Introduction to Microeconomics – 7 of 14 – The Theory of the Firm – Murray N Rothbard

INTRODUCTION TO MICROECONOMICS
Presented by Murray N. Rothbard in 1986 at New York Polytechnic University. Recorded by Hans-Hermann Hoppe.

7. Intro to Micro: Mid-Term Review and The Theory of the Firm

The objective of the corporate firm is to maximize profits and avoid losses – the same objective of the free market. But the costs are paid out before the income comes in. Stockholders will sell stock to shake up the managers. Government firms – agencies – do not have shareholders and there are no shares to be sold.

Part 7 of 14. Presented in 1986 at New York Polytechnic University.

This lecture as a Podcast: http://enemyofthestate.podomatic.com/

Sourced from: https://mises.org/library/introduction-microeconomics

Source: Introduction to Microeconomics – 7 of 14 – The Theory of the Firm – Murray N Rothbard – YouTube

http://www.readrothbard.com/introduction-to-microeconomics-7-of-14-the-theory-of-the-firm-murray-n-rothbard

TRANSCRIPT

00:00
ah mid term i was on thursday so today
00:02
we’re going to give a wrap-up midterms
00:04
on thursday today we’re going to give a
00:07
wrap up of look course so far and then
00:10
that’s the answer questions or whatever
00:11
honor of your gotten okay we we’ve done
00:19
the first two parts of the course on
00:22
demand and supply and price and
00:25
applications and case studies of
00:29
intervention government intervention
00:30
into the PI system we started with the
00:34
law the meshing marginal utility in
00:36
other words has given the greater this
00:42
is this is utility all night y axis this
00:45
is quantity the greater the supply the
00:47
good the lower the utility of each unit
00:52
that’s the law of the measuring more
00:54
utility so that if you this solves the
01:07
value paradox in other words the idea
01:09
how come that how come water even though
01:14
it’s extremely important for life or
01:16
bread which is important for life is
01:17
very cheap the other hand diamonds with
01:19
your Emir luxuriant prepara are very
01:21
expensive that’s the famous value
01:23
paradox saw by concentrating on the unit
01:27
in other words that the people not do
01:29
not evaluate the entire supply of bread
01:31
or water or diamonds for all climber in
01:34
current con a value of each unit each
01:36
loaf of bread each carat of diamonds
01:38
each glass of water or gallon or
01:41
whatever and this solves the value
01:45
paradox because there’s a lot more bread
01:47
and water around them our diamonds so
01:49
the relative scarcity of diamonds are
01:52
greater unit in other words what lower
01:58
margin utility margin margin
02:04
concentrates or focuses on each unit and
02:06
utility means value or placed on a unit
02:09
so so this means as I say
02:13
the greater the supply of it does a
02:15
lower the value of each unit we don’t
02:19
know the exact with slope of this and I
02:21
fact you can’t even talk about the slope
02:22
since this uh this value is an ordinal
02:24
concept utilities ordinal concept but we
02:27
do know it’s lower as you get more units
02:30
of a good okay taking that and also
02:32
taking a fact every individual in Morgan
02:34
is different value scale the different
02:37
different valuations we places he or she
02:40
placed on different commodities you wind
02:42
up of a falling demand curve in other
02:45
words that the price of any good or
02:49
service and the y-axis quantity on the
02:51
x-axis at any given price at a higher
02:55
price people will buy less of it a lower
02:57
price of my more of it you get something
03:00
like that we don’t know that it’s linear
03:04
demand curve we just know that it’s
03:05
falling nuts s is a little bit like then
03:07
utility slot on utility curve there we
03:11
just for convenience we make it a
03:12
straight line but only know is it’s
03:15
going to be people will buy more of it
03:17
at a lower price and less of a higher
03:18
price for key am I knowing that you
03:21
already know more than most the people
03:22
in the United States because most people
03:24
think of the magter bit think of it at
03:26
all is vertical and call us of what the
03:28
price is people by the same amount you
03:30
know they in their daily lives of course
03:32
don’t act out what so we have a falling
03:38
demand curve and the and the major
03:39
property of the demand curve is its
03:41
elasticity this is the this is an
03:48
analogy for physics or physical sciences
03:50
where a spring is moral life you place a
03:52
certain our way down a spring is more
03:53
elastic the more distance it moves by
03:56
putting weight on it less elastic less
03:58
distance it moves similarly that
04:01
elasticity is how much if you get for
04:02
price falls price of any good for how
04:05
much will quantity increase but only
04:08
increases a little bit the man cover
04:10
consider inelastic if it increases a lot
04:12
considered elastic so in a sense of
04:15
flattered given given the given point I
04:19
can hear the flatter the curve the more
04:22
elastic it isn’t a seat for a less
04:24
elastic man curve cannot be
04:27
zontal because it’s falling at any given
04:31
price and it can’t be vertical to swing
04:33
reason but somewhere any demand curve
04:36
will be within this structure you can
04:41
define it you can define the artists
04:43
name and you know in various ways the
04:45
textbook definition is all right for its
04:47
own purposes where the percentage usse
04:50
the percentage change in quantity
04:51
divided by the sudden change of price
04:53
that’s one way to do it the trouble of
04:57
that is there’s nothing wrong with it
04:58
mathematically this is trouble it’s
05:00
irrelevant economically nobody really
05:01
measures this thing is nobody knows what
05:03
it is anyway and for the economic point
05:06
of view in point view of the businessman
05:08
the firm of the industry what’s really
05:09
important is the direction what’s what
05:11
happens to total revenue that’s what
05:12
it’s really concerned with to cut price
05:14
will total revenue go up or go down it
05:16
could work you away since total revenue
05:19
is equal to ice times quantity and since
05:22
as the price fool these two things are
05:25
going up as a direction in other words
05:26
if the price goes down quantity goes up
05:28
and what the impact on total revenue is
05:31
purely as part of depends on the problem
05:33
has I look good and people buying it on
05:35
what sort of stock nobody knows in
05:37
advance what of it we can have hunches
05:39
but nobody knows any precision what the
05:43
electricity demand curve is at any time
05:45
so so the way I define the electricity
05:49
is the man curve is elastic if when
05:54
price change would price falls he’ll rub
05:57
knee goes up so the total revenue in
06:00
this area here which is court five times
06:02
quantity is greater than this so the man
06:06
curve is elastic if when price falls
06:12
price full total revenue increases and
06:19
the makarov demand curve is inelastic if
06:22
went high schools pro revenue drops so
06:26
this would be elastic and this would be
06:28
in elastic and inelastic if when price
06:39
falls
06:41
total revenue decreases at the total
06:47
revenue remains the same was it some
06:50
online here then it’s called unitarily
06:52
elastic a unit elasticity so this is
06:55
unit or the office ly equal to one its
07:02
price falls whoever you remain the same
07:09
so in other words we have a schedule
07:11
here with some this is price and this is
07:15
quantity and its price of ten dollars of
07:18
whatever it is the item of the case or
07:20
whatever and quantity sold 100 total
07:23
revenue is a thousand a price goes down
07:27
a nine and quantity goes up to 120 is
07:33
1080 and so that means a demand curve an
07:35
elastic and that zones in this region if
07:38
the other hand only goes up to hunt of
07:39
them thighs and it’s been nice by 45
07:47
right that case whole revenue is
07:48
inelastic if it just percentage changes
07:52
exactly the same and it winds up with a
07:53
thousand and thence Dennis Lee till 11
07:55
units unitarily elastic unit elasticity
07:58
neither elastic or inelastic we saw that
08:03
the main curves as they were drawn by
08:06
economics textbooks in economics
08:07
textbooks for 1943 approximately work
08:10
all like this in a rectangular hyperbola
08:12
which means that the total revenue was
08:15
always constant never changed and the
08:20
way this got out of the textbook it
08:22
takes a lot to get something out of a
08:23
textbook what’s it gonna shine in
08:24
textbook takes with dynamite you get it
08:26
out and with pressure stiegler and later
08:29
nobel prize or prize winner and economic
08:32
said well why is boy finally say there’s
08:34
no evidence for the sunset so evidence
08:36
tour of your mains of saying that i
08:38
probably changing with why don’t we make
08:39
it a straight line ever since then
08:41
demand curves have been straight lines
08:42
no evidence for that either but Lisa
08:44
doesn’t assume custom total revenue
08:45
absolute you can see that their changes
08:47
that you go up in there so this is the
08:51
most important property of the main
08:52
service elife Sicily
08:54
and that depends where the co revenue
08:56
goes up or down when the price changes
08:58
of course the exact opposite occurs when
09:01
you go up the price increase more than
09:03
economics and microeconomics it always
09:05
change the sign so it’s symmetrical so
09:07
this is the price goes up it was this is
09:10
a unit you know i solicit e if the price
09:12
goes increases pogrom you drop a fool
09:15
exact opposite happens you know up put
09:17
three words you up in here Pais goes up
09:23
from here to here the toll revenues
09:25
drops as an elastic curve until Emma
09:28
goes on personalized that curve so that
09:29
again you just reverse the focus if
09:32
price increases until revenue increases
09:37
then it’s an elastic demand curve and
09:40
similarly for the price increases in
09:42
program remains the same you still have
09:43
your unit elastic range any given the
09:47
man curve Ellis to see changes in the
09:49
course of the curb just because it
09:50
flattered steep doesn’t necessarily mean
09:52
it’s the last thing I don’t you go down
09:54
here might change go up here
09:56
particularly you might have a seat
09:58
looking Kerr but eventually keep raising
10:00
the price of become elastic no words
10:02
will become tourism start falling it
10:05
increases spice of wonder about a twenty
