WEBVTT NOTE Demand and Supply, Consumer Goods, Prices and Exchange 1 00:00:00.000 --> 00:00:17.000 Well, what micro means in economics is dealing with the individual, with the individual level, individual action, the market, prices, dealing with demand, supply, production, the oil price thing which is happening somewhere. These things are part of micro. 2 00:00:17.000 --> 00:00:23.960 Macro deals with the larger pictures like inflation, unemployment, business cycles, that's where 3 00:00:23.960 --> 00:00:28.520 everybody forecasts, economists forecast every year and always get it wrong, forecast always 4 00:00:28.520 --> 00:00:30.920 way off the beam, that's macro. 5 00:00:30.920 --> 00:00:36.200 Micro is in pretty good shape, I think it's basically sort of a consensus about micro. 6 00:00:36.200 --> 00:00:40.920 Macro is pretty screwed up for good reason, but at any rate, we're dealing now with sort 7 00:00:40.920 --> 00:00:47.520 So the basic economics, even good macro is essentially based on micro, so it's best to 8 00:00:47.520 --> 00:00:49.720 take micro first. 9 00:00:49.720 --> 00:00:53.800 We deal in economics with, we don't deal only with numbers and graphs. 10 00:00:53.800 --> 00:00:58.680 As usually happens in economics, the graphs came in and the numbers came in, in order 11 00:00:58.680 --> 00:01:03.460 to simplify, to present a simple basis of theory. 12 00:01:03.460 --> 00:01:08.000 Everybody got enchanted with a graph, the graphs became an end of themselves, and economists 13 00:01:08.000 --> 00:01:15.000 What we're dealing with, economics really deals with the individual and starts with a very simple fact, simple basic fact, namely everybody has goals which they're trying to achieve, he or she is trying to achieve. 14 00:01:15.000 --> 00:01:24.000 The goal can be a very simple one, like eating a sandwich in one hour, a simple short-run goal, it can be a much longer goal, graduating from poly, getting a job in electrical engineering, or whatever. 15 00:01:24.000 --> 00:01:27.000 The goals which they're trying to achieve, he or she is trying to achieve. 16 00:01:27.000 --> 00:01:31.000 The goal can be a very simple one, like eating a sandwich in one hour. 17 00:01:31.000 --> 00:01:34.000 A simple, short-run goal can be a much longer goal. 18 00:01:34.000 --> 00:01:38.000 Graduating from poly, or getting a job in electrical engineering, or whatever. 19 00:01:38.000 --> 00:01:40.000 There's a whole structure of goals. 20 00:01:40.000 --> 00:01:45.000 And in order to achieve these goals, you have to employ resources of some sort. 21 00:01:45.000 --> 00:01:46.000 You have to do something. 22 00:01:46.000 --> 00:01:51.000 In other words, by having goals of a sort, you're assuming that people can achieve them. 23 00:01:51.000 --> 00:01:55.840 These can take measures to take steps to buy a ham sandwich or to find a newspaper or to 24 00:01:55.840 --> 00:01:59.040 buy a hi-fi set or whatever, or to graduate from poly. 25 00:01:59.040 --> 00:02:02.120 These things are at least presumably accomplishable. 26 00:02:02.120 --> 00:02:07.120 In other words, everybody has a different objective in mind and has an idea of how to 27 00:02:07.120 --> 00:02:09.080 arrive at it, how to go about it. 28 00:02:09.080 --> 00:02:12.160 This is basically the source of economic theory. 29 00:02:12.160 --> 00:02:17.160 Economic theory is a deductive system built on this and this basic fact, on economical 30 00:02:17.160 --> 00:02:18.160 action. 31 00:02:18.160 --> 00:02:22.660 In other words, the fact that people act in the world to accomplish something. 32 00:02:22.660 --> 00:02:27.160 And I say the accomplishment can be very short-run, it can be very simple, it can be eating a sandwich, 33 00:02:27.160 --> 00:02:29.660 or it can be very complex, a whole series of things. 34 00:02:29.660 --> 00:02:30.660 It doesn't matter. 35 00:02:30.660 --> 00:02:33.660 From the point of view of economics, it doesn't matter what the goals are. 36 00:02:33.660 --> 00:02:36.160 That's up to some other discipline to worry about. 37 00:02:36.160 --> 00:02:43.160 What we deal with is the fact that people employ resources of different sorts to arrive at goals. 38 00:02:43.160 --> 00:02:49.960 Okay, this is what action is. You have goals, and you've got resources to try to achieve them. 39 00:02:49.960 --> 00:02:58.460 This is also called a means-ends relationship. You have an end or an objective, and you employ a means, different means to try to achieve it. 40 00:02:58.460 --> 00:03:04.460 Okay, what are some of the resources? Well, in first place, we kind of like to deal with what's known as Crusoeconomics. 41 00:03:04.460 --> 00:03:09.660 Robinson Crusoe, you're familiar with this little tale, also been in the movies, where 42 00:03:09.660 --> 00:03:13.620 the guy shipwrecked and he winds up on an island somewhere in the South Pacific, and 43 00:03:13.620 --> 00:03:15.340 he's got no resources except himself. 44 00:03:15.340 --> 00:03:20.140 He has different goals as the chief, one he's got to keep alive, these would be the basic 45 00:03:20.140 --> 00:03:21.580 for him to accomplish anything else. 46 00:03:21.580 --> 00:03:25.580 So in the case of Crusoe, the reason why we like to use this is it's a stark situation 47 00:03:25.580 --> 00:03:30.780 where we can isolate one person, you can take one person vis-a-vis nature and bring in other 48 00:03:30.780 --> 00:03:31.780 people later on. 49 00:03:31.780 --> 00:03:38.780 That's how you sort of deal in economics. You should take one simple situation and you add on a more complex situation after you analyze it. 50 00:03:38.780 --> 00:03:42.780 So if you have Crusoe, okay, he's got different goals or objectives. 51 00:03:42.780 --> 00:03:46.780 Food, he looks around fast to find out what the sources of food are. 52 00:03:46.780 --> 00:03:53.780 Shelter and clothing or whatever. So that's some of his priorities and he lists them in a certain rank. 53 00:03:53.780 --> 00:03:57.780 What are his means? What are his resources that he has? Like, he looks around and first of all he's got himself. 54 00:03:57.780 --> 00:04:02.780 He's got his own personal energy, and he's got his own technological knowledge. 55 00:04:02.780 --> 00:04:04.780 Presumably he doesn't have amnesia. 56 00:04:04.780 --> 00:04:08.780 He knows how to fish or chop down trees or build a bow and arrow or something like that. 57 00:04:08.780 --> 00:04:09.780 Technology is low tech. 58 00:04:09.780 --> 00:04:12.780 High tech doesn't make it on Desert Island or Crusoe Island. 59 00:04:12.780 --> 00:04:18.780 Unfortunately, the knowledge about how to construct a computer or something, how to use it, is not going to do him much good. 60 00:04:18.780 --> 00:04:25.780 But low tech, even if it's low tech, it's an important tech for him, namely how to fish and how to hunt and that sort of stuff. 61 00:04:25.780 --> 00:04:31.700 I construct a log cabin. All right, so he's got technological ideas. And he's also got 62 00:04:31.700 --> 00:04:35.300 different natural resources. He looks around and he's got, let's say, there's trees or 63 00:04:35.300 --> 00:04:38.620 there's fish. He looks around and finds out what the natural resources are, and that's 64 00:04:38.620 --> 00:04:42.540 what he starts off with. He starts off with technological ideas, his own personal energy 65 00:04:42.540 --> 00:04:46.940 and natural resources. This is basically what we have in the world in general. The world 66 00:04:46.940 --> 00:04:51.940 starts off, you look at the caveman. The caveman will start off with just a person, some kind 67 00:04:51.940 --> 00:04:53.940 The Theory of Money and Credit 68 00:05:21.940 --> 00:05:25.980 and the proletariat type, since Marxism came and we think of a laborer as somebody who's 69 00:05:25.980 --> 00:05:31.180 working a steel mill or something like that. This concept of labor means anybody who works 70 00:05:31.180 --> 00:05:35.460 in production. We haven't defined production. It means doing something in the world to transform 71 00:05:35.460 --> 00:05:40.180 it for consumer goods. We'll get to that later. So everybody is a laborer in that sense. Anybody 72 00:05:40.180 --> 00:05:43.700 who works in production is a laborer in this sense. The president of General Motors is 73 00:05:43.700 --> 00:05:47.940 a laborer just as the guy who works on the assembly line. Who isn't a laborer? Well, 74 00:05:47.940 --> 00:05:51.940 People who are clipping coupons, doesn't mean they're not important, just they're not laborers. 75 00:05:51.940 --> 00:06:00.940 People who are stockholders, per se, or bondholders, are not engaging in personal labor in the plant, which really means here personal energy. 76 00:06:00.940 --> 00:06:08.940 Natural resources, since it was 18th century agricultural Britain, is called land, the famous land and labor. 77 00:06:08.940 --> 00:06:14.940 So we're stuck with the word land, we're stuck with the word labor, but again it doesn't quite mean what we think of in common sense terms now. 78 00:06:14.940 --> 00:06:21.340 Land and economics means ground land. It means natural resources. It doesn't mean, in other words, this building here. 79 00:06:21.340 --> 00:06:25.440 We think of land, we think of the building, we think of it as the building here. 80 00:06:25.440 --> 00:06:30.940 But land is considered in economics only the ground underneath. In other words, nature made and not man made. 81 00:06:30.940 --> 00:06:36.440 So land also includes fish, includes natural resources on the water, includes water. 82 00:06:36.440 --> 00:06:41.440 See, when they were making up economics in the 18th century, water was not considered a scarce resource. 