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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Let's continue with our orange juice producing example. And in this situation I want to think about what a rational quantity of orange juice might be, or what would be a rational quantity of orange juice to produce, given a market price. So let's say that the market price right now, the market price of orange juice is 50 cents a gallon. And I'm going to assume that there are many producers here, so we're going to have to be price takers. Obviously we want to charge as much as we can per gallon, but if we charge even a penny over 50 cents a gallon, then people are going to buy all of their orange juice from other people. So this is the price that we can charge, 50 cents per gallon. So if we think about it in terms of marginal revenue, revenue per incremental gallon, well that first incremental gallon we're going to get 50 cents.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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And I'm going to assume that there are many producers here, so we're going to have to be price takers. Obviously we want to charge as much as we can per gallon, but if we charge even a penny over 50 cents a gallon, then people are going to buy all of their orange juice from other people. So this is the price that we can charge, 50 cents per gallon. So if we think about it in terms of marginal revenue, revenue per incremental gallon, well that first incremental gallon we're going to get 50 cents. That next incremental gallon we're going to get 50 cents for that one. And the next one we're going to get 50 cents as well. For the first 1,000 gallons we're going to get 50 cents for each of those gallons.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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So if we think about it in terms of marginal revenue, revenue per incremental gallon, well that first incremental gallon we're going to get 50 cents. That next incremental gallon we're going to get 50 cents for that one. And the next one we're going to get 50 cents as well. For the first 1,000 gallons we're going to get 50 cents for each of those gallons. For the first 10,000 gallons we'll get 50 cents per gallon. So our marginal revenue curve looks something like this. Our marginal revenue is a flat curve right at 50 cents a gallon.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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For the first 1,000 gallons we're going to get 50 cents for each of those gallons. For the first 10,000 gallons we'll get 50 cents per gallon. So our marginal revenue curve looks something like this. Our marginal revenue is a flat curve right at 50 cents a gallon. So that is our marginal revenue at 50 cents, at a market price of 50 cents per gallon. Now in this situation, what's a reasonable quantity that we would want to produce? And there's two dynamics here.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Our marginal revenue is a flat curve right at 50 cents a gallon. So that is our marginal revenue at 50 cents, at a market price of 50 cents per gallon. Now in this situation, what's a reasonable quantity that we would want to produce? And there's two dynamics here. We want to produce as much as possible, as much as possible, so that we can spread our fixed costs over those gallons. Spread our fixed costs is one way of thinking about it. Fixed costs.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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And there's two dynamics here. We want to produce as much as possible, as much as possible, so that we can spread our fixed costs over those gallons. Spread our fixed costs is one way of thinking about it. Fixed costs. Or another way of thinking about it is we have a certain amount of fixed costs. We are spending $1,000 no matter what. So why don't we try to get as much revenue as possible to try to make up for those fixed costs.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Fixed costs. Or another way of thinking about it is we have a certain amount of fixed costs. We are spending $1,000 no matter what. So why don't we try to get as much revenue as possible to try to make up for those fixed costs. Or if we think about it in terms of average fixed costs, the more quantity that we produce, the component of the cost for that from the fixed costs go down and down and down. So we want to have as much as possible to spread our fixed costs. Now, the one thing that we do need to think about is, especially once we kind of get beyond this little dip in the marginal cost curve, and as we're producing more and more units, the marginal cost is going up higher and higher and higher.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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So why don't we try to get as much revenue as possible to try to make up for those fixed costs. Or if we think about it in terms of average fixed costs, the more quantity that we produce, the component of the cost for that from the fixed costs go down and down and down. So we want to have as much as possible to spread our fixed costs. Now, the one thing that we do need to think about is, especially once we kind of get beyond this little dip in the marginal cost curve, and as we're producing more and more units, the marginal cost is going up higher and higher and higher. We don't want to produce so much that the cost of producing that incremental unit, the marginal cost of that incremental unit, is more than the marginal cost of that actual, or the marginal cost of that incremental unit is not higher than the marginal revenue that we're getting on that incremental unit. So until marginal revenue is equal to marginal cost. Or another way of thinking about it, you don't want marginal cost, and this is after we go through this little dip here, we're trying to do as much as possible, marginal cost is going higher and higher and higher, we don't want to produce this much right over here because here, the cost for that extra gallon is higher than what we're going to get for that extra gallon.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Now, the one thing that we do need to think about is, especially once we kind of get beyond this little dip in the marginal cost curve, and as we're producing more and more units, the marginal cost is going up higher and higher and higher. We don't want to produce so much that the cost of producing that incremental unit, the marginal cost of that incremental unit, is more than the marginal cost of that actual, or the marginal cost of that incremental unit is not higher than the marginal revenue that we're getting on that incremental unit. So until marginal revenue is equal to marginal cost. Or another way of thinking about it, you don't want marginal cost, and this is after we go through this little dip here, we're trying to do as much as possible, marginal cost is going higher and higher and higher, we don't want to produce this much right over here because here, the cost for that extra gallon is higher than what we're going to get for that extra gallon. Looks like that cost for that extra gallon might be 53 cents, while we're only gonna get 50 cents for that extra gallon. So every extra gallon we produce over here, we're going to be losing money. So you don't want marginal cost to be greater than marginal revenue.