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Dialogue: 0,0:00:00.00,0:00:03.00,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:09.17,0:00:14.06,Default,,0000,0000,0000,,- Now that we understand a firm's cost\Ncurves and its entry and exit decisions
Dialogue: 0,0:00:14.24,0:00:19.02,Default,,0000,0000,0000,,we're able to show how supply curves are\Nactually derived from these more
Dialogue: 0,0:00:19.02,0:00:22.65,Default,,0000,0000,0000,,fundamental considerations.\NLet's take a closer look.
Dialogue: 0,0:00:27.90,0:00:30.06,Default,,0000,0000,0000,,- The supply curve\Nis built upon firm
Dialogue: 0,0:00:30.06,0:00:34.59,Default,,0000,0000,0000,,entry and exit decisions and the\Neffect of these decisions on industry
Dialogue: 0,0:00:34.77,0:00:40.63,Default,,0000,0000,0000,,costs and the key question is this as\Nindustry output increases, what happens to
Dialogue: 0,0:00:40.81,0:00:45.84,Default,,0000,0000,0000,,costs? There are three possibilities.\NFirst, an increase in cost industry. That
Dialogue: 0,0:00:46.02,0:00:51.67,Default,,0000,0000,0000,,is industry costs increase with greater\Noutput. Second, constant cost industry
Dialogue: 0,0:00:51.85,0:00:56.65,Default,,0000,0000,0000,,industry costs are flat. They don't change\Nwith greater or lesser output and
Dialogue: 0,0:00:56.83,0:01:01.91,Default,,0000,0000,0000,,finally a decreasing cost industry,\Nindustry cost falls with greater output.
Dialogue: 0,0:01:02.09,0:01:06.43,Default,,0000,0000,0000,,As we'll see the first and second are\Nquite common the third is quite uncommon
Dialogue: 0,0:01:06.61,0:01:10.33,Default,,0000,0000,0000,,but is nevertheless important and\Ninteresting in order to understand
Dialogue: 0,0:01:10.51,0:01:14.52,Default,,0000,0000,0000,,economic geography which we'll come to a\Nbit later. Let's show how the industry
Dialogue: 0,0:01:14.70,0:01:20.41,Default,,0000,0000,0000,,supply curve is derived from the entry and\Nexit and cost curves of individual firms.
Dialogue: 0,0:01:20.59,0:01:24.20,Default,,0000,0000,0000,,We can do this for an increase in cost\Nindustry very easily with just a two firm
Dialogue: 0,0:01:24.38,0:01:29.13,Default,,0000,0000,0000,,example. Suppose that firm one is a\Nproducer of oil where its oil is very
Dialogue: 0,0:01:29.31,0:01:34.07,Default,,0000,0000,0000,,close to the surface so it has a quite low\Naverage cost curve. It's pretty cheap for
Dialogue: 0,0:01:34.25,0:01:39.31,Default,,0000,0000,0000,,this firm to produce oil. On the other\Nhand, firm two has a much higher average
Dialogue: 0,0:01:39.49,0:01:43.74,Default,,0000,0000,0000,,cost curve because for firm two it's\Nlocated in a part of the world where it
Dialogue: 0,0:01:43.92,0:01:50.40,Default,,0000,0000,0000,,has to drill much deeper in order to get\Nthe oil. Now given these figures what's
Dialogue: 0,0:01:50.58,0:01:58.98,Default,,0000,0000,0000,,the industry supply curve of oil if the\Nprice of oil is below $17? Well, if the
Dialogue: 0,0:01:59.16,0:02:03.97,Default,,0000,0000,0000,,price of oil is below $17 neither of\Nthese firms can make a profit.