83 00:06:41.440 --> 00:06:45.320 We consider super-abundant and have plenty of wet agriculture. 84 00:06:45.320 --> 00:06:49.000 Nowadays we know better, water is scarce, so 85 00:06:49.000 --> 00:06:53.000 water is a scarce resource, fish are a scarce resource, also other things like 86 00:06:53.000 --> 00:06:59.240 TV channels, frequencies, things like that, are also land in that sense, in other words, natural resources. 87 00:06:59.240 --> 00:07:04.780 Space is land, ocean is land, lots of resources in the ocean which haven't been tapped yet. 88 00:07:04.780 --> 00:07:09.440 There's mineral in the bottom of the sea and things like that, this is all land, quote unquote, 89 00:07:09.440 --> 00:07:11.120 in other words, natural resource. 90 00:07:11.120 --> 00:07:14.800 The land means natural resources, labor means personal energy. 91 00:07:14.800 --> 00:07:15.800 Okay, what else is there? 92 00:07:15.800 --> 00:07:16.800 What else? 93 00:07:16.800 --> 00:07:17.800 Everything else. 94 00:07:17.800 --> 00:07:22.880 In other words, people, man, take natural resources and transform them in order to get 95 00:07:22.880 --> 00:07:23.880 to what? 96 00:07:23.880 --> 00:07:24.880 The consumer goods so they can use it. 97 00:07:24.880 --> 00:07:29.480 In other words, Crusoe's got to eat, he's got to take the resources, he's got to shoot 98 00:07:29.480 --> 00:07:32.640 the deer or catch the fish and eat it. 99 00:07:32.640 --> 00:07:35.440 So he's got to do various things to get to consumer goods. 100 00:07:35.440 --> 00:07:39.280 The objective of working hard to do this is to wind up with consumer goods. 101 00:07:39.280 --> 00:07:43.280 Food, shelter, clothing, high-fives, that sort of stuff. 102 00:07:43.280 --> 00:07:46.280 These things are consumer goods, used as an end of themselves. 103 00:07:46.280 --> 00:07:49.280 This is what the objective of action is all about. 104 00:07:49.280 --> 00:07:52.280 Consumer goods are coming off the assembly line, so to speak. 105 00:07:52.280 --> 00:07:58.280 Everything else, which is not labor or natural resources, is called capital goods. 106 00:07:58.280 --> 00:08:04.280 Capital consists of everything used in production, which is not land or labor. 107 00:08:04.280 --> 00:08:33.280 The end process of millions of people engaged in production, 108 00:08:33.280 --> 00:08:44.280 By the way, what is production? Production is a transformation, the use of labor, working on natural resources to transform into capital, different types of capital, finally you wind up with consumer goods. 109 00:08:44.280 --> 00:08:51.280 So production is this whole process of starting with land and labor and winding up with consumer goods, with different degrees of capital. 110 00:08:51.280 --> 00:09:02.280 So for example, let's take a ham sandwich that goes in there. It's a whole production tree of structure production, starting with a farmer and miner and so forth, going for about 30 years at least, so you get the ham sandwich. 111 00:09:02.280 --> 00:09:04.280 Ham Sandwich 112 00:09:32.280 --> 00:09:36.280 You don't have to be combined to get to the one ham sandwich, you have to be produced for many years. 113 00:09:36.280 --> 00:09:41.280 The ham is sold by a wholesaler, and they get it from a jobber, which is like Eastern Seaboard, 114 00:09:41.280 --> 00:09:44.280 they get it from Chicago, they get the meat packer, the meat packer, 115 00:09:44.280 --> 00:09:50.280 they package the meat in slaughterhouses, the slaughterhouse gets it from the farmer, raises the pigs, 116 00:09:50.280 --> 00:09:54.280 they have to have stockyards, they have to have trucks in every step of the way, and gasoline for the trucks and tires, 117 00:09:54.280 --> 00:09:56.280 and on and on and on, this is only for the ham. 118 00:09:56.280 --> 00:10:01.280 The pigs have to eat, they usually eat corn, the corn has to be grown and on and on and on, 119 00:10:31.280 --> 00:10:35.280 at every step of the way, and one of the amazing things about the market, the free market economy, 120 00:10:35.280 --> 00:10:41.280 is it all works. For me to get a ham sandwich right today, you don't have to have some world planning board, 121 00:10:41.280 --> 00:10:47.280 eight guys on a planning board sitting around 30 years ago, and say, let's see, on January 28th, 1986, 122 00:10:47.280 --> 00:10:50.280 we have to get Rothbard a ham sandwich, therefore you gotta go raise the pigs, 123 00:10:50.280 --> 00:10:54.280 you over there go raise the corn and so forth, gotta get Rothbard a ham sandwich. Nobody does that. 124 00:10:54.280 --> 00:10:58.280 There's no world planning board trying to figure this out. If there were, we'd all be in big trouble. 125 00:10:58.280 --> 00:11:05.280 And yet it all works at every step of the way, all these things happen at every step of the way with no shortages and no surpluses. 126 00:11:05.280 --> 00:11:12.280 Everything fits together like a latticework structure. The market economy is like a latticework, like a lace thing. It all fits in. 127 00:11:12.280 --> 00:11:17.280 How come it all fits in? There's no planning board that fits it all, and the market itself does it. 128 00:11:17.280 --> 00:11:24.280 And really what microeconomics is, is to study how the thing works and what happens when the government intervenes in the process and screws everything up. 129 00:11:24.280 --> 00:11:30.280 The big factor here, which is true both in Crusoe and for us, the big factor is this. 130 00:11:30.280 --> 00:11:34.280 We contrast the world with what I call the Garden of Eden model. 131 00:11:34.280 --> 00:11:39.280 Some people believe mankind used to be in the Garden of Eden and was then kicked out for various transgressions. 132 00:11:39.280 --> 00:11:42.280 Whether it's true or not, it's an interesting model to look at. 133 00:11:42.280 --> 00:11:47.280 The Garden of Eden, everybody satisfies his or her wants in unlimited fashion, but no work, no nothing. 134 00:11:47.280 --> 00:11:50.280 Snap your fingers and Pepsi is trickling down your throat. 135 00:11:50.280 --> 00:11:52.280 Nobody has to work at it, nobody has to produce it. 136 00:11:52.280 --> 00:11:57.280 Why is that? Because there's no scarcity. If there's no scarcity, you don't need private property, you don't need labor, you don't have to work. 137 00:11:57.280 --> 00:12:00.280 Unfortunately, we were kicked out of the Garden of Eden if it ever existed. 138 00:12:00.280 --> 00:12:07.280 And so in the world as it exists, in human history, there's tremendous scarcity. You don't have unlimited abundance of all factors of production of all goods. 139 00:12:07.280 --> 00:12:11.280 The Garden of Eden models unlimited abundance of all desire for good. 140 00:12:11.280 --> 00:12:14.280 If somebody wants to hear a symphony, they snap their fingers and get it right there. 141 00:12:14.280 --> 00:12:16.280 We haven't got that. We have to have somebody working to produce it. 142 00:12:16.280 --> 00:12:19.280 And so what we have is the ever-present fact of scarcity. 143 00:12:19.280 --> 00:12:25.960 Scarcity meaning scarcity of resources relative to the goals that we have and we've got to try to accomplish. 144 00:12:25.960 --> 00:12:29.440 Scarcity of resources, scarcity, we'll see in a minute what the resources are. 145 00:12:29.440 --> 00:12:33.520 Obviously, it's scarcity of land, labor, and capital. Scarcity in the sense that we'd like to have more of it. 146 00:12:33.520 --> 00:12:36.800 If we had more of it, we could produce more, consume more, get a higher standard of living. 147 00:12:36.800 --> 00:12:41.120 If we had no scarcity, if everything was super abundant, we wouldn't have to work, we wouldn't have to worry about anything, 148 00:12:41.120 --> 00:12:44.800 we'd just have to eat trickling down our throat, just like that, or whatever equivalent. 149 00:12:44.800 --> 00:12:48.880 What happens is the caveman has everything that's extremely scarce. 150 00:12:48.880 --> 00:12:53.880 They're in bad shape. Crusoe is in bad shape. Everything is very scared. He's going to die tomorrow. He doesn't get food immediately. 151 00:12:53.880 --> 00:12:58.880 The progress of the human race, the progress of civilization, is essentially the alleviating of scarcity. 152 00:12:58.880 --> 00:13:05.880 Scarcity is still there. There's a lot less of it. A lot further from the brink than Crusoe is, or the caveman was. 153 00:13:05.880 --> 00:13:13.880 A higher living standard. So the progress of human race is essentially the progressive diminution or alleviation of scarcity. 154 00:13:13.880 --> 00:13:15.880 Scarcity is still there, but there's just a lot less of it. 155 00:13:15.880 --> 00:13:21.640 In the intellectual world, there are sort of fashions. One of the few good things about 156 00:13:21.640 --> 00:13:25.640 being in my advanced age is I've seen them all. All the fashions come and go. Every five 157 00:13:25.640 --> 00:13:30.360 years, some new nut comes on with a new theory, and everybody adopts it for about five years 158 00:13:30.360 --> 00:13:35.440 and forgets it five years later. One nutty theory that came in about 1970 was there's 159 00:13:35.440 --> 00:13:40.280 no more scarcity. Economics, microeconomics might have been correct. In the old days, 160 00:13:40.280 --> 00:13:45.280 there was scarcity. Now, there's no scarcity. It's cool. We live in a post-scarcity world. 161 00:13:45.280 --> 00:13:52.280 What does that mean? I don't know what it means. What it really would mean is we're back in the garden of Eden. Nobody has to work, nobody has to produce. No, not. 162 00:13:52.280 --> 00:14:00.280 Obviously, we're not in that situation. I remember I had a debate with some turkey. I think it was at the American University in Washington, which is an odd place anyway. 