Published on 18 Mar 2015
Ever wonder why pharmaceuticals are so expensive? In this video, we show how low elasticity of demand results in monopoly markups. This is especially the case with goods that involve the “you can’t take it with you” effect (for example, people with serious medical conditions are relatively insensitive to the price of life-saving drugs) and the “other people’s money” effect (if third parties pay for the medicine, people are less sensitive to price).
December 14, 2015
The Monopoly Markup
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QotD: Veblen goods
… the point about a Veblen Good is not that sales rise when prices do. Rather, it’s that a Veblen Good is desirable because it is expensive. It is a way of showing that you can afford to buy something expensive. That you can afford something expensive is a sign of social status (well, it is in our society, where having lots of money and thus being able to buy something expensive is a sign of social status. It’s possible to imagine other societal forms which don’t include this).
The archetypal example was certain of the Vanderbilt women who would have diamonds implanted into their backs, where they would be visible to people at parties given the low cut backs of dresses at the time. The point of such implantations simply being to show that one had enough money (and perhaps little enough sense in a pre-antibiotic era) to have a diamond implanted over one’s spine. There’s a story that Mick Jagger had a diamond implanted into one of his teeth for the same sort of reason at one point (removed when it promoted caries).
The point being that a Veblen Good does signal something, and as such the greater the price the more desirable the ability to transmit that signal. But it doesn’t go as far as stating that the more the price rises then the higher sales go.
Tim Worstall, “Being Quoted In The New York Times Is Great But…”, Forbes, 2014-11-22.
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December 2, 2015
Maximizing Profit under Monopoly
Published on 18 Mar 2015
AIDS has killed more than 36 million people worldwide. There are drugs available to treat AIDS, but the price of one pill is incredibly high in the U.S. — coming in at 25 times higher than its cost. Why is that? In this video, we show how patent rights have created a monopoly in the U.S. market for AIDS medication, causing pills to be very expensive. In other countries, however, such as India, which does not recognize patents on AIDS medication, prices remain low. Using this example, we go over how monopolies use market power to increase prices.
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November 27, 2015
The Balance of Industries and Creative Destruction
Published on 18 Mar 2015
Why are price signals and market competition so important to a market economy? When prices accurately signal costs and benefits and markets are competitive, the Invisible Hand ensures that costs are minimized and production is maximized. If these conditions aren’t met, market inefficiencies arise and the Invisible Hand cannot do its work. In this video, we show how two major processes, creative destruction and the elimination principle, work with the Invisible Hand to create a competitive marketplace that works for producers and consumers.
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November 23, 2015
Minimization of Total Industry Costs of Production
Published on 18 Mar 2015
This section connects several ideas covered in previous videos about the price system and profit maximization. In this video, we begin to understand two basic functions of the Invisible Hand. In competitive markets, the market price (with the help of the Invisible Hand) balances production across firms so that total industry costs are minimized. Competitive markets also connect different industries. By balancing production, the Invisible Hand of the market ensures that the total value of production is maximized across different industries. We’ll use the example of minimizing total costs of corn production, and demonstrate our findings through several charts.
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November 15, 2015
The more likely explanation for the fall in eBook sales
Sarah Hoyt explains why you should be darned careful not to base your business plans on wishful thinking:
Of course ebooks from traditional publishers are a) unreasonably priced (No, really. There is a book I’m dying to get. It’s $17 for ebook. It’s $32 for the hardcover. You know, I have KULL subscription and the indie books aren’t as good as this particular book should be, but it takes a lot of not as good at 9.99 a month to compare to those prices.) b) often stupidly formatted/edited c) even more often on themes/by authors I have no interest in. (Other than Baen, I currently read two other authors. Period. Oh, and one in mystery.)
Or to put it another way, traditional publishers went to war with Amazon to be allowed to price their books astronomically high. Amazon let them. They priced books at same price as hardcover or a little under (a very little.) E-book sales fell, compared to what they were when books were tops 9.99. Um….
Let me see if I can explain this as I would a child: your little friends love and adore your cupcakes. So you decide to set up shop and make a batch in your easy-bake oven, and sell them for ten cents a piece. Since your friends’ on average have an allowance of a dollar a week, you sell out of the whole batch in hours. So you think “Hey, I can make more.” You set the price at a dollar per cupcake. No one buys them. Your conclusion is “My friends no longer like cupcakes and prefer to eat vegetable sticks.”
Would anyone but a two year old buy that narrative? Well, according to publishers this is a perfectly sane thing to say. I mean, if people won’t buy your overpriced ebooks, it must mean they are going back to paper. Happy days are here again. Let’s build warehouses for all those books we’ll be shipping out to the no-longer existent big-chain bookstores! We’ll be able to control what books make it by our push again! We’re rich, rich, I tell you.
But it’s not just publishers. A friend sent me this article, and I scratched my head and frowned at it and said, in my deep thinking way, “Wut?” This is sort of like if you told your mom your friends’ refusal to buy your $1 a piece cupcakes was because they liked celery more and she said “Sounds legit. For your birthday party we’ll have ONLY celery.”
