ECO LECTURE NINE 1 OKAY. WELL, TODAY WHAT WE WANT TO DO IS, WE WANT TO CONTINUE TALKING ABOUT SUPPLY AND DEMAND, AND THAT MODEL AND

Transcription

1 1 OKAY. WELL, TODAY WHAT WE WANT TO DO IS, WE WANT TO CONTINUE TALKING ABOUT SUPPLY AND DEMAND, AND THAT MODEL AND HOW IT WORKS, SOME APPLICATION. IF YOU REMEMBER LAST TIME, WHAT WE TALKED ABOUT WAS WHAT CAUSES THE DEMAND CURVE TO SHIFT. LET ME SORT OF GO BACK AND MENTION -- IF YOU REMEMBER, THE POSITION, THE SHAPE AND POSITION OF THE SUPPLY AND DEMAND CURVE, DETERMINES THE EQUILIBRIUM PRICE AND QUANTITY IN THE MARKETPLACE. AND WHAT WE SAID WAS, IS THAT EQUILIBRIUM PRICE AND QUANTITY WILL CONTINUE TO BE OBSERVED -- WILL PREVAIL FOREVER UNLESS THESE CURVES SHIFT. BUT THAT'S WHERE THE ACTION IS IN THE MARKET. LAST TIME WHAT WE TALKED ABOUT WAS WHAT WOULD CAUSE THE DEMAND CURVE TO SHIFT, LET'S SAY, FROM D1 TO D2 OR TO D3. IF YOU'LL REMEMBER, A RIGHTWARD SHIFT IN DEMAND IS AN INCREASE IN DEMAND AND A LEFTWARD SHIFT IN THE DEMAND CURVE IS A DECREASE IN DEMAND. SO LAST TIME WE TALKED ABOUT A FEW OF THE THINGS, THE MAJOR THINGS, THAT WILL CAUSE THE DEMAND CURVE TO SHIFT. OKAY. WHAT WE'RE GONNA TALK ABOUT TODAY, AND I THINK WE JUST GOT A LITTLE START ON IT LAST TIME, IS FACTORS THAT WILL CAUSE THE SUPPLY CURVE TO SHIFT EITHER TO THE RIGHT OR TO THE LEFT. KIND OF AN UGLY LOOKING DRAFT WITH ALL THESE CURVES IN HERE. BUT BASICALLY, THAT'S WHAT WE'RE WORKING OUR WAY THROUGH RIGHT NOW, IS JUST TALKING

2 ABOUT FACTORS THAT SHIFT THE SUPPLY CURVE. 2 AND IF YOU REMEMBER, WHAT WE DO IS WE RESERVE THAT TERM, THE SHIFT IN SUPPLY OR SHIFT IN DEMAND, CHANGE IN SUPPLY, CHANGE IN DEMAND, WE USE THAT TERM TO DISCUSS -- TO DESCRIBE A MOVEMENT OF THE CURVE AS OPPOSED TO A MOVEMENT ALONG THE CURVE, FROM ONE POINT TO ANOTHER, AND THAT CAN ONLY BE CAUSED BY A CHANGE IN PRICE. OKAY. SO ANYWAY, WHAT CAUSES THE SUPPLY CURVE TO SHIFT? ONE, A CHANGE IN THE NUMBER OF FIRMS. WELL, LET'S SAY A NUMBER OF SUPPLIERS IN THE MARKET. THE MORE SUPPLIERS THERE ARE IN THE MARKETPLACE, THE GREATER THE SUPPLY WILL BE. AND THE GREATER THE SUPPLY, I MEAN, THE SUPPLY CURVE WILL SHIFT TO THE RIGHT. LET'S SEE IF I CAN'T DRAW THIS REAL QUICKLY. SO IF WE HAVE A SUPPLY CURVE S1 WHEN AT SOME PRICE -- LET'S SAY THE PRICE IS P1. THE QUANTITY Q1 IS BEING OFFERED FOR SALE. MAYBE WE HAVE -- I DON'T KNOW THE EXAMPLE I GAVE LAST TIME. MAYBE THERE ARE TWENTY-FIVE FIRMS IN THE INDUSTRY TO BEGIN WITH. AND NOW IF THERE'S THE ENTRY OF ONE MORE FIRM, WE HAVE TWENTY-SIX FIRMS, WHAT HAPPENS IS THAT SUPPLY CURVE WILL SHIFT TO THE RIGHT. S2 WITH TWENTY-SIX FIRMS. WE GET A GREATER QUANTITY BEING OFFERED FOR SALE -- Q2 NOW -- EVEN THOUGH THE PRICE HAS NOT CHANGED AT ALL. A RIGHTWARD SHIFT IN SUPPLY, A GREATER SUPPLY.