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Or another way of thinking about it, you don't want marginal cost, and this is after we go through this little dip here, we're trying to do as much as possible, marginal cost is going higher and higher and higher, we don't want to produce this much right over here because here, the cost for that extra gallon is higher than what we're going to get for that extra gallon. Looks like that cost for that extra gallon might be 53 cents, while we're only gonna get 50 cents for that extra gallon. So every extra gallon we produce over here, we're going to be losing money. So you don't want marginal cost to be greater than marginal revenue. Marginal revenue. So when you look at the curves like this, it makes sense to just say, well, when does marginal revenue equal marginal cost? And that's this point right over here, and that is the rational amount to produce.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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So you don't want marginal cost to be greater than marginal revenue. Marginal revenue. So when you look at the curves like this, it makes sense to just say, well, when does marginal revenue equal marginal cost? And that's this point right over here, and that is the rational amount to produce. So that is 9,000 units. So we're going to be at this line right over here, we're gonna produce 9,000 gallons of juice. Our revenue that we're going to get is going to be the area, is going to be the rectangle of the area that's as high as the price we're getting per unit times the number of units.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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And that's this point right over here, and that is the rational amount to produce. So that is 9,000 units. So we're going to be at this line right over here, we're gonna produce 9,000 gallons of juice. Our revenue that we're going to get is going to be the area, is going to be the rectangle of the area that's as high as the price we're getting per unit times the number of units. So this is going to be the total revenue we get if we were to shade this in, and I'm not going to shade it in because it's going to make my whole diagram messy. And what is our total cost? Well, we have our average total cost right here.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Our revenue that we're going to get is going to be the area, is going to be the rectangle of the area that's as high as the price we're getting per unit times the number of units. So this is going to be the total revenue we get if we were to shade this in, and I'm not going to shade it in because it's going to make my whole diagram messy. And what is our total cost? Well, we have our average total cost right here. This is, our average total cost are 48 cents. That's this little green triangle right over here. So it's 48 cents per unit times the total number of units.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Well, we have our average total cost right here. This is, our average total cost are 48 cents. That's this little green triangle right over here. So it's 48 cents per unit times the total number of units. Our costs are the area under the area in this rectangle. So if I were to shade this in, this little slightly smaller rectangle, and so our profits are the difference between the two. Our total revenue is the area under the rectangle that has this, the marginal revenue line as its upper bound, and our cost is a rectangle that has our average total cost, this line right over here, as its upper bound.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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So it's 48 cents per unit times the total number of units. Our costs are the area under the area in this rectangle. So if I were to shade this in, this little slightly smaller rectangle, and so our profits are the difference between the two. Our total revenue is the area under the rectangle that has this, the marginal revenue line as its upper bound, and our cost is a rectangle that has our average total cost, this line right over here, as its upper bound. So our profits, our profits in this circumstance are going to be the area right over here. The height is the difference between our marginal cost, which is the same as our marginal revenue and our total cost. So it's going to be, the height is going to be these two cents right over here.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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Our total revenue is the area under the rectangle that has this, the marginal revenue line as its upper bound, and our cost is a rectangle that has our average total cost, this line right over here, as its upper bound. So our profits, our profits in this circumstance are going to be the area right over here. The height is the difference between our marginal cost, which is the same as our marginal revenue and our total cost. So it's going to be, the height is going to be these two cents right over here. We're taking the difference between 50 and 48. So it's going to be two cents. And then the quantity produced is going to be 9,000 units.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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So it's going to be, the height is going to be these two cents right over here. We're taking the difference between 50 and 48. So it's going to be two cents. And then the quantity produced is going to be 9,000 units. So 9,000, we're making two cents per unit. Remember, our average cost, our average total cost is 48 cents per unit. We're selling them at 50 cents per unit, so we're making two cents per unit.
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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And then the quantity produced is going to be 9,000 units. So 9,000, we're making two cents per unit. Remember, our average cost, our average total cost is 48 cents per unit. We're selling them at 50 cents per unit, so we're making two cents per unit. I wrote 20. We're making two cents per unit. Two cents times 9,000 units, times 9,000 units, gives us, what is that?
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Marginal revenue and marginal cost Microeconomics Khan Academy.mp3
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We're selling them at 50 cents per unit, so we're making two cents per unit. I wrote 20. We're making two cents per unit. Two cents times 9,000 units, times 9,000 units, gives us, what is that? That's 18,000 cents, or $180 of profit. Now, what I want you to think about, and we'll answer this in the next video, is does it make sense, does it make sense to sell units at all, and if so, how many units should we sell, if, and here's the question, if the market price, if the market price is lower than your average total cost? So does it make sense, and how many units does it make sense to produce?