10:07
dollars i love whatever those people
10:08
total revenue suckers will spend on with
10:11
for considerably so you can’t just look
10:14
the only time you can look at the
10:15
flatness or steepness and say that’s you
10:18
last year when L I think when you have
10:19
the same point inferring the same point
10:25
okay so that’s the that’s the nice to
10:28
see the demand property of that and then
10:32
we then we went to then we brought in
10:35
the supply line we now have less this
10:37
Needham and oh one thing about this need
10:40
a man again is that you know we don’t
10:42
know what the necessity is we do know
10:44
the more range of choice other things
10:46
being equal a greater the range of
10:47
choice in the consumer of the buyer has
10:51
a morir elastic that the man curve will
10:52
tend to be so in other words if the
10:55
place of winter dragos up manal and
10:58
lobster sauce ft and all the other bread
11:01
prices remain the same it will be
11:03
tremendous falling off and purchased the
11:04
other hand if all the bid prices go up
11:06
will be if
11:07
woven that merely is right because it
11:09
won’t be that range of choice consumers
11:11
wouldn’t be able to share from under
11:12
brother it’s a tasty bread or pepperidge
11:14
fun all going up you have to shift the
11:16
roles or you know whatever so similarly
11:20
here if the wonder bread is the only
11:22
firm a cut to the price you have a big
11:24
increase in one of the purchase if all
11:27
of Reds cut their prices you’d have a
11:29
small increase not nearly as much so the
11:32
other thing we can say is that the man
11:33
curve for the firm individual firm is
11:37
always greater than a man curve the
11:38
industry could be a little bit greater
11:40
could be a lot later we don’t know but
11:41
we do know it will be more elastic man
11:44
careful friend unless of course the
11:45
industry has only one for a minute
11:47
becomes the same thing so all right
11:51
don’t we then we move from that to the
11:54
determination of price most important
11:57
single item single part of a course how
12:01
are prices on the market determine and
12:02
two thing in the market of course you
12:04
have exchange of two commodities and two
12:06
people good and every every change is
12:09
that sort of exchange i buy a sandwich
12:11
for whatever it is but gonna half or
12:13
something I’m exchanging a bug on half
12:15
or a sandwich so twice again and y-axis
12:19
quantity x axis you have demand curve
12:21
for any given product fully demand curve
12:24
and have us at any given time you have a
12:26
vertical supply line and you have a
12:28
certain number of goods which are out
12:29
there on the market ready to be sold
12:31
today heads of lettuce stereo sets years
12:37
years whatever happens to be our nails
12:38
is a certain amount ready to be sold and
12:41
in certain demand curve and then like we
12:44
maintain is that the day-to-day price on
12:46
the market will be the intersection
12:49
point between of the man current supply
12:51
line and this will be the equilibrium
12:54
price I mean good or service it’s a good
12:59
hour service differs from that differs
13:01
from the equilibrium though their forces
13:03
of the market immediately bring it back
13:04
to that particular in this section point
13:06
that’s why it’s called equilibrium
13:07
because equilibrium physics is if
13:10
something tends to rest at a certain
13:11
point that is displaced in that point
13:13
goes right back to it simply market
13:15
forces bring it right back to the
13:18
equilibrium point market forces in this
13:20
case the
13:21
two things one of the free prices though
13:23
the price isn’t free to move and to
13:26
desired I’m a businessman and make
13:27
profits and avoid losses that’s all you
13:29
need if we’re told business don’t have a
13:30
bizarre otherwise it wouldn’t be
13:32
business great long exactly don’t desire
13:34
to avoid losses example they lose a lot
13:36
of money and go and be out of business
13:38
so then we saw that if the price for
13:41
example and higher then implement point
13:43
and they’ll be certain irony be so
13:46
lonely much less of it six sell it sell
13:49
a bullet of humors this will be an
13:52
unsold surplus you pile up on a shell
13:55
something which Albans then hate like a
13:57
very Dickens comes like blazes stuff
14:00
they thought was going to sell and so
14:01
with piling up on the soul and then they
14:03
find as a lower the price of it lo and
14:06
behold morally so finally as they keep
14:08
lowering it surplus is over so the way
14:11
the market eliminates unsold surplus is
14:13
like cutting the price and the pipes for
14:15
the back alley equilibrium point kind of
14:18
virtually if the price is below people
14:22
living a point there will then be
14:23
certain amount ready to be sober fires
14:26
or consumers will want to buy more than
14:28
that that lower price they want to buy
14:29
this much and this is a shortage in
14:33
other words here you have an excess
14:34
demand you man is greater than supply at
14:36
that price sure is means the things
14:38
stuff disappears from the shell of them
14:40
and break rapidly and then businessmen
14:42
say hands means i can raise the price of
14:44
that worry about cutting a sales as they
14:46
raised the price the shortage i’m more
14:48
more over to finding your back of a
14:50
million point no shortage and no surplus
14:53
so so below the equilibrium price the
14:57
man is right in the supply excess the
14:59
man above it blinds rather than the man
15:01
was excess supply or unsold surplus only
15:05
at this price and the demand and supply
15:07
equal in other words it’s called
15:10
clearing the market or supplying a
15:12
manner exactly equal as much as soul as
15:16
if people want to sell other words this
15:18
is that produced a certain amount they
15:19
want to sell it this is that the amount
15:21
of humor is willing to buy so this is
15:23
the price which we set the terminal
15:25
market this is love now where’s one of
15:28
the three one of the important things
15:29
this shows is that even though people
15:31
who don’t understand economics thinks of
15:33
the market of chaotic the prices are
15:35
nobody knows why prices are suddenly
15:37
they are it’s all unplanned as own
15:39
government planning board which says
15:40
okay you and you produced this much and
15:42
sell at that price instead of that works
15:44
much better than a government planning
15:45
because it works that smoothly
15:47
integrator harmonizes amount people want
15:50
to pay for a product with the amount of
15:52
people who produce equate supplying a
15:55
minute so every step of the way either a
15:57
consumer goes the producers go to raw
15:59
materials of a mining co ever it is
16:01
there’s never any shortage or any sir
16:03
paul ways in equations amana supply even
16:07
though the individuals own work it down
16:08
don’t may not realize this though poker
16:10
buddy queens appointed man that’s the
16:12
way it works in practice because why
16:15
adam smith says the market works as if
16:16
there’s an invisible hand harmonized
16:19
hear me alright sure it was uh doesn’t
16:22
mean there isn’t it doesn’t mean you got
16:23
the way it works okay if the price tends
16:27
to be set of this particular point what
16:29
can change it then if there’s an
16:30
equilibrium price why do prices change
16:32
all the time and the answer there is of
16:34
course they’re either supply changing or
16:37
demand curve changes those are the only
16:38
two things that can change prices will
16:40
see later on of course the change an
16:43
increase in court cannot increase price
16:44
only does it through cutting supply
16:46
because these are the only two factors
16:50
that’s going to a price determining
16:53
price so if the supply changes let’s say
16:58
if as a coffee frost right now is there
17:01
coffee white a grout in brazil usually
17:04
there’s a cross every few years this
17:05
time is a big drought the coffee prices
17:07
will go up eminently and so in other
17:10
words you don’t have a big drop in
17:12
supplying the price curve shifts to the
17:14
left means of the old equilibrium price
17:16
is now on shortage the man is not
17:20
greater than supply prices therefore go
17:22
up you wind up with an equilibrium price
17:25
the higher price which clears the market
17:27
so a decrease in supply and decrease in
17:32
the supply of X lead to increase the
17:35
point of x this shows how prices for
17:39
form a rational function pricing perform
17:40
two important function one is a rational
17:42
function rationing the scarcity the
17:45
scarcity is greater price goes up this
17:47
is scarcity is lesser price is cheap
17:49
down to the point where our goods is
17:51
superabundant like air then the price is
17:53
afraid you’ll have to worry about is
17:54
always there ah so the greater that you
17:58
have you have questions know the rate of
18:00
the relative scarcity the greater the
18:02
price conversely if a coffee crop is
18:07
clearly Justin or whatever comes back in
18:09
the normal situation then have an
18:13
increase in the supply at the old
18:15
equilibrium pranking I’ll have a surplus
18:17
in order to induce people to buy more of
18:20
the coffee you have to lower the price
18:24
as the price is lower you eliminate the
18:26
curb twenty lineup of new equilibrium
18:27
price where the supplies greater than
18:30
the price is lower in other words
18:31
scarcity or less now and therefore the
18:33
place the rationing thing becomes less
18:36
intense an increase in the supply needs
18:39
to drop it and Trunks now over time most
18:46
goods under a free market economy goods
18:48
to the increasing to have increased
18:49
capital investment and better technology
18:51
most goods have supplied tends to
18:54
increase so prices tons of four in other
18:57
words the general trend of of falling
18:58
prices you can see that romantically in
19:01
areas we have tremendous increase in
19:02
productivity a few years computers
19:05
calculators TV sets and things like that
19:09
where prices are falling even though we
19:11
have a general inflation a teak of
19:12
general inflation which means the real
19:14
prices in other words prices in terms of
19:16
the price level as a whole fooling even
19:19
more than you might think and to
19:23
consider per quality unit quality which
19:25
is it happen way you really have to
19:26
think of prices because a good as
19:28
homogeneous remembered if we define a
19:30
