Intro to Micro: Demand and Supply

0:00The reason it's called micro is it's typically an attempt by economics to ape the physical sciences to borrow the prestige of physics, where the term micro means something really completely different than it means here. What micro means in economics is dealing with the individual, with the individual level, individual action, the market, prices, is quiet please, dealing with demand, supply, production, the oil price thing which is happening somewhere, these things are part of micro, and macro which is the other basic course deals with a larger picture sort of like inflation, unemployment, business cycles, that's where everybody forecasts, economists forecast every year and always get it wrong, forecast always way off the beam, that's macro. Micro is in pretty good shape, I think it's basically a sort of a consensus about micro. Macro is pretty screwed up, and for good reason. At any rate, this is the, we're dealing now with much, sort of the basic economics of macro.

1:12Even good macro is essentially based on micro, so it's best to take micro first, if you're We deal in economics with, we don't deal only with numbers and graphs. That's only, as usually happens with economics, the graphs came in and the numbers came in in order to simplify, to present a simple basis of the theory. and what usually happens is that everybody got enchanted with the grass, they started the grass, it came to an end in themselves and economists began to lose sight of the actual people and what's going on in the world so that's been a danger in the higher stratospheric reaches of economic theory at any rate, what we're dealing with, economics really deals with as an individual and starts with a very simple fact, simple basic fact, namely everybody, every individual has goals which they're trying to achieve that he or she is trying to achieve. The goal can be a very simple one, like eating a ham sandwich in one hour, a simple short run goal, it can be a much longer goal, graduating from poly, or getting a job in electrical engineering, or whatever, there's a whole structure of goals, and in order to achieve these goals, you have to employ resources of some sort, you have to do something. In other words, by having goals of a sort, you're assuming that people can achieve them,

2:41to take measures, to take steps to buy a ham sandwich or to find a newspaper or to buy a Hi-Fi set or whatever or to graduate from poly. These things are at least presumably accomplishable. So, in other words, everybody has an objective, has different objectives in mind and has an idea of how to arrive at it, how to go about it. And that is basically the source of economic theory. The economic theory is a deductive system built on this basic fact, on autonomous core action. In other words, the fact that people act in the world to accomplish something. And I'd say the accomplishment can be very short-run, it can be very simple, it can be eating a sandwich, or it can be very complex, a whole series of things. It doesn't matter. From the point of view of economics, it doesn't matter what the goals are.

3:30That's up to some other discipline to worry about. What we deal with is the fact that people employ resources of different sorts to arrive at goals. This is an action where you have goals and you've got resources to try to achieve them. This is also called a means-ends relationship. You have an end or an objective and you employ a different means to try to achieve it. Okay, what are some of the resources? Well, in the first place, economists like to deal with what's known as Crusoeconomics. Robinson Crusoe, you're familiar with this little tale of also been in the movies, where a guy shipwrecked and he winds up on an island somewhere in the South Pacific, and he's got no resources except himself. And he's trying to, first of all, he has different goals he has to achieve. One, he's got to keep alive. These would be So the case of CRUSO, the reason why we like to use it is it's a stark situation where we can isolate one person.

4:37You can take one person vis-a-vis nature and bring in other people later on. That's how you deal with economics. You take one simple situation and you add on a more complex situation after you analyze it. So if you have CRUSO, it's got different goals or objectives. food, and he looks around fast to find out what the sources of food are, shelter and clothing or whatever. So that's, okay, so this is, he has some of his priorities and he lists them in a certain rank. We'll get to that a little later on. What are his means? What are his resources that he has? Well, he looks around his inventory and we go, first of all, he's got himself, he's got his own energy, his own personal energy.

5:23So, resources, energy, and he's got his own technological knowledge, presumably he doesn't have amnesia, he knows how to fish or chop down trees or build a bow and arrow or something like that. Technology is low tech, high tech doesn't make it on Desert Island or Crusoe Island. The knowledge about how to construct a computer or something, how to use it, is not going to do him much good, but low tech, even if it's low tech, it's an important tech for him, namely how to fish and how to hunt and that sort of stuff, so how to construct a long cabin.

6:08So, all right, so he's got technological ideas, or recipes can be called, technological knowledge, and he's also got different natural resources. He's got, looks around, he's got, let's say there's trees or there's fish in the stream or whatever, looks around and finds out what the natural resources are, and that's what he starts off with, starts off with technological ideas, his own personal energy and natural resources. This is basically what we have in the world in general. The world starts off, you look at the caveman, the caveman will start off with just a person, some kind of idea of what to do, and resources, a person's resources. Now, economics really begins as a discipline, early 19th century or late 18th century England, Britain, and so the language, we're sort of stuck with a little language, a lot of the language and the concepts, we're still stuck with, even though they're kind of, the words are a little different now, we have to adjust to that, you can't change the word, just have to explain why it's a little different.

7:16Similarly here, personal energy used to be called labor, so this is called labor, a labor energy. And nowadays when we think of labor, we think of a proletariat type, since Marxism came, and we think of a laborer as somebody who's working a steel mill or something like that. And this concept of labor means anybody who works in production, we haven't defined production, it means doing something in the world to transform it, the consumer goods, we'll get to that later. So everybody is a laborer in that sense, anybody who works in production is a laborer in this sense. The president of General Motors is a laborer, just as the guy who works on the assembly line. Who isn't a laborer? Well, people who are clipping coupons. It doesn't mean they're not important, just they're not laborers. People who are stockholders, per se, or bondholders, are not engaging in personal labor in the plant, or in production.