3 AND, OF COURSE, IF ONE OF THE FIRMS LEFT THE INDUSTRY AND WE 3 ONLY HAD TWENTY-FOUR REMAINING, THE SUPPLY CURVE WOULD SHIFT TO THE LEFT. OKAY. AND SO THEN WHAT WE WOULD OBSERVE IS A SMALLER QUANTITY BEING OFFERED FOR SALE, EVEN AT THAT SAME OLD PRICE OF P1. A SECOND THING WILL SHIFT THE SUPPLY CURVE IS THE CHANGE IN TECHNOLOGY. NOW, TO GIVE YOU AN EXAMPLE OF A CHANGE IN TECHNOLOGY -- I THINK EVERYBODY'S SORT OF FAMILIAR WITH TECHNOLOGY. TECHNOLOGY -- LET ME JUST SORT OF GIVE YOU A QUICK DEFINITION. TECHNOLOGY IS REALLY -- IT'S A KNOWLEDGE THING. IT'S OUR KNOWLEDGE OF HOW TO USE RESOURCES, HOW TO COMBINE RESOURCES AND SO FORTH. AND BETTER TECHNOLOGY MEANS WE CAN BRING THOSE RESOURCES TOGETHER IN A DIFFERENT SORT OF MIX OR APPLICATION AND GET A GREATER LEVEL OF OUTPUT. NOW, THERE'S A LOT OF DIFFERENT EXAMPLES OF TECHNOLOGY. LET'S TAKE A SIMPLE ONE, THOUGH. LET'S SAY THAT YOUR BUSINESS IS DIGGING DITCHES. AND YOU CAN DIG A DITCH WITH, OF COURSE, A SHOVEL OR YOU CAN DIG A DITCH WITH A BACKHOE, ONE OF THESE BIG TRACTOR THINGS WITH A CLAW ON IT THAT WILL PICK DIRT UP AND SO FORTH. WHAT HAPPENS IS THAT IF YOU HAVE A WORKER AND THAT WORKER'S OUT THERE WITH A SHOVEL, USING VERY LITTLE CAPITAL, THAT WORKER'S NOT VERY PRODUCTIVE. IF WE TAKE NATURAL RESOURCES AGAIN BUT STEEL AND RUBBER AND SO FORTH, THINGS THAT WE GET FROM NATURE, AND COMBINE

4 THOSE INTO A CERTAIN COMBINATION, WE GET A TRACTOR WITH A 4 BACKHOE, ONE OF THESE SHOVELS ON IT. AND SO THE IMPROVEMENT IN TECHNOLOGY MEANS THAT THAT ONE WORKER CAN NOW DIG A LOT MORE IN THE SAME AMOUNT OF TIME THAN PREVIOUSLY. OR IT MIGHT BE THAT WE'RE TALKING ABOUT -- OH, GOSH, WHAT -- TELEPHONE CALLS. IN THE OLD DAYS -- AND BY "OLD DAYS" I MEAN A FEW YEARS BACK -- WHAT WOULD HAPPEN WAS, YOU'D HAVE PEOPLE AT EITHER END -- LET ME SORT OF GET THESE PEOPLE WITH THEIR STICK LEGS AND ARMS AND SO FORTH -- AND THEY WANT TO TALK TO EACH OTHER. WHAT WE HAD BACK IN THE OLD DAYS IS WE HAD A WIRE RUNNING FROM ONE POINT TO ANOTHER. AND THAT'S A CERTAIN TECHNOLOGY. AND THEN AS TIME WENT BY, WE SHIFTED OVER, STOPPED USING THE LINES JUST RUNNING FROM ONE TELEPHONE POLE TO THE NEXT, AND THEY STARTED -- LET'S PUT THESE LINES IN THE AIR AND THE POLES. AND THE NEXT TECHNOLOGY THAT CAME ALONG WAS THEY PUT THESE IN CABLES UNDERGROUND. NOW, THESE LINES THAT WERE, YOU KNOW, SORT OF RUNNING FROM POLE TO POLE, THEY WOULD CARRY JUST A FEW TELEPHONE CONVERSATIONS AT ANY ONE POINT IN TIME. BUT THAT WAS OKAY BECAUSE THERE WEREN'T A LOT OF PEOPLE. THERE WERE A LOT OF PEOPLE WITH PHONES, BUT NOT EVERYBODY HAD TELEPHONES. AND THE ONES WHO DID HAVE TELEPHONES, VERY OFTEN THEY WOULDN'T CALL ANYBODY LONG-DISTANCE. AND SO THE NUMBER OF THESE LINES GOING