Dialogue: 0,0:02:04.15,0:02:08.11,Default,,0000,0000,0000,,That's below the minimum point of the\Naverage cost curve for both of these
Dialogue: 0,0:02:08.29,0:02:12.37,Default,,0000,0000,0000,,firms. So neither of these firms is going\Nto want to be in the industry. So if the
Dialogue: 0,0:02:12.55,0:02:18.56,Default,,0000,0000,0000,,price of oil is below $17 the industry\Nsupply is just going to be zero, right
Dialogue: 0,0:02:18.74,0:02:27.70,Default,,0000,0000,0000,,here, zero. Now what happens at $17? Well,\Nat $17 firm one just breaks even. So
Dialogue: 0,0:02:27.88,0:02:34.08,Default,,0000,0000,0000,,we'll say firm one will just enter the\Nindustry. So at $17 the industry output
Dialogue: 0,0:02:34.26,0:02:41.00,Default,,0000,0000,0000,,is the same as the output of firm one\Nnamely four units. Notice that at $17
Dialogue: 0,0:02:41.18,0:02:46.89,Default,,0000,0000,0000,,firm two doesn't enter the industry\Nbecause the price is still too low. Firm
Dialogue: 0,0:02:47.07,0:02:52.31,Default,,0000,0000,0000,,two is not going to make a profit. We'll\Ntake a loss at that price. Indeed as the
Dialogue: 0,0:02:52.49,0:02:59.61,Default,,0000,0000,0000,,price of oil increases the output from\Nfirm two will increase as it moves along
Dialogue: 0,0:02:59.79,0:03:04.61,Default,,0000,0000,0000,,its marginal costs curve. That will\Ncontinue to happen so industry output will
Dialogue: 0,0:03:04.61,0:03:11.58,Default,,0000,0000,0000,,increase along with the output of firm one\Nuntil we reach a price of $29. At the
Dialogue: 0,0:03:11.58,0:03:18.19,Default,,0000,0000,0000,,price of $29 firm two just breaks even\Nand it enters the industry. So at $29
Dialogue: 0,0:03:18.19,0:03:24.95,Default,,0000,0000,0000,,total industry output is 6 units from\Nfirm 1 and 5 units from firm 2 for
Dialogue: 0,0:03:24.95,0:03:33.65,Default,,0000,0000,0000,,a total of 11 units from the industry. As\Nthe price goes above $29 both firm 1
Dialogue: 0,0:03:33.65,0:03:39.81,Default,,0000,0000,0000,,and firm 2 expand along their marginal\Ncost curves so the industry output is then
Dialogue: 0,0:03:39.81,0:03:48.34,Default,,0000,0000,0000,,the sum of the output from both firms. So\Nwhat we see here is that the industry
Dialogue: 0,0:03:48.34,0:03:56.82,Default,,0000,0000,0000,,supply curve is upward sloping because the\Ncost curves of these firms are different
Dialogue: 0,0:03:56.82,0:04:02.100,Default,,0000,0000,0000,,because in order to attract more firms\Ninto this industry the only way we can do
Dialogue: 0,0:04:02.100,0:04:09.42,Default,,0000,0000,0000,,that is by attracting higher cost firms.\NSo the industry supply curve is upward
Dialogue: 0,0:04:09.60,0:04:16.51,Default,,0000,0000,0000,,sloping. Any industry where its difficult\Nto exactly duplicate the productive inputs
Dialogue: 0,0:04:16.69,0:04:20.54,Default,,0000,0000,0000,,is going to be an increase in cost\Nindustry. I've already mentioned oil but
Dialogue: 0,0:04:20.72,0:04:25.31,Default,,0000,0000,0000,,copper, gold, silver all the mining\Nindustries are very similar. We can't just
Dialogue: 0,0:04:25.49,0:04:29.23,Default,,0000,0000,0000,,duplicate another gold mine. If we want\Nanother gold mine we're going to have to
Dialogue: 0,0:04:29.41,0:04:32.50,Default,,0000,0000,0000,,dig deeper, we're going to have to look\Nelsewhere, it's going to be more expensive
Dialogue: 0,0:04:32.68,0:04:36.75,Default,,0000,0000,0000,,to produce it than it is now. Coffee is\Nanother example because there's really
Dialogue: 0,0:04:36.93,0:04:41.13,Default,,0000,0000,0000,,only a limited number of places in the\Nworld where we could produce great coffee.