8:06So this is less labor, labor which really means here personal energy. Natural resources, since it was 18th century agricultural Britain, is called land, the same as land and labor. So we use the word land, so we're stuck with the word land, we're stuck with the word labor, but again it doesn't quite mean what we think of in common sense terms now. Land in economics means ground land, it means natural resources, it doesn't mean in other words this building here. We think of land, we think of the building, Brooklyn Polytechnic University, dazzling name changes. We think of it as the building here, but land is considered in economics only the ground underneath.

8:53In other words, natural nature made and not man-made. So land also includes fish whose natural resources are on the water, includes water. See, when they were making up economics in the 18th century, water was not considered a scarce resource. It was considered super-abundant. They had plenty of wet agriculture. So, nowadays we know better. Water is scarce. So, water is a scarce resource. Fish are a scarce resource. Also, other things like TV channels, frequencies, things like that, are also land in that sense. That was the natural resources. Space is land. Ocean is land. Lots of resources in the ocean which haven't been tapped yet. The continental shelf. There's minerals underneath the bottom of the sea and things like that.

9:41This is all land in a quote unquote. In other words, natural resources. So land means natural resources. Labor means personal energy. So what else is there? What else? Everything else. Everything else. In other words, people, man, take natural resources and transform them in order to get to what? The consumer goods so they can use it. In other words, Crusoe's got to eat, he's got to take the resources, he's got to shoot the deer or catch the fish and eat it. So he's got to do various things to get to consumer goods. The objective of working hard to do this is to wind up with consumer goods, food, shelter, clothing, high-five sets or whatever, or music coming out of the stereo. These things are consumer goods. This is what I use as an end of themselves. This is what the objective of action is all about.

10:32So, consumer goods are coming off the assembly line, so to speak. Everything else, which is not labor or natural resources, is called capital. Capital Goods

10:51Capital consists of everything used in production, which is not land or labor. It could be the net, fishing net used for fishing, poles used to fish, bow and arrow to hunt. Anything like that. Anything right now can be roads, trucks, tires on a truck. All these things are factories of course, goods in process, all these things are product capital, until you get to the consumer. For example, if you just ate a ham sandwich in Michelangelo, take that, one of my favorite examples. That was the end process of millions of people engaged in production. By the way, what is production? Production is a transformation, the use of labor, working on natural resources to transform into capital, different types of capital, finally you wind up with consumer goods.

11:47The production is this whole process of starting with land and labor and winding up with consumer goods. There's different degrees of capital, different stages. So for example, let's take a ham sandwich and Michael Weintraub, you have an enormous What's the most amount of cooperating factors in there? Factors of production. Got it. It's a whole production tree, a structure of production, starting with a farmer and mineral miner and so forth. Going for about 30 years at least until you get to the ham sandwich. What do you got? You got different ingredients going into it. To produce the ham sandwich This sandwich is solid to the consumer. You've got to have the ham, of course. You have to have the bread, the hero, whatever. You have to have cheese, all right? You have to have cheese, butter, and, yeah, tomato.

12:48All these things have to be brought together on a retail level. And you have to have workers doing it. You have to have the workers and aprons and counters. You've got to have counters and refrigerator units and all that sort of stuff. And chairs. Somebody's got to produce the chairs and sit on it. So all these things have to be produced. They all have to be combined to get to the one ham sandwich. One Ham Sandwich It has to be produced for many years. You've got to have somebody working at, the ham goes back, let's see, it goes to a, it's sold by a wholesaler probably, the Brooklyn Ham Division or whatever, the Brooklyn Armour Ham Unit or something like that. And they get it from a jobber, it's like Eastern Seaboard, and they get it from Chicago, they get the meat packer, the meat packer, gets it from the meat packer, you know, package the meat in slaughterhouses, slaughterhouse gets it from a farmer, raises a pig, they

13:47You have to have stockyards, you have to have trucks in every step of the way, and gasoline for the trucks, and tires, and stuff going, and metal going, and all sorts of stuff, I mean, on and on and on, this is only for the ham, okay? The pigs have to eat, they usually eat corn, the corn has to be grown, and on and on and on, with machinery every step of the way, and all this I say is just from one unit. It takes 30 years to involve millions of people for one lousy ham sandwich. It's incredible. And every country in the world probably is involved in this. People are growing ebony for pencils in Africa and so forth and so on. Because you have to have paper, you have to have pencils to record all this stuff and figure out what's going on. Every step of the way you have to have land, things to grow on, you have to have different kinds of capital, and you have to have labor.

14:33And all these things are involved in this. Each step of the way, each unit. Somebody's got to put it all together. The interesting thing is it works at every step of the way and one of the amazing things about the market, the free market economy, is it all works. You don't have to have, for me to get a ham sandwich right today, you don't have to have some rural planning board, eight guys on a planning board sitting around 30 years ago, and say, let's see, on January 20th, what is it, 26th today, 28th, January 28th, 1986, we have to get a Rothbard ham sandwich, therefore you gotta go raise the pigs, You over there go, raise the corn and so forth, gotta get Rothbard's hands down, nobody does that, there's no world planning board trying to figure this out. If there were, we'd all be in big trouble. And yet it all works at every step of the way, all these things happen at every step of the way with no shortages and no surpluses.