163 00:14:00.280 --> 00:14:10.280 I was on the question about, do we live in a post-scarcity world? He was maintaining we live in a post-scarcity world, therefore we don't have to work, and therefore, I don't know what this therefore was, we're all very murky. 164 00:14:10.280 --> 00:14:12.780 His conclusion was that you should therefore have socialism. 165 00:14:12.780 --> 00:14:17.780 I'm not sure why that was the conclusion. Presumably, if there's no scarcity, you can have anything you want. 166 00:14:17.780 --> 00:14:26.280 Deuces are wild. So I said, well, if it's true that Professor So-and-so is right that we live in a post-scarcity world, why does he tear up his paycheck? 167 00:14:26.280 --> 00:14:30.280 Why does he at least tear up his raises that he gets every year? 168 00:14:30.280 --> 00:14:35.280 Anyway, his answer was an interesting answer. That's because I, too, have been sucked into the capitalist ethos. 169 00:14:35.280 --> 00:14:42.280 So it's interesting in reply. In other words, he's also saying, he's admitting there is scarce, and he's trying to alleviate it as much as anybody else. 170 00:14:42.280 --> 00:14:51.280 That has been forgotten. I haven't heard that for a long time now about post-scarce. As a matter of fact, the next fashion that came in shortly after that, I think by 1975, 171 00:14:51.280 --> 00:14:57.280 my God, everything is scarce. We're going to run out of resources. That was a big gimmick for about five years. 172 00:14:57.280 --> 00:15:03.280 From 1975 to 1980, the same jerks were claiming we live in a post-scarcity world, and therefore we should have socialism. 173 00:15:03.280 --> 00:15:07.280 I don't know how the therefor comes in. I can never figure that out. 174 00:15:07.280 --> 00:15:11.280 Dens said from 75 to 80, oil resources are running out. 175 00:15:11.280 --> 00:15:15.280 Oil is going to run out. Energy is going to run out. Forests are going to run out. 176 00:15:15.280 --> 00:15:19.280 Therefore, we should have socialism. The conclusion is always the same. 177 00:15:19.280 --> 00:15:23.280 There's never any connection. Then you have to run around refuting that. And it turned out by 1980, 178 00:15:23.280 --> 00:15:27.280 they shut up after that because there's plenty of resources. There is scarcity 179 00:15:27.280 --> 00:15:31.280 like there always has been, but there's plenty of resources. Nothing ran out. 180 00:15:31.280 --> 00:15:37.280 We got into the oil caper, by the way, fairly shortly. We got into the whole energy crisis, the alleged energy crisis, and all the rest of it. 181 00:15:37.280 --> 00:15:40.280 It's an interesting example of this stuff in action. 182 00:15:40.280 --> 00:15:46.280 So we have an ever-present scarcity of resources, and people therefore have to allocate their resources to the highest values, 183 00:15:46.280 --> 00:15:53.280 to their highest values, and try to make sure that they don't waste them, in the sense that they make sure they don't spend their time or their energy or whatever, 184 00:15:53.280 --> 00:15:57.280 and stuff they'll regret, figure that they really should have spent on something else. 185 00:15:57.280 --> 00:16:05.280 These resources, by the way, also include time. Time is a resource, scarce, as you all know. 186 00:16:05.280 --> 00:16:10.280 What are you going to do tonight? What are you going to do for a block of hours from, say, 8 to 11 or something? 187 00:16:10.280 --> 00:16:16.280 You have all sorts of choices. Every person has a concrete choice. You can go to a whole bunch of movies, not all at once. 188 00:16:16.280 --> 00:16:22.280 See people. You can do homework. Each of you could probably get a list right now of seven or eight things you could do tonight. 189 00:16:22.280 --> 00:16:27.280 How do you decide what you should do? Well, you decide on basically your own personal values, which you think is most important. 190 00:16:27.280 --> 00:16:30.280 Which you think is more fun. Whatever it is, you decide, one way or the other. 191 00:16:30.280 --> 00:16:36.280 It doesn't have to be an excruciating decision. You don't have to spend 10 hours on it. You can make a snap judgment. 192 00:16:36.280 --> 00:16:41.280 Economists, again, don't care about how long it takes to make a decision. That's not our bag. That's the psychologist or whatever. 193 00:16:41.280 --> 00:16:46.280 What we're interested in is the fact everybody's got scarce resources, everybody's got goals they're trying to achieve, 194 00:16:46.280 --> 00:16:53.380 nd the people are trying to achieve scarce time, scarce money, scarce labor, scarce capital, whatever, and they're trying to allocate as best as they can the best possible advantage. 195 00:16:55.300 --> 00:17:07.200 If you pick a movie, a certain movie, movie X, and you go to that, it turns out it was a bummer, you find out, I wasted time and money, wasted money going to it, and you went to waste the time, you could've gone to something else, you could have done something else, so. 196 00:17:08.600 --> 00:17:15.600 And looking back you figure, you took a loss, a psychic loss on it. The other half of the good movie you figure it was a psychic gain, you benefited from this. 197 00:17:16.280 --> 00:17:46.280 If somebody looks at it prospectively, tries to do the best he can, or she can, and looking back, he'd say, well gee, I was good, or I was a bad action, or a good action, or I was too costly, or I was a loser, you figure out the next time you won't go to a movie with this director in it, or a movie with this particular actor in it, because often, the same actor usually appears in the same kind of movies. So you learn from experience, hopefully, you do better next time, presumably. Talking about Crusoe, and also about life in general, and shifting back and forth between them, 198 00:18:16.280 --> 00:18:22.120 Natural Resources, transform them, move them over vast spaces, and finally get to the consumers 199 00:18:22.120 --> 00:18:23.600 and sell them consumer goods. 200 00:18:23.600 --> 00:18:26.200 That's how the whole economy is oriented. 201 00:18:26.200 --> 00:18:31.680 Another thing about human action in general, about CUSO and about life in general, is that 202 00:18:31.680 --> 00:18:32.680 it takes time. 203 00:18:32.680 --> 00:18:33.680 Everything takes time. 204 00:18:33.680 --> 00:18:37.080 Some things take less time, others take more time. 205 00:18:37.080 --> 00:18:40.800 And everybody prefers having stuff now than waiting for it. 206 00:18:40.800 --> 00:18:45.920 So anybody has a choice of, aside from price changes, human prices remain the same, somebody 207 00:18:45.920 --> 00:18:50.920 So I'll either give you a million dollars now or 10 years from now. What are you going to pick? Obviously you'll pick now. 208 00:18:50.920 --> 00:18:56.920 This is called time preference. People prefer getting stuff, achieving their goals earlier than later. 209 00:18:56.920 --> 00:19:01.920 And this conflicts to the sense that it has to be balanced against the fact that people prefer getting stuff now than later. 210 00:19:01.920 --> 00:19:04.920 But the more they save and invest, the higher their standard of living will be in the future. 211 00:19:04.920 --> 00:19:10.920 So they have to choose, consuming now or saving up now, consuming more later. That's the basics. 212 00:19:10.920 --> 00:19:12.920 We'll get to that more later on. 213 00:19:12.920 --> 00:19:17.840 These things take time, and also there's time preference, and also action is risky. There's 214 00:19:17.840 --> 00:19:24.440 uncertainty of the world, and the function of the entrepreneur is to meet that uncertainty, 215 00:19:24.440 --> 00:19:26.160 to bear the risk of uncertainty. 216 00:19:26.160 --> 00:19:30.080 Crusoe is an entrepreneur, in a sense he hopes he can catch fish, or he hopes he can build 217 00:19:30.080 --> 00:19:34.240 a cabin, things like that. Well, everybody's an entrepreneur. To become a mechanical engineer 218 00:19:34.240 --> 00:19:38.600 you hope or expect that you'll be able to get a good job at it. More entrepreneurial 219 00:19:38.600 --> 00:19:42.120 are the capitalists who invest a lot of money in certain processes and hope they'll make 220 00:19:42.120 --> 00:19:49.120 This is called entrepreneurship. There's no good English word for it. It's a French word. It's now been incorporated in English language. 221 00:19:49.120 --> 00:19:53.120 Adam Smith used the word undertaker. That didn't fly for obvious reasons. 222 00:19:53.120 --> 00:19:58.120 So, entrepreneur is it. Which essentially means a risk-taking capitalist. 223 00:19:58.120 --> 00:20:03.120 Or the person who invests capital in some enterprise and hopes to make profits and not suffer losses. 224 00:20:03.120 --> 00:20:08.120 We'll get to them later on too. Right now, we're sort of surveying the basic situation. 225 00:20:08.120 --> 00:20:14.120 The situation is that everybody, Crusoe and us, have goals which we want to meet and which we prioritize. 226 00:20:14.120 --> 00:20:18.120 We put in terms of priorities and we list them in ranked order. 227 00:20:18.120 --> 00:20:22.120 And you pick what's your best choice, most valuable choice, what you think is going to be best. 228 00:20:22.120 --> 00:20:24.120 Everybody's got a rank of choices. 229 00:20:24.120 --> 00:20:28.120 You pick what's your highest value and you hope you improve to be correct. 230 00:20:28.120 --> 00:20:33.120 This is called, I call it a value scale, but it's been given the name in economics of utility. 