good as an homogeneous units supply of a
19:36
gum sorry which means the end
19:39
homogeneous units so in order to be
19:41
really home a genius you have to have
19:42
same quality usually in the market
19:44
market economy they probably improves
19:48
electrons matter of fact except for
19:49
government the time of capitalist sector
19:51
calling you guys are always ain’t going
19:53
up and the quality of TV sets are much
19:55
better needs to be quality computers and
19:56
all its or substance the price full of
19:59
much greater than might think is a
20:01
tremendous full per unit
20:03
for per unit quality and in only in
20:06
government sector I think the quality
20:07
was going down like a post office
20:10
beloved post office used to have deliver
20:12
mail twice and dais now once a day if
20:14
that ok so as they not only a price is
20:17
going up not only the price of stamps go
20:19
up but the quality goes down with
20:20
government so ok so that’s the that’s
20:27
the suppliant side of the situation if
20:29
you ask the question if prices are
20:31
always going tending to go down how come
20:32
price is always going up in general the
20:34
answers the macro course you learn that
20:36
an external it of us because government
20:38
keep pouring more money in the system
20:39
where governments like a mass
20:41
counterfeit ER like it is advanced
20:43
counterfeit its prints money all the
20:45
time and creates more money as it
20:47
creates more money for its prices that I
20:48
go up a greater demand known as a man
20:50
turns go up everyone’s got more money in
20:52
their pockets than had before which
20:54
tends to offset the Fallen prices due to
20:56
increase productivity ok let’s see it
20:59
says the supply simey now get to demand
21:02
what can increase with a man car
21:04
changing demand curve and when we talk
21:07
about demand increasing or decreasing
21:08
mean the entire curve shifting up or
21:10
down and again I’m going to repeat this
21:12
again sometime the she’s not confused
21:16
going down or up and given the man curve
21:19
with a change in the car the whole curve
21:20
when the supply increases the price goes
21:24
down the quantity demanded goes up in
21:26
other words the quantity so producing so
21:29
goes up the quantity demanded goes up in
21:31
the entire demand curve is not go up
21:33
that doesn’t change the reason it
21:34
doesn’t changes the man code is defined
21:36
as the locus of what happens when prices
21:39
change and will you have a certain
21:40
amount at any given price how much will
21:42
be purchased so if the price falls
21:45
unless you say the man can change which
21:47
we know how no reason why it should as a
21:50
place full the quantity demanded goes up
21:52
as a main cover the whole a man as a
21:54
whole that means constant demand curve
21:55
remain constant you’re going down the
21:57
given the man curve the only thing which
21:59
cannot increase the demand curve is a
22:01
change in price the only thing which
22:03
can’t cut to the minute over the change
22:04
in price because the man curve is
22:06
defined as response the prices okay so
22:12
that in other words when a man curve
22:13
goes up why should a man can go up well
22:15
it can go
22:16
so many reasons either government puts
22:18
more money everybody’s got more money in
22:20
their pocket one reason to go up the
22:22
manager of going out means technically
22:24
at any given price more will be
22:27
purchasing that one before whatever the
22:29
price is in an increase in purchases so
22:33
if everybody’s got more money if a
22:35
government prints a lot of money and
22:36
tributes it around by spending by
22:39
lending it out and ripples through the
22:41
system then the man care will shift
22:43
upward or if there’s a big tax cut left
22:45
side will have more money in our pockets
22:48
the maker will shift upward that’s one
22:50
reason of a general curve that shift
22:52
over for individual items it’s due to
22:55
changes in text ages and fashion taking
22:56
values it’s also the value change can be
22:59
important as it could be frivolous the
23:01
Economist don’t worry about that it’s up
23:03
to more or less whatever social
23:06
psychologists wherever it is all we
23:08
register the fact that the man curves go
23:10
up or down values change they could be
23:14
back up for example law used to be as a
23:16
big game around outdoor game was hula
23:19
hoops big traveler who holds one year
23:22
and everybody boy big increase the mega
23:24
of a whole host and then the whole host
23:25
Rob out frisbees comment big boom which
23:28
i think is probably still going on for
23:29
the beef I’m not really up on whole list
23:31
but uh any rate and then of course
23:35
though a couple years ago came the
23:36
famous Cabbage Patch doll caper were
23:38
made of making dolls for hundreds of
23:41
years and then nobody got excited one
23:42
where they all of a sudden Cabbage Patch
23:43
doll that was it okay so and people one
23:46
guy flew to London to buy it because the
23:47
one that hadn’t had this big cabbage
23:49
patch doll boom so he had his weight
23:55
paid for I think it’s a life of a travel
23:57
agent something like I world or Stewart
23:58
so the skull is obviously very expensive
24:01
the schlepping one on the x mi amor
24:03
Christmas so does a big but still going
24:06
on then question for the Cabbage Patch
24:07
doll people is Willis continue is in a
24:09
flash of a panel I have to figure it out
24:11
if they play their hunches their insight
24:13
on the market whether it is so and again
24:19
as I as I mentioned has been a big shift
24:21
of values over the last 40 years or so
24:23
out of out of pork and it’s a beef out
24:26
of dark beer into light beer out of red
24:29
wine at the white one
24:30
out of bourbon is a vodka and some
24:31
weren’t so on so this these are their
24:34
shifts up and down other words in some
24:36
cases the dropping decreasing the demand
24:39
curve other cases angry okay so one of
24:43
the main curve increases there’s a rise
24:47
in price because in other words that the
24:48
old price I mean the old pipe is now a
24:50
shortage prices are bid up until we get
24:53
to the to the higher price whether the
24:55
man curve Falls there’s a dropping
24:59
lopping these are the old fight is our
25:02
surplus people don’t want to buy any
25:04
more and so there’s a price for doing
25:07
these people arriving the available
25:09
supply and right there damn then then we
25:12
get into the fact that as man changes if
25:15
the demand is considered changing
25:17
considered fairly permanent there’ll be
25:18
a change in supplies supplying the long
25:20
run response to the man so in other
25:22
words this is an increase in demand
25:24
curve for vodka and people realize that
25:27
the bottom makers okay we’re going to
25:29
get out of bourbon I’ll with brownie
25:30
they got into more more vodka and as
25:31
they do that depending on a technology
25:34
how long this takes them the goal
25:35
depends on the individual item the stunt
25:38
increasing supply and vodka and so over
25:39
the years you have something like that
25:41
should get us the price which is
25:42
somewhere in between usually between the
25:44
Yolo and the suddenly increased price so
25:49
you wind up then a higher price perhaps
25:51
on a greater output in the case of for
25:56
the man curve you might not be have a
25:58
big drop in there for bourbon and people
26:03
get the producers get out of bourbon the
26:05
time we’re gonna produce less of that
26:06
over the years you know have a lower
26:09
production and a higher price from the
26:11
from the original somewhere in between
26:12
again so in this way consumers over the
26:15
long run because we didn’t seem first we
26:17
talked about a given supplying laws well
26:19
only then we start talking well what the
26:20
terms of supply I thought God given it
26:23
was due the previous decisions by
26:25
producers you know six months ago a year
26:26
ago five years ago or whatever depending
26:28
on the good in case of liquor or wine
26:31
particular says it takes many years of
26:32
course the morning to ripen at the
26:34
flight path anyway over the long run
26:36
then you get in the situation where if
26:38
it increase the man will then induce the
26:40
greater supply of the product a lower de
26:42
mayo cause of
26:43
lower supply laprade so that way supply
26:46
production response to consumer the men
26:47
and a greater demand will cause greater
26:51
out plan vice versa except reports and
26:53
goods with your Apple affixed forever
26:55
like Rembrandt paintings they got a
26:57
perfect forgery and which is these days
26:59
of technology almost impossible because
27:01
they can think like that supply of
27:04
Rembrandt’s is dead with rent I mean go
27:06
on with Rembrandt so this is absolutely
27:08
fixed certainly can’t be increased which
27:10
wasn’t like you lose a painting or
27:12
something to destroy it but we cannot
27:13
you cannot increase so anyway so that
27:18
way supply on the market production
27:21
response to consumer demand first what
27:23
people expect assuming a man will be and
27:25
then if the producers are right as the
27:28
man is increasing will make profits this
27:30
will swear them to make even more of
27:32
them if they’re wrong it turns out the
27:34
increase the man for vaca was only
27:36
temporary and I lose a lotta money all
27:37
cut back so in other words profits and
27:39
losses are signals and producers whether
27:41
on the right track or not they make
27:43
higher profits will increase the man
27:45
that will increase the production they
27:47
make lower profits or losses then I’ll
27:49
cut back so the profits are like a
27:51
signal whether they’re on the right
27:53
track of surveying consumers or not and
27:55
later after the midterm will get into
27:57
theory of the firm part 3 and we’ll get
28:02
to start talking about costs and
28:05
production that when someone have a
28:06
production is determined and that with
28:08
profits apparently like that okay so
28:11
then we offered such that sort of
28:13
covered any given good so he went is a
28:17
relationship for clean good there’s two
28:28
major ones or substitutability co
28:33
substitute weird isn’t something for
28:38
each other and a claim for filling the
28:41
same market coffee and tea cocoa and tea
28:45
a sort of thing uh metals the aluminum
28:47
of steel all these things can feel more
28:53
or less the same they’re not perfect
28:54
something this for they’re fairly close
