Econ 101: The Complete Intro to Economics For Beginners | Chris Benjamin | Skillshare

Econ 101: The Complete Intro to Economics For Beginners

Chris Benjamin, Instructor, MBA and CFO

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61 Lessons (3h 32m)
    • 1. Course Introduction

      1:32
    • 2. Instructor Introduction

      1:48
    • 3. 075ECON Section 02a Economic History

      3:37
    • 4. Science of Scarcity

      1:30
    • 5. Micro Vs Macro

      1:10
    • 6. Economic Models and Graphs

      2:22
    • 7. Human Behaior and Choices

      2:53
    • 8. Pursuing Personal Happiness

      3:25
    • 9. Limitations

      4:47
    • 10. Marginal Utility

      3:26
    • 11. Limitations and Violations

      5:14
    • 12. What Is Possible To Produce

      4:25
    • 13. Deciding What To Produce

      5:02
    • 14. Deconstructing Demand

      6:29
    • 15. Sorting Out Supply

      6:22
    • 16. Supply and Demand Together

      5:40
    • 17. Price Controls

      4:32
    • 18. Utility

      1:49
    • 19. Choosing By Ranking

      1:33
    • 20. Getting Less From More

      2:16
    • 21. Choosing Between Options

      2:01
    • 22. Demand Curves and Dimishing Returns

      2:48
    • 23. Maximizing Profit

      0:52
    • 24. Facing Competition

      3:50
    • 25. Firm Cost Structure

      3:44
    • 26. Marginal Revenues and Costs

      2:43
    • 27. Producing Nothing Is Best Sometimes

      1:39
    • 28. Competitive Free Markets

      2:30
    • 29. When Competitive Markets Lose Freedom

      3:03
    • 30. Perfect Competition

      2:53
    • 31. Profit Maximizing Monopolies

      3:28
    • 32. Good Monopolies

      3:33
    • 33. Regulating Monopolies

      1:01
    • 34. Oligopolies

      2:48
    • 35. Incentives To Cheat

      6:30
    • 36. Regulating Oligopolies

      1:15
    • 37. Monopolistic Competition

      2:08
    • 38. Socially Optimal Outcomes

      0:46
    • 39. Examining Externalities

      4:38
    • 40. Tragedy of Commons

      3:47
    • 41. Asymentric Information

      7:23
    • 42. Public Goods

      5:10
    • 43. Health Economics and Finances

      0:28
    • 44. The Limits of Health

      8:26
    • 45. Comparing Health Internationally

      4:24
    • 46. Inflated Demand for Health Insurance

      4:26
    • 47. Singapores Secrets to Health

      5:12
    • 48. Gross Domestic Product

      2:24
    • 49. The GDP Formula

      4:17
    • 50. Inflation When Too Much Is A Bad Thing

      4:31
    • 51. Measuring Inflation

      6:01
    • 52. Recession and the Business Cycle

      2:06
    • 53. Striving for Full Employment

      3:02
    • 54. Price Adjustments

      2:31
    • 55. Heading Towards Recession

      4:07
    • 56. Acheiving Equilibrium

      3:48
    • 57. Financial Crisis Understanding The Bubble

      3:20
    • 58. When the Bubble Bursts

      3:21
    • 59. Recovering From Financial Crisis

      2:06
    • 60. Economic Concepts Take Aways

      7:09
    • 61. Course Conclusion

      1:52
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About This Class

Does The Study of Micro Economics Seem Daunting?

Have You Ever Wondered About Game Theory?

Do You Wonder How Businesses Make Pricing Decisions?

Are You A Business Student or Graduate Who Wants To Learn More?

Do You Get Lost When People Start Talking About Interest Rates, Market Growth, Supply and Demand?

If You Answered "Yes" To Any Of The Above, Look No Further.  This Is The Course For You!

*** Updated June 2019 with new content! ***

Enroll today and join the 100,000+ successful students I have taught as a Top Rated instructor!

Three reasons to TAKE THIS COURSE right now:

  1. You get lifetime access to lectures, including all new lectures, assignments, quizzes and downloads

  2. You can ask me questions and see me respond to every single one of them thoroughly! 

  3. You will are being taught by a professional with a proven track record of success!

  4. Bonus reason: Udemy has a 30 day 100% money back guarantee if for some reason you don't enjoy the course!

Recent Review:

Brad O. says "Fantastic course on micro economics.  It's such a fascinating topic, but seems like it could be daunting.  Chris makes it easy to understand, fun even.  You really see how micro economics applies to everything in life.  I especially loved learning about game theory."

Why You Should Take This Course With Me:

Have you ever wanted to fully grasp the world of Economics, but didn't know where to start?  Have you wanted to develop a better understanding of what makes the financial world go around, and why people, businesses and countries make decisions?  Most likely there's an economic reason, and you have come to the right place to learn everything you will need to know.  By the end of this course you will be an economics pro!

What We Do In The Course:  

  • Learn the basic fundamentals of economics, why people make certain choices

  • Learn about production levels and optimization

  • Learn about supply and demand

  • Learn about capitalism and the free market model

  • Learn about monopolies and how the dynamics change

  • Apply these microeconomic theories to real world situations

  • Learn about macroeconomics

  • Learn about interest rates and recessions

  • Apply macroeconomic theories to real world situations

  • And Much More!!!  

At any point if you have a question, please feel free to ask through the course forum, I'd be happy to answer any and all questions.  

***JOIN NOW AND LEARN ECONOMICS WITH EASE! ***

About The Instructor

Chris Benjamin, MBA & CFO is a seasoned professional with over 20 years experience in accounting, finance, financial reporting, small business and CRM systems.  Having spent the first 10 years of my career in corporate settings with both large and small companies, I learned a lot about the accounting process, managing accounting departments, financial reporting, external reporting to board of directors and the Securities and Exchange Commission, and working with external auditors.  

The following 10+ years I decided to go into CFO Consulting, working with growing companies and bringing CFO level experience to companies.  I help implement proper best business practices in accounting and finance, consult on implementation of accounting systems, implementing accounting procedures, while also still fulfilling the CFO roll for many of my clients which includes financial reporting, auditing, working with investors, financial analysis and much more.  

Thank you for signing up for this course. I look forward to being your instructor for this course and many more!