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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And just going with the logic that we introduced in the last video, you want to produce as much as possible to spread out the fixed costs. But you don't want to produce so much that the marginal cost is higher than your marginal revenue. And your marginal revenue is your market price. Every unit, every incremental unit, you're going to get $0.45. So you want to look at the quantity where your marginal revenue, the $0.45, is equal to your marginal cost. And we can look at it over here. So if we look at our marginal revenue, so let's say $0.45 is right over there.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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Every unit, every incremental unit, you're going to get $0.45. So you want to look at the quantity where your marginal revenue, the $0.45, is equal to your marginal cost. And we can look at it over here. So if we look at our marginal revenue, so let's say $0.45 is right over there. You want to look where the $0.45 is equal to your marginal cost. And it looks like it is right over there. Now we can even see it on our table.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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So if we look at our marginal revenue, so let's say $0.45 is right over there. You want to look where the $0.45 is equal to your marginal cost. And it looks like it is right over there. Now we can even see it on our table. When does our marginal cost equal $0.45? It equals that when we produce 8,000 gallons of our juice. Now the reason why this is somewhat interesting is that that point, the amount of revenue that we're getting per unit, our marginal revenue, is less than our total cost per unit.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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Now we can even see it on our table. When does our marginal cost equal $0.45? It equals that when we produce 8,000 gallons of our juice. Now the reason why this is somewhat interesting is that that point, the amount of revenue that we're getting per unit, our marginal revenue, is less than our total cost per unit. We're selling each unit at $0.45, but our total cost for each of those units is $0.48 on average. So this right over here is our total cost. So you might say, look, I'm making a loss on every unit.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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Now the reason why this is somewhat interesting is that that point, the amount of revenue that we're getting per unit, our marginal revenue, is less than our total cost per unit. We're selling each unit at $0.45, but our total cost for each of those units is $0.48 on average. So this right over here is our total cost. So you might say, look, I'm making a loss on every unit. The total amount of revenue I'm getting is a smaller rectangle over here. It's the quantity times the marginal revenue per unit. So this is the amount of revenue that I'm getting.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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So you might say, look, I'm making a loss on every unit. The total amount of revenue I'm getting is a smaller rectangle over here. It's the quantity times the marginal revenue per unit. So this is the amount of revenue that I'm getting. Let me color it in carefully. That is the amount of revenue that I'm getting. While my costs are this larger rectangle, my quantity times my average total cost per unit.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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So this is the amount of revenue that I'm getting. Let me color it in carefully. That is the amount of revenue that I'm getting. While my costs are this larger rectangle, my quantity times my average total cost per unit. And so what I end up with is if you take that revenue and you subtract out that quantity, you end up with a loss of exactly this much. You are operating in this situation at a loss. When you are producing 8,000 units and you're getting $0.45 per unit.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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While my costs are this larger rectangle, my quantity times my average total cost per unit. And so what I end up with is if you take that revenue and you subtract out that quantity, you end up with a loss of exactly this much. You are operating in this situation at a loss. When you are producing 8,000 units and you're getting $0.45 per unit. So does it make sense for you to do this? And we can even figure out the loss. You are producing 8,000 units and you're selling them for $0.45 a unit.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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When you are producing 8,000 units and you're getting $0.45 per unit. So does it make sense for you to do this? And we can even figure out the loss. You are producing 8,000 units and you're selling them for $0.45 a unit. And it costs you $0.48 per unit to produce them on average when you put all the costs in, $0.48 per unit. So you are losing $0.03 per unit. I guess gallon.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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You are producing 8,000 units and you're selling them for $0.45 a unit. And it costs you $0.48 per unit to produce them on average when you put all the costs in, $0.48 per unit. So you are losing $0.03 per unit. I guess gallon. We're talking about orange juice here. And it's times 8,000 gallons means that we are losing $240. 8,000 times $0.03 is $24,000, which is the same thing as $240.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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I guess gallon. We're talking about orange juice here. And it's times 8,000 gallons means that we are losing $240. 8,000 times $0.03 is $24,000, which is the same thing as $240. So does it make sense for us to do this? Well, one way to think about it, let's say we didn't do it. Let's say we're just like, hey, I'm not going to produce any gallons.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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8,000 times $0.03 is $24,000, which is the same thing as $240. So does it make sense for us to do this? Well, one way to think about it, let's say we didn't do it. Let's say we're just like, hey, I'm not going to produce any gallons. Well, then what's going to be our loss? Well, we're assuming that this is our fixed cost. We've already committed ourselves to this expenditure right over here.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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Let's say we're just like, hey, I'm not going to produce any gallons. Well, then what's going to be our loss? Well, we're assuming that this is our fixed cost. We've already committed ourselves to this expenditure right over here. Whether we produce no drops of orange juice, we are still going to be spending $1,000. So if we produce nothing, we are guaranteeing ourselves a weekly loss of $1,000. And so this is at least better than that.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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We've already committed ourselves to this expenditure right over here. Whether we produce no drops of orange juice, we are still going to be spending $1,000. So if we produce nothing, we are guaranteeing ourselves a weekly loss of $1,000. And so this is at least better than that. So by starting to produce some units, we are at least able to offset some of that loss. And we're spreading out that fixed cost over more and more and more gallons. And you might say, hey, well, why don't I just keep producing more and more units?
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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And so this is at least better than that. So by starting to produce some units, we are at least able to offset some of that loss. And we're spreading out that fixed cost over more and more and more gallons. And you might say, hey, well, why don't I just keep producing more and more units? Why don't I go here? Maybe I produce 9,000 units where the marginal cost, all of a sudden, is higher than our marginal revenue. And the reason why that won't make any sense to do is because if you produce that many units, then all of a sudden, each of those incremental units that you're producing beyond the 8,000, you're losing money on those.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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And you might say, hey, well, why don't I just keep producing more and more units? Why don't I go here? Maybe I produce 9,000 units where the marginal cost, all of a sudden, is higher than our marginal revenue. And the reason why that won't make any sense to do is because if you produce that many units, then all of a sudden, each of those incremental units that you're producing beyond the 8,000, you're losing money on those. That 8,001st unit, the marginal cost is going to be higher than the marginal revenue that you're bringing in on that unit. So you're going to be losing money. You're going to start having a lower profit than even the negative $240 loss.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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And the reason why that won't make any sense to do is because if you produce that many units, then all of a sudden, each of those incremental units that you're producing beyond the 8,000, you're losing money on those. That 8,001st unit, the marginal cost is going to be higher than the marginal revenue that you're bringing in on that unit. So you're going to be losing money. You're going to start having a lower profit than even the negative $240 loss. It'll start going to negative 240-something, negative 250, and so forth and so on. So you still don't want to produce beyond that point. And we'll touch more deeply on it in future videos.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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You're going to start having a lower profit than even the negative $240 loss. It'll start going to negative 240-something, negative 250, and so forth and so on. So you still don't want to produce beyond that point. And we'll touch more deeply on it in future videos. But this is essentially what differentiates the short-term supply curve from the long-run supply curve. In the short term, we're going to assume that we have these fixed costs. And so it's just going to make sense to produce equivalent to our marginal cost.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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And we'll touch more deeply on it in future videos. But this is essentially what differentiates the short-term supply curve from the long-run supply curve. In the short term, we're going to assume that we have these fixed costs. And so it's just going to make sense to produce equivalent to our marginal cost. But over the long run, maybe our fixed items, our capital, our machinery wears off, or maybe the contract for my employees wear off. And then we have a different cost structure over the long term. But we'll think about that in another video.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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And so it's just going to make sense to produce equivalent to our marginal cost. But over the long run, maybe our fixed items, our capital, our machinery wears off, or maybe the contract for my employees wear off. And then we have a different cost structure over the long term. But we'll think about that in another video. But the simple answer is, assuming these really are your fixed costs, you still want to produce as many units as possible so that your marginal cost is equal to your marginal revenue, which in this case is the market price. We are price takers. So it actually is a rational thing to produce 8,000 units and take a loss on that, and take a $240 per week loss, as opposed to just producing nothing and taking $1,000 per week loss.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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But we'll think about that in another video. But the simple answer is, assuming these really are your fixed costs, you still want to produce as many units as possible so that your marginal cost is equal to your marginal revenue, which in this case is the market price. We are price takers. So it actually is a rational thing to produce 8,000 units and take a loss on that, and take a $240 per week loss, as opposed to just producing nothing and taking $1,000 per week loss. Now, it might not be rational once these things have been worn out, your robots and the employees' contracts. It might not be rational to continue them past their term. And we'll think about that more in another, because obviously we are running at a loss.