15:23Everything fits together like a latticework structure. The market economy is like a latticework, like a spiderweb when we look at something like this, derogatory metaphor. It's like a latticework, like a lace thing, it all fits in. How come it all fits in what? There's no magic, there's no planning board that fits it all, and the market itself does it. And really what microeconomics is, is to study how the thing works, and what happens when the government intervenes in the process and screws everything up. That's basically what microeconomics is all about. The big factor here, which is true both in cruise selling for us, the big factor is this. We contrast the world, whether we're talking about the caveman or kusar right now, with what I call the Garden of Eden model.

16:10Some people believe, some of us believe that mankind used to be in the Garden of Eden, and was then kicked out for various transgressions. Whether it's true or not, it's an interesting model to look at. In the Garden of Eden, everybody gets unlimited, satisfies his or her wants in unlimited fashion, but no work, no nothing. You snap your fingers and Pepsi is trickling down your throat. Nobody has to work at it, nobody has to produce it. Why is that? Because there's no scarcity. There's no nut, no scarcity. If there's no scarcity, you don't need private property, you don't need labor, you don't have to work, that's it. Unfortunately, we were kicked out of the Garden of Eden if it ever existed. And so in the world as it exists, in human history, there's tremendous scarcity. You don't have unlimited abundance of all factors of production of all goods. The Garden of Eden models unlimited abundance of all desired for goods.

16:56Somebody wants to hear a symphony, they snap their fingers and get it right there. We haven't got that. We have to have somebody working to produce it. And so we have the ever-present fact of scarcity. Scarcity meaning scarcity of resources relative to the goals that we have got to accomplish. Scarcity of resources, scarcity, we'll see in a minute what the resources are. Obviously, it's scarcity of land, labor, and capital. It's all scarce. Scarce in the sense that we'd like to have more of it. But if we had more, we could produce more, consume more, get a higher standard of living. If we had no scarcity, if everything was super-abundant, we wouldn't have to work, we wouldn't have to worry about anything. We'd just have Pepsi trickling down our throat, just like that, or whatever equivalent. So, what happens is, the caveman, everything is extremely scarce.

17:46They're in bad shape. Crusoe is in bad shape. Everything is very scarce. He's going to die tomorrow if he doesn't get food immediately. We're in better shape, we have less scarcity than we had in the human races. The progress of the human race, the progress of civilization, is essentially the alleviating of scarcity. Scarcity is still there, there's a lot less of it. A lot further from the brink than Crusoe or the caveman was. We've got a lot more fat, so to speak, a higher living standard. So the process of the progress of human race is essentially the progressive diminution or alleviation of scarcity. In the intellectual world, there's sort of fashions, one of the few good things about being in my advanced age is I've seen them all, all the fashions come and go.

18:33Every five years, some new nut comes on with a new theory and everybody adopts it for about five years and forgets it five years later. One nutty theory that came in about 1970 was there's no more scarcity. Scarcity. Economics, micro-economics might have been correct in the old days when there was scarcity. Now there's no scarcity. It's cool. We live, they said, in a post-scarcity world, a post-scarcity world. What does that mean? Well, it's an interesting question. I know what it means. What it really would mean is we're back in the garden of Eden. Nobody has to work. Nobody has to produce. No, not. Obviously, we're not in that situation. I remember I had a debate with some turkey, I think it was at the American University in Washington, which is an odd place anyway.

19:21And I was on a question about, do we live in a post-scarcity world? He was maintaining we live in a post-scarcity world, therefore we don't have to work, and therefore, I don't know what this therefore was, they're all very murky. And my question was, if that were really true, if Professor So-and-so were not, his conclusion was, we should therefore have socialism. I'm not sure why that was the conclusion. Presumably, there's no scarcity, you can have anything you want. Deuces are wild. So I said, well, if it's true that Professor So-and-so is right and we live in a post-scarcity world, why doesn't he tear up his paycheck? Why doesn't he at least tear up his raises that he gets every year? Anyway, his answer was interesting. That's because I, too, have been sucked into the capitalist ethos. So it's interesting in his reply. In other words, he's also saying, he's admitting there is scarcity, and he's trying to alleviate it as much as anybody else.

20:12So at any rate, that has been forgotten. I haven't heard that for a long time about post-scarcity. As a matter of fact, the next fashion that came in shortly after that, I think by 1975, My God, everything is scarce. We're going to run out of resources. That was a big gimmick for about five years. From 1975 to 1980, the same jerks were claiming we live in a post-scarcity world, and therefore we should have socialism. I don't know how the therefore comes in. I can never figure that out. At any rate, then said from 1975 to 1980, we live, all resources are running out. Oil is going to run out, energy is going to run out, forests are going to run out, therefore we should have socialism. The conclusion is always the same, you understand? There's never any connection, but at any rate, then you have to run around refuting that, and it turned out by 1980 they shut up after that because there's plenty of resources, I mean there is scarcity like there always has been, but there's

21:04plenty of resources, nothing ran out. We'll get into the oil paper, by the way, fairly shortly, we'll get into the alleged energy crisis and all the rest of it. It's an interesting example of this stuff in action. At any rate, we have an ever-present scarcity of resources and people therefore have to allocate their resources to their highest values and try to make sure that they don't waste them, in the sense that they make sure they don't spend their time or their energy or whatever, and stuff they'll regret, figure that they really shouldn't have spent on something else. So these resources, by the way, also include time. Time is a resource. It's scarce. As you all know. What are you going to do tonight? What are you going to do for a block of hours from, say, 8 to 11 or something?