Chris Benjamin, Instructor, CFO & MBA

Transcripts

1. Course Introduction: Hi, everybody. Welcome to the course. Economic theory 101 My name is Chris Benjamin, and I'll be your instructor now in the next lecture and give you a little bit more background on myself and kind of my sort of upbringing with economics. And you know why I'm qualified to be your instructor in this introductory video. I mainly wanted to first welcome you to the course. I welcome you again. Thanks so much for signing up in enrolling. We're going to be learning a lot information in this course, so let me just give you an idea. So first of all, we're just gonna start with economics. In general, definitions of economics kind of put you in the right mind frame when it comes to learning about economics, then is well, we're gonna focus on two major disciplines. The 1st 1 being macro economics. How economic supplies on a global level. And that is what we're gonna talk about. Micro economics more domestically, sort of at home, your community and even yourself, your day to day life. And how you can apply economic theory to make things better. Just figure out how things will possibly work out on the best decisions to make. That said, we covered quite a bit information, of course, because we cover some additional economic theory as well, on top of all that. So sit back, enjoy. Throughout the course, there's gonna be different downloadable for you. Some quizzes as well feel free to take those. I also encourage you if you have questions any point during the course. Definitely send me a message. Happy to answer all of your questions Always encouraged my students to make this an interactive course. I'd love to give you my feedback and or just, you know, answer questions you have. So definitely send me messages, and I believe that's it. So let's get started on Learn all about economics. 2. Instructor Introduction: Hi, everyone. Welcome back again. My name is Chris Benjamin. I will be your instructor on this course. So a little bit about me. I've been in accounting and finance professional for over 20 years now. My formal education. Originally my undergraduate degree was in accounting and finance. And then later on I went to get a masters degree MBA in business from the University of Washington, where I went on the study, even more so kind of business strategy and economics as well. So, having taken economics in my undergrad, I was considered economics sort of my second passion besides accounting. So definitely focus a little more on economics when it came to my master's degree. No, economics is a very fascinating subject. I'm sure that's why you're here taking this course. And don't worry, I'm not gonna bore you with my background for too long. But basically you can really apply economics toe everyday life. And it's really fascinating. Once you have a background in economics, how you start to view situations in sort of economic theory and think of supply and demand curves. Not a day goes by where I don't try to apply supply are apply supply and demand to a given situation. We talk about things like game theory and Prisoner's dilemma. If you're not familiar with those will get to them in the course, but definitely things that you can apply on that as well. Beyond just playing things to our daily life, We're just gonna learn how to apply economics. How do things like, you know, interest rates and exchange rate impact, different economic situations? How do we figure out the optimal situations? We're gonna cover all of that and a lot more in this course, So definitely excited to be your instructor on this course. I'm really I've really been looking forward to teaching this one. Economics is an area that I'm very passionate about. So, uh, that said, Let's go ahead, get started. Just another reminder, I said the previous lecture. Definitely so many questions you have during the course. So let's go ahead, get started learning all about economics 3. 075ECON Section 02a Economic History: So before we dive into economics and we're gonna be covering a lot of information just a brief introduction, economic history. I won't try to bore you too much. But to sort of set the tone, you know, where did just the concept of economics really come from? Well, it's really developed. Over the last 250 years, Industrial Revolution was definitely a big sort of push and a change in our society. And definitely how markets function and society works is a whole. Now there's four main areas that are kind of attributed to economics and how economics came into play really shifts and how the dynamics worked in the public. So let's go over those few eso, first of all, is democracy. You know, all of a sudden the people had a voice, so it wasn't a huge disparage between, you know, the people in charge and everybody else. Now the peat everybody else had to say and how things worked, which really radically shifted how things work. Now the common person got to say, you know, this is what we want that really changed how countries were run and obviously plays in economics. Limited liability corporations some of these areas things you might not think about. But, uh, limited liability corporations exist in The biggest benefit to a limited liability corporation is that it protects the business owner in that there ever sued. You know, the person that's suing them can only go after the assets of the business. So really creates a separation between personal life, a business life before limited liability corporations or LLC's. There was no way to protect yourself. You know, there was no incentive almost to start a business because if you had any sort of wealth combined built up, somebody could sue you and through the business, essentially go after everything that you won't really created. That separation definitely big incentive than for people to start companies, right. They can now very much segment their personal life in the business life similarly somewhat patent rights. In the past, it was seen that, you know, somebody would come up with a new idea and somebody else would just steal it right away and try to do it better and try to do a cheaper. So it really took away the incentive to even try and crumb up with new ideas, right? like, why bother to work on? You know, something very specific you can imagine today if, you know, there was no such thing as patents. No. Why would companies go on develop all these new technologies when they know that immediately after they put them out, they're gonna be stolen and other people are gonna figure out better ways to do them? There's just, you know, there's such a heavy investment both in time and money to build new. I mean, and I'm using technology. That's his example to build anything that you would patent, you know? So the last thing you would want us to have the free ability just steal that away and do what they want with it. So patents definitely created a barrier for people s so that when they come up with new ideas, they're protected now in the markets place. And then, lastly was just widespread literacy and education. You know, everybody in the world just started getting better at, you know, their lives and business, if you will. They're learning, you know, they're going out learning disciplines that they didn't have a way to learn in the past. So now all of a sudden. You haven't educated population, you know who has skill sets that they want to put to use. They have better ways of doing things. They're you know, they're thinking about the market, how we run the markets, tools to develop. Now there's competition as well, right? So people are coming up with ideas and this competition between ideas, which only spurs for the best ideas that kind of rise to the top. So those four factors were really kind of the backbone of what drove economics. So the economic says we know it today and we're gonna learn all about in this course, we really started with those four factors, so try to keep those in mind. 4. Science of Scarcity: So next let's talk about the concept of scarcity. Scarcity is really one of the fundamentals of economics that really drives it. So when I'm talking about scarcity we're talking about resource is a lot of economics. Deals with resource is what's available for us to use now, when something is scarce. That means there's only so much of it available and typically only think of something being scarce. That means there's not a lot of it available. There's very finite amount, and eventually it's gonna run out. So economics, you know, really factors in scarcity, because as we start to run out of X amount X goods, you know X supply, you know it becomes more and more valuable on per unit basis. We also talk about on the flip side of that diminishing returns, the more and more you do something, or the more and more you have of something the less and less return you get from him. I mean, you can't even relate this on a personal level, right? You know, if you do some, if there's something you can go, do some experience and it's really rare, and you do it once. It means a lot to you. But if it's something you could do, then again and again and again, and every day it becomes monotonous. And all of a sudden goes from this thing that you really want to do an experience to something that you almost don't want to bother doing anymore, right? Well, that has to do with diminishing returns. It's just less and less valuable to you to do that. Good to do that service. Do that act, whatever it might be time and time again. So we're going to get more into diminishing returns and scarcity as well through the course . But I just want to introduce the concepts on a very high level. 5. Micro Vs Macro: so next. I wanted to introduce the concepts of micro economics and macro economics. Now you might have heard these terms before, and we're definitely going to get into each of the discipline separately through the course and talk about the specifics. Now. In general, though, what are the specific? Some macro has to do with the big level. It's more of a global look at economic, so it's really looking at things like international trade. Looking at things like recessions, interest rates, how the world's economy is impacted by different shifts in demand, the supply worldwide. Compare that to micro economics. Think of micro economics is very domestic, very localized. It has to do with supply and demand on a local basis, you know it has to do with utility and how much extra excitement you will you get out of something. Or how many Utahns will talk about you tells as we go through the courts, Really, just keep in mind that micro economics has to do I like to think of as either your local community or your local country. Macro is much more of the big picture. It's really the worldwide global view of economics, and under each of those topics, there's very different, relatable economic theory that we're gonna put together 6. Economic Models and Graphs: Now, if you know anything about economics and economists, they love graph. So we'll be drawing some graphs in this course. I'm gonna not gonna break one out for this little brief introduction, but we will get to some eventually. So the supply and demand draft is a staple of economics. Now, just a za slight introduction. You can think of this and you don't have to think of it in a graph format. Just think of it in concept, supply and demand. So it has to do with pricing decisions. Eso if a company wants to price something, how many people would buy it? So, for example, if gas was $10 a gallon currently the actual going right where I live is roughly $3. So if one gas station decided to price that $10 a gallon, do you think a lot of people would buy gas from them? Probably not. They're going to go by it, you know, at the gas station, you know, a mile away, that's only $3 a gallon. Conversely, if somebody was to price their gas out $1 a gallon, they're probably lineups down the street. You know, people want to save. You know that that's has substantial savings on gas and gas, one of those things that people spend a lot on every month, especially if they commute or have a big vehicle, etcetera. So what's the happy? What's the happy medium? What's the price where you get the company makes the most money? Essentially, that's really what you're looking for. So where you know there's enough supply to supply that? Because that's the other factor to the company that's selling it for, I should say, the gas station that's selling it for a dollar a gallon. It's gonna run out at some point, right? So they're going to run out of gas and say a day or say the truck comes and delivers gas every single morning at 8 a.m. But if they price it at $1 there's such a demand for the gas at $1 that they run out by noon. Well, they didn't make an optimal decision there, you know. They ran out of gas. So what if they had priced it at $2 a gallon? Okay, so maybe now by five oclock they run out of gas, really supplying the man is about figuring out. What's that optimal intersection? What is the right price to charge where you get the most profit from the resource that you have? Basically, the ideal situation would be your running out of gas for sale, right as the truck shows up with a new low to gas tree of the cell. So what is that price point that gets you there? And that's what we're gonna be learning. When we look at supply and demand, Grass will talk about Nash equilibrium. That's kind of the intersection. What is that exact right price? And we'll get much more into that through the course. But just as a heads up will be known some graphs and figuring out where those lines intersect. 7. Human Behaior and Choices: Now, in this next section, we're gonna be talking about consumer choices. How do people go about choosing what it is that they do or what they end up buying and typically, and economics? That's more what we're thinking about. But we can do it as well in terms of our decisions of what we do now, Economists have come up with sort of a generalized, sort of three step process that people take in order to really make decisions when it comes to anything in life. So region those three decisions, and we'll get into him a little bit more in the next few lectures as well. So, first of all, we assume that people are able to evaluate how happy, how happy each possible option will make you. So here you are. You wake up one morning and you're faced with a slew of options, right? Maybe it's what to do with your day. Maybe have the day off. Maybe it's your buying a car. Need to evaluate what car is gonna make you the happiest. Whatever that choices that you're making, you're able to look at it and evaluate what your options are. Your at least it able to identify what your options are. Second, you're able to look at the constraints on the trade offs limiting your options. So let's use the cars an example cause that's kind of a a very standard, sort of, if you will, economic choice, right? And something that makes people very happy when you do buy a new car. So here you are. You wake up and you realize, you know what? I want to buy a new car. Okay, I've narrowed it down. I've got a few ideas of what I want, so I've evaluated, you know, the choices that I have. But I still you know, I've got a few options here, so Step two is then looking at the constraints. Well, maybe car A is way outside of your budget. Well, that's a constrained. That's a limit that eliminates that as a possible option. Maybe Carby only comes in blue, and you hate the color blue. OK, that's no longer an option as well, so people are able to evaluate their choices then, so they make choices are at least they narrow it down to sort of a few possible choices and then are able to apply those constraints and limitations to help narrow down even further. And then thirdly, you're able to ultimately choose and decide on an option that makes you the most happiest, right? So that's probably a combination off you get a good price. It's a color that you like. It has all the features that you want or most of them. Again. It's a bit of a trade off. What happens when car see No, is the color you want? It's maybe the most affordable. It's great on gas, but it doesn't come with air conditioning, whereas Cardy does everything, but it cost $20,000 more. You have to make that decision. Is the air conditioning worth the extra $10,000 as well? Maybe Cardy isn't quite, and that's just not, you know. You prefer car. See, it's maybe a car manufacturer that you lean towards whatever the case might be, so you is a rational human being are able to evaluate your choices, narrow it down, look at your limits and constraints, and then make a rational choice based on the pros and cons essentially of each of the options that you have available. That is basically the gist of consumer choice 8. Pursuing Personal Happiness: So now we're gonna examine each of those three concepts and a little bit more detail. So the first is just assuming people are rational. They're able to evaluate some potential decisions and narrow the field down a little bit. So, looking again in our car buying example, we assume that you know the person buying a car. You know, there's lots of different vehicles out there that come in different shapes and sizes and colors and manufacturers. The person is able to use some sort of high level distinguishing feeds are facts about the vehicles to narrow it down. It's and everybody is unique, right? So what makes us the most happy? Economists often referred to his utility. It's often measured in you tells just a concept, a high level concept. So utility is what brings you happy. And what brings makes you happy is probably different for makes me happy. So each have our own personal utility, and we assign a value of utility two different concepts, right? So when it comes to the vehicles, you know, maybe you decided you're going to buy a new car. But you know you're an environmentalist and you really decide that you want on electric car ? You know, one that doesn't use any gas. And you think, Well, maybe, you know, hybrid, where uses some gas, Some electricity is a possible option as well. Well, you get the most utility out of the fully electric vehicle. You know, it's just much more better for the environment, and that's what makes you the most happy. But the trade off is maybe that it costs a little bit Maurits and newer technology. You can't go with fire on a charge. It's a little bit more of an inconvenience, right? You know, if you buy a Tesla, you're gonna have to go find a charging station if you go on a long trip. I know that. You know, one time I looked in the list is the personal example, and I believe they could only go up to save roughly 300 miles. I don't even think it was that far on a single charge. And that's if you didn't run the air conditioning and basically captain in a very sort of low needs status. So there's that. But there was charging stations along the way, say I was driving from here to somewhere that was 300 miles away. There's charging stations along the way, but there's a bit of an inconvenience in that right. I have to make sure I make it to the charging station. We have to find it. It's gonna be new to me the first time I do it. What if there's other people? They're charging their vehicles, and now I have to wait for somebody to finish. Charging there is before I could do mine. So there's lots of factors to figure in, and that's all factors into your utility, right, Because what's your other alternative? Well, maybe you get sort of a fuel efficient car, but the one that runs on traditional gasoline. It's not quite what you want in terms of environmental friendliness, but it introduces some convenience factors. So each of us that humans would evaluate all those concepts and really decide what's most important to us. What will bring us the most happiness? And that's kind of our starting point for making choices, then right? And like I said, your choices are different than mine. The person who's buying you know, the Tesla and they have to charge it. They have to make sure it's less than every 300 miles. You know, I might look at that and go too much inconvenience. You know what? I'd rather the car that costs a little bit less runs on, you know, normal gasoline fuel. But I know that there's gonna be 20 million gas stations between here and whatever destination they have. So we just signed different utility to different concepts in life. Pretty much everything. And that's what makes us unique, is human. So keep those concepts in mind that your utility is different than my utility is different in someone else's utility. How much utility we assigned to something is very much also a relative concept. 9. Limitations: so the next concept will talk about is now the constraints and limitations on your decisions, you know, will continue with our car example. We'll also talk in the high level. So there's several different types of constraints on your decisions. And excuse me for this lecture and also throughout the course, if I looked down at my notes, just want to make sure I don't forget anything. Eso First of all, there's a resource constraint. What happens if going back to the car and you want that fully electric car? Well, you know, there's a wait list for Tesla's, you know, it might be up to a year, especially. They come out with a new model. There really is a long waiting list. So what if you need a car, though next month your current car is breaking down, he said. You know what I really want with those electric vehicles? And then you go and look and you see that Oh, you know I can't have one for a year. Well, that's a big restraint on your plan, right? So as much as the electric field cool, you decide, it brings you the most utility. Now there's a constraint on your plan, and you have to make a decision. Are you willing to wait a year? May be able to buy used one from someone possible option. You might have to pay a premium. Maybe there's a way to get it done early as well if you pay a premium. But there's a resource constraint on you, so not everything is available for you at all times. There's also technology constraints. Maybe it doesn't work so much in the terms of the car, but let's say, Well, there is to a degree of technology constraint there. So we talked about, you know, the roughly 300 mile limit, and I don't know if that's currently the case. That's when I look at one time, Um, so it's a There's a limit on what you could do with that vehicle. You really want Teoh get electric card. He wanted to operate and function the exact same as a gas powered vehicle, but the reality is, is it just doesn't do that because there is a technology constraint. Technology limits you to a 300 mile range, and that car is gonna have to powered up, and maybe it takes I'm not sure how long it takes to charge the cars. I believe it's relatively fast, but I know it's a lot longer than it takes to fill up a car with gas filling up a tank of gas. What a few minutes, maybe five at the most. If you have a really big tank, I believe charging car can take, at least on our, if not a couple hours, to really get a fully charged Well, that's also a technology constraint on view. What if you do frequent trips to another city and let's say it is within range? But you do and you do found somewhere, though, that you can charge up your car halfway. But you know, you need to make that trip in four hours, but now you're gonna be stuck somewhere for an hour and 1/2 charging up your car technology constraint time. You, um, as well. This kind of actually rolls into both of these. It's just time constraints in general. So the time constraint of you know that example? I just gave. So that's both the technology and a time constraint. There might also be time constraints of in the previous example before that where I said, You know, you need a car this month. You know your car is on its last legs and need to buy a vehicle and you want an electric vehicle. But guess what? There's none available. There's a 12 month waiting list. Well, that's a time constraint on you. So on those will, factoring in all different decisions throughout. So wouldn't we get to talking about maybe a manufacturing environment? Maybe you just got a big order for your product, whatever it is that you sell and you know it takes five different parts to assemble, and that's how you build your product. And four of them are an ample supply. But there's one piece that you know there's a backlog, and you're not going to get it for a month. Well, that's a time constraint right now on your being able to deliver, you know you have a limitation on you. So there's also one last constraint. Sometimes it's a little bit foreign. You might have heard of the concept, but it's basically opportunity costs. So opportunity cost is that whatever decisions we make and what we decide to do, we're basically for going all the other options, right? For the most part, me and maybe you want to do to it once. But assuming that when you make a decision So you've decided toe by the electric vehicle, Um, and you go and he's signed on the dotted line. Well, you've given away all your other options. At that point, we've lost that opportunity to take on other projects. So you really have to look at your opportunity costs as to what else could you have been doing? So, for example, let's say the electric vehicle costs $50,000 you have to wait a month for it, you know, a month being generous based on a previous example. So when you sign the dotted line, well, now you're committed. So that's a $50,000 you could have. Maybe, you know, bought a $30,000 vehicle. I got it sooner and used at $20,000 for something else. Maybe went on a great vacation. Maybe put it aside, and savings or your retirement account. You gave away all those other opportunities because you decided to go with the $50,000 vehicle, and that's really what opportunity costs is. You have to look at What were those other options that you gave up and where they worth enough to you? Or were they not worth enough to you that you decided that that was OK worth letting them go? So really think about each option and what it means when you decide on it. What? It also means you're giving up, not just what you're getting. 10. Marginal Utility: So next let's talk about sort of diminishing returns and something called marginal utility . Now it's a little bit difficult with the car. Example is typically you would just buy one vehicle and you'd be good, right? Not many people are buying multiple vehicles, but actually, let's just use that as an example. Let's say you're very wealthy, and now you know you bought the brand new First off the line Tessa Electric vehicle. You get a lot of utility out that you wanted electric vehicle cause very environmentally friendly. Maybe you don't drive so far. So don't worry about Electric Philip Dilemma that we had in a previous lecture. So let's say that you decide you want a 2nd 1 You know, it's so cool you love that car. You want a 2nd 1 so you can spread out your mileage. You know you're not racking up all the miles on that. What first car thing is, though you kind of you know, that initial excitement that you gotta buying that first car? It's not as exciting. The 2nd 1 right? Maybe you have a bit of you know you're thinking OK, well, I'll buy a 2nd 1 There's lots of pros toe having a second car, but I already got over the excitement of the fact that I own a Tesla. Now, let's say for some idea, you also decide you need 1/3 1 Maybe you have a kid in college. You say No, I'm gonna get you, Testa. But that excitement of going to the dealership and putting down the $50,000 really isn't It's exciting the third time around. It just isn't. You know, you've already gone through all the hoops you've explored the bells and whistles your over the fact that maybe the doors rise up on what I starts remotely all those things like your over because you already know another example would be when it comes to food, we've all been there. We've been out. Maybe we went on a trip and we're running around all day and we're just starving, right? We just want something to eat. And you love pizza and you find, you know, maybe you're in New York, you know, it's famous for pizza is at Chicago. I think they both are. But nonetheless, you find a pizza place and you can't wait to eat pizza. So you decide you're gonna buy four pieces of pizza way more than you would typically. So that first piece of pizza is gonna be amazing. You know, you're starving all of a sudden. You know, you have no longer starving. It just tastes so great. You know, you're on vacation, cetera. So then you dive down the eat that second piece of pizza pretty good. You know, your hunger is kind of quenched at this point, but now you still have two more pieces of pizza. So you go. Well, I bought them. So I'm gonna get that third piece of pizza. You can eat it, you can get it down. But you realize you know what? Now I'm getting kind of full, uh, you know, not so great. And then you go, Well, I bought this for a piece of pizza. I hate the waste it. So I'm gonna eat at a new power through and you eat it. Now you feel sick. So what happened there? You were so excited for that pizza. And your first slice was so great for you By the four slice, we were regretting every decision you made two by four pieces of pizza. That's marginal utility. In an example, things lose their value over the more of it that you have and the more you consume of it. And it pretty much goes for most things in life, right? So kind of inner vehicle, you know, we were so psyched to buy that first Tesla the 2nd 1 we were excited. But, you know, there starts to come a trade off to like, Well, I'm spending money for this thing. 