5 5 FROM TOWN TO TOWN, EVEN THOUGH THERE WAS JUST A LIMITED NUMBER, THAT WAS OKAY. USUALLY YOU COULD GET THROUGH; USUALLY YOU DIDN'T GET A BUSY SIGNAL. THEN AS TIME WENT BY -- AND THIS WOULD'VE BEEN LIKE IN THE MID 1960S -- THE TELEPHONE COMPANIES STARTED PUTTING THESE CABLES UNDERGROUND. AND THE CABLE WOULD BE, I DON'T KNOW, FOUR INCHES ACROSS AND IT WOULD HAVE THESE WIRES RUNNING THROUGH IT, AND EACH ONE OF THOSE WIRES WAS CAPABLE OF CARRYING SEVERAL TELEPHONE CONVERSATIONS AT ONCE. AND THAT BEING THE CASE, THOUGH, AN ENTIRE CABLE COULD CARRY A FEW THOUSAND TELEPHONE CONVERSATIONS. THEN THE NEXT THING IS THEY PUT THESE ON MICROWAVE TOWERS. OH, YES. I'M QUITE AN ARTIST, YOU KNOW? GOT A LITTLE BIT OF A CURVATURE TO THAT ONE TO MAKE SURE IT GETS TO THE RIGHT SPOT. THESE TOWERS WOULD SEND OUT THOSE SIGNALS, THOUGH, AND THE TOWERS -- I DON'T KNOW EXACTLY THE DISTANCE, BUT THEY COULD SHOOT THIS SIGNAL ROUGHLY, LET'S SAY, THIRTY MILES. AND THEN AS SOON AS IT WAS CAUGHT AT THE NEXT TOWER, THEY'D TURN AROUND AND BEAM IT ON TO THE NEXT ONE ANOTHER THIRTY MILES OR SO AWAY. BUT THESE TELEPHONE CONVERSATIONS, LONG-DISTANCE CONVERSATIONS, WERE BEING CARRIED BY THAT TECHNOLOGY, A LITTLE BIT OF AN IMPROVEMENT. AND WHAT THEY COULD DO AT THIS POINT AS THEY DID NOT HAVE TO

6 BUILD THAT CABLE -- YOU DON'T HAVE TO ACTUALLY CREATE THE CABLE 6 -- AND THAT CABLE STUFF IS NOT ALL THAT CHEAP TO MAKE, YOU KNOW. BECAUSE IT'S HEAVY; IT'S GOT BIG, THICK, PLASTIC COATING AROUND IT, INSULATION; IT'S GOT ALL THIS COPPER WIRE AND SO FORTH. SO THAT CABLE COSTS A GOOD DEAL, I DON'T KNOW, TENS OF THOUSANDS OF DOLLARS A MILE. AND SO ALL OF A SUDDEN, WITH THE MICROWAVE TOWERS, THEY DIDN'T HAVE TO HAVE THAT CABLE SO THEY SAVED THE COST OF THE CABLE. AND NOT ONLY DID THEY SAVE THE COST OF THE CABLE, THEY SAVED THE COST OF DIGGING A TRENCH AND LAYING THAT CABLE DOWN IN THERE. AND NOT ONLY THAT, BUT THEY SAVED THE COST OF HAVING TO COME ALONG LATER WHEN THERE'S A PROBLEM WITH THE TELEPHONE LINE AND DIGGING UP -- YOU KNOW, DIGGING A HOLE AND GOING DOWN AND FINDING THAT CABLE, AND FINDING SOME BREAK IN THE LINE OR WHATEVER. THEY SAVED ALL THAT COST. THEY JUST PUT THIS TOWER RIGHT HERE AND THEN SHOOT THAT SIGNAL FOR THIRTY MILES, AND THEN BUILD ANOTHER TOWER AND ANOTHER ONE AND -- EVEN THOUGH THE TOWERS ARE PRETTY EXPENSIVE, A FEW MILLION DOLLARS, IT WAS STILL MUCH CHEAPER THAN LAYING THE CABLE AND ALSO THEY COULD CARRY A LARGER NUMBER OF SIGNALS. THESE MICROWAVE TOWERS, THOSE CAME ALONG IN SORT OF A BIG WAY. I'M GONNA SAY IN THE EARLY 1970S, EARLY TO MID 1970S. OKAY.