231 00:20:33.120 --> 00:20:38.960 And it's a little unfortunate, again, because utility often means useful, and that's objectively 232 00:20:38.960 --> 00:20:45.440 useful, but in economics it means purely subjective valuation. It could be useful or not. If people 233 00:20:45.440 --> 00:20:49.840 think that it is, that's all we care about in economics. In other words, a lot of left-wing 234 00:20:49.840 --> 00:20:53.840 intellectuals hate cosmetics. They think it's an evil thing for a lot of women to use cosmetics. 235 00:20:53.840 --> 00:20:58.680 Well, most women don't agree with this. They like cosmetics, and their value scale cosmetics 236 00:20:58.680 --> 00:21:06.480 is ranked pretty high. So this is purely subjective. The thing about utility scales is that they're 237 00:21:06.480 --> 00:21:11.620 ordinal. They're ranking. Unfortunately, this is my first big disagreement with every 238 00:21:11.620 --> 00:21:16.440 textbook I know of. Textbooks will give lip service to this. They'll say, yes, it's ordinal. 239 00:21:16.440 --> 00:21:21.080 All of a sudden they start talking about utils. This is three utils. That's two utils. Util 240 00:21:21.080 --> 00:21:25.440 being a unit of utility. And they add it up and they multiply it. There's no utils. There's 241 00:21:25.440 --> 00:21:32.440 Let's just think of the eugle. Who's ever seen a eugle? It's absurd. If you want to choose between going from movie A and movie B, you don't say to yourself, 242 00:21:32.440 --> 00:21:40.440 let's see, I value this at eight eugles, right? So, forget it. Forget eugles. It's my first injunction. 243 00:21:40.440 --> 00:21:45.440 It's a purely ordinal ranking order. It's a mathematics often called lexicographic. 244 00:21:45.440 --> 00:21:52.440 We could say we rank at one, two, three, four, but it should be ranked as lexicographically, in other words, A, B, C, D. 245 00:21:52.440 --> 00:21:58.440 The use of the number sucks economists into thinking that you can do something. We can add, subtract. 246 00:21:58.440 --> 00:22:02.440 If you use A and B and C, nobody would say C is twice B. 247 00:22:02.440 --> 00:22:05.440 It's one of the sociological phenomenon here which we're dealing with. 248 00:22:05.440 --> 00:22:10.440 So there's no such thing as U. It's strictly ordinal, it's strictly ranking, and rank order. 249 00:22:10.440 --> 00:22:13.440 So all the laws of economics, they're qualitative and not quantitative. 250 00:22:13.440 --> 00:22:18.440 See, one of the problems with economists is they take a qualitative science, which is really what this is, 251 00:22:18.440 --> 00:22:22.440 I'm not a convertor to being quantitative because I can predict precisely what's going to happen. I can't do that. 252 00:22:22.440 --> 00:22:26.440 The predictions are always wrong. When they make quantitative predictions, they always flop. 253 00:22:26.440 --> 00:22:30.440 What they do is they keep flopping and they keep saying, well, we have to change the model. 254 00:22:30.440 --> 00:22:35.440 We missed out on XYZ. They change it and they still flop. This has been going on for 20 years. 255 00:22:35.440 --> 00:22:41.440 Some economists begin to realize that it's also customers of economists, people who buy forecasts, corporations, 256 00:22:41.440 --> 00:22:44.440 begin to realize this thing is a scam. 257 00:22:44.440 --> 00:22:49.640 One of the reasons why the customers of economic forecasters haven't turned on them before 258 00:22:49.640 --> 00:22:51.440 this is because of the tax write-off. 259 00:22:51.440 --> 00:22:54.480 It's considered a legitimate expense to hire economists. 260 00:22:54.480 --> 00:22:57.320 Everybody hires economists to tell you what the unemployment rate is going to be next 261 00:22:57.320 --> 00:22:58.320 year. 262 00:22:58.320 --> 00:23:00.440 And if it's a lousy unemployment rate, so what? 263 00:23:00.440 --> 00:23:04.760 You've hired a top economist, everybody else missed the forecast, and your expenses can 264 00:23:04.760 --> 00:23:08.280 be written off as a legitimate tax write-off, one sort or another. 265 00:23:08.280 --> 00:23:10.200 So we have a qualitative discipline. 266 00:23:10.200 --> 00:23:13.320 There are laws about tendency and direction, not about quantitative. 267 00:23:13.320 --> 00:23:20.320 Let's get back to Crusoe. He's going to make a couple of simplifying assumptions here. He's got a bunch of logs. He's chopped down a bunch of logs. 268 00:23:20.320 --> 00:23:27.320 We're going to assume that one log or one set of logs can be used for each of three or four different uses. 269 00:23:27.320 --> 00:23:34.320 So you can take these logs and say, okay, what's my first priority? He's got an ordinal value scale, ordinal utility scale. 270 00:23:34.320 --> 00:23:40.320 His top priority is food for tonight. He makes the logs for a fire to cook tonight's meat. 271 00:23:40.320 --> 00:23:44.980 to Cook Tonight's Meat, and I think in the case of Crusoe, we can come to much more agreement 272 00:23:44.980 --> 00:23:50.920 than we would about which movie to go to, down to basics here, down to survival. 273 00:23:50.920 --> 00:23:54.400 Second priority might be fire for tomorrow night and keep it for tomorrow. 274 00:23:54.400 --> 00:24:01.200 Okay, third priority, let's say, is building a cabin, fourth priority might be setting 275 00:24:01.200 --> 00:24:07.160 a perimeter of logs around the little camps that wolves won't come in or whatever, perimeter, 276 00:24:07.160 --> 00:24:13.720 The fifth priority is building a boardwalk down to the beach, obviously a real luxury item because it probably won't be full of sand. 277 00:24:13.720 --> 00:24:25.000 Now he has these logs. The point is, if he has a supply, a supply by the way is defined as an amount of N units of a homogeneous good. 278 00:24:25.000 --> 00:24:33.400 Meaning that each unit is the same as any other unit. So what you're dealing with is the same log or the same horse or whatever, for more or less practical purposes they're interchangeable. 279 00:24:33.400 --> 00:24:36.600 You're not dealing with two totally different types of wood or something like that. 280 00:24:36.600 --> 00:24:46.600 There's five N units of a homogeneous good. If he's got one log after all he's got, or one unit, he will satisfy the top priority and let the others go by the board. 281 00:24:46.600 --> 00:24:55.600 He will not satisfy priority three and forget about one. In other words, he will pick his highest priority. If he has two logs, he'll pick his first two priorities, and so forth. 282 00:24:55.600 --> 00:25:05.600 Looking at it another way, supposing he's got three logs and he loses one, a wave comes and washes it away, or something like that, he will give up his lowest priority, priority three. 283 00:25:05.600 --> 00:25:07.600 Don't forget about food tonight. 284 00:25:07.600 --> 00:25:12.520 It will rearrange the logs so as to knock out three and leave one and two. 285 00:25:12.520 --> 00:25:16.160 If, on the other hand, he's got five logs and he loses one, he'll give up the boardwalk. 286 00:25:16.160 --> 00:25:18.640 He's not going to give up the really tough stuff. 287 00:25:18.640 --> 00:25:21.000 Now, what do we deduce from this? 288 00:25:21.000 --> 00:25:27.160 We deduce that the greater the supply of the good, the greater the number of units that a person has, 289 00:25:27.160 --> 00:25:30.640 the lower the value of the ranking of each unit. 290 00:25:30.640 --> 00:25:32.440 So the value now is how much he's willing to give up. 291 00:25:32.440 --> 00:25:36.460 the ranking of how much he loses if he loses one unit he's got a supply of 292 00:25:36.460 --> 00:25:40.740 three units and loses one the value of each unit is number three or third or C 293 00:25:40.740 --> 00:25:45.520 or whatever you want to call it the greater the supply the lower the value of each unit technically the lower the 294 00:25:45.520 --> 00:25:50.860 marginal utility because utility means value marginal means each unit if you're 295 00:25:50.860 --> 00:25:54.700 highfalutin jargon again but it's basically that's what it means so 296 00:25:54.700 --> 00:25:58.580 marginal means the next unit with one log one pound of butter whatever the 297 00:25:58.580 --> 00:26:04.260 The greater the supply, the lower the value of each unit and the lower the marginal utility, 298 00:26:04.260 --> 00:26:05.260 vice versa. 299 00:26:05.260 --> 00:26:09.180 In almost every law in economics, you can just switch it around. 300 00:26:09.180 --> 00:26:10.180 Simply logic. 301 00:26:10.180 --> 00:26:15.460 The lower the supply of a good, the greater the value of each unit. 302 00:26:15.460 --> 00:26:18.820 This is called, there's a name for this, the law of diminishing marginal utility. 303 00:26:18.820 --> 00:26:24.140 It's really saying the same thing, the greater the supply, the lower the value of each unit. 304 00:26:24.140 --> 00:26:33.140 And we can put this in a little diagram, and the diagram is supposed to be used for in economics to make it clearer, unfortunately in most cases they're used to make it more complicated. 305 00:26:33.140 --> 00:26:46.140 Anyway, if you put marginal utility or value of each unit on the y-axis, and only economic diagrams in microeconomics, the y-axis has either marginal utility or price or something like that, the x-axis has quantity of whatever. 306 00:26:46.140 --> 00:26:50.540 Okay, in this case we have quantity of a good. This is zero for both. 307 00:26:50.540 --> 00:26:55.580 So what they're saying is, as you increase the quantity of units one, two, three, four, whatever, 308 00:26:55.580 --> 00:26:59.980 the marginal utility keeps dropping. And we don't know what the height is because it's ordinal. 309 00:26:59.980 --> 00:27:03.980 Probably you shouldn't connect the dots. But anyway, we know it's falling. 