3rd 1 you know, not is excited. Same thing with the pizza, right? You know, we feel like we bought it. We have to eat it, but we really weren't too psyched by the fourth Pizza Pizza. Those decisions come into fact in the factor throughout economics. So keep that concept in mind. It's called marginal utility, also referred to as diminishing returns. You know what, Just whatever it is consuming pizza loses its value. It has a diminishing return. The more and more and more that we do it in any single event, 11. Limitations and Violations: So lastly, in the section we're gonna be talking about some irrational decisions that people make, and they kind of use false logic. And there's a few different ways this comes into play, and then it will tie into our economic concepts as well. So the first is the idea of sunk costs. A sunk cost is where you spend some amount up front. That amount is kind of mandatory, and then what you do after is is variable. So, for example, to put, you try to use lots of just sort of simple examples, if you will. In economics, you go to a buffet in the buffet costs a fixed amount. It cost $20 a person, so you pay your $20. What do most people do? They eat as much food as they possibly put in their mouth all the way to feeling sick. Now the $20 was the $20 assumes you walked in the door and past the person you've spent $20 . So now it's up to you. How much you want to eat. If you eat one plate of food or you eat five plates of food, that's your choice, and people often sort of take the concept of, Well, you know, I'm going to get the most bang for my buck. But really, what's the trade off? The person that eats five plates, a few food feel sick. Maybe they go to the point throwing up, you know, Or maybe again, let's use the you're on vacation example. You're somewhere where they have buffets and you eat so much that you're sick. And now you lose your afternoon because you have to go back to the hotel and lay down for a few hours versus the person who just eats one plate of food and someone else goes, Well, yeah, but I got more out of it, You know, I five plates of food. Well, that's kind of Ah, irrational thinking, if you will. You know, the $20 was a sunk cost. Everybody was gonna pay $20. Really? Now it's about maximizing your utility out of the situation, right? The person who ate comfortably a one plate of food, you know, they're the ones who really got the most utility out of that situation versus a person who ate themselves sick and you know, quantity. Why, sure they did better per dollar on the quantity, but at what trade off? Second example is a situation where people think of percentages instead of absolute dollar amounts. So this example, I think, will make it clear. So let's say that you are in the market for a new cell phone. New iPhone $1000 right in general. So you decide. And it's on sale, though. If you drive half on hour to the special store, they're having a sale on them. So rather than $1000 you can get it for $900. And that's great. I will drive, you know, half hour to save $100. So you do that. You do round trip half hour there. You by the phone for 900 you go home and you think terrific. You know, I saved myself $100. Now, the next weekend you're in the market for a new stereo system for your house, or maybe a huge television nine inch TV, something crazy, right, and it costs $3000 at your local store, but a store about half an hour away, maybe the other direction is selling its set of 3000. They're selling it for $2900 and the person goes, well, yeah, that's cheaper. But it's not that much of a savings on the spending. $3000. They acted completely irrationally in those decisions. They were willing to drive 30 minutes both ways to save $100 on the phone. They weren't willing to drive 1/2 hour both ways to save $100 on the television that 3000. It's because they were thinking of in terms of percentage, you know, they saved 10% on the phone. They were only saving not a few percentage on the television a night in town, about 3.3% against that would be so, they thought, made their decisions based on a percentage, not absolute dollar values, which were exactly the same. So that's sort of an irrational decision that somebody could make. So keep those in mind and then, um, one last choice that people make or, you know, maybe groups make. It has to do with sort of the marginal. So we talked about, you know, diminishing returns on sort of the marginal utility that you get out of something. So here's another example so for example, your city. It has a river, and you put they put in three new Brit bridges. They set up tolls that costs $10 million a bridge to set them up. So it's $30,000 to build these bridges, and they put in tolls. And over the course of 10 years, the bridge is generate $12 million each, so they're making $2 million over the 10 years on each bridge. So a politician thinks, Well, this is great. All we have to do will set up 1/4 bridge, right? Let's set up 1/4 bridge on. We'll start making $12 million. It'll cost us $10 million to build it and will make $12 million over the next 10 years. Well, that's probably follows, right? There's a diminishing return. Each additional bridge isn't going to generate an additional $12 million in revenue. There's only so many people crossing those bridges, and they're already using the 1st 3 So now instead of, you know, making 12 million per bridge, which was an average 36 million, essentially over over the 10 years now that 36 minutes just going to spread over four bridges, so essentially they're actually gonna be losing money on a per bridge basis. So confusing that sort of marginal with the average is a big fallacy that people have. So keep those concepts in mind. When it comes, economics will be talking about sort of marginal decisions, and average is quite a bit. 12. What Is Possible To Produce: So let's get into a little bit more about Resource is and planning and, you know, making options are making decisions to optimize. You know what it is that we're getting in terms of output. So when it comes to resource is, first of all, we tend to break. Our resource is in the three categories. So, first of all, those our land, we think of very traditional things, typically uneconomic. Try to use sort of more contemporary examples, if you will. But where we have to, we might have to use sort of a mole more traditional example. So economists think of resource is as land as people or labor essentially and then as resource is themselves or tools. So things like at machinery eso think of a manufacturing environment, right? You have the land, you have the building, you have the labor force, and then you have the actual machinery that is doing work. So when it comes to making decisions, so in the past, you know, the few examples we've talked about so far, we really just had to decide on one thing, you know, which vehicle did we want to buy? You know how much we're gonna eat at the buffet things like that. So now let's think more of a traditional manufacturing situation. Actually, let's use the example of picking fruit. So let's assume that you have so much land and you have apples and you have oranges planted . Now you make so much on per apple when you sell it. And so much for orange. It turns out that Apple's air a little bit more valuable. So you know our first instinct will be well, you know, why not plant all apples? Well, the other factor we have to consider is now the human resource. So you know, people get tired. So maybe, you know people out there picking apples the 1st 2 hours. They're perfectly happy. They're picking away and they can pick. An average person can pick 300 apples per hour. Lot apples. Ah, so but by the third our fourth hour, they're starting to slow down right there, getting tired. They're going kind of bored picking apples. So now, instead of picking 300 apples or picking 200 apples an hour now, by the end of their shift the 5th 6th 7th 8th hour early, picking 100 apples, an hour. So they really fallen off in terms of, you know, their production value. So what are costs per apple that we're picking has greatly gone up, right? So while the number of apples has greatly decreased, our labor costs is the same because they're going to pay the same amount every hour, but they're producing a lot less per hour by the end of their shift. So the decision is there. Well, what motivates them? Well, if we switch them, say, about middle of the day, we decided you know what Bob will use. Bob is a general example. Bob, you know, you're tired of picking apples. How about we have you go pick oranges? You know, that would be something new and exciting for you. And Bob says, yes, that Bob still a little bit tired, but Bob can pick 200 oranges. Or maybe maybe for the first hour in and pick of the first hour doing oranges. You can pick 300 oranges that first hour and then kind of falls back to 200 per hour on, and they finishes up his day. So we either get, you know, 302 101 100 of all apples or we get 302 100 then maybe 302 101 100 per hour at a Bob. So again, what's the right decision, though? Because we already said, too, that Apple sell for a bit more than oranges. Well, so we kind of have a complicated math problem, right? And I know I'm speaking very general allergies. I don't expect anyone to able to figure it out just based on this little bit of information , But that's just to give you an example of the decisions we need to make a economist. We need to figure out you know what our resource is. We have land. We have our labor. In this example, we have our machinery as well. Then we also have that diminishing return. You know, Bob just can't pick apples all day. He really gets tired. Maybe there's another factor involved. Maybe Bob has to use the machine, and it costs. Even though Apple's cell for bit more, it costs more to run the apple picking machine than it does the orange picking machine. Now it doesn't cost a lot more, but it costs enough just a little bit more so Now we really need to factor that in as well . How many hours a day do we really want to run the apple picking machine versus the orange picking machine? So all of the decisions are true economic decisions that will get more into actually modeling that how you graph all those decisions at some point. But for now, it again, I want to give you an overview of how you know we go from a very easy supply and demand and marginal return. Now think about lots of different factors and how they all play into and factor into our economic decisions. 13. Deciding What To Produce: So when it comes to deciding how much to produce on our previous example apples and oranges , how many? How much land do we devote to each of the different fruits? And you know, how much time do we devote from our labor force to picking one over the other as well? That's tied into machinery. Well, those were decisions that we have to make, and we'll figure out we'll talk about technology and how basically weaken input. Lots of variables like that and basic computer will tell us. Here's your optimum solution. So let's talk a little bit about government, right? We work in societies where the government exists, so there's lots of different, you know, USA, where I'm from, you know, capitalist environment. But then there's countries that still have communism, etcetera. So let's make a case for government intervention case against it and see where we stand. So ah, few pointers on why, you know, having a government involved in market dynamics is a good thing. Eso first of all, you know, the government's looking to protect the citizens, so they're going to do things like ban hazardous chemicals. You know, if there was no government intervention somebody would see that there is a market for hazards chemicals. There is a big amount profit to be made. They would be producing hazardous chemicals, which might be detrimental people. So, you know, government puts those rules in place and makes this isn't for people on consumer goods and services that aren't so great. Um, as well. The government can provide subsidies. So I was I mean, when I think of a subsidy, I do think of things like farmers and our apples and oranges. The government subsidizes industries that we really need as a society to exist. Maybe those industries that just aren't performing the economics of it. They don't make enough profit to exist. So the government is able to subsidize them to make sure that they do exist. And they do, uh, operated optimal level and then third, you know, the government Not everybody loves it. But they imposed taxes and they opposed taxes to sort of drive consumer demand in some ways and as well decisions that we make right. So we think of taxes on things like cigarettes and alcohol. They're considered a sin tax. You know, those are bad things for us. So the government taxes those more heavily and then is able to use those funds to do lots of different things. One of which, though, is the pre examples subsidized industries, which we do need and are good for us. So as well. The government can then different tax levels on other industries as well. It's not just the syntax industries, but we get We pay tax on a variety of goods, right that the government has been able to use that money to then circle back and do its job of subsidies and as well, you know, prohibiting things that set us up. Definitely a case be made for some level of government intervention in our markets. How about the case against government intervention? Certainly. I'm sure there's some people there, special interest groups, you know, We always hear about that as well. Just people who can lobby the government lobby, the governmental officials, these air special interest groups that are well funded, you know. So somebody who you know, a special interest group that really wants people to be able to sell poisonous materials, you know, maybe they form a special interest group, really lobby the government that the government does allow companies to sell poisonous gas or something, whatever the case might be. So the fact that there are these lobby groups that are well funded kind of goes against the concept of having a government in place, right? All the pros that we just talked about kind of go out the window if a lobby group can just come along and persuade them otherwise anyways, inefficiency. You know, we always think of bureaucratic red tape. It takes a long time for things to work their way through the government. Meanwhile, the market might be held up, so maybe there's some policy in place. Things have evolved and, you know, we just can't move forward because we're waiting for the government to make some ruling or change the law. That inefficiency can slow down the markets a swell in flexibilities that once a decision is made, there's a lawn place. It's not easy to response to say the market was to drastically change or something new comes alone. We're gonna have to wait, first of all, for any rulings and law settings, and then once they're in place, even if they're not the greatest, it's going to be very difficult to get those changed down the road. Once things are in place with the government, they tend to stay in place. So what is the best solution? Typically, it's a mixed economy. So not one where the government is making all the decisions, but not one where they're making none. So a nun situation is called lays a fair. It's a French term, basically means do nothing. I mean, I know I'm not using exact translation. Ah, but nonetheless, the government's not involved in the situation, so we look to a mixed solution where the government has its role. But for the most part, the markets are left to operate on their own, and people make decisions like how many apples and oranges to produce and how many to pick . You know, without the idea of having the factor in things like taxes, etcetera, they might exist. But it's not the overwhelming decision making factor for people in this sort of free market 14. Deconstructing Demand: Now we're going to start talking about supply and demand Big part of economics, right? So this lecture, right, you're gonna focus just on demand, and we're gonna be doing it primarily through the use of graphs to explain it. So we have our handy whiteboard here. So when it comes to demand in general, let's just think about it at a high level. So demand is basically a relationship between a certain price level and how much of it someone or a group of people want to buy. So, for example, if we use, uh, carrots, let's say carrots, just a staple vegetable. When carrots are a dollar, maybe the market a whole wants 100 of them. But when market are when carrots air $2. Well, some of those people that you know we're willing to pay a dollar no longer want them. So now there's only about 50 people that want carrots. So how do we and that applies to any good? And you can apply to yourself as a person or, again, entire group of people or an entire country market, whatever it might be. So let's start off with our first graph. So now I'll admit, I hope, you know, use a different marker here. I am not the neatest writer. So you have to bear with me, and I will move out of the way of the graph. So on the left on the Y axis, we have price. So this will be price. And on the bottom will have quantity. The little hold true for most of graphs that we're working with through the course. So here we have maybe 50 cents a dollar dollar, $52 this is carrots demand. Okay. And again, I apologize for my writing on quantity. So maybe 25 will actually write these 10 15 and 20. Let's say this is your personal dollar 1.5 to your personal demand curve. So when you go to the grocery store, depending on what the prices, that's gonna dictate how many carats you buy, because if they're cheap, you're gonna buy a lot of them. You say, Hey, that's a great deal. I'm gonna buy a lot of parents, and I'm gonna eat carrots all week. If they're expensive, though, I like carrots enough. I still want to buy a few books, but I'm not gonna buy as many. So let's think about this. So when carrots are 50 cents you want to buy, you want to buy a lot of them, right? So let's say you actually want to buy 20 carats. So let's plot the points. Now Let's go the other extreme. So we'll get our endpoints with carrots or $2. You only want five. Maybe even only want one. Let's even go like up here. So just roughly up here, that's how many you want now. Demand curves tend not to be a straight line, so it would be unfair for us to to say it's a completely linear equation because there's some combinations where, you know, maybe character dollar, but you really only want seven. You know, it's only when it becomes super cheap that you say Okay, I'm gonna buy a whole bunch of them until they're super cheap. Down 50 cents. You still are like I don't need that many carrots up in general. I'm not gonna plot each point. Demand curves tend to look like this. Now let's say that your demand curve now, I personally, um, you know, I don't like carrots that much. Let's let's be honest. So when Kurtz are, you know, 50 cents or lecture? Let's start with the high. When they're $2 I might buy one carrot. So I'm out here, you buy to buy one when? There, but 50. So the price has fallen. Maybe I'm still only in it for, you know, one. Or maybe now I want to carats. But all the way down the 50 cents, even when carrots there, 50 cents, you pretty much have to give them to me. I really only want, you know, 10 carats. I know I don't want a lot of carrots, so I'd be right here. So my demand curve might look something like this and then probably flattens anything cheaper than 50 cents. Like I'm not gonna buy too many. I might just fall off. Even so you can see how people demand curves. I know. Get apologize. This isn't the need of graph can very much differ based on your personal preferences. And that's what a lot of economics is about, as well as your personal preferences and how they affect your demand. No, let's talk about one other concept groups. Just erase these. So let's say instead This represents the entire market space, if you will. And so we have. Our original carrots are $2 instead of maybe five. It's 5100 1 52 100 Maybe this is your town or your village. Whatever might be. So carrots or $2? You know, there's a few people you know. 50 carats will sell because that's, uh, you know, there's people, just need carrots. And there's people like yourself who love them and all the way down the tourists. Let's draw similar graft. Look kind of like what we had before. Let's are supplied or our demand curve for carrots. Now, let's say all of a sudden, um, you also like eating corn. But corn is in short supply this season. There is no corn out there, so you have to eat something. So, you know, when carrots for $2 there was 50 people willing to buy carrots. Now, though, there's no corn out there, so you kind of less options, what to eat. So in carats or $2 it might be more people willing to eat carrots and thats so they would be out here. So now there's 100 people when there's $2 now. If the price of carrots fellas say all that crop that was corn, that land was used to grow carrots. Now there's abundance of carrots. Um, and as such, the prices fairly cheap. There's a lot of them. So in the price, 50 cents. Maybe now there's quite a few people out here with this. So this shift, this movement in the demand curves outwards reflects a increase in demand. So just keep that in mind. And it kind of makes sense when you think about things on sort of a surface level, you know, when there's less supply of a complementary product, the demand for the other product probably increases. So there's gonna be more people wanted carats of 50 cents and as well, a $2. There's more people now who want those and as well keep in mind just the general nature of the curve. And then when we get to drive, supply curves will draw them on a similar type of graph, and then we'll see where they intersect and we'll get into Nash equilibrium and lots of other stuff 15. Sorting Out Supply: next on our agenda is to talk about supply the other half of supply and demand. So thinking about supply, we're gonna use a similar graph. You notice I changed it to supply, but we're going to use the same price points. And I left this 5100 etcetera. Let's talk about a market as a whole. So now, thinking of a supplier, you are a producer of carrots. You are farmer. What is your incentives or your incentives are two cells may carrots as you can for the best price possible. So let's think so. When Carrots air currently selling on the market for 50 cents. Let's just say not a lot of a lot of people wanted by Carris. It's just the going rate. How many carats are you willing to produce at 50 cents? Probably not allow you'd rather, you know, devote your land and built make other crops instead. So you're not gonna make may I said make, but not grow a lot of carrots. Maybe you're right here Now. On the flip side, Morris fun side the amounts. If people are paying $2 a carat, you think great. I'm gonna make I'm gonna grow as many carrots as I possibly can, like, I want to sell as many parents as I possibly can. So you're somewhere out here. We probably can't even get it on the graph somewhere out here. So similarly, like our other, uh, our demand chart. The relationship isn't always linear Now. It could be. I'm just gonna put in the dotted line. It could be very linear. But that said, typically what happens is take that out. There tends to be a curve. You know what, 50 cents you might grow 50 micro 70 and then that's the price really starts to go up. That's when you start adding on. And then what starts to climb up a dollar $52? Now there's a lot of profit in it for you, right? So let's say let's say cost oot the 40 cents to make a carrot girl carriage just 40 cents and cost the water the land paying labor? No, you're only making about 10 cents a carrot here and same thing about here, you know? Now you mean they're selling for maybe 70 cents, but you're still in making 30 cents a carrot. It's better, but it's not as much. When you start getting up to the $2 Merrick well, now it's you're making five times your investment. You spend 40 cents to grow carrots, you're making $2. So God, that's where the real money is. And that's why this graph kind of has a curve. It really starts to take off. So and there's also another factor with supplies. There's only so much supply you can create, right. You only have so much land. Sure, you could buy another plot of land, but then that would increase your costs as well. So, really, maybe 200 is your max, like you can't produce a more. Even if the price of $5 a carat this curve would just go straight up at that point. So that kind of explains that sloping nature of the supply curve. Now what happens when? Let's say that is the case. You decide. You know what? I need to buy some more land. What's gonna cost me? You know, I always have to buy the land, have to pay more people to take care of the land, harvest the carrots, all that So that is an increase in the cut your base cost right? Your cost per carat has gone up. So what does that do to the supply curve? How many carats are you willing to produce when your costs have gone up? Well, let's think about it. So let's now say instead of 40 cents a carrot, it costs you maybe 80 cents a carrot like Well, let's say it's not quite that linear. Let's just say it's 60 cents a carrot instead. Well, if it cost you 60 cents to make it carrot, you probably are gonna be creating too many at when they're only selling for 50 cents. It's just not worth your time, right? And we're ignoring the fact that it takes time to grow. Cares the price would be obviously fluctuating in that time frame. We're just assuming that whatever the prices, you could instantly create carrots that instant and sell them at whatever your production costs. So when carrots cost, I think I said it was 60 cents to produce. You're down here, you know, no matter what, anyone in 50 cents you're not willing to sell carrots. Uh, but at a dollar. All right, now there's some money to be made you can make that. So what happens is you're more up here. Let's just say 57 50 carats has cut your minimum. You don't even want to bother. Even if you could make the $2 it's not worth making 50 care. Aren't anything less than 50 carats now? Likewise, out here, 200. Well, you know, $2 is good, but still remember, we have There's less profit margin there left a profit percentage. So essentially, we're up here somewhere. And what happened there? Graph goes like this. So if you recall from our demand, demand shifted outwards supply curve shift upwards. So this curve is shifting upwards. Now, the price has to be higher for us to create the same quantities. But it makes sense right again, just thinking on a high level. If it costs us a lot more to create a carrot, we want a higher. So we want to able to sell them at a higher price. And if we can't sell them at a higher price, we're not gonna make them. So the people are actually say the supplier. Let's just draw a dot light up here. So the supplier who was willing to go 150 carats when they sold it. Maybe this was 75 cents. You know, now they're saying No, you know, I'm not even on that range said, You know, I'm not willing to do that, But when carrots, they're selling for us to say that was about 50. When characters selling for dollar 50. Now I am willing to create 150 carats, So same thing, even just with 50 carats. You know, if the we're willing to create 50 carats when the price of 50 cents pretty low price for the consumer, But when our costs is now 60 cents, we're not willing to create any. You know, we have 50 cents. This graph doesn't even intersect. So I mean, if we brought this all the way over, maybe we cross is right at the 60 cent line willing to create zero at 60 cents. But like we said, we actually don't. In theory, you wouldn't creating less just than 50 to start my fifties kind of your base minimum quantity. In general, that is a supply curve. You can also, um, like I said, that could could be linear, but for the most part, Remember the curve. And then the next lesson, What we're gonna do is drive, supply and demand curve on the same graph, clean this up and show you how they go about intersecting and interacting with each other. 16. Supply and Demand Together: All right, So now let's talk about supply and demand, so we'll just relieve it. We know it's supply and demand. So first of all, let's just draw our food graph that we're familiar with the graphs. Here's our supply, and I will make a mess deep this time. Let's just do this. Here's our demand graph. Okay, so this is demand. This is supply. Okay, so we already know that that's a quantity of 100. Supplier is willing to make whatever this is, maybe 60 and we know at a quantity of 100 people are willing to pay whatever that is. Maybe it's at about 50. Let's just say that's there. And let's say this goes over here. It's 75 cents. So So what happened? So at a quantity of 100 what actually happens out there in the market? Well, the supplier or I should say, Actually, let's give it. Let's choose a price instead will demonstrate excess quantity and excess supply access, demand excess supply. So let's say it. 50 cents. Let's start with 50 cents. Well, the demand is way out here. It's an I kind of grew Let's just go with the demand of 50 cents is right here, 150 so at 0.50 equals 150 demand. Well, if we go up, though at 100 at a 50 cents, we're only willing to make 50. There's only a 50 supply. 50 cents supplies only 50. That's not gonna work. So this is a situation where there's excess demand and essentially this area right here again, not connected. The dots very well is excess supply, and I apologize if this a little bit difficult to see another bit of a shine to the board. But that is excess demand, my sense. Klima's access demand at 50 cents people 150 at 50 cents. There's only gonna be 50 supplied. Okay, so what happens when the price is a dollar 50? In this situation, we won't forget the examples in the past reason. Same pricing, but the graphs kind of fellow differently. So when the price is a dollar 50 Well, now the supplies pretty good, right? It's come out here we go down. Maybe that's 1 70 So at a dollar 50 three right, this 1.50 supply is 170. Well, where's demand? All I have to do is come across. Here's their demand curve at a dollar 50 or demand is only 100. So now we have another problem. Suppliers air creating 170 of them. But there's only 100 demand you're gonna have excess supply. And that's what this area represents. This excess supply should say this line. That's much the whole area, something down here. Its actual difference for that given price point that represents excess supply. So there has to be a happy medium right now. When the price is too low, there's too much demand. When the price is too high, there's too much supply. Well, as it turns out, hopefully you can guess and scraps a little bit messy, of course, but the perfect intersection is right here when the price is, let's just say that is the dollars to make our lives easy when the price of the dollar 125 or made so the pride at a dollar suppliers are willing to make 125 at a dollar that demand 125 that is, let's call it the equilibrium. So when you hear a supply and demand and the market equilibrium. That is it. In a nutshell. That's very simple. So essentially you draw your supply curve, your demand curve. Where they intersect is your equilibrium. Now that all sounds great. And then, general, that's what happens in the markets. There's several other things, though, that could obviously impact this. So you know, when we think about out there in the market and maybe the price of carrots goes up well, maybe it's because, you know the suppliers can't choose how much they supply. Sometimes maybe, you know there's a drought and they just can't make carrots. And that's why the price of carrots goes up. Or maybe there's lots of other complementary products, and that's why demand falls first. Say something like carrots. So in the next few lectures will talk about things. Impacts on this graph on how this supply and demand curves can shift actual. We'll just do a quick, uh, quick examples. Let's say the supply drives up a little bit like her shifts up if you remember from our last example. So now, at a dollar hey, the only 75 are gonna be created. This is, in fact, our new equilibrium at whatever price. This is a dollar 25 at a dollar 25. There's 100 carats being produced up depending on where the two graphs lie is what you're claiming it was gonna be. Now you might be thinking, Well, we just have presently drew grass. Can't we just draw the graphs where we want them to intersect in the real world, In the marketplace, the grass will come from the variables that are out there on the market. So kind of our data points for the grass will be given to us. Then it's our job to plot them, see where the Intersect and see how different factors make the graph shift in different ways and then discuss how that would impact changes on pricing. 