7 AND THEN ALONG IN ABOUT THE LATE 1970S, EARLY 1980S, THEY 7 FOUND SOME KIND OF LITTLE BOX THAT YOU CAN PUT ON THESE THINGS. AND THEY PUT THAT LITTLE BOX ON THERE AND NOW EACH TOWER, EACH MICROWAVE TOWER, COULD CARRY THREE TIMES AS MANY TELEPHONE CALLS AS BEFORE. AND NOW -- NOW. WHO KNOWS WHAT'S NEXT? BUT RIGHT NOW WE'RE AT THE POINT WHERE -- I NOTICE HERE A FEW YEARS AGO MOTOROLA CREATED THIS THING CALLED IRIDIUM. IT WAS A SUBSIDIARY. MOTOROLA, OF COURSE, IS A MANUFACTURER. THEY MANUFACTURE CELL PHONES AND COMPUTER PROCESSORS, AND THINGS LIKE THAT. SO ANYWAY, THEY CAME ALONG AND CREATED THIS THING CALLED IRIDIUM. WHAT THEY DID IS, THEY PUT -- WHAT'S A NUMBER -- LIKE SEVENTY-SIX SATELLITES IN SPACE. AND THEN EACH PERSON TAKES, LIKE, A CELL PHONE AND THEY CAN GO ANYPLACE ON EARTH -- I GUESS ANYPLACE ON EARTH. I DON'T KNOW ABOUT THE SOUTH POLE, BUT MOST ANYWHERE ON EARTH, ANYWAY. THEY TAKE THIS THING -- IT'S LIKE A CELL PHONE -- PULL IT OUT, PUSH A FEW BUTTONS IN, AND -- YOU KNOW, YOU CAN BE STANDING OUT IN THE MIDDLE OF THE DESSERT WHERE THERE'S NO CITIES ANYWHERE AROUND, BUT THERE'S A SATELLITE OVERHEAD AND SO YOUR TELEPHONE CALL GETS PICKED UP BY THAT SATELLITE AND IT GOES TO WHEREVER YOU WANT. OR YOU COULD BE ON AN AIRPLANE, SORT OF FLYING OVERHEAD, YOU KNOW, OVER THE OCEAN OR WHATEVER. PICK UP YOUR CELL PHONE,

8 PUSH A FEW BUTTONS, AND CALL SOMEBODY. 8 NOW, WHAT'S HAPPENING HERE? WHAT'S HAPPENING IS, YOU KNOW, WE STILL HAVE THE SAME NATURAL RESOURCES THAT WE ALWAYS DID, BUT WE'RE FINDING NEW WAYS TO USE THOSE NATURAL RESOURCES. FIRST WE WERE USING -- TURNING THOSE NATURAL RESOURCES INTO THINGS LIKE TELEPHONE POLES. THAT WAS OUR CAPITAL GOODS. BUT THEN AFTER AWHILE WE'RE TURNING IT INTO CABLES, AND THEN AFTER AWHILE INTO MICROWAVE TOWERS, SENDING THESE TELEPHONE CALLS THROUGH THE AIR, THIRTY, FORTY MILES, YOU KNOW, EACH TIME. AND THEN HERE WE ARE WHERE WE CAN TALK ANYWHERE ON EARTH. WE'RE FINDING NEW WAYS TO COMBINE NATURAL RESOURCES AND TO NEW KINDS OF CAPITAL EQUIPMENT. AND WHAT HAPPENS IS, EACH TELEPHONE EMPLOYEE IS MORE PRODUCTIVE THAN BEFORE. IT TAKES FEWER TELEPHONE EMPLOYEES TO BASICALLY HANDLE THE BUSINESS OF PROVIDING A TELEPHONE CALL. LET'S SAY IN THE OLD DAYS -- AND I DO NOT KNOW THE SPECIFIC NUMBERS. LET'S JUST SAY IN THE OLD DAYS THAT ONE EMPLOYEE -- MAYBE THE TELEPHONE COMPANY WOULD HAVE ONE EMPLOYEE FOR EVERY -- AND I'LL JUST SAY TEN THOUSAND TELEPHONE CALLS, LONG-DISTANCE TELEPHONE CALLS. AND WHAT HAPPENS IS, OVER THE YEARS, IT TAKES FEWER AND FEWER EMPLOYEES PER TEN THOUSAND CALLS. OR LET'S DO IT THIS WAY: MAYBE ONE EMPLOYEE -- AND, YOU KNOW, I'M TELLING YOU I DON'T KNOW THESE NUMBERS, BUT I'M GIVING YOU SOMETHING TO ILLUSTRATE. MAYBE