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Marginal revenue below average total cost Microeconomics Khan Academy.mp3
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So it actually is a rational thing to produce 8,000 units and take a loss on that, and take a $240 per week loss, as opposed to just producing nothing and taking $1,000 per week loss. Now, it might not be rational once these things have been worn out, your robots and the employees' contracts. It might not be rational to continue them past their term. And we'll think about that more in another, because obviously we are running at a loss. This is not necessarily a good business to be in. But now that we've gotten into the business, we might as well stay in it in order to recoup some of our costs here, or at least spread them out, or at least not have a $1,000 per week loss. Anyway, see you in the next video.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And you can see the equilibrium price right over here, marked with this dotted line. And as we've talked about in multiple videos, the firms in that perfectly competitive market, the perfectly competitive firms, they just have to be price takers. So the market price is going to be their marginal revenue curve, and it's going to be this horizontal curve. And it would be rational for them to produce the quantity. So they're not going to set the price, but they can choose what quantity to produce. But it would be rational for them to keep producing while the marginal revenue is higher than the marginal cost, up to and including when the marginal revenue is equal to the marginal cost. So for this firm at this current state of affairs, it would be rational for them to produce this quantity right over there.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And it would be rational for them to produce the quantity. So they're not going to set the price, but they can choose what quantity to produce. But it would be rational for them to keep producing while the marginal revenue is higher than the marginal cost, up to and including when the marginal revenue is equal to the marginal cost. So for this firm at this current state of affairs, it would be rational for them to produce this quantity right over there. And as we've talked about in other videos, at that quantity, they're going to make an economic profit. And the way that we can see that is, at this quantity, this is the average total cost, that is your marginal revenue. And so you are going to get this much per unit, and then you multiply, so the height is how much you get per unit, and then you multiply that times the number of units.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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So for this firm at this current state of affairs, it would be rational for them to produce this quantity right over there. And as we've talked about in other videos, at that quantity, they're going to make an economic profit. And the way that we can see that is, at this quantity, this is the average total cost, that is your marginal revenue. And so you are going to get this much per unit, and then you multiply, so the height is how much you get per unit, and then you multiply that times the number of units. So the area of this rectangle is that positive economic profit that this firm will have. Now that's in the short run. But now let's think about what will likely happen in the long run.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And so you are going to get this much per unit, and then you multiply, so the height is how much you get per unit, and then you multiply that times the number of units. So the area of this rectangle is that positive economic profit that this firm will have. Now that's in the short run. But now let's think about what will likely happen in the long run. If folks see other folks making a positive economic profit, remember, economic profit doesn't just account for regular costs, it also includes opportunity costs. So a lot of people say, hey, I would want to put my resources into this market so that I can make that positive economic profit as well. But what's going to happen as you have entrance into this market?
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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But now let's think about what will likely happen in the long run. If folks see other folks making a positive economic profit, remember, economic profit doesn't just account for regular costs, it also includes opportunity costs. So a lot of people say, hey, I would want to put my resources into this market so that I can make that positive economic profit as well. But what's going to happen as you have entrance into this market? Well, that's going to shift the supply curve to the right. At any given price, you're going to have more supply is one way to think about it. So if that's supply curve, let's just call that one.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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But what's going to happen as you have entrance into this market? Well, that's going to shift the supply curve to the right. At any given price, you're going to have more supply is one way to think about it. So if that's supply curve, let's just call that one. Now you're going to have more entrance, more entrance. And what's going to happen? Well, you might get to something like, you might get to a situation like this.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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So if that's supply curve, let's just call that one. Now you're going to have more entrance, more entrance. And what's going to happen? Well, you might get to something like, you might get to a situation like this. Actually, let me see if I can draw it well. You might get to a situation like this, where you have more entrance, and you go to supply curve two. Now what's going to be the quantity that firm A produces in that world?