28:55
so what
28:57
have another example in when the supply
28:59
curve of Kofi went down and Kofi became
29:02
more scarce and more expensive people
29:04
shifted more and more to T and Coco
29:06
season have a as a result of this an
29:10
increasing demand curve for t let’s say
29:13
and the price of tea tended to go up and
29:17
Coco the same way so we can then say
29:23
that the decrease decrease in supply of
29:26
X rings not increase the price this
29:30
can’t increase the price will in turn
29:32
bring about increasing demand for why
29:34
the substitute which in turn will raise
29:37
the price of law it separates everything
29:43
it just change the sign and get the same
29:44
you know that increasing supply of
29:45
icicles dropping the price of x poses
29:48
wobble in the mantle why I drop on the
29:51
price no as coffee gets cheaper let’s
29:53
say people shift out of ten the coffee
29:55
and the demand curve for t will go down
29:56
if I city will fall eventually of course
29:59
the output in the long run okay then
30:04
there’s compliments a compliment is to
30:09
goods go together sort of being
30:11
substituted sort of battling each other
30:13
and tell them that they go together
30:14
they’re either demanded together
30:16
produced together the case of joint
30:18
demand tasted like ham and eggs or steak
30:24
and steak sauce or bread and butter
30:27
things like that where should the mana
30:28
together or baseball caps baseball
30:30
gloves you know overall the rest of it
30:32
or factors are going labor and capital
30:34
and land going to a certain production I
30:37
think if the man fashion pain goes up
30:39
you have an increase in the metric
30:40
champagne labor increase demand for
30:42
champagne machinery and champagne land
30:44
all these things will increase the
30:46
prices will go up wage rates will go up
30:47
and champagne country and silver and so
30:50
on these are joint the man and wanted to
30:55
say thing there is what happens with
30:56
supply changes one of these factors in
30:59
other words they say bread and butter
31:01
sandwiches running but are going to
31:05
sandwiches
31:08
it’s the price of butter butter gets
31:11
cheaper spectacularly cheaper because of
31:14
a increasing productivity or fertilizer
31:16
or whatever and the price will fall
31:18
increase in supply of X and this will
31:22
make sandwiches cheaper and the result
31:24
of that will be an increase with a man
31:25
for bread and with more sandwiches we
31:27
purchase but bread haven’t gotten
31:29
cheaper me brothers the same supply
31:31
before so the price of bread will go up
31:33
and so this causes a increasing demand
31:39
for Y and increasing the price of Y and
31:44
you have with joint doesn’t joint demand
31:47
this is what happens compliments and
31:56
first again the sign is reversed if the
31:58
supply goes down for but Earl explains a
32:00
big house shortage or something like
32:01
that price goes up which means that a
32:04
man for sandwiches goes down which means
32:06
with a man for bread goes down a price
32:08
of regular exam so the in both cases the
32:11
prices are going opposite directions
32:12
here between the two factors when the
32:15
supply is the source of a chain but the
32:17
man is a source of change breezy to see
32:19
what happened whole demand curves go up
32:20
or go down that’s it the case of supply
32:23
will ever gets a little trickier ah the
32:27
other the other jointness the other
32:28
column was joint supply with two goods
32:31
is simply produced to governor found
32:33
together in nature beef and highs in the
32:35
famous example Cavill beef cattle or
32:38
killed for meat and also purpose their
32:40
skin which is used for leather hides or
32:42
leather and same way with copper and
32:46
silver which are found together of what
32:48
so on he right here what happens is that
32:53
you have a response other words when the
32:55
increase in demand for beef over time
32:58
and man Curren goes up supply then goes
33:02
up and long run and yet then result of
33:05
that increasing the supply of hides or
33:08
whether which causes drop on the price
33:11
so that’s uh
33:18
then where the man’s / x goes up
33:20
increase the man for beef website and
33:23
this increases the price which in turn
33:26
increases the supply back long run and
33:30
this in turn increase in supply y which
33:34
lowers the price of why that’s the way
33:38
they sympathize that and of course again
33:40
you reverse the signs and exact Robinson
33:42
happens every day uh okay so this just
33:46
gets in this finishes the relationship
33:48
between good then we talk about what
33:49
happens when the government of the fears
33:50
and process whole bunch of case studies
33:52
about that this could be summed up as
33:55
either maximum price controller minimum
33:56
price control we also about cartels will
33:58
attack of the inland I’ll be next after
34:00
the term don’t more than that and
34:03
maximum price control which is more
34:08
common the government orders that you
34:12
can’t sell a good above a certain price
34:15
which is below the freedom of the
34:17
article of ram price three more
34:19
regularly employed maximum patients know
34:22
which puts us twice to lower the price
34:24
below the equilibrium by four so the
34:25
words Padilla putting a floor on a
34:27
ceiling arching me on that thang
34:30
preventing it from going up one of the
34:33
situations we saw this course also has a
34:34
problem first I suppose a shortage since
34:37
it means the shortage cannot be
34:39
eliminated and the market you have a
34:41
permanent shortage which gets worse over
34:43
time as the supply goes down there’s an
34:46
uncomfortability of the whole product
34:48
and then you have black markets which a
34:52
very high price is every scared they
34:53
can’t advertise never pay off what cops
34:55
of all that you have like a like more
34:58
small black market around the edges and
35:00
a decline in rationing through lining up
35:04
so be on a waiting list or standing in
35:06
line does it have to be rationed some
35:08
way the PI system cameras got to be done
35:10
through coercion ration tickets or and
35:12
or standing in lines with favoritism
35:14
through the producer taking over racial
35:17
and religious discrimination because the
35:19
producer that can this Bruce was in the
35:20
sally has a warrant worried about our
35:23
customers are plenty of too many
35:24
customers and they can ration customers
35:26
okay I like this guy and this guy’s guys
35:27
my brother-in-law got him insane races I
35:29
and how will everybody else
35:31
so this is a these are all and also the
35:34
client and quality a hidden price
35:35
increases the quality of decline which
35:37
cannot be police it’s almost impossible
35:39
except for the certain visible things
35:41
that police to the client and Claudette
35:43
figure out there is there is a really
35:44
less almonds now used to be in the
35:46
chocolate almond crunch ice cream so and
35:50
of course it doesn’t really cure
35:52
inflation are usually a maximum pricing
35:54
I put the cure inflation doesn’t do that
35:56
at all silly makes things worse
35:57
inflation is caused by an increasing
35:59
demand curves do the increase the money
36:01
supply which keeps mumbling or Merrill
36:02
anyway the minimum price control the
36:07
government keeps the price above the
36:10
equilibrium point free market
36:11
equilibrium and this perpetuates a
36:14
surplus in other words instead of a
36:15
surplus being eliminated quickly to the
36:18
PI system but now is this is a minimum
36:20
price price floor perpetuates unsold
36:23
strip club many cases of syphilis gets
36:27
worse over time because the producers
36:28
will produce more of a hey the price is
36:30
pretty good here and close forth even
36:32
greater surplus that the government has
36:33
to handle a somewhat the two big
36:35
examples of this are the farm price
36:37
support program the total messin getting
36:40
worse as the surplus keep piling up a
36:43
minimum wage law as its create
36:45
unemployment among marginal among the
36:47
lowest paid workers examples of nice no
36:51
tricycle and lead gen they’re not only
36:53
things like me control World War two and
36:55
all sorts of other things is also water
36:58
the water shortage caused by water price
37:00
control the traffic congestion plus like
37:02
price of traffic so to speak being
37:05
virtually zero price of driving and
37:07
whatever and also some other stuff rent
37:10
control which cord which enforces the
37:12
housing sure apartment shortage and
37:13
photosystems ways to try to evade the
37:16
the regulation and all these things are
37:19
examples of pie control that microphone
37:21
action that really I guess sums up the
37:25
court I might let you much time for
37:26
Question any of any any question any
37:28
part of course you all know it perfectly
37:32
magnificent okay I good luck
37:35
well I’ve just got back from Europe so
37:37
I’ve not been able to haven’t seen the
37:39
exam ship i will text i will mark on my
37:41
thursday give him back what’s europe wow
37:46
what the poland conference in poland
37:47
then London toured around the continent
37:51
bid basically the Polish conference and
37:56
no not me our school gonna haven’t known
38:00
be kidding this is the orgonite finance
38:03
from London organized from London and so
38:07
the Polish polish scholar their will and
38:10
guess the government is heroic this is
38:12
very openly so you know probably an
38:14
apparatchik spying and kind of thing
38:17
here no they parently is apparently
38:20
they’re they’re brave spoke there are no
38:22
polish intellectuals a favor of
38:23
government now so it’s sort of like
38:25
peculiar kind of equilibrium if they
38:27
said that they were that they they just
38:29
the government realized that it would do
38:31
anything about it so it’s very odd
38:33
situation it’s probably apparently this
38:36
is the only place in Eastern Europe but
38:37
it could have had a conference of this
38:39
sort even in Hungary where they which is
38:42
much freer economically is not as
38:45
intellectually free so it was very
38:47
perspective love so anyway I was with
38:50
heartwarming to see I mean hope the
38:52
whole country is sort of pulling apart
38:53
at least they are intellectually I’m
38:55
good shape yeah no you can’t get anyone
39:00
to run can’t get any American or English
39:02
papers either so screw a news blackout
39:06
any right to return to our out of
39:08