17. Price Controls: So lastly, in this section we talk about something price restrictions or price controls and see how they impact the market. So we'll look at both a floor and a ceiling on price. So first off, let's just start with our our standard graphs. Now, in this example, we don't necessarily even need the civic prices on hair. We're just gonna talk in theory, a little bit more about how things work. So we have our supply curve, our demand curve. And here's our equilibrium. So think about plate price ceilings, first of all. So if you've ever heard of rent control some areas, some cities have that where people are only allowed to rent out their house, their apartment, whatever for set amount, they can't charge any more than that, even though the market would let them charge a lot more. There's price controls in place to create a supply for people who maybe couldn't normally afford, You know, the higher prices. So so we have our supply. But what does the price for our ceiling do? I should say price ceiling. Well, it limits the amount that we can charge. So maybe suggesting 50 cents. It's 500 1000 1500. And obviously, you know, when rent owners are allowed to charge $2000 for their place, there's a lot of supply, not much demand. When they charge $1000. That's about where the equilibrium is. Everybody's happy. Well, let's say that the floor is 7 50 So are supplied. Graph now becomes lift. So this is 7 50 is the floor or the ceiling. I keep saying the floor to the ceiling. So what happens here? Well, this is the most anyone can charge. So you know your quantity or demand. It's going to be way out here. I mean, everybody wants, you know, at 7 50 there's a lot of people, So actually, here is the equilibrium at a price set of 7 50 The problem is the supply, this new supply, the actual equally room. Where is right here. So what? It creates his excess demand. You know, there's people wanting to spend well who are willing to take it at 7 50 But at that price, there's only gonna be so many people willing to supply it. So you haven't excess demand for quantity. And what happens in those situations is you get things like people waiting in lines. Maybe not so much for apartment apartments, but possibly, let's say, a new apartments coming on the market and it has price controls. 7 50 is the rent, and it's going to stay that way for the next 10 years. A lot of people are gonna want that apartment when the going rate, let's say, wasn't $1000 in the area. So what happens? You get things like people waiting overnight. They want to be the first ones there. They want to get it. So creates excess demand on those people. Don't have to fight for it. So the opposite situation. Let's say there was a price. Ah, a price floor. The minimum price that somebody could charge. So this might be something more like crops. The government wants to make sure that farmers were getting, you know, fair value. They know they aren't necessary worth a lot. You know, we talked a lot about 50 cent carrots. Let's say the governor wants to ensure that you get a dollar 50 for your carrots. Your supply is up here pricing. You have to charge a dollar 50. So what happens now? A dollar 50. Remember, this is our demand curve here, dollar 50 were were willing to produce up to the maximum amount that we can produce. Well, well, actually, I shouldn't say that up to here is where we would produce. This would be our supply, but the demand is only right here, so we're willing to produce about 180 carats. Let's go back to the carats example, but it is only about 80 people wanting carrots at a dollar 50. So what happens? Suppliers create the 180 carats. Only 80 or purchase and then you have waste. That's 100 carats waste, essentially, so farmers have to figure out other things to do with that space. They maybe have to produce the less profitable product with carrots have to be turned into something else. Maybe they become part of some sort of combination of vegetables and fruits that goes together that they sell, but it essentially creates inefficiencies in the market. And that's really what this is about in both situations, because you have a mismatch between supply and demand. So that's the general impact of price floors, price ceilings, and, uh uh, yeah, I think that's all we have on this 18. Utility: So now that we have an understanding of supply and demand kind of our intro, if you will, to start our first economic graphs, let's talk a little bit about utility and what is utility and how do people go about managing their personal utility? So, first of all, what is Utility Utility is basically a measure of what makes somebody happy. So, uh, it's measured in noodles is kind of the terminology we used in economics. So, for example, playing with the puppy probably makes me more happy than doing your taxes. So you get more utility out of playing with the puppy than with. Then you do sitting down and doing your taxes for the same amount of time. Let's just say now you can measure that on a scale, And if you could say, Hey, I get 100 you tools out of the puppy. I get five you tools out of doing my taxes. Something to that effect, and the next lecture will talk a little bit more about that scale. But nonetheless, this is what economists call a constrained optimization problem. You only have so much time in the day, and you also only have so many resource is it was up to you. You. It could play with puppies all day long and get the maximum utility. But the problem is you have to do your taxes on the other. Problem is, you have other things to do in your life, right? You don't have to decisions yet on any given day of maybe two decisions every five minutes to make dinner, you need to go to work. I need to put gas in your car. All these things have demands on your time. So your goal as a person and this applies to companies, groups, etcetera is to maximize their utility, given your constraints. And that's where you have to optimize within a constrained situation. So we'll be talking more about that. And Mac, basically, how to find that maxim utility Given all the constraints on your situation, 19. Choosing By Ranking: So I mentioned in a previous lecture about utility and how we could assign a number to write. So just using that example, petting a puppy gives you, I think I said 100. You tills, Let's say per hour. Doing your taxes gives you 25 you pills per hour probably gives you none, but let's just say you get some utility out of it because you feel accomplishing getting your taxes done. Uh, well, that very much is what we would call Cardinal Utility. You're actually assigning a numerical value to it, which in some ways puts it in perspective, right, You, ah, 100 Utility is four times as much as 25 utilities, so that's how we tend to think of people now. And when it comes to economics, we don't necessarily have to assign the number. We just have to recognize that one task. One thing has more utility than another, and it doesn't matter how much. So that's what we call orginal utility, So petting a puppy gives you more utility than doing your taxes. It doesn't matter if it's four times as much. Five times as much were ableto put them in order, so say we had five different tasks and you said, Well, petting a puppy gives me more utility and do my taxes And, you know, mowing my grass gives me more utility and do my taxes, but less than petting a puppy. Well, what now We know that mowing your grass fall somewhere in between the two. And if we were given another choice as well and we said how it ranked relative to other items, we would be able to place it as well on her spectrum. So that's the best way to think about utility. We won't always assign a specific number to it. Just it's relative to the other things that you could be doing. 20. Getting Less From More: So now let's talk about the concept of marginal utility, and that means how much utility, how much enjoyment do you get out of each additional unit of whatever it ISS? So let's go back to petting a puppy. So that first hour, when you get to play and pet with a puppy, it's exciting. Maybe you haven't, you know, played with, but you don't have your own dog. You played with a puppy and years. You're really excited to do this. You know, your friend just got a new puppy. You get like, let's let's actually go back to use their number. You get that 100 you deals out of that situation. That's like a lot of enjoyment for you. But you know, after the first hour where you know, you start to think about other stuff you have to do, maybe arms getting tired. It's still a lot of fun, and you don't want to give up this opportunity. But maybe that second hour playing with your friends dog. It's not quite as exciting some now it's only 50 utility, And now, by the third hour, you know you're really starting to run out of energy. You're getting hungry. There's other things that would give you more utility given that situation. So that third hour is maybe down now to 25. Utility and hey, that's where we were with our taxes, right? So that's the concept of marginal utility. The more of something we have typically, the less utility. It gives us each additional unit so that first unit is gonna be the highest. The second unit is going away in a bet, and then further further now, this doesn't always apply. Sometimes it will continue to go up. Maybe that first hour and the second hour just both is exciting, and it's only the third hour where you start to drop off. So it's gonna vary in the very based on the person right? These are all about personal preferences and what your choices are. But just keep in mind the idea of marginal utility. So it's hard to say that something gives us a specific amount of utility. It's really relative as well to the quantity. If you don't like the puppy example, think about just maybe eating pizza, your favorite food. So you haven't had your favorite food in half a year. For whatever reason, and then eventually you get It's your birthday. You decide you're going to go get it. Maybe it's a bit expensive. You know that first bite of food is amazing, but, you know, by the third, the fourth, the fifth bite? No, after your stuffed. You know, eating an extra bite is no longer giving you any utility, because now you just feel sick. So same concept applies in pretty much all different situations. 21. Choosing Between Options: So now let's think a little bit more about marginal utility, and how you should allocate your resource is so in this example we've been using Time is is really your resource that we're using. It could easily be applied to dollars, though, right? So but going back to time, let's just think about the puppy or doing your taxes. So, you know, we originally said, You know, I think 75 or 100 you deals out of paying the puppy only 25 for doing our taxes now, pending the puppy weaken due for hours, Doing our taxes is only going to take us, Let's say an hour to do we know that well would rather pet that puppy. But by the third hour, we said it falls down to 25 you tools, and we've been doing it for two hours as well. Right now, we have limited resource is, let's say it's Sunday afternoon. We work all week. Today is our day, and taxes are due, Let's say by Friday. So we know that taxes have to get done and we're not gonna have much time during the week. It's gonna be more painful to try to do them on a workday. Then it would be today when we have excess time. But we've been afforded this amazing opportunity to play with the puppies. So we played with a puppy for our one. Is that the right choice? Probably so, because playing that puppy gives us 100. Udall's taxes. 25 The second hour, maybe 50. You tills for the puppy, still 25 for the taxes. But now the third hour rolls around. Let's say, you know, we really born out. We're tired of playing with the puppy. So play of the puppy third hours only gonna give us about five. Udall's taxes still 25 because we know that getting them done. You know, it's not fun. Not saying 25 bugles means it's a great experience, but we know that getting done will feel accomplished. Its offer to do list and it has to be done anyways. Well, the third hour. What should we do? Well, obviously, we should just do our taxes. That's what makes us more happy. So that's how you allocate your resource is on a very sort of high level, if you will, you should spend your resource is on what gives you the most marginal utility at any given point. So think about your resource is in that sense and how you would go about allocating your own resource is. 22. Demand Curves and Dimishing Returns: So let's think about marginal utility in relation to price now in terms of money. Now you know it's maybe the weekend, and you like eating pizza and drinking beer. So but you only have a limited budget. You only have $20 to spend. Let's say so. You have to decide what's going to give you the maximum amount of enjoyment for your $20 so you can buy beer at maybe $4 a glass. Let's just say and you can eat pizza at maybe $6 a slice. It's a really great pizza, apparently. So you have to choose. How do you allocate your resource is right, and this is a very real world problem. You know, we have to choose what we do with our money and what gets us the most happiness. Now you really like pizza. Pizza gives you the most utility. So even though it costs $2 more than beer, you would rather take one slice of pizza over a beer, even though it's gonna cost a bit more. So the first piece of pizza gives you the 100 utilities. You know that first beer's gonna end. You still have money lasting and still get you know, a beer with your pizza that one gives you 80 utility. Let's say it also costs less. So what happens now? You still have $10 left. So what do you do? Do you make the same choice with the second slice of pizza in a second beer? Or you have to decide? So what happens? So let's say, after one piece of pizza, it was $6. So it's pretty big pizza, and you're kind of full now. So a second piece of pizza is only going to give you, you know, we said, I think 100 utility. Let's just assume it's kind of the gold standard for the thing that gives us the most utility. The original piece pizza gave us 100 utility first Beer gives 80 but now that second piece of pizza is really going to give us maybe 50 utility like we'll enjoy it. Don't get us wrong, but I'm kind of full Anyways, that might not end up finishing at I'm gonna feel bloated after, Whereas another beer. I like drinking beer. So the 1st 1 was 80. The 2nd 1 is really 70. We still get a lot of enjoyment out of it where he was gonna hang out. We were hanging out with our friends. You know, eating is very much sort of a finite thing. We just want to eat and be full drinking beer. We could sit around for hours and drink beer and child with our friends. So what should you do with your 2nd $10 now? Well, you know, you would get much mawr utility per dollar out of a second beer than you would out of pizza , and you might actually get more utility out of two more beers than a beer in a pizza. So when you crunch the numbers, it turns out that you're better off the marginal utility per dollar on the different activities. Given the shift. Because, remember, the utilities have changed for those second round, if you will so keep those in mind. So utility is not just in terms of, you know, relative to the other. Item is also relative to price, and what your best bang for the buck is 23. Maximizing Profit: So in this next section, we're gonna shift more to think about firms and companies and what what their goals are and how they impact the world in economics. So just to start, one of the big assumptions we make and fairly true, is that a firm's goal is to maximize their profits. Seems fairly straightforward, right? So even when companies maybe have other initiatives, so maybe you know, there's the company out there whose mission statement is to be completely green and ecologically friendly on, you know, zero missions. Whatever the case might be, they still also have an ultimate goal of making profit, because in order to achieve their other goals, they need to generate capital and have money to do all the things that they want to do. So we'll use the assumption that firms goals are to create profit. That's their main goal. As we move forward, 24. Facing Competition: Let's talk about perfect competition and you know what it means to be a competitive firm. So in kind of the real world and think about most industries. This is in all industries, and we'll get into some sort of specific examples later in the courts of industries like monopolies and oligopolies. But a perfect competition world, you sell widgets. There's a few factors that come into play here again, going for will think about. So remember, we assume, well, firms tried to maximize profits. It's also consider these assumptions that will make, first of all, in a perfectly competitive market space. There's lots of competitors, not one. There's not, too. Those are monopolies, oligopolies, their many competitors. Whether it's 1000 that part doesn't matter so much. So there's many competitors, so lots of people willing to supply the widget itself. Second of them, each of them independently, is a small makeup of the market. There's no one competitors that 80% of market and everybody else shares the other 20. Everybody's relatively the same size or relatively owns a small piece of the market, so nobody can really control the market. And third, we all sell the same item. You know, we all sell widgets, so whatever that might be, maybe toothpaste, you know, something very homogeneous or carrots he'll go after are carried. Example. Something that lots of people sell. There's lots of people who sell it. No one company owns the marketer corners the market now. Two other assumptions to make. Now we said that you know companies. Main goal is to generate profits. Now we have to think about profits in a slightly different way when it comes to economics. So there's accounting profit, and then there's economic profit. So county profit is probably what you're used to thinking of counting profit is, you know, you take your total revenues, Lester costs and expenses. What's the bottom line? And that's perfectly fair for measuring a firm sort of abilities. And if it made a profit or not dollar wise. Now, when it comes to economic profit, we factor in one other thing, and it's something called opportunity cost. The opportunity cost is the cost of doing one thing over another, choosing one to do something versus do something else. So let's say, for example, you, yourself, maybe myself, I decided one day you know what It's nice out. I really want to, uh, quit my job and I'm going to sell lemonade on the corner every day. That's what I do for eight hours a day is I make lemonade and I go sell it on the corner and I do that for months and I make $1000 profit, you know, like factoring all my costs. You know, the cost of the lemons and the sugar and the water. And maybe I'm making my stand and a sign. I go sit in the corner and I sell lemonade. I know it sounds ridiculous, but in some ways it's meant to be a little bit ridiculous toe sort of point out the difference between accounting and economic profit. So there I am. I'm selling my lemonade and make $1000 come off the end of month ago. This is awesome. I made $1000 selling lemonade, but what if the job that I quit pays me $10,000 a month? I gave up $10,000 in a normal way just for my eight hours a day to make $1000 a month for my eight hours a day so I gave up $9000. That's what economic profit is actually had economic loss of $9000 in that situation, because you have to factor in what are other alternative choices that you could have been doing that you don't have to factor in each of them because you could only be doing one thing at a time. But you typically tend to factor in what's the next best thing that you could have been doing or for this situation, the better thing that I could have been doing with my time. So that's that every street accounting and economic profit. So keep that in mind. There's always an opportunity cost when we make a decision. We could have been doing something else that we need to factor in, what that would have made us or cost us. 25. Firm Cost Structure: Now let's talk about firms cost. What is the cost to produce a widget? How do we come up with it? So, first of all, let's start by defining the two types of costs that companies tend to incur and they're generally is only two categories. The first is fixed costs these air costs that your company incurs, regardless of whether you make zero widgets or you make the maximum out. Let's say it's 1000 widgets, so costs like rent. You're gonna pay $1000 rent for your warehouse. Even if nothing happens, he said. I'd alone months. You have a contract. You have to pay your rent. You have to pay your full time employees. They show up and they're in a set salary. Your utility bill, someone of a fixed costs. I'd actually argue that some utilities air variable. If you're producing none and shut the factory down, that would decrease. But you're gonna have maybe some baseline utilities that you just pay because things airpower like the lights are on. The computers are on it. Set trap those air fixed costs. The other costs are true variable costs. Those costs typically directly related to whatever it is. You produce your widgets, those They're gonna be things like thes supply. Like the inventory that you have to bring in, so the parts to build your widgets. Now, if you're building none, then you don't have to have any. So you literally have zero. Um, something with labor. You know, you need people to assemble these widgets, but if they're not assembling widgets, they don't need to be there. They're paid by the hour, and you would save on that cost. Or if you produce 1000 of them, you're gonna have to pay them for producing 1000 units. So those air variable costs that vary directly with the amount of items produced. So any given companies total cost Is there total fixed costs for the month, which should be fairly standard. Or it's a set kind of base amount, plus their variable costs, which is in relation directly to how maney widgets are produced. Now something another concept to keep in mind here is what is your average cost per unit. So think about this example, aren't let's say all of our fixed costs are, ah $1000. That's our rent and our salaries. I mean, that's low amount. Pallister issues example. $1000 we don't produce any widgets. We just decided to nothing. Well, are, you know, say we did actually, though. So what? Right now we have zero production. Now we decide we're gonna slowly ease into this business. And we produced 10 units, just 10. So I already have $1000 in costs. And let's say, for every widget we produced, it also costs us a, uh let's say $100. They're fairly expensive. Maybe so. We produce 10 of them, so we have 10 or $100. Variable costs $100 times. The 10 that we make is $1000 in variable costs. We had $1000 a fixed costs, so we have $2000 in total costs. We have $2000 in total costs. We produced 10 of them. That means our average cost per unit. It's $200. Which makes sense, right? That's the $100 of direct variable costs as well as allocating a certain percentage of the six costs now, hopefully starting to sink in. But if we had made 1000 units now, 1000 units is gonna be $100 of that, you know, fixed cost per unit. But now we're spreading our Sorry. Sorry. Sorry. I'll take that back. Uh, each unit, if we're making 1000 of them is $100 per unit. So each unit costs $100 to make in variable costs, and we're also spreading that fixed costs. Now, over 1000 units, it's only a dollar per unit. So our it cost now was $101 per unit, not $200 per unit. So the more units he produced, the maury to spread that fixed costs over and your average cost per unit declines. 26. Marginal Revenues and Costs: so thinking back to our graphs and just how toe price revenue, a company charging a set price for its product, verse and the cost compared each other. So let's just think about this in general. On all included diagram you can download actually attached to this lecture. So go and take a look at it. So are prices pretty much set right? We charge X amount for our widgets. Now, when we talk about supply and demand, we were talking about very much sort of coming up with the price. You know, the more the demand was there, the more we're willing to supply. But we had certain constraints, etcetera should sexual say the higher the price we could charge, the more we would create. But in the real world, I mean, do I mean maybe the price of vegetables fluctuates a little bit of the market, but something like going to the store and buying a widget, whatever that witch it might be, You know, prices tend to stay the same right when you go and buy a camera at the store. It might be on sailors, I mean, but cameras, they're generally going to be X amount say it's $400. I don't know what kind of camera you buy, but you're not going to get a camera for $2 you are going to the same camera for $2000. Gonna have a fairly narrow price range so we can assume whatever widget we make, we have to charge a set price. Now, Also, remember, assumption there's many competitors in a market space and no one competitors has enough market pull to sort of set the price. So, uh, you know, we are gonna, in general have a set price that we charge. So what does that mean? There's very solid line, you know, we're willing. We can only charge X amount $200 or $400 for our camera now the cost. So that's our revenue line as well. So we apply the same concept for us supply and demand to our revenue and costs line a little bit in terms of where they intersect and what's the best optimal sort of solution. So if we draw a straight line for a revenue line now, we're costs increased, right? The mornings we produce our marginal cost goes up each unit you know we're spreading our you know, our fixed costs over more units, but we still have to, you know, pretty producing 50 units cost more than producing 20. We have the same amount of fixed costs, but we have to now buy parts, for we have variable costs related to 50 units, so we'll have an up sloping cost curve. So straight revenue line on Upslope Inc Oscar. At some point those intersect. And there comes a point where producing additional units beyond we concert calculate with the revenue is so, although had download the attachment, that might make a little bit more sense. But definitely we can apply our graphing skills to merge all costs and marginal revenue. 27. Producing Nothing Is Best Sometimes: so final talking point on this, Why do firms, you know, continue to produce when they're losing money? You know, we all hear about companies that are, you know, turning a loss this quarter this year, etcetera. Traditionally especially start up companies. They they operate at a loss for multiple years. So what is the reason behind that? Well, I think in concept, we can all understand that they hope to eventually turn a profit and be able to generate enough revenue to cover their expenses and become a profitable company. But let's think about it from an economics perspective now, and the concept is pretty much the same. You know, we have a fixed set of costs. We've signed things least and, you know, renter kind of the traditional ones because they tend to be expensive. So we could either do nothing, and we will still have to pay our $1000 a month lease. Or we could produce, you know, x many units. And maybe it's not enough to cover all of our fixed costs and variable costs. But maybe instead of just operating at $1000 month loss because we're just paying rent and nothing else maybe we can chip that down to, you know, 604 $100 loss. So we're working on covering some of our costs by producing units that generate revenue and do help cover some red cost. So even though we're adding on a variable cost by producing units, the revenue that were able to charge for that covers that variable costs and eats up a little bit of the fixed cost. So that's why companies tend to operate at a loss because they do, though believe at some point there's going across that equilibrium where they're generating enough revenue from the units that they're covering all of their fixed costs. They're variable costs and then have an excess, which is their profit. 28. Competitive Free Markets: So why do economists love free markets and competition? While the answer is simple, it allows for the optimal solution to find itself naturally. Now, lots of conditions need to apply. And or for that happen, we've talked about some of them, such as There needs to be lots of firms producing the same type of good, you know, and charging the same price. Essentially, there needs to be some other stipulations as well. But with these in place, and we're gonna talk about them here in the second, the market will naturally find that equilibrium price where they mount assert the amount of supply is the amount of demand on the market is operating at its greatest efficiency. And that's what we want this economist. So, um, so first assumption is that all buyers on all sellers have access to the same information. You know, you don't know some secret about the product. You don't know that it's running out of supplies, maybe in a month, you know? So you all of the sudden decide that you want a lot more of it or you're willing to pay more things like that. We all have the exact same information so nobody is at an advantage or a disadvantage. Um, property rights are the same. You know, Obviously, if we're just going to store and buying something, we don't even think about property rights. But, you know, I have the same access to the product that you have to the product. No, it doesn't cost. You know, you don't have to drive two hours to buy the same product that I could buy five minutes down the road because that would create a little bit of a barrier for you. You don't want to drive that far or when you do drive that fire, you're gonna want to buy more of it. So, um, the supply curves and the demand curve capture all the information that's out there. So again, where is making sure that there is operating with the same information? And it's captured exactly correctly in the supply and demand charts that are out there. So again, the slider and charts might not be out there, but in the information that is creating what is happening in the market, which is essentially the supply and demand again, we need many suppliers of goods. We also in many buyers you know, if there's only if there's 10 suppliers of something, there's only two buyers. Well, they really get to choose. And then that's obviously going to impact the pricing as well. So I need to be lots of suppliers and lots of buyers as well on then. Lastly, the market is completely free to adjust prices. There's no ceilings, there's no floors in place. The market will respond to what the different people in the market are doing. That will create essentially a free market. So that's essentially what a free market is. Free market competition and why economists love it because it allows things to equalize and find that equilibrium. 