310 00:27:04.940 --> 00:27:08.300 Obviously, the greater the number of units, the lower the value of each unit. 311 00:27:08.300 --> 00:27:12.380 The lesser the number of units, the greater the value. So this is supposed to be a way of showing this. 312 00:27:12.380 --> 00:27:15.020 Pay no attention to the actual distances and things like that. 313 00:27:16.140 --> 00:27:20.580 This is the basis of what's known as the Law of Demand or the analysis of consumer demand 314 00:27:20.580 --> 00:27:28.340 on the market. How much will people pay for a product? Obviously, if you have one chest 315 00:27:28.340 --> 00:27:32.140 set, you're not going to pay as much for a second one, presumably, given the kind of 316 00:27:32.140 --> 00:27:36.740 chest set. The Law of Demand, based on Law of Demand and machine margin utility, is trying 317 00:27:36.740 --> 00:27:41.620 to figure out how much people spend on different, how much people buy different goods, given 318 00:27:41.620 --> 00:27:47.820 Let's take Wonderbread, one of my favorite consumer purchases. I like Wonderbread, I buy 319 00:27:47.820 --> 00:27:52.060 lots of Wonderbread. However, if the price of Wonderbread suddenly magically, let's say 320 00:27:52.060 --> 00:27:56.780 the Wonder Company, whatever the name of the company is, Mr. Wonder sells out or whatever, 321 00:27:56.780 --> 00:28:01.180 some other guy comes, the other guy's a nut, and the other guy says, I think Wonderbread 322 00:28:01.180 --> 00:28:05.220 is so great, a consumer should have to pay a lot of money for it, it's really worth 323 00:28:05.220 --> 00:28:09.140 ten bucks a loaf. He issues an order to all the Wonderbread people, they only sell a thing 324 00:28:09.140 --> 00:28:12.980 for 10 bucks a loaf. So what happens? Well, what happens is this. Now you have the basic 325 00:28:12.980 --> 00:28:17.060 diagram. You have price on the Y axis. Price of the good. What does price mean? Price actually 326 00:28:17.060 --> 00:28:21.820 means how much you're willing to pay or what the different terms of the exchange are. In 327 00:28:21.820 --> 00:28:28.420 other words, with Crusoe and Friday, let's say Crusoe fishes and Friday hunts. And so 328 00:28:28.420 --> 00:28:33.940 Crusoe has a lot of fish and he decides on one barrel of fish per two pounds of meat 329 00:28:33.940 --> 00:28:39.460 or whatever it is. Pure bargaining situation. When they do that, the price is, in terms 330 00:28:39.460 --> 00:28:43.540 of exchange, the quantity of one exchange, one good in exchange, is paired to the other 331 00:28:43.540 --> 00:28:49.660 good. In other words, two pounds of meat for one barrel of fish. In this case, the price 332 00:28:49.660 --> 00:28:54.900 is one fish in terms of meat. When we have money, and we have things that are very simplified, 333 00:28:54.900 --> 00:28:59.660 and everything is in terms of money price. So the exchange is between the money and the 334 00:28:59.660 --> 00:29:00.660 Specific Good 335 00:29:00.660 --> 00:29:06.740 So here you have a situation, let's say, with Wonder Bread. If we insist on $10 a loaf, 336 00:29:06.740 --> 00:29:12.180 very few people will buy it. Let's say this is $1 a loaf. In this axis, you have quantity, 337 00:29:12.180 --> 00:29:17.780 again, quantity purchased. So I don't know how many loaves of Wonder Bread are sold in 338 00:29:17.780 --> 00:29:23.300 the United States or New York at any given time. Let's say 100,000 loaves. 100,000 loaves, 339 00:29:23.300 --> 00:29:28.500 say, in New York in a week. So the quantity is 100,000. The price is $1 a loaf. So if 340 00:29:28.500 --> 00:29:35.500 Mr. Wonder suddenly says, in ten dollars alone, very few people want to buy it. The only people who will buy it are very wealthy Wonderbread freaks. 341 00:29:35.500 --> 00:29:42.500 If David Rockefeller loves Wonderbread, which is probably dubious, he might shell out a lot of money. Very few of the rest of us will join him. 342 00:29:42.500 --> 00:29:47.500 The quantity suddenly plummets. This much will be purchased. He will go bankrupt pretty early. 343 00:29:47.500 --> 00:29:57.500 On the other hand, supposing he succeeded by another nut, an opposite kind of nut, who says, well, I think that Wonderbread is so great that every person in the world has been able to afford Wonderbread. 344 00:29:57.500 --> 00:30:02.500 I'm going to sell it for a nickel a loaf. Of course, you lose a lot of money per loaf, but he's also crazy. 345 00:30:02.500 --> 00:30:10.500 And a nickel a loaf, lots of people buy it. They hear about a nickel a loaf, hey, wonder about a nickel a loaf, you stop buying Pepperidge Farms or Tasty or whatever, you're rushed to buy one, what the hell, you might not like it too. 346 00:30:10.500 --> 00:30:18.500 Oh, but a nickel a loaf is worth it. You get a huge two million loaves or so. It says that much snooze. 347 00:30:18.500 --> 00:30:24.500 You get something like this. This is the great law of demand. The law of demand, which is related to two things. 348 00:30:24.500 --> 00:30:28.500 There are two things. One is the diminishing margin of utility to keep increasing the supply. 349 00:30:28.500 --> 00:30:34.500 And two is the fact that some people are poorer than others and can't afford to spend a lot of money on one specific item. 350 00:30:34.500 --> 00:30:41.500 You wind up with a law of demand, which is very simple, but very important, probably the most important single law in microeconomics. 351 00:30:41.500 --> 00:30:44.500 Namely, the lower the price, the more will be purchased. 352 00:30:44.500 --> 00:30:49.500 We don't know how much more. That's what we don't know. We know it will be more. That's an absolute law. 353 00:30:49.500 --> 00:30:53.980 How much depends on the specific item, depends on the specific people, it's sort of like 354 00:30:53.980 --> 00:30:54.980 wide punches. 355 00:30:54.980 --> 00:30:58.780 But we do know, absolutely, the lower the price, the more will be purchased. 356 00:30:58.780 --> 00:31:01.780 This is called a falling demand curve. 357 00:31:01.780 --> 00:31:06.100 We also know, again, conversely, again, there's always the other side of the coin, the higher 358 00:31:06.100 --> 00:31:10.180 the price, the less will be purchased, again, saying the same thing. 359 00:31:10.180 --> 00:31:11.180 We don't know the shape. 360 00:31:11.180 --> 00:31:16.580 As a matter of fact, usually before, I guess the demand curve came in about 1920 or something 361 00:31:16.580 --> 00:31:17.580 like that. 362 00:31:17.580 --> 00:31:24.580 The key problem in microeconomics, the key difference between quantity demanded and the demand curve. 363 00:31:24.580 --> 00:31:32.580 The demand curve is the whole curve. The demand curve is a locus of, given the price, how much will be purchased? 364 00:31:32.580 --> 00:31:38.580 Given a high price, given a medium price, a low price, and you map out, it depends on the subject of design, 365 00:31:38.580 --> 00:31:45.580 I don't know exactly what it is because it's in the heads of every person, but you do know that the lower the price, the more will be demanded. 366 00:31:45.580 --> 00:31:55.580 So this gives you a demand curve. That means if you go down the curve, the price is lower, there'll be a higher quantity demanded, but the curve as a whole is falling. 367 00:31:55.580 --> 00:32:04.580 And the demand curve as a whole is the structure, depends on what people think of Wonder Bread, basically, how much income they've got, and competing products. 368 00:32:04.580 --> 00:32:10.580 Pepperidge farm bread, or tasty bread, rolls, or whatever. All these things are competing with Wonder Bread. 369 00:32:10.580 --> 00:32:15.580 This determines the demand curve in accordance with the subject of value scales, utility scales of the people. 370 00:32:15.580 --> 00:32:18.580 Once given this, this gives you the whole demand curve. 371 00:32:18.580 --> 00:32:23.580 And the point is, you must never confuse the quantity demanded at each point. 372 00:32:23.580 --> 00:32:29.580 In other words, at 50 cents a loaf, 200,000 loaves will be demanded, okay? 373 00:32:29.580 --> 00:32:31.580 That's the quantity demanded at each point. 374 00:32:31.580 --> 00:32:38.580 You never confuse that with the entire demand curve, which is the locus of all quantities demanded at every price. 375 00:32:38.580 --> 00:32:48.580 In other words, a falling price will not increase the demand curve, ever. It can't, because the demand curve is defined as a response to prices, price changes, all right? 376 00:32:48.580 --> 00:32:58.580 The one thing which cannot increase the demand curve is the falling price. The one thing which can't lower the demand curve is the rising price, because the whole shape of the demand curve has already been incorporated into the demand curve. 377 00:32:58.580 --> 00:33:03.580 The one thing which cannot increase the demand curve is the falling price. 378 00:33:03.580 --> 00:33:10.580 The one thing which can't lower the demand curve is the rising price, because the whole shape of the demand curve has already been incorporated in the definition of the demand curve. 379 00:33:10.580 --> 00:33:17.580 From 1920 or so when the demand curve starts, until about 1940-45, it was always the same shape in the textbooks. 380 00:33:17.580 --> 00:33:25.580 The shape was known in mathematics as a rectangular hyperbola. In other words, the area under the curve was the same at every point. 381 00:33:25.580 --> 00:33:43.580 Let's say the curve is based on a schedule, on tables, price, quantity, purchase. If the price is $10 a loaf, let's say they sell a thousand loaves, the total revenue is taken in by the retail stores, price times quantity. 382 00:33:43.580 --> 00:33:50.380 If you charge $10 a loaf and you sell it for $1,000, you're making it $10,000, so that's total revenue goes price times quantity, key point. 