9 WE'VE GOT FIFTY THOUSAND TELEPHONE CALLS PER EMPLOYEE WITH THE 9 NEXT TECHNOLOGY. AND MAYBE WITH THE NEXT ONE WE GO UP TO ONE EMPLOYEE FOR TWO HUNDRED THOUSAND CALLS, AND SO FORTH. SO TECHNOLOGY CHANGES. THAT MEANS THAT OUR WORKERS ARE MORE PRODUCTIVE. WE GET MORE OUTPUT FROM THE SAME NUMBER OF WORKERS, AND THAT MEANS THAT THIS SUPPLY CURVE WILL SHIFT TO THE RIGHT. IMPROVEMENTS IN TECHNOLOGY, GAINS IN TECHNOLOGY, A GREATER SUPPLY OF GOODS AND SERVICES THAN BEFORE. AND YOU CAN GO -- I WENT THROUGH A COUPLE OF EXAMPLES HERE, ONE WITH THE TELEPHONE AS IT'S DEVELOPED AND THE OTHER ONE, DIGGING THE DITCHES EITHER WITH A SHOVEL OR WITH A BACKHOE. BUT YOU CAN GO THROUGH VIRTUALLY ANY INDUSTRY YOU WANT TO AND THINK ABOUT THE TECHNOLOGY, HOW IT'S CHANGED AND HOW WE GET MORE OUTPUT FROM A GIVEN AMOUNT OF INPUT. HOW DO WE DO THAT? WE'RE WORKING SMARTER. TECHNOLOGY IS NOT SOMETHING TANGIBLE YOU CAN TOUCH. TECHNOLOGY IS KNOWLEDGE OVER HOW TO USE RESOURCES, HOW TO TAKE NATURAL RESOURCES AND COMBINE 'EM INTO CAPITAL, HOW TO IMPROVE CAPITAL TO USE IT WITH LABOR, AND SO FORTH. BUT AS OUR TECHNOLOGY, AS OUR KNOWLEDGE GROWS, THEN WE'RE ABLE TO SUPPLY A GREATER QUANTITY OF GOODS AND SERVICES. I SAW SOMETHING ON TELEVISION RECENTLY AND IT WAS TALKING ABOUT MINING GOLD. AND THIS WILL BE MY LAST TECHNOLOGY EXAMPLE.