muttons here yeah the okay run where is
39:14
the theory of the firm and every the
39:16
objective of each Sherman to maximize
39:18
their profits are rather than have a
39:21
higher profit as they can to avoid
39:22
losses profits are equal to total
39:27
revenue minus total cost in other words
39:30
over a year period let’s say it take any
39:33
time period the money you take in minus
39:35
the money to pay out this of course gets
39:36
very complicated in practice but in
39:38
theory is pretty simple I understand if
39:40
you take in 1.5 million dollars you pay
39:43
out 1.0 million then you have a proper
39:46
500,000
39:47
if you’re unfortunately pay out a
39:51
million dollars and take out only point
39:52
point five then you have losses of five
39:57
hundred thousand dollars so everybody is
39:59
trying to every business firm business
40:02
entity tries to maximize profit increase
40:04
their problems and avoid losses they
40:06
can’t always do that loss is often pop
40:08
up largely because the costs are paid
40:11
out immediately before the money just
40:14
take it in the words you have to have to
40:15
build your plant whatever it is you can
40:17
hire your workers viral material get a
40:20
little stuff together and then try to
40:22
sell the product and try selling
40:24
probably the profit so the payout comes
40:27
now and like I’m the income comes later
40:29
and as often of course a big slip here
40:30
this consumers don’t always do what they
40:33
are meijer only do what the investors
40:35
think they’re going to do so there’s
40:37
often make losses they try for very hard
40:39
not to and so this is them and this goal
40:45
time maximize profits and avoid losses
40:48
drives the whole economic free market
40:50
system and equilibrates everything code
40:53
rates apply and a man as we saw in the
40:55
first part of the course at each step of
40:56
the way because everybody’s trying to
40:57
increase problems and avoid losses a
41:00
very simple but effective motivation
41:02
impart a businessman especially the fact
41:05
that this man has already pay out the
41:06
money it doesn’t want to lose it that’s
41:08
a very powerful incentive there’s been
41:13
questions that’s electric economist some
41:16
economists a small minority mostly among
41:18
intellectuals sociologists people that
41:21
ilk lighters literary types claiming it
41:25
well it’s maybe it’s true the 19th
41:27
century the business business firms one
41:29
of the maximize profits but now it’s not
41:31
true anymore now the managers taken over
41:33
and managers don’t care about profits so
41:36
they just want to have a minimal amount
41:37
and it won’t increase the size of their
41:41
operations they want a quiet life it’s
41:43
or whatever the cetera except for most
41:45
of this is a generally a lot of nonsense
41:47
the math works the other way around as
41:49
the corporation gets bigger there’s less
41:52
and less of the sort of mom-and-pop kind
41:54
of motivation other words if you are a
41:56
peer say if you owned a grocery store
41:57
with two employees your
42:01
might persuade you to hire incompetent
42:02
brother-in-law you know you know he’s
42:04
incompetent he’s losing money for you
42:06
but still in order to keep peace in the
42:07
family hire them anyone so the lot of
42:09
that goes on and family businesses but
42:12
with a corporation as the firm’s get
42:14
larger and getting corporated is much
42:16
less of that there’s some of that of
42:17
course but much less of a because you
42:18
have to satisfy stockholder you have but
42:20
you haven’t gotten so personal operation
42:22
anymore so the drive for maximizing
42:25
money profit is even stronger in
42:27
corporations and it is with personal
42:28
firms was also a drive to keep peace in
42:32
the private utility takes over psyche
42:34
psyche utility in some cases more
42:37
important than money profit well
42:39
obviously you have to have a certain
42:40
can’t make losses did anything you go
42:42
out of business so the drive for
42:46
maximizing money profits even stronger
42:48
with corporations and it is with
42:49
personal mom-and-pop firm so to speak
42:54
the idea of the managers have taken over
42:56
which is it was came out with a famous
42:58
book by burly and means to new dealers
43:01
in nineteen thirty 30th lincoln was it
43:04
was called a modern corporation and
43:06
private property very famous book they
43:10
were near well means i guess was sort of
43:11
an economist I’ll I sort of question of
43:13
the burly was a corporate lawyer their
43:16
thesis was of the modern corporate firms
43:18
the managers have taken over
43:20
stockholders are no longer important
43:21
they don’t count the managers sort of
43:23
her seized power and what they want is
43:26
sexually increasing the size of the
43:28
company or they don’t care much about
43:30
profits status but I or whatever the
43:33
motivations are others i think is
43:37
refutable fairly easily it’s true the
43:41
managers often don’t care that much of
43:43
our problems on the other hand if they
43:44
don’t make if they don’t make profits if
43:48
their profit they’re earning ratio
43:49
doesn’t look too hot the stockholders
43:51
person will get sword and the getting
43:53
sore doesn’t necessarily mean they’ll
43:54
kick them out it is difficult to kick
43:56
out managers there’s this look like a
43:59
little political machine the stop always
44:01
have to get together and organize
44:02
there’s a lot of them maybe cup 2
44:04
million stockholders and some big
44:06
corporation they don’t have to organize
44:08
the interesting thing about a
44:09
corporation is all the stockholders have
44:11
to do taxes exert their powers a book
44:13
with our pocketbook networks
44:14
the stock so if you own 10 shares or 100
44:17
shares of General Motors stock you think
44:19
Joe motors not doing it very well its
44:21
profits are low it’s every just solo
44:23
stocking buy something else the act of
44:25
selling of stock drives down the price
44:26
of the stock and makes the managers very
44:28
upset because they you know they don’t
44:30
like the fact of the value of a stock is
44:32
going down also so selling the stock is
44:36
sort of a key thing here so long before
44:40
the stockholders start organizing a kick
44:41
out the managers and get somebody else
44:43
in they sold a stock on the value the
44:45
shares go down the managers also own
44:47
share that while managers gonna pay
44:48
partly in the shares of a corporation
44:50
especially the income tax the way it is
44:52
they don’t have to pay money on the
44:54
shares of stock so atop a top president
44:58
of a corporation might make two hundred
44:59
thousand dollars and salary of five
45:00
hundred thousand dollars and shares of
45:02
stock of a company so he himself as a
45:04
stockholder and is worried about he
45:06
doesn’t like to see the value of the
45:07
stock going down so it works very
45:10
interested in a very quick smooth
45:12
fashion you don’t have to have the big
45:13
dramatic vote p and contrast to that of
45:18
course is government operations you only
45:19
zone so we should always contrast
45:22
compare government with private
45:24
enterprise the government for quote firm
45:27
government agency say the post office I
45:29
the beloved Postal Service or the
45:32
transportation of story we can’t shell
45:34
our sell our shares and I wish both the
45:35
owners We the People are alleged owners
45:38
of a public corporation we’re taxpayers
45:41
and they’re citizen therefore owners we
45:42
can’t sell our share we don’t like the
45:44
prevailing Transit Authority you don’t
45:46
like the way the rotten subway system is
45:47
run we can’t sell our shares and it’s
45:49
because we ain’t gotten those shares we
45:50
can’t sell our shares a lot and post
45:52
ball with either if we could do that be
45:54
a very different situation keep the
45:56
managers on their toes but the managers
45:58
get paid from the government tax payer
45:59
they don’t care there’s no shareholders
46:01
the worry of that so share hole is
46:03
exerted an enormous amount of power even
46:05
without voting voting is just a small
46:08
part of it by selling their shares by
46:11
the value of the shares going down a
46:12
register the you know the signals of the
46:14
managers you better shape up fella
46:15
because you’re going to lose out so
46:18
selling shares of stock in very
46:20
important stock market every day you
46:24
evaluate can reevaluate corporations
46:26
without without fear of favorite
46:27
care about the fact guys minute is well
46:29
beloved he’s been remember the union
46:30
league club is in a trench for 30 year
46:32
they don’t care about that the Prophet
46:34
prospects are bad they start selling
46:37
their share and the stock value goes
46:40
down also of course in addition is
46:44
selling the stock which is a key thing
46:45
keeping managers managers honest as the
46:48
took will take over business as you see
46:50
very dramatically but the share of stock
46:54
gets thought low in other words if the
46:56
if the it’s a basically sound
46:59
corporation but being badly managed and
47:01
the value of the share goes way down
47:03
this becomes a tempting for takeover
47:06
bids for other capitalist as I look the
47:08
right letters the shareholders I look
47:10
get us in there will take ridiculous
47:12
company will like a big profit out of it
47:14
we prove our our our judgment in our
47:19
capacity for making profits by giving
47:20
you a much bigger deal and you getting
47:22
better deal you get any now let’s say
47:23
this there’s a value of a share of a
47:25
corporation say something y’all and
47:26
share will pay you 100 on this year if
47:29
you get us in if you sell us enough
47:30
share so we can take over this is a
47:32
powerful incentive it’s also promised
47:34
problem set up for the existing managers
47:36
that shape up and not let the
47:37
corporation run down and not make
47:39
profits otherwise that somebody would
47:40
come i’m going to take over a bit
47:41
interesting lee enough liberals and the
47:46
liberal media the establishment so to
47:48
speak is always a favor of the managers
47:50
you notice this next time you notice
47:52
about to take over there they always
47:53
hate the takeover bidder Taylor Vitter
47:55
is a corporate raider ease of pirate he
47:57
comes from Texas or selling
47:59
automatically makes them evil the
48:01
displacing beloved manages been here for
48:04
30 years well that’s that’s the whole
48:05
point of capitalism in the market
48:06