383 00:33:50.380 --> 00:33:56.580 If the price goes down to $5, let's say they sell 20,000 loaves, and the total revenue goes up to $100,000, and so forth. 384 00:33:56.580 --> 00:34:01.380 But the way the textbooks used to draw the curves is that the area always remained the same. 385 00:34:01.380 --> 00:34:07.180 The total was always $10,000 or whatever. It was adjusted in such a way that the area was always the same. 386 00:34:07.180 --> 00:34:14.180 Finally, by 1943, George Stiegler later won a Nobel Prize as a young professor, wrote a textbook called The Theory of Price. 387 00:34:14.180 --> 00:34:18.180 He said, there's no evidence for this. Why do they draw the curve that way? What is this nonsense? 388 00:34:18.180 --> 00:34:23.180 So he started drawing it as a straight line. The least doesn't commit you to thinking that the areas are the same. 389 00:34:23.180 --> 00:34:26.180 There's no evidence for a straight line either. And so sometimes, 390 00:34:26.180 --> 00:34:33.180 I think McCloskey's latest book on applied price theory is sort of a maverick type. He draws the lines as wavy. 391 00:34:33.180 --> 00:34:40.180 Well, it could be wavy. I still prefer the straight line, provided that you hold it in your head at all times and it's really convenient. 392 00:34:40.180 --> 00:34:44.180 It doesn't mean a damn thing. Unfortunately, most economists don't hold that in their head. 393 00:34:44.180 --> 00:34:51.180 By the time they get to Chapter 8 or something, they're thinking this is deeply significant, and they start talking about tangencies, as you'll see when you go along. 394 00:34:51.180 --> 00:34:56.180 There are all sorts of crazy conclusions based on tangencies that don't exist because there ain't no straight lines. 395 00:34:56.180 --> 00:35:00.180 Straight lines are easy to cope with and at least doesn't assume you have the area of maintenance. 396 00:35:00.180 --> 00:35:05.180 No reason for the area to remain the same. No reason why consumers always spend the same amount of money, regardless of price. 397 00:35:05.180 --> 00:35:08.180 At any rate, we now have the mankers with straight lines. 398 00:35:08.180 --> 00:35:13.180 And the next thing is dealing with supply. All right, we now have the manker which we know is fooling, although we don't know exactly how much. 399 00:35:13.180 --> 00:35:18.180 And we have supply. What's supply? Supply, despite the textbooks, supply is vertical. 400 00:35:18.180 --> 00:35:23.180 Supply for everything is how much is around right now. How many loads of wonder better are around at the stores today? 401 00:35:23.180 --> 00:35:28.180 Let's say 100,000. So you have at any given time, the supply as a fixed amount changes over time. 402 00:35:28.180 --> 00:35:41.180 over time. But the point is, at any given time, and the demand curve after all is a freeze frame situation, how much could be purchased at any given price by consumers? Similarly, the supply curve should be a fixed freeze frame. At any given day, how much is out there? 403 00:35:41.180 --> 00:35:57.180 So the supply curve is vertical. You right now know more economics than most of the people in the country. You know more than the jerks who run the subway system, for example. The way most people who run utilities, particularly, subways, railroads, whatever, they assume that the demand curve is vertical. 404 00:35:57.180 --> 00:36:01.180 The implicit is that they don't think about the man curve, but they implicitly assume the man curve is vertical, 405 00:36:01.180 --> 00:36:06.180 which means that people essentially kick in to buy the same amount of stuff regardless of what the price is. 406 00:36:06.180 --> 00:36:07.180 There's no fooling the man curve. 407 00:36:07.180 --> 00:36:12.180 So, for example, every year or so, they keep raising a subway fare because they've got a deficit. 408 00:36:12.180 --> 00:36:14.180 Of course they have a deficit. The government always has a deficit. 409 00:36:14.180 --> 00:36:16.180 So, almost by definition, the government's always screwed up. 410 00:36:16.180 --> 00:36:20.180 They've got a deficit. How do we cure a deficit? We raise the fare. Why not? 411 00:36:20.180 --> 00:36:25.180 If you're suffering from a certain deficit, you figure out you can balance the budget. 412 00:36:25.180 --> 00:36:30.380 If you raise the price by 20% and you keep the same number of fares, then you'll balance the budget. 413 00:36:30.380 --> 00:36:35.580 So they raise the price by 20%, and by God in that, next year they find out it was a falling off of rides, of fares. 414 00:36:35.580 --> 00:36:37.580 So the deficit never gets cured. 415 00:36:37.580 --> 00:36:40.380 They always startle of this. Why does the number of fares go down? 416 00:36:40.380 --> 00:36:42.580 Why aren't people riding in the subway as much as they used to? 417 00:36:42.580 --> 00:36:45.580 Gee, I don't know, maybe it's because it's crummy, but it's always crummy. 418 00:36:45.580 --> 00:36:47.580 That's not the answer, it's just a fare went up. 419 00:36:47.580 --> 00:36:54.580 So some fine day in the future, it's not going to be too long from now, they're going to raise the fare up again, to five bucks, whatever it is, right? 420 00:36:54.580 --> 00:36:58.900 and they're going to find out not only the number of rides are going but the total revenue 421 00:36:58.900 --> 00:36:59.900 is going down. 422 00:36:59.900 --> 00:37:00.900 That's what they're going to find out. 423 00:37:00.900 --> 00:37:05.260 They're going to get up here somewhere and find out that taking in less money than they 424 00:37:05.260 --> 00:37:06.260 did before. 425 00:37:06.260 --> 00:37:07.260 What are they going to do then? 426 00:37:07.260 --> 00:37:08.260 Who knows? 427 00:37:08.260 --> 00:37:10.260 They haven't even got the mindset of lowering the fare to get a lot of people. 428 00:37:10.260 --> 00:37:11.260 They might even privatize it. 429 00:37:11.260 --> 00:37:12.260 That would help. 430 00:37:12.260 --> 00:37:16.220 This is to say the general mindset of authority and fare-setting business. 431 00:37:16.220 --> 00:37:19.020 As you can see, it makes a big difference to businessmen. 432 00:37:19.020 --> 00:37:20.020 What happens to total revenue? 433 00:37:20.020 --> 00:37:23.020 What happens to total revenue becomes the key thing. 434 00:37:23.020 --> 00:37:27.020 The businessmen are extremely interested in total revenue, which I say we're now concentrating on. 435 00:37:27.020 --> 00:37:29.020 We'll get later in the term of the course question. 436 00:37:29.020 --> 00:37:33.020 It becomes very important to them, what happens if the price changes? 437 00:37:33.020 --> 00:37:37.020 If you raise the price from here to here, what happens to total revenue? 438 00:37:37.020 --> 00:37:44.020 We now come to the most important property of the demand curve, which is the reaction on the demand curve. 439 00:37:44.020 --> 00:37:46.020 As you change the price, what happens to total revenue? 440 00:37:46.020 --> 00:37:49.020 In other words, how does quantity react compared to price? 441 00:37:49.020 --> 00:37:54.220 price. Okay, law of the ministry of marginal utility is a key thing that this is accomplished 442 00:37:54.220 --> 00:37:59.340 in the history of economic thought. Adam Smith, the alleged founder of economics, actually 443 00:37:59.340 --> 00:38:05.140 he really wasn't, but one of the founders of economics as a separate discipline, said 444 00:38:05.140 --> 00:38:09.700 in the Laws of Nations, which was the famous first economic classic, said there's a value 445 00:38:09.700 --> 00:38:14.520 paradox, let's call it value paradox, and he said he couldn't solve it. Now, it's very 446 00:38:14.520 --> 00:38:18.700 peculiar in the history of thought, but if he had solved it 20 years earlier in his lectures 447 00:38:18.700 --> 00:38:24.700 published much later, about 1900 or so, so it's one of the peculiar situations in history of thought. 448 00:38:24.700 --> 00:38:28.700 In fact, it had been solved by scholastic philosophers since the late 16th century. 449 00:38:28.700 --> 00:38:34.700 All of a sudden he creates this problem called the value paradox, and it goes as follows, namely, 450 00:38:34.700 --> 00:38:41.700 why is it that things like bread and water, let's take bread, it's usually called the diamond water paradox, 451 00:38:41.700 --> 00:38:47.700 but water is an extra complication. Anyway, bread, which is the staff of life, it's very important philosophically to man, 452 00:38:47.700 --> 00:38:52.540 demand because you need it for life and water, of course, even more. And yet here, bread 453 00:38:52.540 --> 00:38:58.220 is very important. It has a high use value. And yet, on the market, it's very cheap. Cheap 454 00:38:58.220 --> 00:39:03.100 on the market, therefore, it has a low exchange value. One puzzling situation. Here's something 455 00:39:03.100 --> 00:39:08.020 which has a high use value and a low exchange value. You can probably think of other things. 456 00:39:08.020 --> 00:39:12.940 Nails are pretty important for construction. You know, nails are cheap. On the other hand, 457 00:39:12.940 --> 00:39:16.500 you have luxuries. They're fripries. And here, and this is one of the reasons why Smith's 458 00:39:46.500 --> 00:39:52.020 Value. It's a very strange thing. I can't solve it. And Ricardo has the cycle say the 459 00:39:52.020 --> 00:39:56.700 same thing, or more than, can't solve it. This is a value paradox. Therefore, we can't 460 00:39:56.700 --> 00:40:01.260 say anything about consumers, the value of two consumers, the whole utility analysis. 