10 BUT THEY WERE TALKING ABOUT MINING GOLD, AND HOW THAT NOW THE 10 TECHNOLOGY HAS IMPROVED FROM MINING GOLD TO WHERE THERE'S BEEN AS MUCH GOLD MINED FROM THE EARTH IN THE LAST FIFTY YEARS AS HAD BEEN MINED ALL THROUGH HISTORY BEFORE THAT, THOUSANDS OF YEARS BEFORE THAT. IN FIFTY YEARS WE CAN FIND MORE GOLD NOW THAN WE DID IN THOUSANDS OF YEARS BEFORE. WHAT'S CHANGED ABOUT THE TECHNOLOGY? NOWADAYS WHAT THEY DO IS THEY'LL FIND A PLACE WHERE THERE IS GOLD AND THEY GET THE ROCK WITH THIS GOLD IN IT, AND THEN THEY CRUSH IT UP -- AND I MEAN JUST POUND IT DOWN INTO A POWDER -- AND THEN THEY INJECT SOME CHEMICALS INTO THAT POWER. IT CAUSES THE GOLD TO SORT OF MELT AND BASICALLY SEPARATE ITSELF FROM THE ROCK. IF YOU GET THIS ROCK, THOUGH, WITH THE GOLD IN IT, YOU CAN LOOK AT IT AND SAY, "I DON'T SEE ANY GOLD. THERE'S NO GOLD IN IT." AND SO THEY'RE JUST LIKE LITTLE PARTICLES OF GOLD IN ROCK. IT'S SOMETHING THAT ALL THROUGHOUT HISTORY IF YOU HAD ONE OF THESE ROCKS YOU'D JUST SAY, "MAN, I JUST CANNOT GET THE GOLD OUT OF THAT." IT'S JUST LITTLE PARTICLES AND HARD ROCK, AND IT'S LOCKED UP THERE. AND MAYBE WE CAN GET IT OUT BUT IT JUST TAKES TOO LONG. IT'S NOT WORTHWHILE. AND ALL OF A SUDDEN NOW, AS I SAY WITH CHEMICALS, WE CAN GET THAT GOLD TO SORT OF MELT. YOU HAVE TO CRUSH THE ROCK SO THAT A

11 11 CHEMICAL CAN COME INTO CONTACT WITH THE GOLD. BUT YOU'VE CRUSHED THAT ROCK, THE CHEMICAL TOUCHES THE GOLD, THE GOLD SORT OF MELTS AND RUNS OFF THIS WAY AND THE CRUSHED STONE RUNS OFF IN THE OTHER DIRECTION AND WE HAVE THAT GOLD. AND NOW WE HAVE LOTS AND LOTS AND LOTS OF GOLD THAT'S BEING PRODUCED RELATIVE TO WHAT'S BEEN DONE THROUGHOUT HISTORY. SO MORE GOLD, INCREASE IN THE SUPPLY OF GOLD. BUT THIS IS NOT HAPPENING IN ONE INDUSTRY OR ANOTHER INDUSTRY. THIS IS HAPPENING THROUGHOUT OUR ECONOMY. SO IMPROVEMENTS IN TECHNOLOGY -- THIS SAYS CHANGE IN TECHNOLOGY. SO IF THERE'S AN IMPROVEMENT IN TECHNOLOGY, THEN THAT RESULTS IN AN INCREASE IN SUPPLY OR A RIGHTWARD SHIFT IN SUPPLY. USUALLY WE DON'T HAVE A WORSE TECHNOLOGY OR A DETERIORATION. BUT IF WE DID, THAT WOULD DECREASE THE SUPPLY. YOU KNOW, YOU NORMALLY WOULDN'T EXPECT TECHNOLOGY TO DETERIORATE, TO GET WORSE, BECAUSE PEOPLE CAN CHOOSE WHATEVER TECHNOLOGY THEY WANT, RIGHT? AND SO IF THEY SAY, "HEY, HERE'S A WORSE IDEA" THEY JUST SAY, "I'M NOT GONNA USE IT." AND SO WE NORMALLY WOULD NOT EXPECT TO SEE TECHNOLOGY DETERIORATE IN A MARKET ECONOMY. AND THERE IS ONE WAY THAT IT COULD AND THAT IS WE COULD JUST BE ORDERED TO USE SOME OTHER TECHNOLOGY. NOW, TO GIVE YOU AN EXAMPLE -- AND I DON'T NECESSARILY MEAN