economy you’re being the spice of your
48:08
google our lousy job so this this is
48:10
where competition is all about it’s
48:12
interesting that liberals will tend to
48:14
be who purport of per pound of the idea
48:17
the terrible thing manages to take over
48:18
from stockholder cuts down to the bone
48:20
and the stock was revoked there always a
48:22
favor of the managers against the
48:23
stockholders is interesting little item
48:25
here any change in the status quo they
48:28
consider somehow disrupting and bad in
48:31
some sense of course the managers are
48:33
they’re telling me they’re there as the
48:35
existing manager the president whatever
48:37
corporation is being as being under a
48:39
coat
48:40
tack on quote from a pic overbid is
48:42
giving interviews that taught New York
48:44
Times of the postal whatever isn’t CBS
48:46
and saying look at the turbo thing these
48:47
guys are from Texas now evil guys from
48:50
Texas aren’t here and establish
48:51
therefore they don’t have the access to
48:52
the media the local people go so that’s
48:57
so there’s always a poison atmosphere
48:59
against the newcomers we enforce often
49:02
by court decision or the lawyers are in
49:03
there all the time every every one of
49:05
these guys is fleets of corporate
49:06
lawyers battling on the courts for years
49:08
to try to stop takeover bids of trying
49:11
to facilitate them but anyway the
49:15
takeover bid is in a powerful weapon and
49:17
keeping the managers on their toes and
49:19
kicking them out if they don’t do a
49:20
lousy job so you don’t have to wait for
49:22
the stock whole of themselves to
49:23
organize and get together but take over
49:25
bitter it’s a t-bone Pickens or ever
49:27
this comes in this is ok I’m going to
49:28
Bob Carl Icahn Lily’s eyes are they come
49:30
and say okay we’re going to buy this
49:31
corporation we think is doing a lousy
49:33
job but you do a lot better we’ll pay
49:34
the shareholders thirty dollars on the
49:37
share which is a powerful and seventh so
49:39
any way through this truly through these
49:43
methods to take over visit especially to
49:45
selling stock stockholders are they
49:47
effectual effectively the director her
49:50
runners with owners of the corporation
49:52
not the managers although the managers
49:54
got the publicity of course and
49:56
day-to-day basis of course if I owned
49:58
and one share of general motors aren’t
50:00
gonna have much of a say in it obviously
50:01
not saying each individual stock hole
50:04
except to selling stock the share of the
50:06
power so if you have let’s say ten
50:09
percent of the stock or a group of
50:10
people have ten to fifteen percent you
50:11
can basically run it and of course as a
50:15
manager does a lousy job mean I might
50:16
might not want and rather than we might
50:18
want to sell it that somebody else’s
50:19
comes over the takeover a bit so this
50:22
way s the the stock market works in such
50:25
a way as to this to as to make the
50:27
market economy as efficient as possible
50:29
profitable under the efficient and
50:31
serving the consumers as humanly
50:33
possible keeping making a manager of
50:36
shape up that’s true the managers do try
50:39
to finagle from time to time for example
50:42
the you when you estimating your profits
50:48
during inflation let’s say you have a
50:52
million dollar machine
50:54
you spent the million dollars on it play
50:56
1980 and let’s say it’s a 10-year
50:59
machine for real 1990s gonna have to be
51:02
replaced Orthodox accounting methods
51:05
this is I think I’ve refer to this in
51:06
the past year this custom war between
51:09
account war between accountants and
51:10
economists going off about 40 years
51:12
since of the modern aging inflation has
51:15
come under away if you buy a machine for
51:17
million-dollar you especially evaluate
51:19
on the books at a million dollars it’s
51:20
called historical cost accounting and
51:24
then if other words this is what you
51:27
actually pay for you paid a million
51:28
bucks and then 10 years later if you
51:30
have to replace it you’d appreciate say
51:33
a hundred thousand a year so you have a
51:34
fun of a million dollars to buy another
51:36
one so this is all very well if there’s
51:40
no inflation okay but if you have a
51:41
chronic inflation as we’ve had Africa
51:43
think since World War two this is not
51:45
going to work this distorts the actual
51:47
picture of a corporate firm because
51:50
let’s say prices of double in these ten
51:53
years it’s not unusual prices in fact of
51:55
going up each fold with 1943 fold since
51:58
triples of 1967 for the last 20 years so
52:02
if they double in these 10 years you
52:03
take your million bucks the 1992 replace
52:06
the machine you find you can only buy
52:08
what half of it you need another minion
52:09
to replace it so that the replacement
52:12
cost which is really the important thing
52:14
who cares about the historical course
52:15
it’s interesting for historians if
52:17
you’re if you for now cost two million
52:19
dollars because of inflation means
52:21
you’re wiping out your capital in other
52:23
words you think it may have big profits
52:25
if you really haven’t other words let’s
52:27
say if you you think your Providence
52:28
five million dollars this year but it’s
52:31
only because you have to replace a
52:32
couple of machines your annual you your
52:34
reckoning in as a menu but really cost
52:36
to men you really made very little
52:37
profits or words this is confident you
52:40
overinflate you can plate how much your
52:41
profit you make as you don’t take into
52:43
account the increase in capital costs
52:46
increasing and then cause the
52:47
replacement of machinery so ever since
52:51
inflation started after world war two
52:52
the economist been telling accounts look
52:54
this is great if you don’t have
52:55
inflation it’s distorting the whole
52:57
picture accountants are finally
52:58
beginning to come around after about 40
53:00
years to realizing they’ve got to do
53:02
something that’s true it gets sloppy you
53:04
see if you base it as a minion if you
53:07
paid a million bucks for
53:08
you have a check in nineteen eighty
53:09
saying okay I paid a million dollars of
53:10
this this is objective that’s precise
53:13
you’re trying to estimate how much
53:15
inflation is not objective it’s not
53:16
precise as we’ve seen macro courses it’s
53:19
very it’s very imp recite but still you
53:21
have to do something as otherwise going
53:22
to be wiped out your capital investments
53:24
with them be wiped that so as a result
53:26
what happens is over the years of the
53:28
connivance between of course accountants
53:30
have been lodged in the 19th century
53:33
accounting methods pre inflationary
53:35
accounting method the government the IRS
53:37
which always wants to have taxing war if
53:40
you think that higher profit that means
53:41
a government can tax it away and
53:42
managers like to fool their stock hole
53:44
isn’t thinking that profits are high
53:46
managers don’t like to tell I stocking
53:48
with Lucas it looks like a high profits
53:50
has really been eaten away by inflation
53:51
is it’s sort of a conspiracy in many
53:54
years I’m accountants man at top
53:57
managers and the government each one
53:59
kind of bolster the OL accounting and
54:01
Counting cost system but as I say a for
54:05
about 30 or 40 years finally the guns of
54:07
sunk in there’s more or less shifting
54:09
now toward a a more rational accounting
54:11
system but anyway this is the one of the
54:13
pitfalls here and some ways in which the
54:16
which least in the short run top
54:20
managers trying to fool a stockholder it
54:21
doesn’t work 403 not forever at least it
54:24
should serve a short run and manage of
54:27
course brilliant means didn’t talk about
54:28
that the places again where the managers
54:35
really take over the scope of government
54:36
there’s almost no check at all you can’t
54:38
sell your share and the postal office
54:39
there for the taxpayer gets sucked and
54:41
doesn’t know what’s going on and
54:42
managers the government managers
54:44
government bureaucrats and I’m Rocco Roy
54:46
Hawaiian high wide and handsome ah ah
54:49
there’s also another is the famous
54:53
attack on the idea of maximizing profits
54:56
a so-called questionnaire method these
54:59
are sociologists who go around the
55:02
businessman they go to a creative
55:04
president of the camera board of thing
55:05
is you’re isn’t your goals are to
55:07
maximize profits of course thing they
55:09
say no I mean it sounds terrible no no
55:11
my goal is not to maximize probably my
55:13
goes to help the world on the country
55:14
and and God and all that sort of stuff
55:16
in the meeting and we like to stay in
55:17
business to be able to do that
55:19
so this is not the way you go and then
55:21
they conclude from this the sociologist
55:23
there for business is not in favor of
55:24
maximizing their profit this is not the
55:26
sort of question you asked for Samuel is
55:28
I’m not a great friend of Paul Samuelson
55:29
but this textbook and economics he
55:32
didn’t i think is an effective two
55:34
paragraphs smash of this what he said
55:36
was look but you ask a businessman is
55:38
that you don’t ask him are you in favor
55:39
of maximizing your prop you say looking
55:41
Sarah looking back in your decision
55:42
decisions that you may last year yep all
55:46
your business decision is there any one
55:47
decision when you’ve deliberately
55:48
avoided making profit so you said no I
55:51
think I’ll take a cut in profits if this
55:53
is not always says why should I do that
55:54
I should do a crazy thing like that of
55:56
course not in other words you take the
55:57
marginal approach you break it down as a
55:59
marginal units you same each of these 50
56:02
decision is your made in each one you
56:03
try it you didn’t try you’re trying to
56:05
try to increase your profit like you
56:07
could on that make as much profit as you
56:08
could and not try to cut your profit and
56:10
then of course conceding the fact that
56:13
you go with the maximize profits of the
56:15
way you put it you put it in as a sense
56:18
of looking at each decision what did you
56:21
do you get a rational answer of course
56:23
that’s basically it you know you don’t
56:24
get guff about the public welfare in a
56:26
country or country and stuff like that
56:28
so no you’re right so the goal of each
56:31
fizzes firma increase your profit as
56:33