461 00:40:01.260 --> 00:40:04.380 I can't say anything about it because they're stuck in this thing. They have to deal with 462 00:40:04.380 --> 00:40:08.780 the entrepreneurs and business and labor and all that sort of stuff. And consumer analysis 463 00:40:08.780 --> 00:40:12.740 drops out of the picture, except in France, where they never approach this. I mean, Britain 464 00:40:12.740 --> 00:40:16.740 We didn't have a dominant economic doctrine in the 19th century, 465 00:40:16.740 --> 00:40:19.740 so we were, unfortunately, it took a hundred years to get out of this, 466 00:40:19.740 --> 00:40:21.740 to solve the value paradox. 467 00:40:21.740 --> 00:40:24.740 From this idea, you see, comes the left-wing position, 468 00:40:24.740 --> 00:40:28.740 like Veblen and these other characters in late 19th century America and later, 469 00:40:28.740 --> 00:40:34.740 saying, wow, capitalism, market economy, addresses production for profit and not for use. 470 00:40:34.740 --> 00:40:38.740 They produce things like diamonds, which are for profit, of a high value. 471 00:40:38.740 --> 00:40:41.740 They don't produce bread and water or something, which are of a low value, use value. 472 00:40:41.740 --> 00:40:47.740 This dichotomy between production for profit and production for use is a very important history of left-wing thought. 473 00:40:47.740 --> 00:40:51.740 By this time you have the tools in your possession to realize the fallacy in this whole nonsense. 474 00:40:51.740 --> 00:40:56.740 Basic fallacy is this, people do not choose on philosophic values. 475 00:40:56.740 --> 00:40:59.740 We don't sit around deciding on one big vote. 476 00:40:59.740 --> 00:41:03.740 Let's go back to the model of the grand old science fiction movies of the 50s. 477 00:41:03.740 --> 00:41:07.740 Some space character interfered, blocked into old television sets. 478 00:41:07.740 --> 00:41:12.740 All of a sudden we're asked what channel you want, some guy is speaking to you from the planet Oongbu or something, 479 00:41:12.740 --> 00:41:18.300 and he hands earthlings, he says earthlings listen, conclude peace now or die in six days. 480 00:41:18.300 --> 00:41:22.180 Some planetary character now comes to earth and presents us with a choice. 481 00:41:22.180 --> 00:41:25.420 From now on you have a world parliamentary decision. 482 00:41:25.420 --> 00:41:31.700 You have a choice of losing forevermore, from now on until the end of eternity, either all the bread or all the diamonds in the world. 483 00:41:31.700 --> 00:41:33.820 And that's the choice where the human race is faceless. 484 00:41:33.820 --> 00:41:40.820 Well, given that choice, I'm sure we'd choose bread rather than diamonds, and the space people would, wherever they are, would go off with the diamonds. 485 00:41:40.820 --> 00:41:45.820 The point is, in real life, we're not faced with this kind of a choice, we're not faced with all-encompassing class choice. 486 00:41:45.820 --> 00:41:49.820 We're faced with unit choices, marginal choice, the whole point of the unit. 487 00:41:49.820 --> 00:41:56.820 When somebody goes to buy something, they're not faced with the situation of, he's all the bread in the world versus all the diamonds. 488 00:41:56.820 --> 00:42:01.820 No, you're faced with the thing, should I buy this loaf of bread, or should I buy this diamond with 12 carats or something? 489 00:42:01.820 --> 00:42:07.940 In that situation, the marginal unit becomes extremely important, and the lower the initial marginal utility becomes decisive. 490 00:42:07.940 --> 00:42:13.300 If you only had one loaf of bread in the world, people would be willing to spend hundreds of thousands of dollars with one loaf of bread. 491 00:42:13.300 --> 00:42:14.820 Fortunately, we have lots of bread. 492 00:42:14.820 --> 00:42:24.540 But each unit, as we deal in units in the real world, each unit, each pound of bread is very cheap, because it's a low marginal value. 493 00:42:24.540 --> 00:42:27.180 It's like Crusoe with 20 logs instead of one. 494 00:42:27.180 --> 00:42:29.420 Depends on what the supply is. 495 00:42:29.420 --> 00:42:34.420 We have a huge supply, fortunately, a huge supply of bread, therefore it's cheap. 496 00:42:34.420 --> 00:42:35.420 Units are cheap. 497 00:42:35.420 --> 00:42:39.420 On the other hand, with diamonds, supplies are very, very rare, limited, scarce. 498 00:42:39.420 --> 00:42:44.420 That's true, we have a government cartel monopoly, which makes it scarcer. 499 00:42:44.420 --> 00:42:46.420 I'll get to that when we get to monopoly. 500 00:42:46.420 --> 00:42:47.420 So scarce. 501 00:42:47.420 --> 00:42:53.420 So we have then, even though diamonds, the first unit is much lower, say the least then, 502 00:42:53.420 --> 00:42:57.420 the first unit of bread, there are not that many units around, the supply is limited. 503 00:42:57.420 --> 00:43:02.760 So we have a higher price for diamonds on the market. In other words, a higher valuation 504 00:43:02.760 --> 00:43:07.100 by consumers for each unit, for each carat. This is the unit, the unit of weight of diamonds 505 00:43:07.100 --> 00:43:10.700 equal to a carat. The value placed by people on each carat is much higher than the value 506 00:43:10.700 --> 00:43:13.820 of a piece of each loaf of bread. There's nothing wrong with that. There's nothing paradoxical. 507 00:43:13.820 --> 00:43:18.480 There's nothing unphilosophic. There's nothing unnatural about it. It's perfectly legitimate. 508 00:43:18.480 --> 00:43:22.980 Once you see what the whole picture is, once you see the interpenetration between supply 509 00:43:22.980 --> 00:43:28.260 and Valuation. Once you realize about the margin, this whole thing clears up. That solves 510 00:43:28.260 --> 00:43:34.500 the value of paradox. It took until the Austrians and other economists in 1871, the margin utility 511 00:43:34.500 --> 00:43:41.540 theorists around 1871, to solve this paradox before margin utility dueled. For a hundred 512 00:43:41.540 --> 00:43:46.140 years, economics had been misled by Adam Smith into this cul-de-sac where they couldn't 513 00:43:46.140 --> 00:43:49.980 analyze consumers' behavior, they couldn't analyze consumer actions because they couldn't 514 00:43:49.980 --> 00:43:54.980 and let themselves wide open for leftists to say, wow, gee, it's a terrible thing. 515 00:43:54.980 --> 00:43:57.980 And there's no conflict between production for profit and production for use. 516 00:43:57.980 --> 00:44:02.980 Profit is what's most useful to the consumer, most valuable, and the demand is highest. 517 00:44:02.980 --> 00:44:05.980 Anyway, that solved the value paradox. 518 00:44:05.980 --> 00:44:10.980 Any exchange that takes place in the market, people only exchange because it's more valuable for them. 519 00:44:10.980 --> 00:44:12.980 They prefer what they're getting to what they give up. 520 00:44:12.980 --> 00:44:14.980 They prefer the marginal units. 521 00:44:14.980 --> 00:44:18.980 In other words, you work, you change your labor service of 40 hours a week or whatever 522 00:44:18.980 --> 00:44:23.940 of Money or exchange money for loaves of bread or cereals or whatever. You're doing that 523 00:44:23.940 --> 00:44:28.740 because you prefer the value you're getting for the value you're giving up in exchange. 524 00:44:28.740 --> 00:44:34.220 So each step of the way, each kind of exchange is made on the market. Millions of exchanges 525 00:44:34.220 --> 00:44:38.540 benefit both parties of the exchange. What we have is a lattice work of two-person exchanges. 526 00:44:38.540 --> 00:44:45.300 As always, for every unit exchange, there are two people or two groups and two commodities 527 00:44:45.300 --> 00:44:50.980 including two goods and services. Each unit exchange has two people and two commodities. 528 00:44:50.980 --> 00:44:55.860 In the money economy, money is always one part of the equation here. Money is exchanged 529 00:44:55.860 --> 00:45:01.420 for other things. So if you graduate and work for IBM, you're exchanging your labor service 530 00:45:01.420 --> 00:45:07.540 for salary, for money. So that's again a situation with you and IBM. IBM is not a person, it 531 00:45:07.540 --> 00:45:11.860 acts as a unit in this situation. So each step of the way, and this lattice work of 532 00:45:11.860 --> 00:45:16.740 of Exchange is both parties' benefit. Otherwise, they wouldn't make the exchange and do something 533 00:45:16.740 --> 00:45:21.820 else. They go home, they make some other exchange, they keep their money, they do whatever. 534 00:45:21.820 --> 00:45:26.660 Okay, we now get to the most important property of the demand curve. The only property which 535 00:45:26.660 --> 00:45:31.980 really is important as a matter of fact. Remember that the demand curve is falling. It's all 536 00:45:31.980 --> 00:45:36.820 we really know about it. So you have on the y-axis, you have price, and the x-axis you 537 00:45:36.820 --> 00:45:42.780 The Man Curve tells you, it's really the man's schedule, geometric representation of the 538 00:45:42.780 --> 00:45:43.780 man's schedule. 539 00:45:43.780 --> 00:45:47.940 It tells you, at this price, how much will be bought, the price of one or better 10 bucks 540 00:45:47.940 --> 00:45:52.300 a loaf, this much will be bought, the price of five dollars a loaf, this much. 541 00:45:52.300 --> 00:45:55.820 Cheaper, the price, the more will be purchased. 542 00:45:55.820 --> 00:46:00.100 So you have a man curve which is sloping, so-called falling man curve, a man curve which 543 00:46:00.100 --> 00:46:01.100 slopes downward and to the right. 544 00:46:01.100 --> 00:46:06.100 You don't know if it's linear, you don't know if it's steep or shallow or flat, you only 545 00:46:06.100 --> 00:46:18.100 The important property of the demand curve is, how much, if this is like a freeze-frame situation, telling you what's on the mind of consumers, of course you don't know that the demand curve, who knows, you don't really know, all you know is that it's falling. 