Dialogue: 0,0:04:41.31,0:04:45.68,Default,,0000,0000,0000,,If we want coffee from other places than\NBrazil or Guatemala it's going to be
Dialogue: 0,0:04:45.86,0:04:49.96,Default,,0000,0000,0000,,lower quality. We're going to have to go\Ndown further on the mountain. It's going
Dialogue: 0,0:04:50.14,0:04:56.12,Default,,0000,0000,0000,,to require more inputs. Nuclear engineers,\Nvery hard to expand the supply of nuclear
Dialogue: 0,0:04:56.30,0:05:00.38,Default,,0000,0000,0000,,engineers. There's a limited number of\Npeople who can be a nuclear engineer. If
Dialogue: 0,0:05:00.56,0:05:04.68,Default,,0000,0000,0000,,we want more nuclear engineers, we're\Nreally going to have to pull them from
Dialogue: 0,0:05:04.68,0:05:09.76,Default,,0000,0000,0000,,other industries where they have very high\Nopportunity cost. So it's hard to expand
Dialogue: 0,0:05:09.94,0:05:15.66,Default,,0000,0000,0000,,the supply of nuclear engineers without\Npushing up the wages of nuclear engineers.
Dialogue: 0,0:05:15.84,0:05:21.77,Default,,0000,0000,0000,,That's an increasing cost industry.\NMoreover, any industry that buys a large
Dialogue: 0,0:05:21.95,0:05:27.63,Default,,0000,0000,0000,,fraction of the output of an increasing\Ncost industry will also be an increasing
Dialogue: 0,0:05:27.81,0:05:33.06,Default,,0000,0000,0000,,cost industry. So pretty obviously\Ngasoline is an increasing cost industry
Dialogue: 0,0:05:33.24,0:05:38.55,Default,,0000,0000,0000,,because if we want more gasoline that\Nrequires more oil and oil is an increasing
Dialogue: 0,0:05:38.73,0:05:43.81,Default,,0000,0000,0000,,cost industry. Electricity will primarily\Nbe an increasing cost industry to the
Dialogue: 0,0:05:43.99,0:05:48.26,Default,,0000,0000,0000,,extent that we generate our electricity\Nfrom coal. So if we want a lot more
Dialogue: 0,0:05:48.44,0:05:52.18,Default,,0000,0000,0000,,electricity we're going to require more\Ncoal and that's going to push the price of
Dialogue: 0,0:05:52.36,0:05:57.06,Default,,0000,0000,0000,,coal up which is going to push\Nthe cost of producing electricity up.
Dialogue: 0,0:05:57.06,0:06:03.50,Default,,0000,0000,0000,,- So what we just showed is that for an\Nincreasing cost industry you can derive a
Dialogue: 0,0:06:03.68,0:06:06.33,Default,,0000,0000,0000,,upward sloped supply curve.\NWe're now going to do a constant cost
Dialogue: 0,0:06:06.51,0:06:10.29,Default,,0000,0000,0000,,industry for which we'll show you actually\Nget a flat supply curve and then a
Dialogue: 0,0:06:10.47,0:06:14.70,Default,,0000,0000,0000,,decreasing cost industry, which as you\Nmight expect will give you now a
Dialogue: 0,0:06:14.70,0:06:18.63,Default,,0000,0000,0000,,downward-sloped supply curve. We'll\Ndo these in separate lectures. Thanks.
Dialogue: 0,0:06:19.10,0:06:24.73,Default,,0000,0000,0000,,- If you want to test yourself,\Nclick, "Practice Questions," or if you're
Dialogue: 0,0:06:24.91,0:06:27.43,Default,,0000,0000,0000,,ready to move on,\Njust click, "Next Video."
Dialogue: 0,0:06:27.43,0:06:30.40,Default,,0000,0000,0000,,♪ [music] ♪