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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Well, you might get to something like, you might get to a situation like this. Actually, let me see if I can draw it well. You might get to a situation like this, where you have more entrance, and you go to supply curve two. Now what's going to be the quantity that firm A produces in that world? Remember, firm A is just one of many firms. Well, in this situation, we have a new equilibrium price. So if this was P sub one, now we have this new equilibrium price, P sub two, which is going to define a new marginal revenue curve for all of the players in this perfectly competitive market.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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Now what's going to be the quantity that firm A produces in that world? Remember, firm A is just one of many firms. Well, in this situation, we have a new equilibrium price. So if this was P sub one, now we have this new equilibrium price, P sub two, which is going to define a new marginal revenue curve for all of the players in this perfectly competitive market. And so the new marginal revenue curve is going to be right over there. Now in this situation, what is the rational quantity for firm A to produce? Well, once again, as long as marginal revenue is higher than marginal cost, it makes sense for them to produce more and more and more, up until the point that they are equal.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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So if this was P sub one, now we have this new equilibrium price, P sub two, which is going to define a new marginal revenue curve for all of the players in this perfectly competitive market. And so the new marginal revenue curve is going to be right over there. Now in this situation, what is the rational quantity for firm A to produce? Well, once again, as long as marginal revenue is higher than marginal cost, it makes sense for them to produce more and more and more, up until the point that they are equal. So now firm A would want to produce less, because the market price that it just has to take is less. But notice what happens as more and more entrance got into the market. The market price, which also defines this horizontal marginal revenue curve, went lower and lower to the point where firm A now in this situation is making no economic profit.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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Well, once again, as long as marginal revenue is higher than marginal cost, it makes sense for them to produce more and more and more, up until the point that they are equal. So now firm A would want to produce less, because the market price that it just has to take is less. But notice what happens as more and more entrance got into the market. The market price, which also defines this horizontal marginal revenue curve, went lower and lower to the point where firm A now in this situation is making no economic profit. At this point, not only is marginal revenue intersecting marginal cost, but that's exactly at the point at which marginal cost is equaling average total cost. So one way to think about it is, in a perfectly competitive firm, they are productively efficient. They are producing the quantity that minimizes their average total cost.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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The market price, which also defines this horizontal marginal revenue curve, went lower and lower to the point where firm A now in this situation is making no economic profit. At this point, not only is marginal revenue intersecting marginal cost, but that's exactly at the point at which marginal cost is equaling average total cost. So one way to think about it is, in a perfectly competitive firm, they are productively efficient. They are producing the quantity that minimizes their average total cost. We've already talked about that point where marginal cost and average total cost intersect. That's going to be the minimum point for average total cost. And why is that?
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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They are producing the quantity that minimizes their average total cost. We've already talked about that point where marginal cost and average total cost intersect. That's going to be the minimum point for average total cost. And why is that? Well, while marginal cost is below average total cost, average total cost is gonna get lower and lower and lower, and then once marginal cost gets higher than average total cost, well then the average total cost curve will start curving up. So we just saw a situation that even where we see economic profit in the short run, in the long run, entrance are going to go into that market and it's going to reduce the economic profit down to zero. And at that point, the firm that has that zero economic profit, they are productively efficient.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And why is that? Well, while marginal cost is below average total cost, average total cost is gonna get lower and lower and lower, and then once marginal cost gets higher than average total cost, well then the average total cost curve will start curving up. So we just saw a situation that even where we see economic profit in the short run, in the long run, entrance are going to go into that market and it's going to reduce the economic profit down to zero. And at that point, the firm that has that zero economic profit, they are productively efficient. They are producing at the minimum point of their average total cost curve. And we've already talked before that this equilibrium point right over here in our market, because our demand and supply curves, the intersection point defines the price, our equilibrium price and quantities, we are also allocatively efficient. We've talked about things like deadweight loss in the past.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And at that point, the firm that has that zero economic profit, they are productively efficient. They are producing at the minimum point of their average total cost curve. And we've already talked before that this equilibrium point right over here in our market, because our demand and supply curves, the intersection point defines the price, our equilibrium price and quantities, we are also allocatively efficient. We've talked about things like deadweight loss in the past. That is not happening right over here. Our marginal benefit is equal to our marginal cost right at that equilibrium price and quantity. Now some of you might be saying, well, what about the other situation?
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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We've talked about things like deadweight loss in the past. That is not happening right over here. Our marginal benefit is equal to our marginal cost right at that equilibrium price and quantity. Now some of you might be saying, well, what about the other situation? What about if for some reason we were in a, let's call it a supply curve three, let's say people overshot, too many people joined into this market. So let's say we went to supply curve three, well what's going to happen? And let me label this.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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Now some of you might be saying, well, what about the other situation? What about if for some reason we were in a, let's call it a supply curve three, let's say people overshot, too many people joined into this market. So let's say we went to supply curve three, well what's going to happen? And let me label this. This is right over here, this is marginal revenue curve one, which is equal to price one. This is marginal revenue curve two, which is equal to price two. And then this would define, so this right over here would be price three, price three, which would define marginal revenue curve three.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And let me label this. This is right over here, this is marginal revenue curve one, which is equal to price one. This is marginal revenue curve two, which is equal to price two. And then this would define, so this right over here would be price three, price three, which would define marginal revenue curve three. So marginal revenue curve three, which is equal to price three. Well, if too many entrants joined into that market, now firm A has a more difficult scenario. They would produce at this quantity, we've talked about many times already, but at that quantity, each unit, their average total cost is higher than that revenue they're getting.