29. When Competitive Markets Lose Freedom: so thinking back to when we draw graphs. We talked about price ceilings and price floors. So what's going to revisit when there's a price ceiling? There's a maximum out that a company or the companies in the market space are allowed to charge for their products. So, you know, example again. Maybe the equilibrium price would be a dollar 50 for carrots. But the most anyone's allowed to charges a dollar. The government imposed a rule. The most you can ever charged for carats is a dollar, and that's just because they want to make them affordable to everybody. Well, the problem with that is that it creates a maximum and create something called a deadweight loss. So essentially, what that is is that we know if you reflect back on our graph at a dollar 50 maybe we were producing 100 carrots, and that was the equally room. There's 100 carrots that were wanted we would produce under carats. Terrific. Everybody wins. But when the price is now a dollar, you know I'm not willing to produce that many carats anymore. I'm only gonna produce. And if you think of our supply and demand, curves are supply ships back. You know what a dollar. We're just not making as much. I'd rather devote that land to something else. So we're only produce 50 carats when I can only sell them for a dollar is just not worth it to us because we can do something else. Think about our opportunity. Cost that we talked about a few lectures ago. No, we were traded golf. Now you know the option to make carrots or sell carrots? The $7 federal interest for a dollar. I'd rather grow corn. So that's our opportunity costs And where you made a decision now. So what happened? So at a dollar, we only produce 50. But the thing is, there still all those people who want carrots and actually had a dollar there's even more people that want carrots. So what has happened? Well, the supplies dried up because I'm not gonna make a many. There's even more people that want them because people love carrots at a dollar, right? That's what the government wanted was to create, you know, Maxim Price. And now the people that maybe couldn't afford them in a dollar 50 at a dollar, they say yes. I definitely want to make carrots. That could get Well. Problem is, there's only 50 of them out there. So good luck. So what happens? Things like we talked about lineups for food. Now, we don't see that too often, of course, in our in our market right now. But, um, you could see how the tightening of a demand makes something more scarce. People are gonna have to fight over in the way they fight over. It is maybe be the first ones there to buy. And they have to line up the night before to get those carrots out of dollars. So the difference between what would be supplied at a dollar 50 and what's being forced of , honest at a dollar is essentially what's called deadweight loss. The government has created this sort of zone where we would have been willing to supply more at a slightly higher price and every more people would have been happy. But now, for the benefit of a few people who are willing to get out there early, there's less of the good at a cheaper price. So that's essentially deadweight loss and basically demonstrates why price ceilings typically are not in the best parents interest of the consumer and why they really do slow down sort of the free market that we talked about in previous lecture. 30. Perfect Competition : Now let's talk about the concept of the perfect competition. So no price ceilings, no price floors. The market operates exactly how it should. There's lots of buyers. There's lots of suppliers that cost will fluctuate. So this is what creates what we call a perfect competition. There's we'll also assume there's no barriers to entry. So what happened? So I'm gonna read off sort of the four points that happened in a perfectly competitive environment in this kind of the hallmark of what needs to exist. Also first, the price of the output sold by re firm, uh, is determined by the interaction of the industry's overall supply and demand curves. So thinking back to our supply and demand curves, they moved and we said where they intersected, that was the equilibrium price. That's kind of the best output, and that's true. So what happens is, you know the price shifts around, um, number of competitors enter and leave. Obviously, if firms air charging a lot and making a lot of profit, Maura firms will enter. That will cut into the profits that firms are losing money. Some firms will eventually leave on. That increases the profits of the firms that stayed, and eventually the market settles on a price, which is the perfect price. So we also have to assume that the prices given so the prices said we're not determined the price ourselves. We're having to set the price based on what will get us to that optimum amount of output. Again, each firm has the exact same abilities, the same technologies to produce, no firmas limit. It's not like my firm could only make 10 but yours could make 100. We all have the same capabilities. And essentially, what happens is we all end up making zero economic profit. Now, remember we talked. There's a difference between accounting, profit and economic profit, so we could still make a accounting profit, actually make bottom lines, and we have to actually is cos that's our goal. And we need money to buy more inventory and market ourselves and all those things. But the economic profit, the trade off between doing what we're doing and doing something else is essentially zero. You know, our lemonade stand that we really want to set up instead of, you know, that's only making $1000 you know, we could have been doing something for 10,000 Navy are a lemonade stand, makes $10,000 a month. Now it's a perfect trade off, and we made zero economic profit because we could have dinner a lemonade stand. Or we could have went to work at her full time job. Um, both of those pages. $10,000. So my choosing limited Stanley made 10,000. Excuse me, and by giving up our full time job, we're losing 10,000 and opportunity, an ex net economic zero. But we make $10,000. That's the difference between the accounting and the economic profit, so keeping that in mind prices will adjust the perfect number of competitors Lynch or the market. Everybody will make zero economic profits, and the perfect equilibrium will be found of what that price and quantity of output should be. 31. Profit Maximizing Monopolies: Now we're gonna talk about monopolies in this next section and just the dynamics in the marketplace when there's a monopoly. So first of all, what is Monopoly? It's when there is one firm that is creating all of the output, all of the supply. And as such, we lose all those competitive benefits. We talked about the previous section. You know there's not lots of producers. There's not lots of supply being created. There's not market efficiencies, etcetera. So now it's the opposite one person. So imagine yourself. You are the sole competitors in a society. My competition, your soul producer. In a market space, you basically get to choose how many are gonna produce. And what price are you gonna charge now? You would look at essentially, what are people willing to pay, how maney canoe sail and where would you go from there? Well, what happens typically in a monopolistic come competition situations that really competition, but and this is just a side note. Why monopolies typically frowned upon and or illegal is because they can really set prices high, minimize their quantity output and maximize their profits. Their best maximizing profit initiative is to only create a few units charge a lot for them . Get those people that are willing to pay the high price and go from there. What happens with monopolies is their marginal revenue starts to decrease fairly quickly. So let's say you produce widgets and you haven't monopoly on this market. You have 100 people that want widgets and you decide you're only gonna produce five and you can charge a lot of money for five. And there's five people willing to pay that price. Well, that's great. But now let's say you decide. Well, what if I have makes 10? Well, there's not 10 people willing to pay the high price, so now you have to charge a little bit less. Remember, you can't change the price. You can't charge people individual people, different prices. You have to set a specific price for your good. So maybe you charge $100 a unit and you get three people. But in order to get seven people buying your units now you need a charge. $70. Well, is it as profitable will know your profit per unit now is down. You're still making a profit. But then let's say now, that if you dropped your price to say, from 100 to 72 down to 40 you could get even more people. Well, the problem is this. That monopoly send up a very steep, marginal revenue line, so there's a first few units will sell for a very high price. But each time you successively add on more free more units, the price drops dramatically. So there comes a point where their costs outweighs the marginal revenue and the monopolies . Best option is just to charge the highest price. They can only sell a few units to the highest bidders, if you will, or the people willing to pay that high market praise. And that's how they operate. So what happens? It creates a lot of inefficiency, Right? You have a lot of people who want to buy this good and can't. They've been priced out the market. You have a A company that's able to limit their supply so they're not producing an optimal level. They're not. I mean, when we get to talk about things like the marketplace and you know, kind of macro economics and GDP, you know they're not hiring labor that they would normally be hiring if they were in a competitive market environment, not paying taxes on as much because there were only looking to maximize their revenues, not sell a lot of units, so there's lots of disadvantages to the monopolistic competition situation. 32. Good Monopolies: now are all monopolies bad? Well, I mean, based on what I said, it sounds like they are, but we still have much monopolies in existence and two examples in the 1st 1 I think it's fairly straightforward we think about, but its utility companies, right, typically only have one utility provider in your area like natural gas. Let's say where your power I know I do it anywhere I've ever lived. I have. So what is the purpose of that? Well, the reason is that the infrastructure and the fixed cost for utilities is very, very high. So allowing several companies to exist it's only gonna create a huge fixed cost basis for all these companies that have a very difficult time being profitable at all. Because there's so much infrastructure that they have to cover. And then what happens? Nobody wants to enter the market. So what happens when there's nobody willing to provide utilities? That's a problem as well. So by the government regulating it and only allowing one utility company say, natural gas, your power company. Then you get one competitors, the prices air still somewhat regulated by the government, so they keep the monopoly and check that can't just charge you whatever they want for power , right? But there is only one company allowed now. Another situation, maybe even a more practical example of thing about this is a trash trash hauling garbage people. How, like how often to get waking up? I know I do about 6:30 a.m. every Tuesday morning at Woken Up by the trash company. It's not just one truck, it's too, because they do the trash. And then there's a recycling truck as well. They're fairly loud. It's just a necessary evil of being living in a community in the house. So but what is it? Some of the trash company is another monopoly. There's one company, it's called Waste Management and where I live and they they're in charge of all the trash, and they only come once a week. So what would happen if it was open competition? And I could hire whatever trash company I want. So I decided I'm gonna hire ABC Trash Company What my neighbor decides to hire X Y Z trash company, and my neighbor across the street decides to hire yet another one. But it turns out that my trash company there're out is on Tuesday's in my area. My neighbors is on Thursdays and my other neighbors is on Wednesdays. So now I have trash trucks coming through. It's 6 a.m. Pretty much every single day of the week, right being loud, noisy 6 a.m. Taking one of my neighbor's trash. It's a huge inconvenience. So in that situation, the government is also recognized. That is just an over abundance of something that you don't really need. It isn't necessary, almost causes mawr. You know that costs outweigh the benefits in that situation. Causing havoc in your neighborhood every single morning doesn't outweigh the benefit of just having once in company, that's basically awarded the contract that does the entire area, but just once a week. So there goes. That's a few situations where monopolies are positive. Another way of thinking of a monopoly is potentially also when it comes to patents. So company developed something. They're awarded a patent right. If it wasn't for patents, a lot of intervention wouldn't happen. Would companies spend the time and invest the money to build new technologies? If they knew that once they were done, somebody else could just take it from them and produce it. So Company A spends all the time, the years, the research, the money to build something Company B walks in. At the end of this says, Okay, that looks good. We'll take that now. We'll start producing it cause you know anybody can. That's where another situation where a patent is essentially granting a company a monopoly for some period of time toe won't be the only one that produces that good that's under patent. 33. Regulating Monopolies: so we kind of touched on it by when it comes to monopolies. When the government does allow for a Napoli, they typically regulate that monopoly. So they do things like they set their pricing. You know, there is a maximum out they're allowed to charge and or another option is they will subsidize, subsidize them so they will effectively, you know, give them X amount of dollars to reduce the monopolies overall cost base. So they do produce more and you know, there, then the price naturally will fall on its own. So when it comes to monopolies, when they do exist, just know that they are typically regular. You're very seldom gonna find just a monopoly where it just exists on its own. There's no regulations and plays keeping it in check. Um, and if you think of any other examples of monopolies I'd love to hear about, um, always interact, of course, but given those situations, that's where monopolies can be effective. And in the next section we're gonna move into talking more about oligopolies. So where there's a few competitors, but it's not a completely free competitive market 34. Oligopolies: So the best introduction to oligopolies, which is what we're gonna talk about in this situation. Stinking about the soda makers or pop, depending where you live. What terminology used but Coca Cola and Pepsi, Coke and Pepsi pretty much dominate the soda market, right? There's a few others, but there's basically two main suppliers of soda. If one of them went away, we definitely drastically noticed that. So that is a situation where you have a few competitive firms, but there's only a few of them. So they could either, uh, you know, collude together and set the price is really high and sell less or they could basically compete is a natural competition would let the market dictate the prices paid and go from there. Now, when it comes to Coke and Pepsi, there's something unique about their industry and that they both create a lot of quantity, right? They just sell a lot of soda that's all around the world. Different demographics, etcetera. So there's not much incentive to cheat and try to out price the other, you know. So it is pretty much the same price. Whether it's Coke or Pepsi, you're gonna pay. Basically, it's saying maybe it's on sale at one place, but that we're not talking about that in general there wholesaling at the same prices. Well, if Pepsi was to dramatically increase their prices one day, you know, then the competitors Coke would just say, Okay, let's find that Coke would automatically sell a lot more. Everything that's interesting about the soda market is that there's brand loyalty, but only to a degree. If you think about it, if you're a Pepsi drinker and you go in the store and all of a sudden Pepsi cost twice as much as Coke and it's over and over again, it's not like a one time sales on like Coca Cola's on sale. It's just Pepsi now cost twice as much Coke. A lot of people are probably going to switch. There's those that are very brand loyal, but the market as a whole will then navigate towards the lower cost the same thing. If Pepsi instead of decided to up their price, they decided to drop their price so they attract a bunch of new customers. Well, the problem is, there's such a supply now of their product that the demand you won't be able to meet it. You know, there's only so much demand for soda, and now they've dropped there. Prices that probably put themselves in not profitable position. So that said, companies like Coca Cola and Pepsi pretty much regulate themselves, right? They are in a competitive nature, given the specifics of the industry that they're in. It's kind of its own self made oligopoly because they produce a lot of quantity on and there's a huge distribution network. On the next lecture, we're gonna talk about cartels and colluding and, you know, why wouldn't someone like Pepsi and Coca Cola just combined together and charged twice, a much really capitalize on the situation that they're in? 35. Incentives To Cheat: so we'll talk about two companies, but we're gonna talk about it. Through an example called Prisoner's Dilemma. You might have heard of this game on If you haven't will welcome a prisoner's dilemma. It's actually really interesting, and it's much more about strategy, thinking about your outcomes and what's your best choice. Bruce is. What's the best choice of you and someone else and cannabis? It relates us to a company, so we have two people. Game called Prisoner's Dilemma Person A and person B. They are both arrested for a crime, but the police have no no evidence. They're essentially, you know, they're pretty sure these two guys did it. In fact, they did do it, but the police have no way to prove it. But they really need is one of them or both of them to confess to the crime. That's what will, you know, get the police the conviction. So prisoner a prisoner be they're separated. They have no knowledge of what the other person is doing. Now they're both in jail and arrested. So basically, here's what the possible outcomes are. If both of them stay quiet, Botham say no. You know, we didn't do it, then they both walk. They actually, they don't walk. There's a penalty for for doing so. They know that it's something. There's some misdemeanor crime. They get maybe one year in prison. So if they both just don't confess, they both said No, we didn't do it. They get some minor penalty and let's just say it's a year in prison. Or maybe it's a fine whatever. It might be some minor penalty now if they both confess, then they both They're going to jail and they're going to jail for five years. You know they would. Basically, the police are looking for a conviction. They want a total of 10 years in jail for this crime, so they would split it five years each. So there possible outcomes are, you know, one year in jail, five years in jail. Now the other options are prisoner. A could deny it and say, No, we didn't do it. A prisoner B confesses that said, Yes, we did do it. Now the police have flip flopped as well. Prisoner A could say Yes, we did a prisoner B says No, we didn't do it. Now the police offer the meat to deal and say, If you confess to this crime and the other person doesn't, we will let you go. We will pin this completely on them and they go to jail for the full 10 years. So we dont split it. You confess they don't confess they get to go to jail than for lying because they get to Then take on the full burden and you get rewarded for being the good guy. But if you both confess, then partially you're gonna have to split it cause you both kind of told on each other, um so prisoners knowing what their possible outcomes there. So I'm prisoner in Let's say I know that, OK, I'm sitting in myself. I'm like, OK, well, if I confess and my partner confesses, we each get five years in jails, OK, It's one outcome if I confess and they don't confess when I get no years in jail. I like the sounds of that, and if I don't confess and they don't confess, then we only get one year in jail. All right, that's pretty good. But if I don't confess and they do confess, then I'm the one going to jail for 10 years. So I look at my possible outcomes that might go jail for five years, No years, one year or 10 years, all dependent as well on what my partner decides to do now, keep in mind, we're separated. I don't know what they're going to do, and I start thinking it through, I think. OK, well, what would I do it? Because they have the same payoffs that I do. So I'm sitting there. I'm thinking, OK, well, if I confess, then I'm either going to jail for five years because we both confess I'm going to jail for no years. So you know it's either five or nothing. If I confess, if I don't confess it's one year or 10 years. It's a big risk town to jail for either one or 10. That's a big spread, and you know there's And if you want to think about in terms of averages, I'm either, you know, it's either 10 or one. That's about what a 5.5 or 4 5.5 your average in jail, and I know it's not Naret. You're either doing one or the other, but that's how we kind of think about it. But if I do confess it's either zero or five, the Arizona is only 2.5. So I think about my options. I really don't want spend 10 years in jail. I don't want to take the risk that my part in it rats me out. So what do I do? I confess, I just confess, and I know me at the most. I'm going to jail for five years and possibly for none. Well, my partner goes through the exact same logic. So now one partner B and I went through that sex same scenario, and I come to the same conclusion. I should confess. I'm either going to jail for zero years or five years. Well, now what happens? Well, I confess, Partner be confesses. Going back, partner A. They confess because you wanted either 05 and because he both confess you each get five years in jail. Was that the optimal strategy? No, as a whole. I mean, your optimal strategy individually was to get zero years, but your optimal strategy as a group, as the market was to get one year each and to just both deny it But the problem was, there was these other incentives in place and other potential outcomes. That's the prisoner's dilemma. The incentive to turn on your partner is too great, you know, If I said no, we didn't do it. My other partner knows that His best incentive then is say, Yes, we did he get zero and I would get the full 10 and flip flopped at the other way. So there's, Ah, high, you know, barrier there, if you will, to confessing, and it's well, there are sorry Teoh not confessing because you don't want to take that risk, and that's the same thing happens in the market. So bring it back to the markets. Now you have to cos they have different strategies they could take. They know if they cheat on the cartel cartel being, you know, these two companies, let's say that work together. They both decide they're going to set the prices, but both of them know that if they just lower the price a little bit, they will automatically start getting more sales. So there's an incentive to cheat on both sides, and what happens? They both decided to lower the prices that both settler, the prices and, in the end, the end up ruining essentially the agreement that they had and the market will find its own best price. So that's basically essentially why cartels don't work. 36. Regulating Oligopolies: So in real world situations out there, where there are oligopolies or cartels, what typically happens is once the oligopoly operates for a while. If the firm's cooperate and they don't cheat on each other, the government eventually steps in. So this has happened a few times in the US, and I'm sure, another place in the world as well. Places like the oil industry. There is a company called Standard Oil that oligopoly with some other firms. Eventually, the government came in and broke the firm up. That's essentially what they do is they make the company become several independent operators who would then operate as a competitive nature. A swell. You've seen this in the telephone industries in the railroad a long time ago. The railroads. Now you don't hear about oligopolies too much anymore. The reason being is there's so many different laws in place now. It really makes it ineffective and really just isn't an optimal strategy to try to form an oligopoly. The market has basically forced into competitive nature for the most part, so, aside from those monopolies we talked about which aren't government still regulated, that's for the benefit of the people all the GAAP Elise. In general, you won't see too often anymore, but when you do, they tend to be forced to be. It's broken up essentially and turned into several smaller companies. 37. Monopolistic Competition: Now let's talk about kind of a hybrid something called monopolistic competition. It's kind of the best of both worlds, so it's where there are monopolies. But there's enough similarities to a competitive market that there is competition, and the best example is gas stations. Now you might think gas stations air the same. There's shell. There's mobile. There's 76. Whatever you have in your area, um, that's true. There are only so many, you know, brands of gas, if you will. But if you think about each individual gas station summer standalone gas stations, that's all they have is gas, others air full. Like many markets, they have a full selection of maybe sandwiches and food. Item that bread and stuff for your car and sodas. So some have lottery making. Buy lottery tickets there. Some sell propane. If you need a propane tank for your barbecue, others might have a little movie rental counter, so gas stations are able to distinguish themselves from each other. So while they do somewhat have a monopoly on any given market, um, they as well, a very competitive so in those situations to get the best of both worlds and for example, the you know 76 down the street might be able to charge you two cents more per gallon because they somewhat have a monopoly on you because they have the full mini market as well . But at the end of the day, they're similar enough to the Chevron That's another mile down the road that they can't go outrageous, you know? So the 76 can't say Well, because we have a mini mart. We're gonna charge 20 cents for a gallon because you really want to come to a gas station. No, that's not the case. You know, not everybody is going for the mini Mart as well. Some people just want gas, and if you did charge 20 cents for a gallon, people would drive down to the Chevron. So there's monopoly there in being able to distinguish yourself in what sort of how you accessorize your gas station if you want to call it that. But there's still enough competition from other similar industry people, like the Chevron's who keep you in check. So that's manipulative Monday. Monopolistic competition 38. Socially Optimal Outcomes: next, we're gonna be talking on the micro economic side about property rights and how they can impact the supply and demand curves. Now, if property rights are fully allowable of so everybody has the same and equal property rights, everything. They're fully disclosed. Everybody has the same information. The market does a wonderful thing. The supply and the demand curves will intersect where they're meant to intersect and the optimal amount of output will be reached. Unfortunately, though, where the world we live in that isn't quite the case, and there are property rights that come into play that will affect the supply and demand curves. And then we'll shift. What are equilibrium? Point ends up being, and that's what we'll talk about in the next few lectures. 