21:52There's lots of choices. Every person has a concrete choice. You can go to a whole bunch of movies, possible, not all at once. You can see people. You can do homework. Each of you could probably get a list right now of seven or eight things you could do tonight. What are the things you could do tonight? How do you decide what you should do? Well, you decide on basically your own personal values, which you think is most important, or whatever, or which you think is more fun. Whatever it is, you decide, one way or the other. It doesn't have to be an excruciating decision. You don't have to spend 10 hours on it. You can do it like a snap judgment. Economists, again, don't care about how long it takes to make a decision. That's not our bag. That's the psychologist or whatever. What we're interested in is the fact everybody's got scarce resources, everybody's got goals they're trying to achieve, Scarce time, scarce money, scarce labor, scarce capital, whatever, and they're trying to allocate as best they can and have the best possible advantage.

22:41If you go to a, if you go to a, if you pick a movie, a certain movie, movie X, and you go to that, it turns out it was a bummer. Then you've wasted, you figure, damn it, I've wasted time and money, wasted the money going to it, you've wasted time, you could have gone to something else, you could have done something else. So, you're looking back, you figure, you took a loss, a psychic loss on it. The other half was a good movie, you figure it's a psychic game, you've benefited from this. It was good stuff. So everybody looks at it prospectively, tries to do the best they can. Looking back, you say, well, gee, I was good or I was a bad action or a good action. I was too cross-layered, I was a loser. And you figure out the next time you won't go to this director, a movie with this director in it, a movie with this particular actor in it, because often the same actor usually appears in the same kind of movies.

23:27So, you learn from experience, hopefully, and you do better next time, presumably do better next time. Okay, thanks enough for today. Miller, and you'll get the syllabus. And I hope we'll get a bigger room out of this thing. Talking about Crouson, also about life in general, and shifting back and forth between them, We have crystal energy, which is coal labor, we've got natural resources, coal land and everything else which are coal capital goods, everything else which transforms where labor Labor works on natural resources, transforms them, finally getting the consumer goods.

24:27So this is the capital goods of capital. This is the famous triad of labor, land and capital. As the economy develops and progresses, more and more capital is built up. At CUSO you have what we've got as a bow and arrow or something. We've got an enormous amount of capital equipment, factories, raw material, mines, roads, tires, everything else, designed to take natural resources, transform them, move them over vast spaces, and finally get to the consumers and sell them consumer goods. So that's how the whole economy is oriented.

25:12Another thing about human action in general, about Crusoe and about life in general, is that it takes time. Everything takes time. Some things take less time, others take more time. And everybody prefers having stuff now than waiting for it. So anybody has a choice, aside from price changes, human prices remain about the same. You get a million dollars. Somebody says, I'll either give you a million dollars now or ten years from now. What are you going to pick? Obviously, you'll pick now. So, this is called time preference. People prefer getting stuff, achieving their goals earlier than later. This conflicts, it has to be balanced against the fact that people prefer getting stuff now than later.

25:58But, the more they save and invest, the more stuff higher their standard of living will be in the future. They have to choose between eating, consuming now, or saving up now, consuming more later, those are the basics. We'll get to that more later on. Anyway, these are the things, take time, and also the time preference. Action takes time. And also, action is risky. There's uncertainty in the world. And the function of the entrepreneur is to meet that uncertainty, to bear the risk of uncertainty. uncertainty. So, Crusoe is an entrepreneur, except he hopes he can catch fish or he hopes he can build a cabin, things like that. Entrepreneurs, right now, people, everybody is an entrepreneur. If you become a mechanical engineer, you hope or expect that you'll be able to get a good job in it, stuff like that. On the other hand, more entrepreneurial are the capitalists who invest a lot of money in certain processes and hope they'll make money out of it. So,

26:53this is called entrepreneurship. There's no good English word for it. It's a French word. which has now been incorporated in English language. Adam Smith used the word undertaker, that didn't fly for obvious reasons. So, entrepreneur is it. Which essentially means a risk-taking capitalist, or a person who invests capital in some enterprise and hopes to make profits and not suffer losses. We'll get to that later on too. Right now we're sort of surveying the basic situation of the economy. To everybody, Crusoe and us have goals which we want to meet and which we prioritize, it's a terrible word anyway, we put in terms of priorities and we list them in ranked order. I mentioned just before the end of last hour that you have to choose what to do for three hours tonight.

27:42Let's say you can choose between four or five or eight different choices and you pick what's your best choice, your most valuable choice, what you think is going to be best. You go to movie A, you visit people, whatever. So everybody's got to rank preferences of choices. Say movie A, party, party A, movie B, whatever. Everybody's got different rankings and different choices, obviously, okay? So homework, right, usually low on the rank, most people. Some people, of course, are sports, it's called biology, and bike homework. Okay, so anyway, there's all these different visiting people or whatever.

28:28Okay, so this is something, you pick what's your highest value and you hope that's going to be correct. So this is called, I call it a value scale, but it now has been given the name in economics of utility. and it's a little unfortunate again because utility often means useful, objectively useful but in economics it means purely subjective valuation it could be useful or not, if people think it is, that's all we care about in economics in other words, a lot of left-wing intellectuals hate cosmetics they think it's an evil thing for a lot of women to use cosmetics well, most women don't agree with this, they like cosmetics and their value scale cosmetics rank pretty high, okay, so this is so this is purely subjective to the preferences and valuations of each individual and this is the utility scale which is a rank order and the thing about utility scales is that it's, they're ordinal they're ranking, unfortunately this is my first big disagreement with every textbook that I know of

29:38The textbooks will give lip service to this. They'll say, yes, it's ordinal. All of a sudden they start talking about utils. This margin is utils. This is three utils. That's two utils. Util being a unit of utility. And they add it up and they multiply it. There's no utils. There's no such thing as a util. Who's ever seen a util? Absurd. If you want to choose between going from movie A and movie B, you don't say to yourself, let's see, I value this at eight utils. So, forget it, forget Eugle, it's my first injunction. It's a purely ordinal ranking order, in mathematics often called lexicographic. In other words, it's like, instead of saying, we could say we rank it 1, 2, 3, 4, but it should be ranked as lexicographic, in other words, E, B, C, D.