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Long-run economic profit for perfectly competitive firms Microeconomics Khan Academy.mp3
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And then this would define, so this right over here would be price three, price three, which would define marginal revenue curve three. So marginal revenue curve three, which is equal to price three. Well, if too many entrants joined into that market, now firm A has a more difficult scenario. They would produce at this quantity, we've talked about many times already, but at that quantity, each unit, their average total cost is higher than that revenue they're getting. So they're going to be running at an economic loss in the short run. But what would happen in the long run? Well, firm A in the long run would probably exit the market and other firms who are running an economic loss would exit the market.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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In other videos, we have already looked at production possibility curves and output tables in order to calculate opportunity costs of producing a certain product in a certain country. And then we use that to think about comparative advantage. We're going to do something very similar in this video, but instead of thinking about, or instead of starting with output, we're gonna start with input. So right over here, we have a table that shows us the worker hours per item per country. So instead of this being an output table where we say in a given country, how much of, say, toy cars can a worker in country A produce per day, here we're saying how many hours does a worker in country A take to produce a toy car? In country A, it is two hours. That labor, that two hours of labor, this is the input.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So right over here, we have a table that shows us the worker hours per item per country. So instead of this being an output table where we say in a given country, how much of, say, toy cars can a worker in country A produce per day, here we're saying how many hours does a worker in country A take to produce a toy car? In country A, it is two hours. That labor, that two hours of labor, this is the input. So we're not counting the number of cars per day here. We're saying how many hours per car we need to put in to produce it. Similarly, we have the input required in country A to produce a belt, one hour of worker time.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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That labor, that two hours of labor, this is the input. So we're not counting the number of cars per day here. We're saying how many hours per car we need to put in to produce it. Similarly, we have the input required in country A to produce a belt, one hour of worker time. In country B, four hours of worker time produces a toy car, and in country B, three hours of worker time produce a belt. So what we're gonna do next is convert this into the world that you might be more familiar with, of thinking in an output world. And to do that, we'll just assume that there are eight working hours, eight working hours per day in either country.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Similarly, we have the input required in country A to produce a belt, one hour of worker time. In country B, four hours of worker time produces a toy car, and in country B, three hours of worker time produce a belt. So what we're gonna do next is convert this into the world that you might be more familiar with, of thinking in an output world. And to do that, we'll just assume that there are eight working hours, eight working hours per day in either country. And so from this, can we construct an output table? Let me put this right over here. Output, output table, where once again, we're gonna think about the output in country A, we're gonna think about the output in country B, and this is going to be in how many units of that product can a worker produce per day in each of those countries.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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And to do that, we'll just assume that there are eight working hours, eight working hours per day in either country. And so from this, can we construct an output table? Let me put this right over here. Output, output table, where once again, we're gonna think about the output in country A, we're gonna think about the output in country B, and this is going to be in how many units of that product can a worker produce per day in each of those countries. So once again, we're gonna have toy cars in this row, and we're going to have belts, belts in this row. And let me just draw some lines so it's clear that we're dealing with a table here. So there we go.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Output, output table, where once again, we're gonna think about the output in country A, we're gonna think about the output in country B, and this is going to be in how many units of that product can a worker produce per day in each of those countries. So once again, we're gonna have toy cars in this row, and we're going to have belts, belts in this row. And let me just draw some lines so it's clear that we're dealing with a table here. So there we go. Then one more column. And so see if you can fill these in. So how many toy cars per worker per day can we produce in country A?
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So there we go. Then one more column. And so see if you can fill these in. So how many toy cars per worker per day can we produce in country A? Then think about it for belts, then think about both of them for country B. Pause the video and try to figure that out. All right, now let's think about how many toy cars per worker per day.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So how many toy cars per worker per day can we produce in country A? Then think about it for belts, then think about both of them for country B. Pause the video and try to figure that out. All right, now let's think about how many toy cars per worker per day. Let me make it very clear. We're thinking per worker per day here. Because if we can fill out this output table from this, I guess you could call this an input table, then we can think about opportunity costs in the traditional way, and then we could think about in which country do we have a comparative advantage.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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All right, now let's think about how many toy cars per worker per day. Let me make it very clear. We're thinking per worker per day here. Because if we can fill out this output table from this, I guess you could call this an input table, then we can think about opportunity costs in the traditional way, and then we could think about in which country do we have a comparative advantage. So let's see, toy cars in country A. If it takes two hours to produce one toy car in country A, and if you're working, if the average, or if the worker is working eight hours per day, well then a worker can produce four cars. Four cars times two hours is eight hours.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Because if we can fill out this output table from this, I guess you could call this an input table, then we can think about opportunity costs in the traditional way, and then we could think about in which country do we have a comparative advantage. So let's see, toy cars in country A. If it takes two hours to produce one toy car in country A, and if you're working, if the average, or if the worker is working eight hours per day, well then a worker can produce four cars. Four cars times two hours is eight hours. So an average worker per day in country A can produce four toy cars. Let me write that in that red color. Four toy cars.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Four cars times two hours is eight hours. So an average worker per day in country A can produce four toy cars. Let me write that in that red color. Four toy cars. I just took eight hours and I divided by the number of hours it takes to produce a toy car. Similarly for belts, if I have eight hours and it takes an hour for a worker to make one belt, then per worker per day, eight divided by one, I could produce eight belts. And we could do the same thing for country B, and I encourage you to pause the video if you haven't done so already and try to fill this column out.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Four toy cars. I just took eight hours and I divided by the number of hours it takes to produce a toy car. Similarly for belts, if I have eight hours and it takes an hour for a worker to make one belt, then per worker per day, eight divided by one, I could produce eight belts. And we could do the same thing for country B, and I encourage you to pause the video if you haven't done so already and try to fill this column out. Well in country B, if it takes four hours to produce a toy car per worker, that means you take eight hours divided by four hours that you could produce two toy cars in a day per worker. If it takes three hours to produce a belt, well then you take your eight hours, divide it by three hours per belt, and you're gonna be able to make 8 3rd belts per worker per day. This is the same thing as two and 2 3rd belts per worker per day.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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And we could do the same thing for country B, and I encourage you to pause the video if you haven't done so already and try to fill this column out. Well in country B, if it takes four hours to produce a toy car per worker, that means you take eight hours divided by four hours that you could produce two toy cars in a day per worker. If it takes three hours to produce a belt, well then you take your eight hours, divide it by three hours per belt, and you're gonna be able to make 8 3rd belts per worker per day. This is the same thing as two and 2 3rd belts per worker per day. So as you can see, we can easily translate between the input world and the output world, and then we could use this to calculate opportunity cost. So let's do that. Let me write opportunity, opportunity, opportunity cost, and I'll make another table here.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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This is the same thing as two and 2 3rd belts per worker per day. So as you can see, we can easily translate between the input world and the output world, and then we could use this to calculate opportunity cost. So let's do that. Let me write opportunity, opportunity, opportunity cost, and I'll make another table here. So country A, country B, and then I have the toy cars, toy cars, and then I have the belts. The belt's in that orange color. I have the belts, and then let me set up my table.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Let me write opportunity, opportunity, opportunity cost, and I'll make another table here. So country A, country B, and then I have the toy cars, toy cars, and then I have the belts. The belt's in that orange color. I have the belts, and then let me set up my table. We're almost there. At any point in time, pause this video and see if you can figure out the opportunity cost given the information that we already have. We took this table to figure out this table, and now we could take, and now we could take, and now we could take this table to figure out this one.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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I have the belts, and then let me set up my table. We're almost there. At any point in time, pause this video and see if you can figure out the opportunity cost given the information that we already have. We took this table to figure out this table, and now we could take, and now we could take, and now we could take this table to figure out this one. Well let's do this together now. So toy cars. What's the opportunity cost in country A?
