:12:19.39,0:12:22.92,Default,,0000,0000,0000,,You can be maximizing profits\Nand actually have a loss.
Dialogue: 0,0:12:23.24,0:12:27.12,Default,,0000,0000,0000,,That is, the best that you can do\Nmight be a loss.
Dialogue: 0,0:12:27.13,0:12:30.96,Default,,0000,0000,0000,,So we want to show on the diagram\Nhow large your profits
Dialogue: 0,0:12:30.96,0:12:35.29,Default,,0000,0000,0000,,or how large your losses are\Nwhen you are maximizing profits.
Dialogue: 0,0:12:35.67,0:12:37.47,Default,,0000,0000,0000,,In order to do that,\Nwe need to introduce
Dialogue: 0,0:12:37.47,0:12:39.74,Default,,0000,0000,0000,,another concept\Nand another curve --
Dialogue: 0,0:12:39.74,0:12:41.47,Default,,0000,0000,0000,,average cost.
Dialogue: 0,0:12:41.47,0:12:45.24,Default,,0000,0000,0000,,Average cost is simply\Nthe cost per unit of output.
Dialogue: 0,0:12:45.24,0:12:47.46,Default,,0000,0000,0000,,That is the total cost\Ndivided by Q,
Dialogue: 0,0:12:47.46,0:12:49.32,Default,,0000,0000,0000,,the quantity of the output.
Dialogue: 0,0:12:49.32,0:12:52.70,Default,,0000,0000,0000,,So average cost again --\Ntotal cost divided by Q.
Dialogue: 0,0:12:52.70,0:12:55.84,Default,,0000,0000,0000,,Adding the average cost curve\Nto our graph
Dialogue: 0,0:12:55.84,0:12:58.09,Default,,0000,0000,0000,,will let us show profit\Non the graph.
Dialogue: 0,0:12:58.09,0:13:00.24,Default,,0000,0000,0000,,And that's what we want to do,\Nand that's what we'll do
Dialogue: 0,0:13:00.24,0:13:01.40,Default,,0000,0000,0000,,in the next talk.
Dialogue: 0,0:13:01.40,0:13:02.81,Default,,0000,0000,0000,,Thanks.
Dialogue: 0,0:13:03.21,0:13:04.97,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself,
Dialogue: 0,0:13:04.97,0:13:07.14,Default,,0000,0000,0000,,click, "Practice Questions,"
Dialogue: 0,0:13:07.14,0:13:10.66,Default,,0000,0000,0000,,or if you're ready to move on,\Njust click, "Next Video."
Dialogue: 0,0:13:10.66,0:13:15.67,Default,,0000,0000,0000,,♪ [music] ♪