30:27See, the use of a number sucks economists into thinking you can do something, we can add, subtract, If you use A and B and C, nobody would say C is twice B. So this is, anyway, this is, unfortunately, one of these sociological phenomenon here, which we're dealing with. So there's no such thing as U. It's strictly ordinal, it's strictly ranking and rank order. Okay, so this is, we'll now get to the first important law of economics. All of the laws of economics, I want to say one thing, they're qualitative and not quantitative. See, one of the problems with economists is, They take a qualitative science, which is really what this is, and try to convert it into being quantitative so they can predict precisely what's going to happen. They can't do that. Their predictions are always wrong. When they make quantitative predictions, they always flop.

31:15What they do is they keep flopping. They keep saying, well, we have to change the model. We missed out on x, y, z. They change it, and they still flop. This has been going on for 20 years. Some economists begin to realize, and also customers of economists, people who buy forecasts, like corporations, beginning to realize the whole thing is a scam and beginning to realize, you know, I'm putting something up here anyway, one of the reasons why they haven't the customers of economic forecasters haven't turned on them before this, this is again an important economic lesson here because of the tax write-off, if you consider the legitimate expense to hire an economist everybody hires an economist to tell you what the unemployment rate is going to be next year and if it allows the unemployment rate, so what, you've hired a top economist everybody else missed the forecast and your expenses can be written off as a legitimate tax write-off of one sort or another

32:05anyway, but they're catching on in any case so we have a qualitative discipline there are laws about tendency and direction not about quantitative there are only hunches about quantitative okay, so we have, let's get back to Crusoe, we have we have a we're going to take I'll make a couple of simplifying assumptions here. He's got a bunch of logs. He's chopped down a bunch of logs and he hasn't. And we're going to assume that one log or one set of logs is going to be used for each of three or four different uses. Which they can, we're just going to assume it's about the same amount. So you can take these logs and say, okay, what's my first priority? He's got an ordinal value scale, ordinal utility scale.

32:53The top priority is food for tonight, to make the logs for a fire, to cook tonight's meat. Do you have a question or a point? Fire for tonight. It needs to be a top priority. I think in the case of Crusoe, we can come to much more agreement about which movie to go to. Down to basics here. Down to survival. Okay, so fire for tonight, the first priority, the second priority might be Five for tomorrow, and I can keep it for tomorrow. Oh, why not?

33:34You've got a chair with you. If you bring your own chair, I can't cancel it. The number of people is more than the number of chairs. Okay, the third priority, let's say, is building a... Well, building a shelter... building a cabin. Building an extension of a cabin, whatever. Well, okay, building an extension, who knows? It's fourth priority might be setting a perimeter of logs around the little camps that wolves won't come in or whatever, so you have a perimeter. And fifth priority, building a boardwalk down to the beach, what the hell, obviously a real luxury item, the toes won't be full of sand. I don't know if you saw, it was a CUSA type picture called, a Swiss Family Robinson, a movie called, a Swiss Family Robinson, 40 years ago, and they had this thing to start off with nothing, and yeah, after two years there, they've got a whole, they've got boardwalks, they've got a whole bunch of capital, yeah, right, boardwalks, okay, I'm not sure they've got VCRs yet, anyway, alright, so, now he has these logs, assume each one log or one set of logs can perform each of these different functions. Now the point is, if he has a supply, a supply by the way is

34:51These are defined as an amount of N units of a homogeneous good, meaning that each unit is the same as any other unit. So if you're dealing with the same log or the same horse or whatever thing, for more or less practical purposes they're interchangeable. So you're not dealing with two totally different types of wood or something like that. Supplies N units of a homogeneous good. If he's got one log after all he's got, or one unit, he will, now we know, he will use, he will satisfy the top priority and let the others go by the board. He will not satisfy priority three if he gets about one. In other words, he will pick his highest priority. If he has two logs, he'll pick his first two priorities, and so forth.

35:44Looking at it in another way, supposing he's got three logs and he loses one, a wave comes and washes it away or something like that, he will give up his lowest priority that he already could have satisfied, give up priority three, he won't forget about food tonight, because that's his top priority. He will rearrange the logs so as to knock out three and leave one and two. If on the other hand he's got five logs and he loses one, he'll give up the boardwalk, he's not going to give up the really tough stuff. So in other words, now what do we deduce from this? We deduce that the greater the supply of a good, the greater the number of units a person has,

36:30the lower the value of the ranking of each unit. So, the more units he's got, the value now is how much he's willing to give up. There was a ranking of how much he loses if he loses one unit. If he's got a supply of three units and loses one, the value of each unit is number three, or third, or C, whatever you want to You've got five units, the value of each unit is five, a lesser value, because if he loses one, he gives up less, so one unit is a much higher value, so the greater the supply, the lower the value of each unit. This is called, technically, the lower the marginal utility, because utility means value, marginal means each unit.