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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We took this table to figure out this table, and now we could take, and now we could take, and now we could take this table to figure out this one. Well let's do this together now. So toy cars. What's the opportunity cost in country A? Well one way to think about it is, in country A, the same energy to produce four, four toy cars, I'll call it four C, C for cars, we could also use that to produce eight belts. So if I were to divide both sides by four, the energy to create one car is equal to the energy to create two belts. So my opportunity cost of a car is two belts, and if I start with this original equation and just divide both sides by eight, I would solve for the energy for a belt, and so that would be four over eight is 1 1⁄2 of the energy to make a car is equal to the energy to make a belt, and so the opportunity cost of a belt is 1 1⁄2 a car.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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What's the opportunity cost in country A? Well one way to think about it is, in country A, the same energy to produce four, four toy cars, I'll call it four C, C for cars, we could also use that to produce eight belts. So if I were to divide both sides by four, the energy to create one car is equal to the energy to create two belts. So my opportunity cost of a car is two belts, and if I start with this original equation and just divide both sides by eight, I would solve for the energy for a belt, and so that would be four over eight is 1 1⁄2 of the energy to make a car is equal to the energy to make a belt, and so the opportunity cost of a belt is 1 1⁄2 a car. 1 1⁄2 a car. And like always, this and this are reciprocals of each other. Now we could do the same exercise for country B, and once again, I keep emphasizing, try to pause the video.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So my opportunity cost of a car is two belts, and if I start with this original equation and just divide both sides by eight, I would solve for the energy for a belt, and so that would be four over eight is 1 1⁄2 of the energy to make a car is equal to the energy to make a belt, and so the opportunity cost of a belt is 1 1⁄2 a car. 1 1⁄2 a car. And like always, this and this are reciprocals of each other. Now we could do the same exercise for country B, and once again, I keep emphasizing, try to pause the video. If you do this on your own as opposed to just watching me do it, it'll stick a lot better in your brain. All right, in country B, the same energy to make two cars, toy cars, with that same energy, I could make 8 3rds, 8 3rds belts, 8 3rds belts right over here. So the energy to make a car, divide both sides by two, is equal to, instead of one car, I can make 4 3rds of a belt.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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Now we could do the same exercise for country B, and once again, I keep emphasizing, try to pause the video. If you do this on your own as opposed to just watching me do it, it'll stick a lot better in your brain. All right, in country B, the same energy to make two cars, toy cars, with that same energy, I could make 8 3rds, 8 3rds belts, 8 3rds belts right over here. So the energy to make a car, divide both sides by two, is equal to, instead of one car, I can make 4 3rds of a belt. And so I'll just write this as 1 1⁄3 of a belt. And then if I start right over here and I multiply both sides by 3⁸, actually, let me do that over here. So I have 3⁸ times 2c is equal to 8 3rds B times 3⁸.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So the energy to make a car, divide both sides by two, is equal to, instead of one car, I can make 4 3rds of a belt. And so I'll just write this as 1 1⁄3 of a belt. And then if I start right over here and I multiply both sides by 3⁸, actually, let me do that over here. So I have 3⁸ times 2c is equal to 8 3rds B times 3⁸. These cancel out. And over here, I'm gonna have 6⁸c. 6⁸c is the same thing as 3⁴c is equal to B.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So I have 3⁸ times 2c is equal to 8 3rds B times 3⁸. These cancel out. And over here, I'm gonna have 6⁸c. 6⁸c is the same thing as 3⁴c is equal to B. So instead of making one belt, I could take that same energy and make 3⁴ of a toy car. 3⁴ of a toy car. So given everything that we've just done, which country has the comparative advantage in toy cars?
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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6⁸c is the same thing as 3⁴c is equal to B. So instead of making one belt, I could take that same energy and make 3⁴ of a toy car. 3⁴ of a toy car. So given everything that we've just done, which country has the comparative advantage in toy cars? Well, to figure that out, we just look at the opportunity costs for toy cars and we compare them. In country A, the opportunity cost is two belts. One country B, it's only 1 1⁄3 belts.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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So given everything that we've just done, which country has the comparative advantage in toy cars? Well, to figure that out, we just look at the opportunity costs for toy cars and we compare them. In country A, the opportunity cost is two belts. One country B, it's only 1 1⁄3 belts. So country B has the comparative advantage right over here. Comparative advantage in toy cars. And then in belts, 1⁄2 of a car is less than 3⁴ of a car.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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One country B, it's only 1 1⁄3 belts. So country B has the comparative advantage right over here. Comparative advantage in toy cars. And then in belts, 1⁄2 of a car is less than 3⁴ of a car. In belts, in belts, we see that country A has the comparative advantage. And now what's always interesting about thinking about this is, notice, country B has the comparative advantage in toy cars. It has less of an opportunity cost in toy cars, even though country A has the absolute advantage.