39. Examining Externalities: Let's talk about externalities. So externalities are essentially things. Um, that could be both positive and negative that have some impact on our supply and demand. So think, first of all, about positive externality. So the example likes easy one to kind of digest to think about a beekeeper and beekeeper raises bees. They do so because they generate honey and then they go on and sell the honey. And as consumers, we buy honey cause we use it for baking and cooking, and people enjoy it. So. But there's a positive externality to raising bees and that the beekeeper's bees and I don't know the technical term. You have your high maybe hive, a hive of bees. They fly around and they go to sort of neighbouring neighborhoods and they pollinate flowers. That's what bees do, right? So there's a benefit to sort of other people because, say, the people who are growing flowers, uh, have a swarm of bees to come and pollinate them and help them grow and grow more flowers and they're healthy and everything else. Now the beekeeper themselves is not being paid for that. That's just sort of an external factor that happens on the other people are benefiting from it. So the fact that the beekeepers essentially providing that service technically the bees are . But the beekeepers provide that service, but, you know, sort of against not against their will. But just without even trying. It's just happening because that's just what these dudes, that's a positive externality. We're gonna talk about it, take it a step further. In a second contrast that with a negative externality and negative externality would be someone like, you know, a meal whether they say it's a steel mill and they're producing. And you know, we can all picture sort of the classic, you know, like a big factory with the smokestacks. And, you know, you know, toxins being spewed into the air and into the environment and what not? That's a negative externality. That's just a byproduct of the steel mill. The steel mill, in essence, doesn't care what its impact is on the environment. Now. We're gonna take it a step further. They will eventually. But, um, you know the initial stages. You know, they're just there to make steel. They have all their inputs. They make steel the ship. Still, they make money by selling steal. The fact that they're smoke is ruining the environment doesn't hurt them in any way. So how are positive next and negative externalities dealt with well, from the case of positive externalities, Uh, you know, there's a positive benefit there, and, you know, the beekeeper might actually produce even more honey and have even more hives if they were being compensated in some way for that extra sort of by product, if he will, of what they do think of these as byproducts is another good word to use. So the beekeeper has this byproduct, which is pollinating other people's flowers and whatever else. Um, so if they were paid for that, they would probably keep more hives in the way they are paid for that. So what society does is the government will offer them subsidy subsidy to the beekeepers. Hey, if you keep, you know, I know you have five hives. If you were to have 10 we will pay you extra to do so because there's an added benefit to what you're doing. That's helping the economy and helping other businesses as well. So that's how we encourage positive externalities. On the flip side, negative externalities. What do we do there? Well, essentially, we the government, we being the government imposes taxes, right? They try to discourage, you know, that's smoke and everything bad they do more than just imposed taxes as well. They put you know, different limits on it. You can only produce X amount. You have to put in place certain protective features like filters and what not to prevent base to try to prevent the negative thing from happening. Nobody is benefiting from the negative externalities. So the government tries to prohibit them and or make money off them so that they can then in turn, use that money for subsidies for the good things in life. So, uh, in essence, kind of in summary, the way the government handles externalities is tax and try to prevent the negative externalities, uh, subsidized and try to encourage positive externalities. And in doing so, they're essentially moving the supplies Mauritz supply and demand curves. So think about the positive externalities. You know, you've subsidized the beekeeper, they air gonna produce more, they're going to increase their supply. If you penalized the negative externalities, they're going to reduce their supply so it somewhat artificially moves a supply and demand curve away from kind of a perfect market. Um, dynamic 40. Tragedy of Commons: Let's talk about a concept called the Tragedy of Commons, then I might not have heard of this. It kind of exists more in the world of economics now, um, the tragedy of Commons, essentially where no property rights exist. So the incentive of all the parties is to do as much as they can. So the example I like to use is the ocean. So international waters. Nobody owns the property rights to the ocean, right? So people go out and fish and say, there's five different fishermen. They all go out, and essentially they will fish as much as they possibly can. Right now, this, unfortunately, leads to overfishing and how some species become extinct because everybody is just going for it. Everybody has a self driven sort motive to go out and get as much as they can now. So we said, there's five fishermen Now let's say that you know fishermen A decides. You know what guys know We're doing too much fishing, you know, we're gonna extinct the population. We would all be better off by scaling it back a bit. And then that will leave some fish and they will populate. And then they'll always be a supply of fish for us. Whereas if we keep going up this rape, we're gonna extinct the species. And then in the year, they'll be no fish. So fishermen A says that the problem is is that fishermen B. C. D. E S incentives aren't aligned at all. Everybody just wants to get as much fish as possible. So just because maybe one fisherman, you know, sees or maybe they all see what's going to happen. They are all going for it, sort of the immediate prosperity and what's going to make the money currently not what may be best in the long run, so the incentives will never line up in that situation. And they're always be overfishing or a tragedy of comments. So it's a common good. Everybody has access to it. Everybody is just going to take as much as they possibly can. It also, if you want to think of it, think of it in terms of farming. If there was a private farmer who want a piece of land and he could put out as many cows as he wanted, well, he would only put out so many because he wouldn't want to deplete the you know, the land of all the grass. And you know what makes the cows grow and be productive? Let's say their milk cows. So he would rather have, say, five productive milk cows and have 10 you know, spare sleep, productive milk crowds. It just doesn't do any good. So he strikes his own balance because he has his own set amount of land. He knows what production will be. Compare that to. If there was just a open field, anyone could put cows on this field well again. Everybody has the incentive to get as much out there as they possibly can, and as quickly as they can basically be the first mover and get out there and, you know, let their cows graze, eat up all the grass, be productive, and then too bad for everybody else. So similar idea. So, uh, it's a situation again. It's that tragedy of Commons, and it's where privatisation sometimes leads to better things. So back to the fishing example. So how is that handled? Well, think of things like fishing licenses. You know there's a reason why, at any given lake and and women talking of the us. I don't know how it works in every single country. Obviously, um, but with the lakes, another fishing licenses or hunting licenses as well, people are only allowed to go and fish so much or hunt for so much for a certain period of time. They're only allowed, you know, so many animals. Somebody finish etcetera. And the reason is is to prevent three over. You know it's or harvesting, if he will of what it is that's out there. So the government is essentially stepped in and made it a very limited supply for each individual person. So that's tragedy of comments. When there exists no rules, you're going to see every kind of every man for himself. You'll then see whatever the the good, the service, the product, whatever it is will be over harvested and eventually extinct itself. 41. Asymentric Information: in this next situation or next section, I should say we're going to talk about two ways that the market could fail. Now we're gonna be looking a different things. So first is asymmetric information. So that's essentially where there's a buyer and a seller. Supply and demand. And but the seller has far more information than the buyer, so the classic example is used car sales. Person used car sales person has a lot full of cars. Some are going to be great in perfect condition. Others they're gonna be okay. Others will be in horrible conditions. There, called the Lemon is kind of the common name of the referred to on their certain just on the side. There's lemon laws, you know they're not allowed to sell complete bombs of cars, etcetera. But nonetheless, in our example, let's say the used car sales person has three cars. All are the same. They are all 2014 Nissan Ultimas. They're all fully loaded. They'll have the same mileage, but one is in tip top shape runs perfectly. The other one the middle one. They all run terrific, but the middle one has had some problems that but they've been fixed for the time being. And the 3rd 1 is lemon. You know, they've kind of mast all the issues with the car, so it looks and runs perfectly right now. But in a week it will probably break down or the engine will blow up or something bad will happen. Now the used car sales person is happy to take, say, $5000 for the lemon, $10,000 for the certain middle one, the good one and 15,000 for the terrific one that's in excellent shape. But their incentive is that they you know, they want to get rid of kind of the bad ones. Now you as a buyer have to take their word for it. So when you show up and say, Hey, I want to know your best car, the problem is they all look the same. They all run the same currently. So of course, the incentive of the seller is to get rid of you know, the one that's not that great. Let's try to get rid of that one on someone who can't tell the difference between the three that you, as a buyer knowing this, are gonna take that into consideration. So when you command and you say, well, I'm only willing to pay up to $10,000 because, you know, I don't want to offer 15 and then they give me the worst car. I'd rather just take the average of the three prices, and then it's, you know, I kind of have a one in three shot. Well, doing so So you as a buyer come in and you say I'm gonna offer the average $10,000. Well, now, the seller who has a 15,000 10,000 $5000 car is immediately not going to want to give them the $15,000 car right there going to be taking a loss on that. They, you know, they'd be happy to sell them the $5000 car for 10,000. Didn't even be happy to send them. Sell them the $10,000 car for 10,000. They're getting what they want. So they pretty much removed the terrific car from the situation. So take it a step further. So knowing that so now we're down to two cars that are going to be, you know, sort of presented, if you will to the buyer. So now there's a $10,000 car in a $5000 car. And so knowing that and knowing that they have a 50 50 shot now, the buyer instead does the average and 7500 say, Well, we're only really willing than to spend $7500 because there's 50 50 chance we're gonna get a better, like a good deal for our money. Were bad deal for our money? Well, what does the seller do? Knowing that takes away the good car? So now the $10,000 car is kind of off the market and not available, so all that's left is the lemons. For 5000 the buyer only had one choice. It's offering 5000 for a lemon, and that's what the market degrees to now. Is that great? Not whatsoever. Of course not. Uh, the seller isn't able to sell. You know, the higher price cars they want to sell them. The buyer isn't able to get you know the buyer was willing, you know, wanted to spend 10,000 and get you know either the good or the great car so it creates asymmetric information, creates an issue in the market because both sides start reacting differently and the market dynamic plays out like we just kind of told our story and nobody wins. Everybody just ends up at the lowest common denominator. So how is this presented? Well, her house, it prevented. There's a couple different ways, and some of them may be came to your mind as we told this story. So first of all, there's almost a review system in place, right? So if you go to a used car dealer and you were to offer them 10,000 and they gave you a lemon and it blew up the next week, you know, besides, going complained, try to get your money back. You're also gonna leave them a poor review, right? You're gonna go online, you're gonna go on yelp, you're gonna tell your friends, your family. Hey, this car dealership, it's horrible. Don't go there. Well, that's not in the car Dealerships. Best interest, right? They want to sell cars, and maybe they were the only used. Or maybe there's a couple used car dealerships in the neighborhood. They don't need to be losing business. It's a competitive industry, so they have a built in incentive through just sort of the review system to not be dishonest with you. Ah, second Way is third party information, right? We have things like Carfax appear not familiar with Carfax. It's a service where you can go. You pay a fee. It's like 10 $15. You input the vin of a car and I'll give you the full history of the car. You know how many owners that had? It's been a while since I run the Carfax, but most importantly, it shows you things like accident history. Was the car in any accidents? Has that been totaled? You know, obviously you want to know that? Um, just anything about the car. Also, I don't remember if they give you sort of a fair value for the car based on the mild etcetera, I'm not totally sure if they do that, but nonetheless, you know you can get the full history of the car. So services like that for a relatively low fi, let's say it is even $15 compared to the price of a car, you know, 5 to 15,000. You can learn the full history of the car and kind of put yourself, give yourself the information. So now you're not on asymmetric information. You have symmetric information. Um, those are the main ways. Dealerships also offer warranties. So they basically saying, Hey, you know, we prompt, like we promise you were you want to spend 10,000 we're gonna give you the $10,000 car, So imagine that's the situation. Getting you walk up. All three cars look the same. All three cars run the same. And you know, they tell you what One of these is great. One of them is OK. And one of them isn't so great. You're willing to spend 10,000 and we will give you the okay, one, we will give you the $10,000 car. And again, though your skeptically say, Well, how do I know they're not giving me the the actual the bad won the 5000 our car. Well, we have Carfax, we have the review system and then also warranties. So the dealer will say, Well, give me a warranty on the car. You know, a two year warranty. You know, if you have, like, the $5 our car is probably gonna break down in under a year, if not within two weeks. But the 10,000 cars, a good car, it's gonna last you several years, still has a lot of life in it, etcetera. And to back that up will give you, you know, two year warranty or five year warranty, whatever it ISS. So that's another way that the dealer basically makes the information symmetric. And it's not in that case we're in. That situation is not so much that the information is symmetric, that they're backing up their information and they're putting you on equal footing, Uh, with such that's asymmetric information and how then we turn it and actually level the playing field. And then in the next lecture, we're gonna talk about public goods where one person paste or something, and everybody gets to enjoy it, and then how that impacts who ends up actually paying for it? 42. Public Goods: Now we're gonna talk about public. Good. So these are things that everybody can consume? Uh, there's basically two features to public goods that makes them public. Good. So first of all, they're non rival. So you consuming the public good doesn't, uh, diminished my ability consumed the public good or anybody else's. So think about things like a statue in the park. We can all look at the statue in the park and whether one person looks at it or 100 people , the statue is there. Everybody gets to enjoy it. Another example is fireworks. You know, New Year's Eve, our fourth of July in the United States Canada Day in Canada. You know, big fireworks displays, no one person watching it or a 1,000,000 people watching. It doesn't change. You know, the value of the fireworks they, you know, are consumed the same. You know, whether so me watching them doesn't diminish your ability to watch them and doesn't make them any less enjoyable for you. Same with statue. Now, Um, the other feature is there non excludable. So that means you can't really prevent people. So, me watching the fireworks, I can't stop you from watching the fireworks. So let's say I wanted to put on a fireworks display or I wanted to put up a statue in the park because I would really value that. But in doing so, I know that everybody is going to get to enjoy it. I can't stop somebody else from watching my fireworks display, at least in the vicinity and same living with my statue in the park. If I paid a have a statue in the park, put up. I can't stop other people from coming and enjoying the statue in the park. You know, it's a public place. So those air two features to public goods. Essentially. So how do we deal with in society? So now here I am. You know, the holidays air coming up. It's New Year's Eve or it's getting close. And I want I want to see some fireworks. That's my agenda. But there's no fireworks displays, you know, planned for the area that I know of, unfortunately, and so my choices are, I can either just not watch fireworks or I can pay. And maybe it costs a lot to buy fireworks. Let's say it costs me $1000 to put on the fireworks display I want to see. But then I look at my go. Well, that's unfair, because I'm gonna spend $1000 putting on this terrific fireworks display, and everybody's just gonna come outside and watch it. But so, like, 1000 people are going to get to enjoy it. If everybody had just chipped in a dollar, you know, we could have put on the same fireworks display. A dollar means nothing to everybody. But instead, because of the way this is structured now I'm having to pay the full bill, and that's not fair. So what do I do? I end up probably not putting on my fireworks display, or I don't end up putting up my statue. So I suffer and everybody suffers right now, they don't get to watch fireworks. So, um, but is it feasible to collect a dollar from every single person Well, in the market, you know, the free market Not so much, you know? I mean, I could try, but then you're gonna have people who go. Well, why should I bother to pay is no way to stop me. So once he does it all to say, I'm not gonna watch and then lets the fireworks started. Let's go outside and watch the fireworks anyway, so there's incentives there for people not to want to pay. So how does society deal with this? Well, that's through the government again. You know, we're tax something. So who typically puts on large fireworks displays? It's not, You know, your neighbor. They might put on a fireworks display, but it's the city. You know, the city. You know where the state will put on. Ah, huge fireworks display. I was actually inside story in Canada for its 150th birthday. It was just last year, almost a year ago Was July 1st 2017 and huge, obviously monster fireworks display in the nation's capital where I was visiting. Now who paid for that? Well, the government did. But how did they really pay for? It is through taxes, right? It just comes out of tax revenues that the government generates, Um, same thing with when it comes to parts, you know, and not just statues. Just the park in general landscaping parks and nice. After mow the grass, put in flowers and plants keep, you know, the pave ways, you know, smooth. There's lots of parking. Who pays for all of that? Well, no. One individual you know, paid for that park. It's the governments, whether it's the city, the state, whoever and the way they pay for that is through tax revenues that they're raised. So again, a situation where you aren't going to see too many public goods end up ever being paid by a Nen vivid jewel or, say, a private corporation because the incentives just don't line up. You know, I don't want to pay for a huge fireworks display when everybody else is just gonna come watch it for free. And it's gonna cost me a lot of money, even though I really want to see fireworks. Same thing. Companies aren't going to do that. I'm not gonna put up a statue in the park. But if the government does it and we all essentially pay our dollar through taxes, now everybody gets to enjoy it. So that's when it comes to public goods. Next time, you know, see apart. You think you know, why're parks always handled by the government where fireworks always put on? You know, the big fireworks displays always put on by you know the city, the state or even better when people maybe complained that they're using our tax dollars, you know, to put on you know, this fireworks display for this holiday? Well, it kind of has to be that way, unfortunately, just because of economic. So economics applied in sort of real world situations. 43. Health Economics and Finances: in this section, We're gonna be talking about health care. Always a popular topic out there. People, at least in the United States again, I speak of, but, you know, we're going to talk about the health care system. Um, you know the incentives of people. Obviously, there's private healthcare. There's government issued health care. People just don't pay for health care. So how does economics sort of impact the health care system, if you will? That's what we were talking about in this next section. 44. The Limits of Health : So let's talk about the sort of first or serve initial biggest problem with the health care system in general, and this is again in the United States and will mention how some other countries handle this. But it's something called adverse selection. Now. This applies to more than just health care but will use health care is a terrific way to introduce this concept, So adverse selection is essentially where we get the people we least want selecting the good or service now. So what does that mean? So when it comes to health care, so let's say health care, Just health care in general to buy health insurance costs $100 a month. Well, who's going to go sign up for health care? Well, people who are completely healthy never had a health problem. Look at and say, Well, do I really want to spend $100 a month when I'm fine? Not really. The person who has had five heart attacks bypass surgery, probably working on their six heart attack of maybe older, probably older, you know, they're like $100 sweet. That's a deal. I will buy health insurance for $100 So the health insurance companies essentially get the people they least want. The ones that are gonna cost them a lot of money. Who were the first ones in line to sign up for health insurance. So what happens while they have to raise the premiums? Well, so they raise the premiums to $200 a person. Well, what happens now? Well, the person who maybe goes to the doctor once a year, you know, maybe, you know, gets sick once in a while, you know, they look at the on the go well, $100. I was willing to pay $200. I could just pay out of pocket, you know, and go to the doctor. I need to go pay for medicine, try to manage it myself. So they drop out of the health care system. You still have the people who have. You know, the five heart attacks aren't working on the six they're still in, right. They would pay $1000 for health insurance cause they need it. They know that their costs are going far exceed whatever the health insurance company could ever charge them for a policy. So the system just continues to progress. The people who are the least likely to use health insurance keep dropping off, the higher the price gets, and then that just sort of snowballs. You know, the price keeps increasing cause less unless people are willing to pay for it. So that obviously is not a system that works out. So how is that handled in the markets? Well, one way is through group insurance. There's the reason why your employer are A lot of employers offer insurance, and it's because the health insurance companies really incentivize them to. It's because they want to ensure a group of people they want everybody in. They want the healthy people as well as the non healthy people they want to get in those people who aren't going to go the doctor all year, or the people who maybe go once a year for their check up them, paying X amount. So let's just say it averaged out at $150 a person. They would rather have you know, 100 people paying $150 a month. Then you know, 10 people paying $300 a month. It makes sense for them. It's a bigger pool of people paying that amount of money. So that's one way that the whole insurance companies tried to avoid adverse selection. So, um, there's also the issue of asymmetric information, which we talked about in the previous section. You know, people who so maybe not the person who has had five heart surgeries That's gonna be probably pretty well know when they do a background check. But let's say, you know, the health insurance company isn't going to be able to tell the difference between the person who maybe gets sick three times a year and a person who doesn't get sick at all. You know, if I just say Nope, I'm a healthy individual. I must number Go the doctor, you know? So how did they go about that? So there's a bit of asymmetric information. That's another reason why they would rather choose to pay, like, have a group of a large group, diversify their risks and charge everybody the same rate than try to tailor the rates based on the person is. If that was true, they would certainly try to charge the person who you know is going to utilize the services a lot more. They would want to charge more. But the camp now along with that. So another way that insurance companies are regulated is that the government will step in and they will step maximums. They say you can't charge you know that person $10,000 a month for their insurance policy just because they have poor health. Um, and we see this, you know, health reform and everything is always on going. I don't claim to be the most up to speed on health insurance reform. I pay for my health insurance and I go the doctor when I need to. That's all I know, but I know that health insurance is basically required. So there's also government regulations, sort of, um, posing, Onley buying market. Now you can't just not by insurance. You have to buy some minimum amount of insurance. Now that's one to protect the people. I mean, that's what the government's. Therefore, it really is to, you know, the citizens of the country, you know, make the best living conditions they possibly can for them and one of those ways, Even though people complain, say well, they're forced me to spend money. But forcing you to have health insurance. Even at a minimum level, $50.100 dollars a month probably isn't gonna kill most people. Then there's obviously a whole discussion about people who can't afford that. And we're not here to get into that. But the government's there to basically make sure that the good of the people everybody's required to have health insurance. Now, of course, the health insurance companies love that, because it basically forces everybody to be in the pool. Now everybody has to have health insurance. So again we see an example of where the government kind of steps in and sort of takes the extremes out of the markets. You no longer have the health insurance companies having to raise their premiums up to $1000 a month just because nobody wants their insurance. And you also don't have all the healthy people opting out and say, Well, I don't need health insurance And then so imagine that happened and you got to some sort of balancing point where say, you know, 50% of population just didn't have health insurance because the premiums were so high. Well, certainly some of that 50% even though they think they're gonna be okay. It's going to need services at some point. And that creates a burden on the system, etcetera. So the government stepping in sort of eliminates all the extremes. Extremes of the health insurance system. Um, I think I had one more point for you. Perhaps not. I believe that is it. So that's it for health insurance, Uh, than oh, I did actually have another point. So other countries, Yes. So, uh, some countries, the way they take the south, and so the US initially, everything was sort of private health insurance, right? Unless you were, I really couldn't afford it than the government does offer health insurance programs that are low cost, kind of cover. Those basic needs come down of sorts, certainly tax revenue and everything else. Now they've obviously sort of stepped it up a little bit and said, Well, no, everybody needs to have health insurance. It's required. And I mean, you have to go pay for it yourself if you can afford it, but you need to have it. You can't just opt out and not have it. So other countries, those countries like Canada subsidise they offer some basic level of health insurance for everybody, regardless of where you're at and then you can decide. So you know the person with all the heart attacks on the bypass surgeries They probably still need to go supplement their health insurance. But the government basically says, Well, here, we're gonna provided for everybody at a low level. So kind of how the U. S. Will help provide it for people who really can't afford it. Imagine how the government will provide sort of a basic base level insurance for everybody , and it's up to everybody else to kind of go from there and step it up. So they take out that sort of risk factor that you're gonna have people being unhealthy, putting a burden on the health care system because they didn't have insurance. Now some countries go a step further. They they take away private insurance completely. The government provides just all health insurance, and I read the UK I don't know if that's still true, but certainly I know there's other countries as well, So the government just handles all health insurance. Everybody is covered, so certainly they pay for it in other ways. Right? Higher taxes I mean, that's usually the tradeoff. So, through higher taxes, everybody has is on equal footing, has health insurance. So there's different ways for essentially the government to come in and regulate what happens with the market space when it comes to the market places where, you know, there's definitely different incentives of different parties and different affordability as well. 45. Comparing Health Internationally: continuing on with talking sort about internationally and health care and just some sort of interesting statistics for you. So in terms of countries, that spending and how much they spend on healthcare. So whether that's subsidizing health care, providing social health care to everybody in every country is different. We talked about how Canada provides some base level. UK just handles the entire cost themselves, if that's still true, etcetera some interesting facts. So the United States is one of the highest spending on health care now as a percentage of gross domestic product. So to try and equalize it, if you will and create some metric where we compare these countries equally because certainly us is going to spend more in dollar wise just out of sheer volume and the number of people compared to, say, Italy or Austria so but as a percentage of GDP. So we have some sort of equal footing. The US still spends less, too. Statistic. I have a 16% of its, um the amount spent on health care represents 16% of GDP. Now. What is interesting is that if we translate this as well, actually some say translated, we also look at things like life expectancy or infant mortality rate. Kind of two common metrics used to measure how healthy a country is overall on how it, you know people do in the country and live so out of the list. Actually have a list of 10 countries. The U. S. Is the lowest in life expectancy, so keep that in mind. They spend the most on healthcare as a percentage of GDP. They have the lowest in life expectancy by 34 years, compared to some of the other countries, even up to five. And they have the highest in foreign infant mortality rate. So the United States is being compared to countries like France, Switzerland, Germany, Canada, Italy, Austria, UK, Japan and Singapore. Um, so countries like Singapore at the bottom of the list in terms of spending US spend 16% of GDP. Singapore spent 3% of their GDP on health care, U. S life expectancy is 78 again, this is a average over men, women all races, everybody s s daily life expectancy in Singapore's 81 3 years longer even though this spends substantially less infant mortality per 1000 births. So in the U. S seven, which would represent 70.7% in Singapore, it's 0.2%. So huge differences. So if you want to think of that as I wouldn't call it quality of life. But, you know, you know how long you're gonna live for and if you're gonna live when you're born, um, countries. So those air kind of two extremes and then everybody else falls in between. So someone like Canada spends 10% of their GDP on healthcare. US. Spent 16 but life expectancy in Canada's three years longer 81 versus 78 in the U. S. Infant mortality is five per 1000 to 7. Now again, these air statistics, um you know, you might able to find another statistic that sways things the other way and looks more favorably on the U. S. But I think it's, um it's an indicator of the fact that maybe the money isn't being spent most effectively correct. I mean, if you know, if