much as you can in to avoid losses total
56:38
revenue first of all we start or I want
56:43
it all I should say read out I was gonna
56:45
bring in the readings read the stuff but
56:47
does anybody have the book here nor book
56:49
the reading is the next set of readings
56:51
i think i have it on the syllabus enjoy
56:53
c penicillin buzz ah it’s the I think
56:58
chapter 9 i’ll tell you next time it’s I
57:01
have it in my briefcase just uh it’s a
57:04
chap around ah thank you great it’s this
57:10
is chapter this is part three chapters 4
57:12
9 10 12 and 14 that I get the will at
57:19
this point up until this point I’ve been
57:21
more or less green with a book except I
57:24
don’t have a lot of stuff that look as I
57:25
don’t talk about from now on I gets to
57:27
be much more divergent because the
57:29
although the Miller is better than most
57:31
other books
57:32
topic because the people write textbooks
57:34
are mired in tradition they have to
57:36
present a certain apparatus even though
57:38
they don’t agree with it and they stay
57:40
feel they do so I’m going to take a much
57:44
shorter and more common sense of view of
57:45
this whole situation and the so bear so
57:51
this is important for you they don’t
57:52
have to meet you don’t you all have to
57:53
worry about a nine tenths of two-thirds
57:55
of nine times the materially just
57:57
because I’m not going to talk about it
57:58
and I don’t talk about it’s not gonna be
58:00
on a test he start with the basic
58:05
diagram here is on the y-axis instead of
58:08
price and y-axes dollars which is sort
58:12
of like price except Memphis total
58:13
dollar x-axis quantity of goods usual
58:17
quantity x axis you’re a business firm
58:20
you sell a certain you’re making a
58:21
certain product whatever it is if you
58:23
don’t sell anything and I gotta get
58:24
anything I’m not gonna get any income ok
58:26
I see start with zip started the point
58:28
of origin so zero my cell 0 steel bars I
58:34
get zero revenue from the a total
58:41
revenue we’ve seen above the loan the
58:44
course of course is price times quantity
58:46
and this of course is the demand curve
58:52
that’s also the price on the one on the
58:55
y axis and whatever it is the quantity x
58:59
axis wherever the slope is so we know
59:01
that total revenue is the area and the
59:04
depends on the elasticity of demand
59:06
curve which can be whoever it is can be
59:08
anything one was falling well if you
59:11
have if the prices fools here’s quantity
59:14
and price these are two basic diagram
59:16
the old diagram familiar with price on
59:18
the y-axis quantity x axis and this is
59:21
the new one dollars in the y axis of
59:23
quantity x axis here’s a business firm
59:25
it’s making whatever it is widgets if it
59:28
makes certain amount it’s so that a
59:30
certain price this is the point here if
59:34
it lowers the price and increases the
59:35
quantity to hear toll revenue will
59:38
change or whatever it is if the if it’s
59:41
the elastic in other words that the
59:43
total revenue goes up
59:45
for the price falls is fairly flat then
59:52
we depicted on this diagram quantity
59:54
increases from here to here total
59:56
revenue goes up obviously have to go out
59:59
from zero anyway you can’t get lower
60:01
than zero so total revenue we start with
60:04
a rising 11u occurs PR as quantity
60:08
increases keeps going up to a certain
60:10
extent whatever and finally gets to the
60:13
point let’s say is quantity increases
60:14
where till revenue fools and becomes
60:20
inelastic after a certain zone ah well
60:25
that happens you have a dip in other
60:27
words it reaches a peak Pro review now
60:30
falls this is the this part of the curve
60:33
of the elastic demand curves owned by
60:36
definition of the words number quantity
60:38
increases price goes up and total
60:40
revenue increases that means the elastic
60:42
when the total revenue declines when the
60:45
price when quantity goes up in the price
60:46
for that means its inelastic because of
60:48
the inelastic zone now the text books
60:51
all have this is their curves they have
60:52
a one peak curve doesn’t have to be 1
60:55
Peter doesn’t God is not does not the
60:57
Creed has to be one peak it cuts not
60:59
going up again it could be two piece or
61:01
whatever yes I prefer this kind of a
61:03
curve and it shows that there’s no
61:07
reason why ask me one peak except
61:08
convenience of the guy right draw the
61:09
diagram okay so this is this case this
61:12
would be elastic again this would be
61:15
inelastic after this both an NP total
61:20
revenue curve in this case is too I
61:23
admit that it’s more convenient to have
61:25
one Pete but a test of this leaves the
61:27
reader on the student we’re going to
61:28
tend to think what some houses somebody
61:29
decreased only one Pete doesn’t have to
61:31
be it’s gonna be in elastic in the last
61:33
like an LSA again and whatever total
61:36
cost is Professor hoppy I think mission
61:38
do you vote in the last lecture again in
61:43
the diagram which you have is the
61:45
textbook you have dollars and y-axis to
61:47
quantity on the x-axis quantity of goods
61:49
have a total cost curve a first place
61:53
the total cost curve things like that it
61:57
doesn’t if not really doesn’t have to be
61:58
like that God
61:59
not the Queen has to be alive at it
62:00
could be almost anything other words
62:04
could be higher could be lower if you
62:08
want to increase cost of your pay to
62:09
increase course she’ll do it very easy
62:11
event businessman love to have a
62:13
government toddler let’s say increase
62:15
your cause we will recompense you for it
62:17
essentially the cost plus the fence
62:19
contractile system the French cotton
62:22
firms love the touch contract because
62:24
they can get a guaranteed profit of the
62:26
cost plus rate the words government
62:28
tells you look whatever your costs are
62:29
we will give you will pay you back plus
62:32
eight percent profit or whatever it is
62:34
it’s not the percentage of accounts is
62:36
the fact that the course of garant the
62:37
profit is guaranteed so for course of
62:40
course the government will reimburse
62:41
everybody’s course what the hell not a
62:44
rip no have beautiful offices it’s very
62:47
easy that the increase costs the
62:49
pleasures of the league’s to cut the cut
62:51
cause that’s very difficult you start
62:53
paying high salaries you hire a lot of
62:55
engineers you notice for example at the
62:56
defense contract advertisements for
62:59
engineers are much much bigger than
63:01
regular non defense firms because they
63:03
they’re advertising course of repay by
63:05
the government what the hell government
63:06
pays your advertising course for
63:07
engineers letter gets full page ads on
63:09
Wall Street Journal New York Times
63:10
engineers come to glorias California ok
63:14
if you’re a private firm which has to
63:16
make it in a free market you can’t
63:18
afford to do that have to be more modest
63:20
so if you can convince the government
63:22
these a reasonable costs in the word you
63:25
need to need engineers it’s certainly
63:26
reason we’ll have ads then you can let
63:27
er rip of course what’s reasonable is
63:30
very elastic depends on whether you’re
63:31
the buddy of the guys with the fence
63:33
test apartment usually you are and so
63:37
the whole thing is very cozy in the
63:39
course tens of escalate like that that’s
63:42
why you have them six thousand dollar
63:44
coffee machines and source stuff because
63:47
there’s no there’s no market there’s no
63:49
market test is no market test saying
63:50
you’re gonna lose the fence contractor
63:52
has firm will go out of business of the
63:54
Pentagon go out of business they lose
63:55
money uncle SAP the taxpayer that thus
63:58
pays the bill okay so they’re there for
64:00
those all skyrockets this cost curve in
64:04
the textbook is only when the firm is
64:05
trying desperately to cut costs those
64:07
the void losses and with the keeper
64:09
whole course of a minimum as well as
64:12
possible
64:13
so that they’ll have they’ll make
64:14
profits so this cost curve is the
64:17
envelope the lower end the minimum
64:19
envelope of an array of possible course
64:22
in other words the lowest cost at any
64:24
given quantity produced and the reason
64:27
why business firms will will operate the
64:29
lowest course was their economic
64:30
interest to do so to try and make
64:32
profits and avoid losses they will try
64:33
to add and asst keep their costs as low
64:35
as possible for any given output what’s
64:38
why I have the course garber if you
64:39
didn’t have the free market incentive to
64:42
avoid losses to make problems but course
64:43
can be any place it’s a little skyrocket
64:45
that this $5,000 coffee machines and
64:48
twenty dollar nails and that’s or it can
64:51
be in with anything so that’s one thing
64:55
I have a minimum at San Louis the
64:57
minimum envelope of possible costs the
65:03
other thing is that the next next point
65:04
of this feud here is my contention is if
65:06
you don’t make any widgets I’m not in
65:09
widget manufacture I make zero which is
65:10
per year euro steel bar 0 stereo set
65:14
there for my costs are zero those are
65:16
saying it’s fixed costs or baloney in
65:18
other words you start again at the point
65:20
of origin 0 0 quantity 0 course that’s
65:24
true that there are different kinds of
65:27
indivisibility we’re getting to later of
65:29
course if you build a plant you have a
65:32
fixed course of operation you know
65:34
produce any widgets but you don’t have
65:36
to have a plan you can sell an implant
65:37
you can you can get out you can shut it
65:40
down you don’t have to have fixed costs
65:42
there’s no such thing as fixed work
65:43
they’re all different degrees of
65:44
variability so you can toss out all its
65:47
fixed variable stock which unfortunately
65:49
the harder much micro economic textbooks
65:51
and what you got really is this you have
65:54
total costs which start a total cost
65:56
curve the minimum and lowest envelope of
65:58
possible costs any given quantity and
66:03
start at the point of origin total horse
66:06
zip and my contention is which I have
66:09
them not have to prove okay the total
66:12
course always go up nothing words that
66:15
whole cost always increase as quantity
66:21
increases this is not self-evident
66:26
as a matter of fact many people think
66:27
with jeans not true isn’t there aren’t
66:29
there of course of large-scale
66:31