546 00:46:18.100 --> 00:46:27.100 The important property of the demand curve is, if you change the price, let's say if you cut the price from here to here, how much will the quantity increase? Or at least in what direction? 547 00:46:27.100 --> 00:46:33.100 We know it will increase, we don't know about how much. If it increases just a little bit, you have a steep curve here. 548 00:46:33.100 --> 00:46:41.100 It can either do that, or it can increase a lot. We have a much flatter curve, given the same point. 549 00:46:41.100 --> 00:46:45.100 This property of the man curve is called elasticity. 550 00:46:45.100 --> 00:46:54.100 Once again, it's borrowing the prestige of physics, where the question, for example, is if you put a certain different weights on a spring, how much will the spring give? 551 00:46:54.100 --> 00:46:58.400 give. There are two different kinds of definitions for you all. One kind, which is a textbook 552 00:46:58.400 --> 00:47:02.820 definition, there's nothing wrong with it, it's just kind of irrelevant. The more elastic 553 00:47:02.820 --> 00:47:07.380 is how much more give there is, in other words, how much the quantity will increase when the 554 00:47:07.380 --> 00:47:11.700 price falls. The reason why it's irrelevant is nobody knows anyway. And it's also the 555 00:47:11.700 --> 00:47:15.340 really important thing, it's quality, the really important thing for the businessman 556 00:47:15.340 --> 00:47:19.260 or for the industry is, will total revenue go up or down? That's what they really care 557 00:47:19.260 --> 00:47:23.300 about. If I cut the price, what's going to happen to my total revenue? That's what I 558 00:47:23.300 --> 00:47:30.500 The total revenue, business income, net income, is total revenue minus total cost. 559 00:47:30.500 --> 00:47:34.780 This is a very simple way of looking at it, but basically it is how much money do you 560 00:47:34.780 --> 00:47:39.740 take in a year over the transom or over the cash register or whatever, how much money 561 00:47:39.740 --> 00:47:40.740 do you pay out? 562 00:47:40.740 --> 00:47:48.420 If you take in $100,000 a year, you pay out $80,000 total cost, and your net profit is 563 00:47:48.420 --> 00:47:49.420 $20,000. 564 00:47:49.420 --> 00:47:57.420 If, on the other hand, your total revenue is $60,000 and you pay out $80,000, you're in pretty poor shape, suffer net losses of $20,000. 565 00:47:57.420 --> 00:48:05.420 So, therefore, total revenue of any firm, or any person, doesn't matter, equals the price of anything times the quantity sold. 566 00:48:05.420 --> 00:48:13.420 Let's take our Wonder Bread example. The curve is based on a schedule. Let's say the price is $10 a loaf. You have very few loaves sold. Let's say $1,000. 567 00:48:43.420 --> 00:48:47.380 So, when you get your total revenue, what we're interested in here is, what happens 568 00:48:47.380 --> 00:48:48.380 to total revenue? 569 00:48:48.380 --> 00:48:51.620 In other words, the key thing, and I'm thinking on here, is the direction. 570 00:48:51.620 --> 00:48:54.580 What happens to total revenue for the change in price? 571 00:48:54.580 --> 00:48:58.500 If when you cut the price, if quantity increases by a greater proportion, you have an increase 572 00:48:58.500 --> 00:49:01.340 in total revenue, that's an elastic demand curve. 573 00:49:01.340 --> 00:49:04.940 You raise the price, then you have a fall in total revenue. 574 00:49:04.940 --> 00:49:08.440 It's not easy to forecast in advance what the demand curve will be, because it'll change 575 00:49:08.440 --> 00:49:12.340 across the zone, and it can be different from different things, so that's an elastic demand 576 00:49:12.340 --> 00:49:13.340 curve. 577 00:49:13.340 --> 00:49:18.740 The other hand, if you have that curve, which is relatively steep, then you'd have the new 578 00:49:18.740 --> 00:49:23.300 total revenue be smaller, in other words, the increase in quantity is not enough to 579 00:49:23.300 --> 00:49:28.500 offset the drop in price, so the result is lower in total revenue. 580 00:49:28.500 --> 00:49:35.260 So in this situation, where a fall in price leads to a fall in total revenue, or looking 581 00:49:35.260 --> 00:49:38.260 at it again the other way around, if you raise the price from here to here, you've got an 582 00:49:38.260 --> 00:49:40.300 increase in total revenue. 583 00:49:40.300 --> 00:49:48.300 This is something that businessmen are very interested in. They don't care that much about the percentage or the amount or the formula. They care about what happens to the damn total revenue in this. 584 00:49:48.300 --> 00:50:00.300 Because in the real world, businessmen don't know that the man curves are not listed up in the book for them. They have to try to find out. It's not easy to find out. It's part of the job of the entrepreneur or the business man to try to figure out what's going on. 585 00:50:00.300 --> 00:50:04.700 This situation is called an inelastic demand curve. Inelastic. 586 00:50:04.700 --> 00:50:08.980 In other words, we're setting up here a new definition of elastic and inelastic. 587 00:50:08.980 --> 00:50:12.660 Instead of concentrating on percentages, we're concentrating on the direction of total revenue. 588 00:50:12.660 --> 00:50:16.820 If the total revenue increases to the full or the full on price of an elastic demand curve, 589 00:50:16.820 --> 00:50:21.420 if it drops to the full on price of an inelastic demand curve, and vice versa. 590 00:50:21.420 --> 00:50:24.340 So what can we say about when things will be elastic or inelastic? 591 00:50:24.340 --> 00:50:28.660 Well, one thing we can say that other things being equal, 592 00:50:28.660 --> 00:50:31.420 A larger range of choice will lead to greater elasticity. 593 00:50:31.420 --> 00:50:33.760 In other words, let's say this is a, 594 00:50:33.760 --> 00:50:35.140 back to our Wonder Bread example, 595 00:50:35.140 --> 00:50:37.460 here's the price of Wonder Bread, let's say a buck, 596 00:50:37.460 --> 00:50:39.380 this is a buck a loaf. 597 00:50:39.380 --> 00:50:43.380 Let's say Mr. Wonder, you know, huge increase in price, 598 00:50:44.500 --> 00:50:46.140 sales are gonna fall off tremendously 599 00:50:46.140 --> 00:50:48.300 because all the other breads will remain the same price. 600 00:50:48.300 --> 00:50:50.660 Rolled bread, everything is a buck a loaf or so, 601 00:50:50.660 --> 00:50:53.740 he's raising his price to $5, $10 a loaf, 602 00:50:53.740 --> 00:50:55.060 it means a tremendous falling off, 603 00:50:55.060 --> 00:50:59.060 The demand curve is very elastic for Wonderbread. 604 00:50:59.060 --> 00:51:03.060 So that's one of the reasons he's not going to do it, if he's sane. 605 00:51:03.060 --> 00:51:07.060 On the other hand, if all the breads go up together, that's a different story. 606 00:51:07.060 --> 00:51:13.060 Then there'll still be a falling off, but people won't be able to shift out of Wonderbread as a pepperage formula, because they'll all be going up. 607 00:51:13.060 --> 00:51:21.060 So in that situation, to be much steeper, it could still be elastic, but be less elastic for each given firm, or each given brand. 608 00:51:21.060 --> 00:51:23.060 Same way on the way down. 609 00:51:23.060 --> 00:51:26.800 One thing we can conclude from this is the demand curve in all cases, regardless of how 610 00:51:26.800 --> 00:51:34.200 elastic the demand curve is, the demand curve for the firm, any given firm, is more elastic 611 00:51:34.200 --> 00:51:38.240 than the demand curve for the industry as a whole. Unless, of course, there's only one 612 00:51:38.240 --> 00:51:43.280 firm in the industry, in which case it's the same thing. When you have a big gap, say the 613 00:51:43.280 --> 00:51:46.720 demand curve for each firm is quite elastic, and the demand curve of the industry as a 614 00:51:46.720 --> 00:51:52.560 whole is inelastic, it sets up a temptation for a cartel agreement among the firms because 615 00:51:52.560 --> 00:52:11.800 The only time a cartel will last for any length of time is when the government steps in and 616 00:52:11.800 --> 00:52:17.600 forces it, prevents new competition from coming in, prevents anybody from breaking the agreement. 617 00:52:17.600 --> 00:52:19.600 And this is what's happening in Europe a lot. 618 00:52:19.600 --> 00:52:26.640 So elasticity is a major property of the man curve, either elastic or inelastic, which 619 00:52:26.640 --> 00:52:32.840 means you only have a situation where total revenue either falls or increases and changes 620 00:52:32.840 --> 00:52:33.840 in price. 621 00:52:33.840 --> 00:52:36.360 And it's obviously extremely important for businessmen to try to figure out what's going 622 00:52:36.360 --> 00:52:37.360 to happen. 623 00:52:37.360 --> 00:52:41.200 In the real life, there are no given demand curves, businessmen are trying to find out 624 00:52:41.200 --> 00:52:43.440 what will happen if they raise the price or lower the price. 625 00:52:43.440 --> 00:52:49.440 That's a trial-error kind of procedure, much of a hunch and based on their intuitive insight 626 00:52:49.440 --> 00:52:53.680 in the market, which is of course based on knowledge, but based on a sort of knowledge 627 00:52:53.680 --> 00:52:57.880 economists don't have, because we're not in the fish market or the computer market or 628 00:52:57.880 --> 00:52:58.880 whatever it is. 629 00:52:58.880 --> 00:53:01.280 Each market is different, has different people in it, different resources and stuff going 630 00:53:01.280 --> 00:53:04.440 on, dynamics, it's the only people involved that I can figure out.