I were dumping in 16% in the United States of our GDP into the health care system, but have a substantially lower substantially being a few percentage points. But life expectancy a few years less that speaks other problems now, certainly we can, obviously. And now we're kind of string a little bit away from economics. This is kind of Morgan macro and sort of global statistics, if you will, they will get back to economics. But, um, you know, we think about things like lifestyle in different countries and diet and sort of just things like in the United States was obviously obesity problems and whatnot. So, um, then that begs the question. Where is that 16% of GDP being spent? Is it being spent just treating people who are already sick? Or is it being spent trying to help people, you know, get a healthier lifestyle and sort of live longer? So obviously, probably the first things up. Nonetheless interesting statistics there for you that just because a country spends a lot of money on the health care system doesn't necessarily mean they are a healthier country. Is the take away 46. Inflated Demand for Health Insurance: Let's get back to some economics and let's think about now what happens in two different countries. So it's just compare. Our is going to use United States and Canada, even though Canada's and completely 100% government run, there is a government aspect there, more so in the United States. So in the United States, what happens when there is an increase in demand and health services? Prices rise right? So if all of a sudden let's say deductible, you know, it's health insurance policies where $150 a month everybody had $25 deductibles. Well, if you had a $25 deductible and say it was $25 deductible for anything, you could go The doctor, You could have surgery. It doesn't matter. You know. You're gonna b'more incentivized to do that. Then say you had $1000 deductible, right? No. If you have a $25 deductible or let's even let's go a step for let's say you have either a free, you can go visit the doctor for free. You're allowed to go like minor things. You know you have a cold, etcetera. You go for free versus you had to pay a $25 deductible for an office visit. So if you had a cold and they had to pay $25 you might go. I know the cold will go away. I can go spend $25 on some medicine at the grocery store or the drugstore. I'll just do that. But if it's free, you might say, Hey, I'll go The doctor, It's free anyway. He'll be able to really assess, like how severe it is. And you'll probably prescribed me some medicine, which is probably also covered under my insurance. I could get it for free then, so the incentive is there. When costs are low to just go utilize. The resource is utilize the doctors, the clinics, everything else. So what happens in everybody's going to the doctor? Prices rise. Insurance companies have to raise their rates, and then they eventually implement things like deductibles for an office visit. So that's where they come from. Eventually, they're gonna have to happen in that situation. So in a country like Canada, though, so say the government just handles. Let's assume the government again, like offices. It's that's something that's covered under candidates free health insurance. So how does what happens in those situations? Because there is no system in place where prices can rise because everybody's just covered by health insurance. So what happens? Everybody runs to the doctor, while the problem now is that everybody runs to the doctor, there's now long wait lines. It takes a while. If you want to see a specialist, you have to book a month or three months in advance because so many people have access to the same resource is you have a huge demand, a limited supply. And but there's no mechanism in place for the price to change. The price is the same. It's always gonna be free for you or whatever visit cost. I have no idea. Maybe it cost $10 but it's a low cost or free event. So and it's something that can't change to the market dynamics because it's set by the government. So everybody's ready. The doctor and you're just gonna have a constant overwhelming supply are sorry, overwhelming demand for the limited supply services and as such, you are going to face things like long wait lines, etcetera. Now, one way that they try to battle. That isn Oh, it's not so much for saying regular office visits, but, um, se you decided you wanted to have any surgery or knee kind of hurts. You feel like you need to see a specialist. So instead of in a somewhere like the United States, where you could just go to your doctor, say, Hey, my knee hurts and they would send you to a specialist. You probably go the next week somewhere like Canada. You'd probably have to wait again, maybe three months. And they have something that's almost like a gateway doctor, if you will. You have to see somebody before you get to see the specialist. Get to see someone who will evaluate if you really need to go see a specialist so they add in multiple layers to try and suss out and reduce the volume if you will. And it also acts as a discouraging factors. So whereas in the free market system prices, what's discouraging, maybe and are separating, if you will. The people who I really want to go see the doctor versus the people are just doing it because they can, uh, wait times or what's the limiting factor in somewhere like they can that will. This doing interesting? Those people who got my knee kind of hurts. I should really go see a specialist versus somebody who maybe was in an accident and actually really needs to go see a specialist. So that's the two ways the different countries differ. And it all has to do with pricing model and again, those government sort of regulations and how involved the government is. 47. Singapores Secrets to Health : So let's talk a little bit about Singapore will wrap up our health insurance discussion. So why back on our lives? Singapore spent very little percentage of GDP on health care, but they were one of the most healthy countries out of the top 10. So what's the secret? While they have three things in place that they do that sort of very drastic, uh, drastically different from maybe a system at least that we're accustomed to in the United States and even in Canada. Stuff, um, So, first of all, the government basically requires and encourages competition between the hospital medical doctors, etcetera. One way they do that, they're required to post the prices. When you think about it, I don't think I've ever gone to a hospital or to a doctor's office and seen prices. You know, your doctor's visit is going to cost X amount of dollars today, or if you want any surgery, it's gonna cost $10,000. Nothing like that. You don't see that here, Um, so they're required to post the prices. Seeing those prices really makes people think twice before deciding to, you know, my knee hurts a little bit. Maybe I need new surgery, and then they see the price. 10,000 is an example. They say, No, I don't. You know what? I'm gonna look Another way. It's maybe I can eat healthier and exercise, etcetera. Um, so doing so, along with number two, which is basically their high out of pocket costs for consumers. So even though the prices maybe $10,000 for knee surgery, they also know that they're gonna have to pay for that themselves. For the most part, insurance covers very little of what they would spend, so they know that whenever the prices are, they're gonna have to pay for them themselves. So insurance only covers sort of very minimalistic. Things are very small portion of anything, whether it's a doctor's visit or knee surgery or other things in between. So what that encourages people to do is say, for health insurance. Now it stay for health emergencies, if you will, or just health. In general. If you think about an example, I'd like to use a sort of your vehicle. You know, there's no insurance for your cars. Health. You know when you're alternator breaks or you needed oil change or your fuel pump breaks or your brakes wear out. You have to pay for that, and it comes out of nowhere and nobody likes paying for it. But everybody manages and you know it sucks. And you put it on your credit card and you do whatever you have to do to get your car back and running right? Well, it's basically they're doing the same thing with their health entrances on there saying, Hey, no, there's no insurance policy. You can pay for where we'll we'll just fix everything on your car or fix everything on your body. So you have to pay for that. Now you have two options. You can just wait till something goes wrong and then figure out how to pay for it. Or if you can't pay for, then you're just gonna have to suffer. And like, maybe, you know, put yourself in the even worse situation or you can save up, and that's what they're essentially encourage people to do is save up. So when there is an emergency, you know you break your leg. Any new surgery you need to change the alternator in your car. You have money of side and you go OK, I'll just take that out of my savings that I set aside for health or vehicle health in that case, in example, And then the third thing they do is actually have laws in place where you are required to save, um, for your health for later in life. So recognizing the fact that the older you get, the more health services you're gonna need, um, you know, they require people to save for that. So it's your choice. If you don't want to say for that sort of near term health emergency that you might have, that's your problem. And when you break your leg, you don't have any money saved. Well, you're gonna be the one who is gonna have to pay for it somehow. Um, but in the long run, we're gonna force you to save so kind of how somewhat actions it's someone out similar. How were encouraged to save for retirement and just all of our costs. Well, they're really encouraged to say, for health expenses, specifically for when they're going to be older. I mean, I shouldn't say they're encouraged. They're required to by law. So those three big differences between Singapore and loss of different countries, especially United States, are what really leads to low spending on the government's behalf when it comes to health insurance on also really sort of leads towards a so one thing we noticed they had a higher at a low mortality rate infant mortality rate, and they also had a longer average lifespan. Well, part of that's because they make healthy life choices because they don't want to get sick. They don't want to have to spend a lot of money to go to the doctor. You know, we used extreme examples like you break your leg and maybe that you can avoid cause you get in an accident, but something like just getting ill, you know, or maybe needing the surgery because you're overweight. Well, those things are things you can't avoid over time, so they make better decisions. And it's all incentivised by the fact that there really, truly gonna have to pay for it out of their own pockets. So definitely different way of going about the health care system really is an interesting example of incentives and sort of government sort of interference, if you will, in a market space and how there could be a completely different shift in sort of the viewpoints on how it really has an impact in the way people spend their money and the way they live their lives as well. 48. Gross Domestic Product: and this section, we're gonna get into a little bit of macro economics now. I mentioned GDP and the previous lectures on, and we will talk a little bit about it right now. So what GDP is is gross domestic product you may have heard of this term when it comes economics, you know, society at large probably isn't exposed much to sort of the nitty gritty of economics. But if you listen to the news they might hear about GDP was up was down relative to previous period, etcetera. So what is GDP? Gross domestic product essentially is a measure of the entire amount of sort of volume, while volume in terms of dollars of the transactions at a country involves itself in in a given period. So in the United States, it's measured every three months by the Bureau of Economic Analysis at the Department of Commerce. So essentially, it's just trying to put a value on all the goods and services that transact and given period. Now, why is that important? Because it really represents, and really, what the value is is the number itself, but how it's changed from previous period. So you can imagine if GDP has gone up 10% for the last you know, 12 months every three months. When they measure it, it's gone up 10% 10% 10%. That just means there's more. Activity typically is indicator of a strong market, growing market or economic activity. On the flip side, if you see this decline in decline declining, it might be a leading indicator that no things air starting to slide into a recession or depression. So it has predictive value as well, and then as well. It's a good comparative value for different countries. So in the previous section we talked about health care spending as a percentage of GDP. So how much money are people and government spending on health care as a percentage of the entire mount the country is spending on everything. That's how we're able to compare the United States to Singapore and say Singapore only spends 3% of GDP on Court of the United States that spent 16% so dollar wise, the United States is always gonna be tremendously larger just based on population size, but as a percentage, that's what the rial comparative value was there. So that's GDP in a nutshell, and then we'll get into a little bit more about the specifics of it in the next lecture. 49. The GDP Formula: So let's talk about the GDP equation. What goes into GDP? I mean, we know it's the total, you know, goods and services consume, but really, you know what does that mean? What's included now? Luckily, it's not too difficult. We're not going to get into very specific examples. But as a whole, what is GDP? And it consists of essentially four factors, although one that sometimes broken out. Um, so first of all, GDP. So the biggest part of GDP, typically roughly 70% I mean obviously varies. But the lion's share, the biggest factor is just consumer spending. So it's things, you know. You go out and you buy a car, you buy gas, you buy groceries. All that is consumer spending by close everything else. Everything you spend money on as an individual consumer is consumer. Spending on that adds up for the country to about 70% of what our GDP is. So obviously, Just think about your own impacting on GDP, so when you know if you lose your job, you spend less on clothes and on gas and on groceries, right, you reduce the GDP, so apply that now country wide. So when the country is headed towards a recession. Depression. Everybody is spending less, so you can see how that's an indicator that you know as that number. So if you were watching GDP and it starts to shrink a little bit a little bit, I mean people probably. I mean, there's other factors here we're gonna talk about but are spending less. They're spending less, and there's a bigger percentage of the spending less, or they're just spending a bigger percentage individually, less each each person. So second factor is import or sorry investing. So investing, investing. So you take money. Corporations invest, venture capitalists invest. You invest investing in whatever different methods you do. Bond securities typically would be the two main categories. Retirement funding, etcetera. It's another place you spend your money right, so we get our pay. We go, we buy. Groceries are closed, we buy a new car, would pair carpet whatever it might be. Then we also maybe investment of money. We put it aside for retirement, or we have a favorite stock that we invest in so that money needs to be captured as well. It's money that we are putting out there into the economy so investing from third is government, but the government spent so you know, we think we always think of the government is spending billions and billions of dollars, and that's true. But we, as consumers, spend far more than the government does, and we don't think about that. So the government's impact on GDP is definitely less than individual consumers. But I think we think of the government or because the government we think of as one entity and we think of ourselves as consumers is just a no. Having such a small impact but truly as a whole, consumers as a group do have a huge impact on GDP. So there are consumers are consumer spending. I should say we have our investment activities, which is both US investment firms, everything else. Then we have our government spending as well. On government spending is everything. Government spends money on health insurance like we talked about in the previous example military infrastructure, all those things, you know, government wages, etcetera. So, uh, those air the streaming categories. Now the fourth category is basically import export and the, um, the balance between them, so we technically add all exported goods, so we create goods that we export well, those goods are being consumed in the United States or being consumed elsewhere. So that's why we add our exports. But we also then deduct our imports. Now the export import balance is often times combined. So if you're ever to look at the formula, you might just see one number at the end and be 1/4 kind of number, which would be the balance between exports and imports. Now, if it's a positive number, that means we are exporting more than we're importing negative number. We're importing more than we are exporting to avoid the confusion. Sometimes people will just break it out, and they will show exports individually. So you add exports and you subtract imports up those air, the main categories for the GDP on a very simplistic factor. Just think of all the economic transactions that happened in the country on any given day over the period of a year. They're somehow being calculated and grouped into one of those categories. 50. Inflation When Too Much Is A Bad Thing: Now this section, we're gonna talk a little bit about inflation. So what is inflation? I think we know at a fundamental level, inflation is essentially when prices of goods and services increases and, you know, inflation. Normal inflation is actually healthy for the economy. And we often hear about things like people. Often I get a raise that the job, maybe, and they'll say, Well, you know, we got a standard 3% to adjust for inflation. People just expect prices to go up over time. Just naturally, things cost more. Now where trouble rises is when prices begin to rise to dramatically. And those things like hyperinflation. Now, um, I can say in the United States, I don't think we've ever incurred hyperinflation least not in my generation, to the extent of some other countries have. Where prices were rising, you know, inflation was 20% 30% read stories of families actually cos actually paying employees daily because value of their money was deteriorating on a daily basis. So you know, someone would get paid X amount of dollars for the day. Let's just say it was a long time ago. Now there's policies in place. Let's say they were paid $20 for the day. Well, that $20 was worth a lot more today than it would be tomorrow, because prices would be increasing day over day. And they needed to just buy things like fundamental spread, no milk, etcetera, food, gas. So being paid on a daily basis. That way there got a little bit more out of their money. Now what's the problem with hyperinflation? While? Obviously, it's just sound terrific, of course, but it really encourages people to just spend their money. You know, you're about your money is worth more today than it will be tomorrow or is next week. So people just go and spend their money and buy as much goods and services as they possibly can now because they know they'll be able to buy less tomorrow or next week. Now, how does hyperinflation even sort of exist? How does this coming new existence? Well, in some ways, it's a lot. It is a bit of a snowball effect. You have everybody spending their money. Everybody spending their money drives up prices right. If everybody is just buying something, well, that's going to drive up the price. The price drives up, people spending money even quicker because they want to get it now instead of tomorrow on the price continues to increase, so it's kind of a self fulfilling prophecy as well. The way it can occur through government is through the assurance of too much money. So the government no prints money. There's a matter money out in circulation. And if the government wants to essentially encourage spending, so think about times. Maybe if you're in the United States, where you know the government really wanted to encourage spending, get us out of a recession. There's been a few times, even in my lifetime, I think twice that I can think of it not third time where people were given just sort of, ah, you know, a bonus, if you will, from the government. It wouldn't be much be like $100.200 dollars. So let's say it was two or $300. But you have everybody receiving say, $200. Well, that's a bonus. And, sir, it means something more to some people than it does to others. But people who don't make much you know you get $200. You're probably gonna go spending spend it on things that maybe you couldn't afford in the past. That maybe that you need. Maybe you stock up on groceries or you get something fixed on your car. You get some new clothes because you can have some bonus money. Now that you know, you've been managing to get five and I have some money, so it does stimulate the economy. But you've also done is printed additional money. So there's more money in circulation and as well you create a situation where it's kind of a one time gain, right? If ever I received $200 goes and spends it well, that increases the spending out there starts that cycle of prices might start to increase. And then, you know people are less likely to spend down the road, and it just creates a vicious cycle. So nonetheless, self inflation is actually a very tricky thing. It's typically handled through monetary policy through the government these days, and it's very sort of balance that they strike between how much money is printed put in circulation on. Then they are effectively able to manage inflation, and you don't see those hyperinflation situations anymore. um, at least in sort of North America. But in other countries that still do suffer with hyperinflation, cause they just it's once it starts, it's very difficult to stop. So keep that in mind when comes to inflation. We'll talk more about inflation in general in the next lecture. 51. Measuring Inflation: Let's talk about how you calculate inflation now, so it's actually fairly straightforward equation. So first of all, you would take the price of So let's, let's say, I mean, we typically talk about inflation for the entire marketplace. You know, we don't do it on individual product by product basis now. Um, but that said, let's just think about So let's say the inflation in se bread prices. So what you would do is you would take the bread price in Year two. Let's say it's a dollar 10 and let's say you could, um, you would subtract the bread price in your one, which would say a dollar, and you would divide that by the bread price in your one. So essentially you're saying, Hey, bread costs a dollar 10 now. It used to cost a dollar, so it went up 10 cents and it went up 10 cents, divided by the original base price of a dollar. Bread prices went up 10% and I think we see that right, A dollar 10 versus a dollar from the past, a very simple example There. Now I mentioned you know, we don't do inflation on product by product. basis. We usually do it on like a basket of good, so think about everything that you buy. So if you were to buy the exact same quantities of gas, food, clothing whenever services getting your hair cut, all those things in your to compare those prices to your ones make get the Delta and divided by year ones price. He would see what your overall inflation is for you, particularly now. We obviously don't do that. We consume different amounts or what not so, but that's exactly what the government does. So the government does to in order to calculate inflation, cause we just hear one inflation number, right? Inflation is 4% this year. Well, how where did 4% come from? They don't actually look at every single item purchased out there, and every single good but the government uses is basically a basket of goods, and they so they select multiple items that kind of reflect what the average family would buy. Things like gas prices, you know, different grocery items, food travel, all those other things. Compare those prices to the previous year, get the delta and divided by what prices were in the previous year, and that's essentially how inflation is calculated. So the formula itself is not necessarily difficult. One other thing they do is they will typically set a base year. So we're just talking about calculating inflation from one year to the next. So how would you compare it over a 10 year period? While you're not always comparing it to you know, the previous year, sometimes you set a base years. Let's just say it's 2000 and 10 is our base year. Then you would calculate your inflation in 11 4012 and you are always comparing it to the base year. But you're also then able to compare it relative to the previous year. So, let's say, in 2011 inflation hat was 4%. You know everything costs 4% more on a whole, but then, in 2012 never thing costs 7% more relative to 2010. Well, inflation, that was roughly 3% in the second year, right? So they're able to compare that way by setting a base year. There's a few problems with way kind of inflation is calculated for us on kind of this generic level. So one thing is that obviously this basket of goods that the government has chosen doesn't reflect every single family. It might not reflect what you spend your money on whatsoever. So it's inflation, for the market and for the country of the whole. But it's not necessarily inflation that applies directly to use. So where you might hear Oh, no, inflation was 5% this year and everybody is No, no, no stuff cost more. Well, did really your stuff cost more? You have to really evaluate. You'd have to go and look and see well, what actually cost more what was included in that basket. So that's one thing. The other thing is the basket becomes outdated, right? So, I mean, if they're using 2010 is a base year and then using that same basket of goods first, say the next decade. Well, what people were buying in 2010 isn't necessary. What they're buying now. In 2018 right people's taste changed their consumption changes. For example, you just think about gasoline. You know, things like uber and lift and exist in 2010. There's a lot of people now that don't buy a vehicle. Instead, they just pay for uber and lift. So they're spending on gasoline is, um, zero. But they're spending on alternative transportation is, you know, 100% of their travel budget, if you will. We're getting to work and everything else so but uber live probably are included in what inflation? Waas. So you aren't impacted by the rise in gas prices. So that aspect doesn't change so that the change in the basket does tend to get outdated over time. And that's why they re evaluate what that basket is every so many years. Um, as well. The basket doesn't account for quantity, so besides, maybe you don't you know you don't spend your money on gasoline aim or you only take uber and lift. Well, let's just say you do spend your money on gasoline. But let's say you spend 10% your budget on gas and 30% on clothing and the rest on groceries and rent. Well, maybe the basket is shifted differently. You know it weighs gasoline at 20% clothing only a 10%. It puts more weight on safe food than it does travel like the basket. Even if it reflects how an individual like yourself might spend your money. The weightings of the different categories aren't. Don't match correctly. What? How you spend your money. So it's very difficult to say, You know, 4% market inflation year over year applies directly to any given person, cause your personal inflation might be 10%. Somebody else's might be negative 2%. Maybe the things they use actually went down and cost. So keep that in mind when it comes to inflation now as well, you know, just in general how inflation is calculated. 