37:23It's a high-falutin jargon again, but it's basically just what it means. So, marginal means the next unit with one log, one pound of butter, whatever the unit happens to be. So, the greater the supply, there's a lower the value of each unit and lower the marginal utility. Vice versa. In almost every law and economics, you can just switch it around, okay, which is simply The logic of the situation, the lower the supply of a good, the greater the value of each unit.

38:12It's saying the same thing. It's the other side of the coin. This is economics. What economics really is, is just simple of spelling out the logic of action.

38:34So, this is called, there's a name for this, the law of diminishing marginal utility. Fancy name for it.

39:02Okay, so that means the greater, it's really saying the same thing, the greater the supply, the lower the value of each unit. and we can put this in a little diagram the diagram is supposed to be used for economics to make it clearer unfortunately most cases are used to make it more complicated. Anyway, if you put marginal utility or value of each unit on the y-axis and only economic diagrams in microeconomics the y-axis has either marginal utility or price or something like that the x-axis has quantity of whatever In this case, we have quantity of a good. This is zero for both. And what they're saying is, as you increase the quantity of units one, two, three, four, whatever, the marginal utility keeps dropping. And we don't know what the height is, because it's ordinal.

39:55We probably shouldn't connect the dots. But anyway, we know it's falling. So that means that if you just see, obviously, the greater the number of units, the lower the value of each unit. The lesser the number of units, the greater the value of each unit. So this is supposed to be a way of showing this. Pay no attention to the actual distances and things like that, because it's a point.

40:29Okay, so from this we... This is the basis of what's known as the Law of Demand, or the analysis of consumer demand on the market. How much will people pay for products? Obviously, if you have one chess set, you're not going to pay as much for a second one, presumably, given the kind of chess set. So, I'm going to go on to the next step.

41:12The next question is, how much, the law of demand, which is based on the law of machine marginality, tries to figure out what consumer behavior, how much people spend on different, how much people buy different goods, given their different prices. In other words, Let's take Wonderbread, one of my favorite consumer purchases. I like Wonderbread. I buy lots of Wonderbread. However, if the price of Wonderbread is suddenly magically... let's say some guy, Mr. Wonder company, whatever the name of the company is, Mr. Wonder sells out or whatever, some other guy comes, the other guy's a nut. And the other guy says, I think Wonderbread is so great, a consumer should have to pay a lot of money for it. It's really worth ten bucks a loaf. So, he issues an order to all the Wonder Bread people, from now on, you only sell a thing for ten bucks a loaf.

42:00Now, of course, about a buck a loaf. So what happens? Well, what happens is this, you have, now you have, the basic diagram, you have price on the y-axis, price of the good. What does price mean? Price actually means how much you're willing to pay, or what the different terms of the exchange are. In other words, this is, the Crusoe and Friday, they've got, let's say the Crusoe fishes and Friday hunts, and so Crusoe has a lot of fish, and they decide on one barrel of fish per two pounds of meat, or whatever it is, okay, and they decide that that's a pure bargaining situation. When they do that, the price is how much you get, how much you, in terms of exchange, the quantity of one exchange, one good in exchange, is compared to the other good.

42:53In other words, the fish price of meat is one barrel of fish per half-pound of meat situation. And, per pound of meat, no, not per half-pound, yeah, one barrel of meat, yeah, one pound Half a pound of meat, two pounds of meat for one barrel of fish, it's half a pound of meat for a barrel. So you can, in this case, the price is one fish in terms of meat. When we have money and we have, in macro we deal with how money, how you get the money, but things get very simplified and everything in terms of money price, whatever the money is, ounces of gold or dollars or whatever. So the exchanges between the money and the specific good. So here you have a situation, let's say with Wonder Bread, it's a price, if it's on $10 a loaf, very few people will buy it, let's say this is $1 a loaf, and you have this many people, this axis you have quantity again, quantity purchased, so I don't know how many loaves of Wonder Bread are sold in the United States or New York at any given time, let's say 100,000 loaves, just as good as any other, 100,000 loaves say in New York in a week,

44:06So the quantity is $100,000, the price is $1 a loaf. So if Mr. Wonder suddenly insists on $10 a loaf, very few people will buy it. The only people who will buy it are very wealthy Wonderbread freaks. If David Rockefeller loves Wonderbread, which is probably dubious, he might shell out a lot of money. So the very few of the rest of us will join in, so the quantity suddenly plummets, so let's say this much will be purchased, and so he will go bankrupt pretty early and he will lose his, he keeps on with us, he will lose his fortune, whatever it is, pretty quickly. uh... on the other hand supposing he succeeded by another nut, an opposite kind of nut who says well, I think that the Wonder Bread is so great that people, every person in the world has been able to afford Wonder Bread I'm going to sell it for a nickel a loaf of course he loses a lot of money per loaf, but he's also crazy, so anyway

45:10and the Nickel Loaf, lots of people buy it, hear about a Nickel Loaf, hey, Wonder Bread's Nickel Loaf, you stop buying Pepperidge Farms or or tasty whatever, you rush to buy one, what the hell, you might not like it till, oh, there are nickel loads that's worth it, you get a huge, two million loads or so, it says that much so, produced, you get something like this, alright? Now, this is the great law of demand, and the law of demand, which is related to the fact of, related to two things. One is diminishing marginal utility to keep increasing the supply, and two is the fact that some people are poorer than others and can't afford to spend a lot of money on one specific item. So, at any rate, you wind up with a law of demand which is very simple, but very important, probably the most important single law in microeconomics.