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Input approach to determining comparative advantage AP Macroeconomics Khan Academy.mp3
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And then in belts, 1⁄2 of a car is less than 3⁴ of a car. In belts, in belts, we see that country A has the comparative advantage. And now what's always interesting about thinking about this is, notice, country B has the comparative advantage in toy cars. It has less of an opportunity cost in toy cars, even though country A has the absolute advantage. Its workers are more efficient at producing toy cars. A worker can produce four cars in country A versus two in country B. But despite that, because of the opportunity cost, it would actually make sense for country B to focus on cars and for country A to focus on the belts.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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And as you can imagine, the answer is, of course we can. And it's interesting to think about how does the quantity, the percent change in quantity supplied, relate to percent change in prices? So for example, let's say we have a lemonade stand of some sort, so this is price on that axis, that is quantity on that axis. And let's say that our supply curve looks something like that. Obviously, the higher the price, the more quantity we're willing to supply. And let's say at a price of $1, the quantity supplied is going to be 10, and this is going to be in gallons per week. So the quantity supplied is going to be 10 gallons per week.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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And let's say that our supply curve looks something like that. Obviously, the higher the price, the more quantity we're willing to supply. And let's say at a price of $1, the quantity supplied is going to be 10, and this is going to be in gallons per week. So the quantity supplied is going to be 10 gallons per week. And let's say that if the price goes to $2, the quantity supplied goes to 16 gallons per week. So what is the elasticity of supply roughly over this period right over here? So the elasticity of supply, and you could imagine how we're going to calculate it.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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So the quantity supplied is going to be 10 gallons per week. And let's say that if the price goes to $2, the quantity supplied goes to 16 gallons per week. So what is the elasticity of supply roughly over this period right over here? So the elasticity of supply, and you could imagine how we're going to calculate it. It's going to be the percent change in quantity supplied over our percent change in price. So what is our percent change in price? Well, we went from $1 to $2.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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So the elasticity of supply, and you could imagine how we're going to calculate it. It's going to be the percent change in quantity supplied over our percent change in price. So what is our percent change in price? Well, we went from $1 to $2. So this part right over here is going to be, we went up by $1. So we went up by $1 per gallon. So it's going to be up by $1.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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Well, we went from $1 to $2. So this part right over here is going to be, we went up by $1. So we went up by $1 per gallon. So it's going to be up by $1. And we don't use 1, we don't use our starting point as our base like we would do when we're traditionally finding a percent change, because we want to have the same percent change whether we go from 1 to 2 as from 2 to 1. So instead, the convention when we think about elasticities is use the midpoint of these two, or use the average of these two. So 1 plus 2 is 3.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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So it's going to be up by $1. And we don't use 1, we don't use our starting point as our base like we would do when we're traditionally finding a percent change, because we want to have the same percent change whether we go from 1 to 2 as from 2 to 1. So instead, the convention when we think about elasticities is use the midpoint of these two, or use the average of these two. So 1 plus 2 is 3. 3 divided by 2 is 1.5. So it's 1 over $1.50. Or you could say $1.50 is right in between these two things.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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So 1 plus 2 is 3. 3 divided by 2 is 1.5. So it's 1 over $1.50. Or you could say $1.50 is right in between these two things. And 1 over $1.50, this is 67%, roughly. So this is approximately 67. We have approximately a 67% change in price based on how we just calculated.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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Or you could say $1.50 is right in between these two things. And 1 over $1.50, this is 67%, roughly. So this is approximately 67. We have approximately a 67% change in price based on how we just calculated. Remember, we're using the midpoint as our base. And then our percent change in quantity supplied, that's this, so this right over here. We went from 10 to 16.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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We have approximately a 67% change in price based on how we just calculated. Remember, we're using the midpoint as our base. And then our percent change in quantity supplied, that's this, so this right over here. We went from 10 to 16. So we have plus 6 over a base of midpoint between 10 and 16 is 13. 10 plus 6 is 26 divided by 2 is 13. 6 over 13, which is going to be 40-something percent.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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We went from 10 to 16. So we have plus 6 over a base of midpoint between 10 and 16 is 13. 10 plus 6 is 26 divided by 2 is 13. 6 over 13, which is going to be 40-something percent. Get a calculator out. So we have 6 divided by 13 gives us 46%. So this right over here is 46%.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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6 over 13, which is going to be 40-something percent. Get a calculator out. So we have 6 divided by 13 gives us 46%. So this right over here is 46%. So we have when we had, based on the way we calculated, a 67% increase in price, we had a 46% increase in quantity supplied. So this is a 46% increase in quantity supplied. And so we can see our elasticity of supply is going to be 46% over 67%.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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So this right over here is 46%. So we have when we had, based on the way we calculated, a 67% increase in price, we had a 46% increase in quantity supplied. So this is a 46% increase in quantity supplied. And so we can see our elasticity of supply is going to be 46% over 67%. So it's going to be something less than 1. So that's going to be that divided by 0.6666. It keeps going on forever.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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And so we can see our elasticity of supply is going to be 46% over 67%. So it's going to be something less than 1. So that's going to be that divided by 0.6666. It keeps going on forever. Gives us to 0.69. So this gives us an elasticity of supply of 0.69. Maybe I can say it approximately, 0.69, which tells us that we get a smaller percent, at least at this price point right over here, we get a smaller percent change in quantity supplied than our percent change in price.
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Elasticity of supply Elasticity Microeconomics Khan Academy.mp3
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It keeps going on forever. Gives us to 0.69. So this gives us an elasticity of supply of 0.69. Maybe I can say it approximately, 0.69, which tells us that we get a smaller percent, at least at this price point right over here, we get a smaller percent change in quantity supplied than our percent change in price. Now let's think about, like we did when we thought about the elasticities of demand, let's think about different scenarios. So let's think about a scenario that is inelastic, that is maybe perfectly inelastic. So let's say that price and quantity.
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