production though the cost curve goes
66:33
down and not total costs over average
66:35
course goes as we’ll see total costs
66:37
keep going up and this can be proven
66:39
logically other words while total
66:41
revenue can either go up or down
66:43
depending on cuz there are two forces at
66:44
work remember total revenues prices and
66:46
this quantity going in different
66:48
direction price goes down quantity goes
66:49
up and the tug of war to see what
66:52
happens to total revenue can either go
66:53
up or down Cole coral on the other hand
66:55
always going up it’s a proven buyer
66:58
reductio ad absurdum a– the easiest way
67:01
to demonstrate this in other word to
67:02
show that any anything else is the
67:05
illogical and absurd let’s take job this
67:09
is quantity produced google course ah
67:14
let’s say your business business firms
67:17
producing a hundred cases hundred
67:20
widgets 100 steel bars wherever the unit
67:23
happens to be that’s assuming its total
67:25
at minimum total cost remember this is
67:26
minimum the lowest envelope the minimum
67:29
total cost is i don’t know five thousand
67:32
dollars i doesn’t matter one of this now
67:36
the firm makes another unit and
67:38
increases quantity to say 101 what I’m
67:42
saying it’s illogical and absurd to say
67:44
the total cost goes down and say 4500
67:47
it’s impossible logically impossible for
67:50
this reason if your total your minimum
67:54
total cost is five thousand dollars for
67:55
making 100 and you make 101 you have to
68:02
produce uh to say that the total cost
68:07
goes down means you can you can you can
68:12
take before you you can put this way but
68:22
if you say that look I’m saying this is
68:24
impossible for this reason demonstrated
68:25
this way if this isn’t the minimum total
68:28
cost for losing hunter than one is 4500
68:30
it means you could take you produce 101
68:32
for 4500 you throw away one you left
68:35
them this is 4500 and not a 55 of the
68:38
initial conditions of the problem
68:40
possible doin in other words it’s
68:42
impossible to say that you increase the
68:44
production that you lower the total cost
68:46
because then you can take the lower
68:48
total cost throw one away so the extra
68:51
on when you left them 4500 you can’t do
68:53
the initial conditions of Apollo are
68:55
then violated so and you can’t even have
69:00
it the same because one more cost
69:03
something even if it’s a little bit even
69:05
though you know the material on one
69:07
widget or course a few cents it can’t
69:10
even be the same then you can take that
69:11
you can throw that away so therefore the
69:16
amount of home cause always have to go
69:18
up in other words remember this is a
69:20
minimum total cost the minimum can’t be
69:23
5,000 discs and this can’t be less than
69:25
because as I said if you can’t do that
69:28
you can then produce the 101 pocket the
69:31
one and then you have this will be 4500
69:33
not 5,000 okay illogical illogical
69:37
situation violates the conditions of a
69:39
problem so therefore total course always
69:41
have to go up even if I a little bit the
69:44
economies of our scale production not
69:46
apply to total court they apply to
69:47
average call average total cost very
69:50
different its total cost per unit that
69:51
goes down a large share production not
69:53
cool cause period so this always is
69:57
going up from the point of origin which
70:00
is 0 on up so then the business firm has
70:04
got to pick the maximum profit point the
70:07
maximum profit point will be the largest
70:09
distance between toll revenue total cost
70:12
they lat or this and the conditions for
70:22
the and this this is what gets it all
70:24
the average in marginal stuff at the
70:26
text books are filled with the
70:28
conditions for say take this as a
70:30
maximum different distance between toll
70:32
revenue in total cost ah those of you
70:36
have taken differential calculus will
70:37
beat new being the ceiling analogies
70:39
here at this point of whether the
70:42
maximum difference between these two a
70:44
slope of the slope of the tangent of the
70:48
slope yeah Angeles thought would be that
70:50
would we eat board the
70:53
tangents with a list of total cost curve
70:55
them and the whole revenue curve will be
70:57
the same maximum distance this is the
71:01
this is a tangent Delta change in PR /
71:08
delta q this is changing TC divided by
71:14
delta q this is also known as marginal
71:17
revenue the change in total revenue
71:20
whether increase or decrease with one
71:24
more unit of quantity is the marginal
71:26
revenue in the changing total cost which
71:28
of course is always going up remember
71:29
one more unit of cost marginal cost at
71:33
the where these two things that the
71:35
slope is the same marginal revenue
71:37
marginal course are equal this is the
71:38
whole is the famous marginal revenue
71:39
marginal cost criterion all it’s really
71:43
saying is it’s not saying anything else
71:44
their toll revenue the total profits are
71:46
maximized in the words with this kind of
71:49
curves this is maximized when profits
71:58
maximized when marginal revenue equals
72:01
marginal cost and mr it’s TT r delta q
72:06
MC that’ll does a TCO relic you it where
72:10
you have when the change is infinitely
72:11
this is where differential calculus
72:13
comes in with a change is infinitely the
72:14
infinitely small infinitesimally small
72:16
then this becomes first derivative VTR
72:20
vers / DQ etc unfortunately human
72:23
actually you don’t have it for the
72:24
infinitesimally small steps therefore
72:27
calculate calculus is really a
72:28
legitimate the situation however it’s
72:30
this is my gripe of mathematical
72:33
economics in general but this is where
72:35
this thing comes from with the pegging
72:37
infinitely small steps it will get then
72:39
its first derivative Delta V T or
72:44
marginal revenue is equal marginal cost
72:46
but you’re not saying anything more
72:48
notice you’re not saying anything more
72:50
of interest than simply your Mac try and
72:51
maximize profit this is a criterion to
72:53
maximizing flop that’s all of us to it
72:55
the whole shtick those millions of words
72:58
a waiter than economics works on this
73:00
whole topic another problem with this is
73:02
once you realize it might be more than
73:04
one peach this girls will be a minimum
73:07
hey this could also identify a minimum
73:10
point minimum profit point or it could
73:12
be another maximum so which is better
73:14
you only you only find out which is
73:16
better which is minimum which is maximum
73:17
by inspecting the total get back on the
73:19
pole again minimum so the marginal stuff
73:22
really mislead you more than anything
73:23
else so it’s an interesting way of
73:25
looking at Heather’s been sort of the
73:26
many ways helpful to show what’s going
73:29
on if you’re interesting you’re
73:30
interested each step of the way of
73:31
making a profit at your marginal revenue
73:34
is at least greater or at least no no no
73:36
less than the marginal cost for any
73:38
decision you cannot make this business
73:40
decision they want to make sure you get
73:42
your taking in at least as much as
73:43
you’re paying out hopefully force more
73:45
but the main point is that the total is
73:48
really the key the key is you’re trying
73:50
to make total profits rest of the stuff
73:52
of them and you see how the mathematical
73:54
economist get wrapped up in this you can
73:55
see just fascinated by the tangency is
73:57
like slopes on sort of stuff it’s really
73:59
all subordinate to the main problem
74:01
businessman cares about profits and loss
74:03
it doesn’t really care about the other
74:04
stuff and this is why when he kind of
74:06
missed call to businessmen it’ll break
74:07
down a communication what do you mean by
74:09
marginal you don’t understand what
74:10
marginal cost is marginal and for good
74:12
reason most of the lot of olive draw
74:14
periphery of cookery i would say useless
74:17
for free on the main on main topic and
74:20
they write so if you have more than
74:22
especially as i say if you have more
74:23
than one peak you can get a big trouble
74:25
by only talking about marginal because
74:27
it could easily be a minimal profit and
74:29
so you have to the only way to make sure
74:30
by looking at the actual totals so the
74:35
whole point here is there’s a say
74:36
maximize total revenue minus total cost
74:37
and the Equality of marginal revenue and
74:41
marginal cost is a interesting property
74:44
of a total of maximal proper situation
74:49
ok the this gives us our marginal
74:54
marginal revenue marginal cost marginal
74:56
revenue is built of peace he or over
75:01
Delta Q and when devil does like he was
75:03
one of course it comes very easy to look
75:05
you know just doublet PR and marginal
75:07
cost is doesn’t teach see over don’t
75:09
like you see the other thing that the
75:17
average comes in again is fairly simple
75:19
loudly
75:21
uh average revenue is PR / q it’s the
75:27
average revenue per unit averaged over
75:29
your unit produced that’s the same thing
75:30
as price other words if you’re if you’re
75:33
selling a five cases of widgets at five
75:38
thousand dollars you’re selling a
75:39
thousand dollars per caso that’s what
75:40
prices this is our demand curve in other
75:42
words same thing is remember P times Q
75:45
ago easy equal of PR so average revenue
75:48
is the same thing as price that’s where
75:51
it all fits as a wife that these two
75:52
curves the total revenue curve here and
75:54
the average revenue curve which is
75:56
demand curve priced and quantity average
76:01
cost the total cost divided by quantity
76:05
this is also this is average total cost
76:08
i should say goes I don’t talk about
76:09
average fixed cost average variable a
76:11
lot on nonsense the average whole cause
76:13
the total cost divided by quantity in
76:16
other words you spend a million dollars
76:19
and produce 100 units or something in
76:21
the course one hundred thousand dollars
76:22
per unit turns out what is it that Los
76:24
Pinos you divide the total cost a unit
76:27
it’s average total course are often
76:29
falls spectacularly from norcal
76:31
production not not the total of the
76:34
average total total cost per unit okay
76:39
all right this is enough e to absorb
76:41
this connell good we’ll continue on with
76:42
this stuff and third then I give you
76:46
back your exams

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