November 12, 2015
Entry, Exit, and Supply Curves: Decreasing Costs
Published on 18 Mar 2015
In this video, we talk about the special case of the decreasing cost industry. As output increases, costs will continue to fall, and more firms will enter which, again, increases output. It’s a virtuous circle! At the end of this video, we review the major points made in this section. If you find that something doesn’t quite make sense, feel free to re-watch videos as many times as you’d like.
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November 4, 2015
Entry, Exit, and Supply Curves: Constant Costs
Published on 18 Mar 2015
Some industries have a flat supply curve. These are called constant cost industries. Take domain name registration: to increase the supply of domain names, we must only increase the inputs by a negligible amount. That is why even as the Internet expands so rapidly, it still costs only about six or seven dollars to register a new domain name. By showing you how these industries respond to an increase in demand, we can explain why they are constant cost industries.
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October 29, 2015
Entry, Exit, and Supply Curves: Increasing Costs
Published on 18 Mar 2015
We understand cost curves and entry and entry/exit decisions. Now we are going to explore how each firm’s decisions influence the supply curve. Here’s the key question: As industry output increases, what happens to costs? We look at three options: an increasing cost industry, a constant cost industry, and a decreasing cost industry.
First up, we look at oil as an example of an increasing cost industry. Other examples of increasing cost industries include copper, gold, and silver, coffee, and even the profession of nuclear engineers.
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October 24, 2015
Maximizing Profit and the Average Cost Curve
Published on 18 Mar 2015
Being able to predict your company’s profit is a very useful tool. In this video, we introduce the third concept you need to maximize profit — average cost. When looked at in conjunction with the marginal revenue and marginal cost, the average cost curve will show you how to accurately predict how much profit you can make!
The usefulness of these tools does not stop there. Sometimes, you can’t make a profit. You’ll have to take a loss. These tools can also show you how to minimize losses, and make decisions on whether a company should enter or exit an industry.
We also define terms such as zero profits and sunk costs in this video.
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October 19, 2015
Maximizing Profit under Competition
Published on 18 Mar 2015
A company in a competitive environment does not control prices. So the key to maximizing profit is choosing how much to produce. To do that, we need to factor in the costs involved in production. So what exactly are the costs? How do these costs influence how you maximize profit? And, remember, if you want to think like an economist, you must factor in opportunity cost!
In this video, we define profit, including how to calculate total revenue and total cost. We also go over fixed costs, variable costs, marginal revenue, and marginal cost.
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October 16, 2015
Fair Trade: Does It Help Poor Workers? (Everyday Economics 7/7)
Published on 8 Jul 2015
Elizabeth, an Everyday Economics viewer, asks: “How does the purchase of fair-trade goods affect wages in developing countries?”
Great question! The “fair trade” movement has become popular as a proposed way to increase living standards in developing countries. In this video, we look at whether fair trade does just that.
For a good to be considered “fair trade” it must meet various requirements developed by a handful of fair trade organizations. In the developing world, who is better positioned to meet these fair trade requirements — large producers in wealthier countries or small producers in poorer countries? To answer this question, we take a look at the the example of fair trade coffee produced in both Costa Rica and Ethiopia. How does fair trade affect wages and overall quality of life in those countries?
And, if fair trade isn’t the best way to improve living standards in developing countries, how else can we maximize employment options and well-being for poor workers? This question is at the core of an entire branch of economics — Development Economics. To learn more, check out MRU’s Development Economics course.
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October 14, 2015
Introduction to the Competitive Firm
Published on 18 Mar 2015
How does a company really behave? We tend to assume profit — the bottom line — is the main motivation for a firm’s actions. For most firms most of the time, this is a good assumption, especially in a competitive market. With this video, you will explore how a company maximizes profit in a competitive environment where there are many buyers and sellers.
This idea comes with a few surprises. Does a company really control what price it sets? Or does the market determine the price? Here’s a clue. If you owned an oil well, even your mother wouldn’t buy your oil if she could get the same oil somewhere else for less money. Watch and find out why.
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October 9, 2015
Are We Better Off if We Buy Local? (Everyday Economics 6/7)
Published on 24 Jun 2015
In this Everyday Economics video, Don Boudreaux addresses one of your viewer-submitted questions: “Is everyone better off if we buy local?”
In a modern economy, it’s hard to say that anything is truly “local.” Even an apple grown at a nearby farm isn’t a “local” good — everything from the fertilizer used to feed the trees to the wooden crates that carry the apples to market are likely made elsewhere. And, the profits the farmer makes from selling his apples are likely not spent locally — for instance, he may buy a tractor or supplies manufactured far away.
This video also takes a look at what would happen if you could direct your money locally. Would it benefit the local economy? How many businesses could survive solely on local business? What happens to specialization and productivity when we shrink markets? What about prices and variety of goods? Let’s take a look.
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October 7, 2015
A Deeper Look at Tradeable Allowances
Published on 18 Mar 2015
Since the passage of the Clean Air Act, SO2 emissions have decreased by 35%. Part of this is due to tradable allowances, which created a market solution to the external costs of SO2 emissions. In this video, we look at the lessons of tradable allowances for SO2 and see if a similar market-based solution could work to decrease other pollutants, such as CO2.
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