52. Recession and the Business Cycle: next, we're gonna be talking about recessions. We often hear about recessions. You hear about depressions. Although we don't typically go into any deep depressions anymore, I think countries the whole it's got a little smarter about, you know, when they start to recognize, you know, recessionary, um, issues that we're able to kind of say that in pull out of it. So at the same time, recessions are, believe it or not somewhat part of a natural part of the business cycle. So if you think of to compare it to investing in the stock, so you invest in a long term stock overall over the long term growth right is what you expect. So you see ups and downs. But as a whole, there's a line that's trending upwards. Well, that's very much like our market. That's our country. Um, you know, you expect and you want that line to trend upwards, and the steeper it is the better. But as well you're gonna have ups and downs. You're gonna have years where things were really prosperous in other years, where things kind of slow down, less output, less demand for the goods, etcetera. We just fall our way, just don't fall. But you know, the amount of people are anyway just follow, etcetera. So that's just part of the natural up and down. And as long as over the long run, you know, the country's growing GDP is growing a good measure of sort of economic sort of ability, instability and growth. Essentially then, everything is working great, so recessions aren't necessarily a bad thing Now. It's not always great to live through them, especially when they have a very personal impact. So say you are someone who loses their job because your company is slowed down. You know, make a much sales and company lays you off. Now that is a big impact of on you of a recession. So certainly you can understand how individual people recessions can impact their lives very much so. But as a whole, as a country, the recession and sort of growth phases are fairly natural. So keep that in mind, and they will go into recessions a little bit more in the next few lectures 53. Striving for Full Employment: so kind of the common factor that we used to sort of determine if we're in a recession or not is employment. Now, you know, full employment would mean that everybody who is capable and capable of working is ableto work. They're able to work for maximum that they could. Now, do we ever experience full employment? No, we don't. One. The reasons is, there's a percentage of population that just doesn't want to work, right? I mean, they, um, for example, maybe they are. They stay at home. That's just what they do. They aren't, You know, they're part of a family. One of the family members goes to work. The other one just stayed at home, take care of kids, whatever. It just doesn't work as well. There's those that just choose not to work. They might be on government assistance and they might not be able to work. But then there's a percentage of that population who, um, who is on government assistance that could work, but they choose the alternative of not working cause they're gonna get some based amount of income from being on government assistance. Just two examples of the population. You know who you know, there's never gonna be 100% employment just because there are groups of people who just will not be employed. So that said, though, we can think of, you know, full employment than being everybody who is capable and willing to work is working now again, Do we ever reach full employment? No. There's always gonna be a swell people in transitionary periods, right? People between jobs, somebody who got laid off, or just someone who is changing careers, maybe, Or someone who goes back to school. They decide they want to go back to school. Now they effectively have taken themselves out of the workforce. Um, but there's always gonna be some percentage of population that is in transition. So do we ever reach full employment? No. So that said, we try to strive to reach as close to full employment as we can. Being as close to full employment as we can is the true marker of sort of the fully functioning, um, economy, if you will. Now, as employment slows down, that's typically when we see recessions, right? And again, that's kind of the big indicator when you listen to the news. Oh, you know employment fell 3% last month. You know, that means X amount of people that were working are now unemployed, for whatever reasons that might be so, Um, keep that in mind. Employment. It's kind of the main indicator of whether we're in a recession or not, or how the market is functioning. One of the reasons for that as well. This is just it is on indicator that everybody can understand, right? People can identify with the fact if people are working, that means the economy is doing great if people are unemployed and not by choice. You know, these are people who do want to work. They can't find work than that's an indicator of the economy's not performing as well. So essentially, just keep that in mind. Starts. Recessions go. Employment will be the biggest factor using to determine where we're at on the recession scale 54. Price Adjustments: let's talk a little bit about price adjustments in the economy, so thinking about quick and dramatic price adjustments. So let's say a natural disaster happens. You know, there's a hurricane in the Gulf of Mexico and, you know, a bunch of oil wells were wiped out, and now the price of gasoline skyrockets around the country. Right? Well, what happens? Well, a few things. So when the price skyrockets, you have more people seeking to make profit from it. So you're gonna have maybe additional people try to movement in the market. Now we're going to ignore the fact that gasoline was actually a tough example because there's high barriers to entry, right? Not anybody can just go and set up shop and set up a gasoline station on the corner. You know, the next day I was obviously a lot involved in doing so. But you have companies than that. You know, the price rises. You have more companies wanting to get involved in selling gasoline. More people. Selling something means hiring people stimulates the economy because employment starts to rise right, so something like a natural disaster can actually help stimulate an economy they're spending that's happening Now it's forced spending. People need to be hired to not only work at the gas stations that we talked about, but to go do relief effort and people in medical and health care, etcetera. So natural disasters are, while horrible, often times can spur an economy. Now what happens once everything is resolved, the natural disaster passes. You know, people start to get back to their everyday lives while prices start to fall, right? You know, the price of gas can only remain artificially inflated for so long. You know, demand supply starts to pick up again. We start importing oil, you know, so the prices can't maintain themselves. And then as well when it comes to, really, if efforts to know they die off, you know the initial impact has passed. It's a month later. It's three months later. The need for medical emergency medical services just isn't there anymore. So the economy tested, then shift back to its natural state. But that immediate sort of impact well, sometimes almost shake. It's very shocking to the economy, so it will jar the economy into, um, recovering itself, if you will, from a depression or from a recession. I should say, And then when it goes back after, like after a few months of past, it doesn't necessarily always regressed back to where it Wasit can sustain some levels. Natural disasters in an odd way, our way to promote through the economy. 55. Heading Towards Recession: So let's talk about prices being sticky now. What do I mean by that? It means that prices don't tend to change day to day. Right now, things like gasoline do when you drive by your local gas station. The price changes day today, sometimes even during the day and my change. But gas station aside, when you go to your grocery store, they constantly changing. You know, the price of bread and frozen peat says, and everything else that you buy in a grocery store or clothing. And I would go to a clothing store or they change in the price every day. No, not at all. Right Prices air fairly sticky. They tend to change. That might have a sale that might do something that effect, but even still, it would be over the course of a week. It's not gonna be a day by day, where they change a different price. If they did so, people might wait, they might say, Oh, well, you know that pair of jeans that cost $100 today cost $80 last week and then they went up to 110 and now they're at 100. Although sit and wait a few days and see if they go back down to 90 80. Essentially wait so prices don't change that way. And that's prices are sticky now. Another area of the prices are sticky, and it's not so much in prices, but it's in wages. Wages are sticky, right? We don't adjust people's wages day today, not even a month, A month, and no, possibly your in a year and typically upwards, right? Very seldom do you see price wages fall. You know somebody doesn't take a pay cut. Now. Excuse me. The, um you do hear of pay cuts. So now let's say it. The globe. You know, the country is entering a recession and, you know, business is slowing down. Do people tend to get their wages cut? You know, week by week? No, not at all. What happens, You know, demand starts to fall. Maybe over the course of a few months, the company struggles. Eventually, it realizes it has to do something. And typically, you know, the labor force is one area says look to, but what do they do typically, rather than reduce everybody's wages, they just lay off a chunk of the work for us so rather than on an individual basis, try to save money, they as an aggregate. Just take a piece of the workforce and let them go. So it's kind of this piece gets to remain and earn full wages, and this piece gets earned no wages, and they're no longer working for us. That's typically how firms react to entering a recession. Now that said, there's very much a stair strap, a stair step nature to that right, you know, coming to go along, everybody's getting paid, and then the next day, you know expenses fall. Now let's say the recession continues. That might let's more workforce go. So that creates a stair step in a company when they lay off people. It's someone of a nod dynamic. When we think about it, just that they wouldn't opt to pay everybody like a less wage like, say, pay everybody 20% less. Then I'm let go part of the workforce. But is it really all that on? Think about the dynamics of the workforce and being employed somewhere. If you're working, would you would you be is incentivized to work if your wages were cut 20%. Not so much now. Recognize that everybody working there wages were cut 20%. Now there might be a bit of a sympathy factor there, but now you have an entire workforce who probably really doesn't want to work that hard because they feel like they're just making less. They are making less. In some ways, it is in the firm's incentive to just let a chunk of workforce go, because you know, they're not going to be that productive anyways and keep everybody else at their full wages that way. Those people that stay thankful they kept their job, they're still making their full time earnings, and if anything, they will work the same and or maybe a little bit harder because they want to keep their jobs when it comes to the next cuts, the payoffs are far more dramatic, right? It's either you get nothing and you lose your job or you get to keep your job and make exactly what you're making versus well, I'm gonna make 20% less, so I'm just gonna do 20% last or maybe 50% last. But I know that I get to keep my job, so keep that in mind when it comes to recession heading into a recession, Not everything is smooth, Prices are sticky, and so are wages. 56. Acheiving Equilibrium: So lastly, in this section, talking about recessions and a little bit on depressions here, we're gonna touch on just more statistics. Kind of like I did in the health care section for you. So just to give you an example of how we've gotten better at least again, I'm speaking of the United States in this example. Um, we've gotten better at determining, you know, when we start to enter into a recession, how to put in place the economic measures to stimulate growth and keep us from sliding too far or too deep to where it becomes the Depression. So the Great Depression started in 1929. So almost 90 years ago now, um, and it lasted 43 months. I mean, we're talking almost four years, um, the highest unemployment rate during that time, almost 25%. So imagine 25% of the population who wants to work. Can't. They just can't find jobs. Since then, we've gone through, say, about eight different recessions. We haven't gone through anything to the magnitude of the Great Depression. Recessions last anywhere from six months to about 18 months, so half a year to a year and 1/2. Um, unemployment rates. We've never seen double digits since the Great Depression. The highest was almost it was 9.9% in the 2007 to 2009 recession. Now, um, if you live in the United States and I certainly do, um, you know, I remember that recession now was bad. I mean, people are losing their jobs or whatnot, but it's nothing like, you know, when you look at pictures of the Great Depression or you hear about stories, the Great Depression, we weren't in that dire of straits now, certainly 10% unemployed, with 9.9 10% unemployment fairly high, right? And certainly I can remember some of the impact on various people, even that I knew personally or just on the economy as a whole. But it was nothing like a four year depression. Um, so and honestly, that was probably the worst recession we have had since the Great Depression. So, uh, that said, we've definitely learned how to sort of swing ourselves out of it. Now there's other causes. So certainly the dynamic of the economy and just our social being since 1929 has changed dramatically right. Just industries that are out there and how we operate. You know, the Internet exists now, things like that. Um, you know, 7 4009 you have things also like the housing crisis. You know, people are being extended far too much credit, so there's lots of other reasons the people, you know fell into situations of unemployment and not being for their bills and everything else. Lots more. In some ways, there was almost more at play in 7 4009 factors that contributed then maybe more simpler times in 1929. But unfortunately, back then, they just didn't have the economic understanding about how do you prevent or how do you stop the slide on get to things like a four year depression and 25% unemployment. So, um, the positive take away from that is that we definitely learn over time, we understand how to adjust how to use monetary policy, the government, how to stimulate demand, how to slow inflation, and everything else comes together. So while we're still gonna suffer through those sort of natural, if you think back to begin the section I talked about how recessions are just part of natural part of the business cycle. So the 4007 to 2009 recession, you know, while somewhat driven just through the nature of the economy itself and things that were going on was also just part of a natural ebb and flow of the ups and downs as we continue to grow. And then obviously everything rebounded. So that said, that is all about recessions and a little bit of history. 57. Financial Crisis Understanding The Bubble: So in this next section, we're just going to vote a little bit of time. About sort of financial crisis is, and essentially on the best example is the housing bubble in the market that imploded, you know, in the last decade, at least here in the United States. So we'll just kind of analyze that, Um, not don't spend too much time on this, but it is sort of, Ah, very live economic example of how things can drastically go wrong. It's kind of right in front of everybody faces. So the first thing let's talk about just how did this bubble develop? So you know, when we think about the bubble, you know, I think for the most part, people understand. But essentially think of a balloon. It's just growing and growing, growing, growing. And think of the balloon is the problem, and eventually it bursts and then everything collapses in on it. It's sudden, and it's dramatic, and that's essentially what happened in the real estate market and in the lending market in general. But that said the real estate market was definitely the hardest hit. So, um, what happened? So essentially, um, housing prices were on the rise. You know, house that was worth 200,000 was gonna be worth 210,000 next year to 20 the next year at set up. So people looked at real estate as a great investment. So more and more people want to buy houses in their minds. They're like, Well, I come by this $200,000 house now, and whether they live in it or they buy it as an investment property, you know, it'll be worth 210 220 etcetera, and then in their heads, they're like, Well, you know, sure, I have to pay the mortgage on this every month. But at some point in the next few years, I can sell this off and make a nice profit. You know, I'll pay off the mortgage and and clear say, $20,000. I'll make 10% of this over the next two years, so you have a lot of people doing that, and they're seeing it in motion It It's working because they see the housing prices go up. That house they bought for 200,000 is worth $210,000 the next year, so On the flip side of that, you have the lenders. You have people who are lending the original $200,000 and the house is essentially collateral now, so they lent $200,000. But the banks are so looking at the Marien going well, that house is going to be worth 210,000 to 20,000. So we have an asset that's backing this loan. That's going to be very shortly worth more than the loan that we even have put out on it. So we're safe. We're in a good position. So essentially became a self fulfilling prophecy. You had more and more people than wanting to buy houses. Credit became easier. Banks became fire, less lax on their policies and whatnot for lending. So people who maybe shouldn't have been receiving loans were receiving loans. Now, because everybody wants a it's completely agreed. But the banks looked at it as Hey, we have assets. You know all that. All the loans were secured by houses from the house is going up in value. So even if we lend money to somebody who maybe they end up not being able to pay the mortgage we can just take back the house and you know, we'll make money on the house when we sell it. So you have banks willing to lend money to pretty much everybody. And then you had pretty much everybody wanting to borrow money because even people who knew they probably couldn't afford the mortgages were buying houses that they then, um, you know, could see going up in value. So that's essentially how the Bubble Group came sort of again, a self fulfilling prophecy on expanded. So in the next lecture will talk about where it all burst. 58. When the Bubble Bursts: So what happened next? Eventually everything kind of peak. It got to the point where people housing prices stopped rising. People were starting to not be able to afford their mortgages. And then eventually what happens is now, as people recognize while things were starting to peak. So you know how their prices really are going up like they were. It's time for me to sell well. The problem is, everybody kind of realized that so now you have a large percentage of the population trying to sell their property. But what happens when the supply, you know, supply curve, all of a sudden is shifted out? There's a lot more supply. Prices start to fall, and that's exactly what happened in the housing market. Prices just started to fall, so everybody's now value. They had their house of the $200,000 house that was worth to 10 to 20. Now, all of a sudden, quickly they wouldn't be able to sell it for 2 10 and then not even for 200. And it got to the point where houses were worth less than the original purchase price. There was just way too much supply now and if there's a bit of a panic, right? All these people who are buying houses with the sole purpose being the house was going to go up in value, they would sell it, pay off the mortgage, make a profit. Now we're looking at being in a loss situation. They need to get rid of their houses quickly as possible, so that makes it even more direct. You have everybody trying to liquidate their properties, so prices continue to fall on. Now it gets to a point where, um, the houses were worth far less than the loans that people had on them. Now there's lots of different things going on. Things like loan modifications. Lenders were doing anything they could to keep people in the home so that they would, um, you know, continue paying on their mortgages. But there's a large percentage that just said it was easier to walk away from a house then , especially given investment property. It was easier to just walk away and stop paying on it because it was worth far less than when I say far less. I don't mean just like a few 1000. I mean, there's people who had you know $300,000 homes that were now only worth $200,000. So prices dramatically fell. Um, and, you know, on top of you know, we kind of blazed over some of the some of the things. But, you know, there was lots of new construction, these air lots of new homes as well. But homes in general, let's just stick with. So essentially the bubble burst, you have everybody trying to sell their house, prices plummet, people are walking away from their loans. And then this is when you have the situation where banks, then we're going out of business. And they had to be bailed out because they now had so much, um, you know, loans on their books that people just weren't paying and they were never going to collect on these. Where do you even start? That's essentially how the bubble popped. Everybody, you know, created, You know, a lot of people lost lost, either homes they lived in, lost their investment properties, had to walk away from them. It also ruins people's credit, which also then discourages them from spending money, taking out other loans. I mean, loans just dried up in general. So you had a very dramatic shift in the economy, and I mean, a lot of that obvious soon as well leads to things like recessions. You have a large part of the population who you know, is very debt laden or is just walking away from their debts. And now the banks are debt laden, etcetera. So that's essentially how the bubble burst on. Then in the next lecture will just kind of wrap it up and talk a little bit about the road to recovery. What happens after all of this shakes out? 59. Recovering From Financial Crisis: soas faras the road to recovery. I mean, here we are, you know, about 10 12 years after the fact. Still, I would say the impacts are still felt. I mean, lending regulations definitely became far more stricter. Um, you know, the loans that were being handed out to anybody for a house. Now it's far more difficult to receive. And of course, that's natural, right? I mean, you've hopefully learn from those mistakes, and then regulations are put in place, but it also clamps down. And so tightening down on the lending policies also somewhat slows down the growth. When we think about it right away, that we grow the economy and recover from recessions is by spending. But if spending is limited because loans are limited, you know, we sort of hold back what it iss. So essentially the government, through fiscal policy, monetary policy and then through lending, is able to control sort of the growth and how we recover and bounce back from this recession. Now myself, I can only personally add my two cents that living in Phoenix, which was actually one of the biggest hit cities just cause there was tons of new construction pre, um, you know the housing crisis. You know, lenders could build Hauser, Soria. Homebuilders couldn't build houses fast enough because there were just so many people looking to buy houses and then that all came to a halt. Well, in the last few years and definitely even the last year or two, you're seeing homebuilding starting to increase, starting to see a pick up again. So all those areas that were kind of maybe abandoned 10 years ago, you know, they were going to build houses and they just stopped. Well, the last two years, they've started to pick up. Now there's definitely a road to recovery, even just around the corner, not too far. Walking's distance from my place plot of land that was originally slated to build houses was not there now, building brand new houses on. So the road recoveries, like right there physically, I'm able to see it myself. But just know that from a economic standpoint, it is very controlled and very sort of. It's gonna be a long process to sort of completely get back out. They were close to being out of, if not where we were in the past, but with a lot more lessons learned 60. Economic Concepts Take Aways: So as we near the end of the course, I want to leave you with just some economic ideas that you should definitely walk away with . So we've covered quite a bit in this course and sometimes went off on different past. You know, we talked about micro economics, macro economics, public policies, monetary policy, inflation, recessions, lots of different stuff. Supply and demand, the very basics of economic. So all of that said, you know, and you know it doesn't always tied together neatly in a nice bow. You know, different supply and demand might be completely unrelated to one topic or 100% related to another. So, um, I want you to walk away with some sort of concluding ideas, if you will. So, first of all, self interest can improve society people acting out of their own self interest. Doing what works best for them isn't necessarily bad thing. If you have, everybody is striving to do what works best for them. Eventually there comes a sort of community consensus and sort of the prevailing ideas will raise rice of the top and things might work out. Free markets require regulations, so you know, some people have the idea that everybody should be left to do as they will let the markets decide. That's very true. But I think there's been a few examples through the course where you know the government being involved isn't necessarily a bad thing. Think about things like health insurance. Having some sort of base level health insurance isn't necessarily a bad thing. Letting the free market decide health insurance, we determined, would mean that prices would just continue to rise and people wouldn't want to pay them. And so ultimately get to the point where only you know you completely unhealthy people would face extreme health insurance premiums. We don't need that. So free markets left to their own devices aren't always the best functioning. Sometimes government intervention isn't so bad. Um, economic growth relies on intervention. Innovation. Richard. I mean, just think about think about our lifetime. Our life spans, you know, cell phones, Internet, things like that. Cars, you know, we're shifting now from, you know, fuel based to electric etcetera, lots of different areas in the world and the economy. But innovation is what really sparks also economic growth, right? It creates new opportunities and new ways for companies to exist and develop and just become companies and create new products. And you know, those who sustained the test of time will, and then those that don't and are inefficient will eventually I'm go out of business. So innovation will always continue to push us on a global level towards being better, better economically. Um, education raises all living standards. This is one obviously debatable topic. You have people who say no, you know, you don't need education. People are just good and skilled trade. I agree again. You really When it comes economics, I would almost say my biggest takeaways. Think of things on a very sort of macro level. Always. I mean, unless you're talking about micro economics, but on a macro level, as the whole education helps you rise, the standard it does. People were more educated, tend to be the ones who are higher paid, are paid, means more money going from a corporation to an individual, that individuals and spending the money contributed to GDP stuff. You want to think about it on a macro level, people who are making more money or higher educated are gonna help the economy. So intellectual property rights boost innovation. So I p trademarks, patents, etcetera. You know, being able to protect your idea really helps some people. You know, We talked about monopolies and oligopolies, but you can look at I p as a monopoly essentially. But it's a good monopoly. It's giving somebody a right to something they developed, you know, otherwise there would be no innovation because I don't want to do it because I could just steal someone else's idea once they do it. But if they're protected through I P, then I can't steal our ideas. So intellectual property rights definitely helped create and sort of boost innovation. Um, think about property rights and the environment. Lack of property rights really cause a lot of environmental issues. We talked about the one of species becoming extinct because of, say, overfishing or over hunting etcetera. Well, that's because there's no, you know, when there's no property rights, everybody, it's one everybody for themselves, and everybody's gonna try to get as much of it as they can because they all know it's gonna become extinct. So while as a whole, we know that something becoming extinct is a bad thing. We also know that us stopping isn't gonna stop anybody else. So we might as well join the pack and try to be the ones who get the most of it now before it is extinct. So having property rights, though, things like we talked about fishing licenses or hunting licenses. That's somewhat solves the problem. It creates a system where you are. Everybody is then limited, and it can help protect kind of that base that will reproduce and help in the long run. International trade is good. Keep that in mind. We didn't talk too much about international business and international pricing, etcetera. But, um, I think we can all agree global economy only continues to grow the importance of the global economy. We've become more reliant on other nations. So I mean, that is something that's just going to naturally develop but strongly encourage anyone who is interested in sort of international business and international economics to definitely pursue that look into. It's definitely a whole new way of looking at it. We could create entire course just on international economics, A so well, so international trade in the background of that definitely will help grow your own individual countries in the world. This whole, um, remember the government. There's a reason sometimes that public goods exists. We went into that. I think examples were fairly clear. You know, the fireworks demonstration. You know, the statue in the park. There's a reason why the government government being the city, the state, your country, whoever does those things, it's because it makes the most sense no individual person would do them. So it makes sense for an entity like the government to be the one who collects all of our $1 through tax and puts up the statue puts in the park. Does the fireworks display things that better our lives? You know, we might not see that direct correlation way to see it. So we have to pay taxes. I'm going to go to the park. But we don't see that correlation that well. The reason we're paying taxes to pay for things like the park and the fireworks. So lastly, a levy with preventing inflation honestly, not so difficult. I think countries have their hands around this a little bit more. But all through monetary policy and the supply and demand of money is essentially what really dictates inflation. So as countries start to tail's been a little bit into high inflation, there are ways that they can prevent it. So keep all those things in mind. When it comes to economics on the next video, we'll do a little conclusion, and then that's it for the course. 61. Course Conclusion: congratulations. Everybody made it through the course that I know. It's been quite a bit of content. As I mentioned the previous lecture. You know, economics cover so many different areas. Micro macro supply and demand, inflation, monetary policy, you know, bubbles, you know, wages, GDP, all of these terms, all these different concepts. There's so much to it. So hopefully through this course you've learned and we've touched on a lot of economics. You feel a lot more confident in your sort of knowledge and abilities when it comes to economics as a whole. Now certainly their specific disciplines. You can go and study just micro economics or just study monetary policy, etcetera. But I really wanted you to get a full overview of what economics is all about. And I think we've accomplished that through this course. So congratulations again. A few final points, um, one. I love hearing from you guys. So if you have any questions during the course, I hope you sent me a message. If you didn't and you still have questions, definitely. Send me a message. I'll be happy to answer them for you to interact. Of course, as much as I can make it. Secondly, speaking of loving hearing from you guys, if you can leave me feedback on the course, I always appreciate it greatly helps me out. Just spending a few minutes once the courses over to leave feedback is terrific. So I really encourage that. And then lastly, I, speaking of encouraging, encourage you to look at my other courses. I've quite a few other courses right now have over 80 courses business, economics, accounting, finance, Microsoft, Excel, negotiations, leadership, courage, anything. When it comes to business, I might have a course on it. So, um, I love teaching you guys. I hope to be your instructor on yet more courses to come. Definitely. Look at those. Um, I appreciate you taking this course and sticking all the way through it. That's that. Everybody have a terrific day and go use all your new economic knowledge.