45:59Namely, the lower the price, the more will be purchased, the more the consumers will purchase. Lower the price for any item. We don't know how much more, that's what we don't know. We know it will be more, that's an absolute law. How much? That depends on the specific item, depends on the people. It's sort of like applied punches. But we do know, absolutely, the lower the price, the more will be purchased.

46:37And this is called a falling demand curve. We also know, again, conversely, again, there's always the other side of the coin, the higher the price, the less will be purchased. Again, saying the same thing. That's the law of demand. Again, as I say, it's saying the same thing. We're following the man curve, and we don't know the shape. As a matter of fact, there are fashions in and Economics, like everything else.

47:25And originally, before, say, I guess the Mankers came in about 1920 or something like that. Why is that called falling to the right? It's falling to the right. That's wrong. As you look at it from left to right, most of us do, we read from left to right, it's falling. Isn't it the length of the right side? No, it's not rising. Now, that, they have hit it. You've now hit the key problem in microeconomics, which I tell students all the time, the key problem, every year, and half of you usually get it wrong on exams. Namely, the key difference between quantity demanded and the demand curve. The demand curve is the whole curve. The demand curve is a locus of, given the price, how much will be purchased?

48:43Wonder Bread, basically, how much income they've got, and what they think of Wonder Bread, and competing products, what's going on competing products, with Pepperidge Farm Bread, or Tasty Bread, or Rolls, or whatever, all these things are competing with Wonder Bread, so this determines the demand curve in accordance with the subject of value scales, utility scales of the people, once given this, this gives you the whole demand curve, and I'll get into this a little bit later, because the point is, you must never confuse the quantity The quantity demanded at each point, which is, let's say this is, in other words, at 50 cents a loaf, 200,000 loaves will be demanded of that, okay? That's the quantity demanded at each point.

49:29I'm going to confuse that with the entire demand curve, which is the locus of all quantity demand at every point, at every price, I should say at each price at all. Quantity demand at any given price, alright? You never confuse the quantity demand at any given price with the demand curve of the whole. Now, the point is that a man-curve as a whole cannot change if price changes. That's the key. The reason it can't change, in other words, a falling price will not increase at a man-curve, ever. It can't, because the man-curve is defined as a response to prices, price changes, alright? The one thing which cannot increase the demand curve is a falling price.

50:15The one thing which can't lower the demand curve is a rising price, because the whole shape of the man-curve has already been incorporated in the definition of the man-curve, the whole shape of this thing. All the responses to price. So the one thing which can't change the price of the curve as a whole is changes in price. I'll explain this more in greater detail as we go along. We'll still get it wrong in the test. Anyway, this is like a law of students over the years. Every economics professor has the same reaction to it, but I'll tell you anyway. It's once in a while that they get it right. Alright, so this is, uh, in 18, from 1920 or so when the man curve starts, until about 1940-45, there was always the same shape in the textbooks. The shape was the man curve.

51:02Remember, we don't know the shape. All we know is that it's falling. Right from the y-axis, one of the x-axis. The shape was this. The shape was known in mathematics as the rectangular hyperbola. In other words, the area under the curve is the same at every point. This means that...

51:29Let's say the curve is based on a schedule, on tables, price, quantity, purchase. If the price is $10 a loaf, let's say they sell a thousand loaves, The total revenue taken in by the retail stores is price times quantity. Obviously, if you're selling, you charge 10 bucks a load, you can sell 1,000 loads, you're taking in 10,000 dollars. That's total revenue equal price times quantity. Key point. If the price goes down to $5, let's say they sell 20,000 copies, and the total revenue goes up to $100,000, and so forth.

52:16But the way the textbooks used to draw the curves is that the area always remained the same. In other words, the total was always $10,000 or whatever, $100,000 or whatever. It was adjusted in such a way that the area was always the same. That's the definition of rectangular hyperbola. Finally, by 1943, George Stiegler, later one of Nobel Prize, his young professor wrote a textbook called The Theory of Price, he said, there's no evidence for this, why do they draw the curve that way? What is this nonsense? And so he started drawing it as a straight line, which at least doesn't commit you to thinking that the areas are the same, okay? There's no evidence for a straight line either, and so sometimes, I think McCloskey's latest book on applied price theory, sort of a maverick type, he draws the lines as wavy, yeah, kind It could be wavy, it's easier to make it, I still prefer the straight lines, provided that you're holding your head at all times, it's purely convenience, doesn't mean a damn

53:12thing. Unfortunately, most economists don't hold that in their head. By the time they get to Chapter 8 or something, they're thinking it's deeply significant, they start talking about tangencies, as we'll see as we go along, and go to all sorts of crazy conclusions based on tangencies that don't exist because there ain't no straight lines. At any rate, straight lines are at least easier to cope with, at least doesn't assume you have a theory of No reason for the area to remain the same. No reason why consumers always spend the same amount of money, regardless of price. So, we'll get back to that too, what happens is the total spending becomes a key thing, a property of the man curve. The only really important property of the man curve. Anyway, we now have the man curve with straight lines. And the next thing is dealing with supply. Alright, we now have the man curve, which we know is falling, although we don't know exactly how much.

54:00And we have supply. What's supply? Supply, despite the textbooks. You see in this thing, when I disagree with the textbook, I'm always right. Axiom of the courts. Supply is vertical. In other words, supply of everything is how much there's around right now. How many loads of wonder better around at the stores today? Say 100,000. So you have, in other words, at any given time, supply as a fixed amount. It changes over time. Sure, they'll produce more next week or something, or less. The point is, at any given time, and the demand curve, after all, is a freeze-frame situation. How much, at any given time, how much will be purchased at any given price by consumers? Similarly, the supply curve should be a fixed freeze-frame. At any given day, how much is out there? So the supply curve is vertical.

54:47Right now, by the way, by knowing about the falling demand curve, you right now know more economics than most of the people in the country. They already, after one week, less than a week, they're already very savvy, you know, more than the jerks who run the subway system, for example. I'll tell you that right now. The way most people run utilities, particularly, subways, railroads, whatever, they assume that the man curve is vertical. The implicit is that they don't think about the man curve, but they implicitly assume the man curve is vertical. And it means that people will essentially kick in to buy the same amount of stuff regardless of what the price is. There's no fooling the maker. There's no problem with the maker going that way.

55:33So, for example, every year or so they keep raising a subway fare. And because they've got a deficit. Of course they have a deficit. The government always has a deficit. It's almost by definition. The government's always screwed up. Anyway, we've got a deficit. How do we cure a deficit? We raise the fare. Why not? If you're suffering from a certain deficit, you figure out, you can balance the budget, if you take in whatever, if you raise the price by 20% and you keep the same number of fares, then you'll balance the budget. by God, next year they find out there's a falling off of rides, of fares, so deficit never gets cured, and there's always startle of this, how come we didn't, why did the number of fares go down?

56:20Why aren't people riding the subway as much as they used to? Gee, I don't know, maybe it's because it's crummy, but it's always crummy, that's not the answer, it's just the fare went up, okay? and it takes, it's a long time before it sinks into these jerks, it still really hasn't. My prediction is that some fine day in the future is not going to be too long from now. See, what happened was, on the fair caper, is that they built, they first built the subways around 1900, 1904. The fair was done in nickel. Well, nickel was a lot then, alright, so prices were low and for nickel you could buy a good lunch or something. The Fair of Maine and Nickel was regulated by the government, naturally the New York City government, they kept the fair, they froze the Fair of Nickel from then on until about 1950.

57:05For 50 years the fair was frozen to nickels, actually the firms began to lose a lot of money, it was inflation, costs are going up, you can only charge a nickel, and so the subways began to go bankrupt. At that point, the city government made a deal with the owners of the subway, the stockholders of the IRP and BNP, which were privately owned. The 8th Avenue subway came in later, in the 1930s, as a government subway. So they made a deal, they bought the subway from the stockholders at a very high subsidy. In other words, subways were crazy bank crops, they really weren't worth much. So they made a deal with the stockholders, they were, I don't know, 50% bonus. The stockholders loved it. They have to realize about businessmen. They don't mind being nationalized or stateized if they make money out of it. So these guys were coining it. Not only that, they got paid off in government and New York City transit bonds.

57:53And then they created this transit authority situation, a real racket if there ever was one, and the transit authority, they get the bondholders keep getting money off the top. In other words, before they pay off anybody else on the subway system, they pay the bondholders. The bondholders are usually the former stockholders. Their bonds get refinanced every few years at a higher interest rate. Because in the old days, the interest rate was much lower. So they originally got bonds at 3%, which was a handsome subsidy then, and now getting 10% or something. And they're living off us, basically. I mean, the bondholders. At any rate, so some flying day in the future, it's not going to be too long from now, they're going to raise the fare again, sometimes, to five bucks, whatever it is, right?

58:41And they're going to find out, not only the number of rides are going, but the total revenue is going down. That's what they're going to find out. They're going to get up here somewhere, and find out they're taking in less money than they did before. What are they going to do then? Who knows? Cut their throat, perhaps. because they haven't even got the mindset of lowering the fare to try to get a lot of people they might even privatize it, that would help but that's uh... that's the objective and you heard it here first five years from now you're looking at the newspaper and the fare goes up to five bucks and they find out they lose money on it you know you heard it here first okay so this is the uh... this is the general mindset of uh... of most people, authorities and government, in a fair-setting business.

59:31We have a law of demand, and there's a property of, as you can see, it makes a big difference to businessmen, what happens to total revenue. Because we know now, it's not necessarily, It's not going to be the same, it can change. What happens to total revenue becomes a key thing, because this is what I'm trying to make profits and avoid losses. Total revenue, price times quantity is total revenue. And total revenue minus total cost, which we'll get to later on in the course, will give you the profit or loss. In other words, if this is positive, if total revenue is $100,000, that means you take in $100,000 and you pay out $80,000, then your profit is $20,000.

1:00:18Plus, if on the other hand your total revenue is $100,000 and you've paid out $120,000 then you're in bad shape and you have a loss of $20,000. So you have to do something fairly rapidly to get out of this. So businessmen are extremely interested in total revenue. Let's say we're now concentrating on, we'll get later in the term, the cost question. And so, it becomes very important to them, what happens if the price changes, if it's raised, whatever the price, whatever the thing is, whatever the good is, you raise the price from here to here, what happens to total revenue? We now come to the most important property of the demand curve, which is the reaction on the demand curve as you change the price, what happens to total revenue?

1:01:13In other words, how does quantity react compared to their price? This is the end of this hour. I think what I'm going to do is I'm going to do, we didn't have more chairs than number more people, more people in chairs, it's just about even, as a sort of a modified protest, I'm going to cancel a second hour and hope that next Thursday we'll have a decent room. The Tuesday room isn't so bad, the Thursday room, although I'm trying to change that too. The Thursday room is abominable. Okay, so I'm going to cancel an hour or two, and you've got the syllabus, and you've got the readings, etc. That's it.