12 12 TECHNOLOGY IS WORSE HERE, BUT IT'S CHANGED. IF YOU GO BACK TO THE 1950S AND 1960S YOU'D HAVE -- OR FOR SURE BEFORE THAT -- YOU'D HAVE BIG FACTORIES OUT HERE AND THEY WOULD BE PRODUCING THINGS LIKE STEEL OR WHATEVER. AND THEN THEY WOULD CREATE A LOT OF POLLUTION AND JUST PUT THAT POLLUTION UP IN THE AIR OR DUMP IT INTO THE WATER, JUST GET RID OF THE POLLUTION. AND WHAT WOULD HAPPEN IS -- AND THEY WERE VERY EFFICIENT AT PRODUCING LOTS AND LOTS OF OUTPUT BECAUSE THEY DIDN'T HAVE TO WORRY ABOUT KEEPING THE AIR OR THE WATER CLEAN, AND SO THEY COULD PRODUCE A LOT OF STEEL OR A LOT OF WHATEVER IT IS THEY'RE PRODUCING -- TEXTILES AND SO FORTH. AND THEN ALONG CAME THE GOVERNMENT -- IN THE 1970S, REALLY, IS WHEN IT STARTED WITH THE ENVIRONMENTAL PROTECTION AGENCY, AND THEY'RE SAYING, "WE'VE GOTTA PROTECT THE ENVIRONMENT. SO WE'RE GONNA PASS LAWS THAT MAKE A LOT OF THIS ACTIVITY, THIS POLLUTION ACTIVITY, ILLEGAL OR WE'RE GONNA LIMIT IT." AND WHAT HAPPENED WAS, FROM THE POINT OF VIEW OF MANUFACTURING STEEL, THAT WOULD BE A DETERIORATION IN TECHNOLOGY. I DON'T MEAN TO SAY THAT THAT'S A WORSE THING OR GOING BACKWARDS, BUT I DO MEAN TO SAY THAT IF YOU'RE ONLY INTERESTED IN PRODUCING STEEL, THEN WHAT YOU'D SAY IS, "TECHNOLOGY IS WORSE. WE CAN'T PRODUCE AS MUCH STEEL AS WE USED TO BE ABLE TO." NOW, WE WERE PRODUCING SOMETHING ELSE THAT WE HAD NOT BEEN

13 13 ABLE TO PRODUCE BEFORE WHICH WAS THIS CLEAN AIR -- OR CLEANER AIR, AT LEAST. AND THAT'S WHAT MAKES THIS NOT REALLY A DETERIORATION IN TECHNOLOGY FROM A BROADER PERSPECTIVE. BUT FROM THE NARROW PERSPECTIVE OF PRODUCING STEEL, TECHNOLOGY GOT WORSE AND THE SUPPLY CURVE SHIFTED TO THE LEFT. WE HAD LESS STEEL PRODUCED IN THE UNITED STATES AS A RESULT OF THESE EPA AND OTHER TYPES OF LAWS OF THAT NATURE. AS I SAY, I'M NOT TRYING TO RUN THAT DOWN OR SAY WE SHOULDN'T HAVE HAD THAT -- THOSE LAWS. I'M ONLY SAYING THAT THAT'S THE EFFECT WAS TO SHIFT THAT SUPPLY CURVE TO THE LEFT. AND WE COULD SAY THE SAME THING ABOUT OTHER TYPES OF LAWS AS WELL. ANYWAY, CHANGE IN TECHNOLOGY. QUESTIONS ABOUT THIS? AN IMPROVEMENT IN TECHNOLOGY, WE SHIFT THE CURVE TO THE RIGHT. WE'RE GETTING MORE OUTPUT FROM A GIVEN AMOUNT OF RESOURCES. OR IF TECHNOLOGY GETS WORSE, THE CURVE SHIFTS TO THE LEFT. ANY QUESTIONS? NUMBER -- WHAT'S NUMBER THREE? NUMBER THREE, A CHANGE IN RESOURCE PRICES. NOW, THESE RESOURCES WE'VE TALKED ABOUT BEFORE: LAND, LABOR, CAPITAL, AND ENTREPRENEURSHIP. THOSE ARE THE RESOURCES, IF YOU'LL RECALL, FROM ABOUT THE FIRST OR SECOND DAY OF CLASS. WE TALKED ABOUT PRODUCTIVE RESOURCES. I THINK WE FIRST TALKED ABOUT THOSE WHEN WE TALKED ABOUT THE PRODUCTION

14 POSSIBILITIES FRONTIER. 14 EACH ONE OF THESE RESOURCES HAS A PRICE. LAND -- WELL, THE PRICE ON LAND IS RENT. LABOR, THE PRICE OF LABOR WE CALL A WAGE. CAPITAL, THE PRICE OF THAT WE CALL INTEREST. AND ENTREPRENEURSHIP, THE PRICE OF THAT OR THE RETURN OF THAT WE CALL PROFIT. SO THESE ARE THE RESOURCES AND HERE ARE THE RESOURCE PRICES: WAGE, RENT, INTEREST, AND PROFIT. ANYWAY, WHAT WE WANT TO KNOW IS WHAT HAPPENS IF THESE RESOURCE PRICES GO UP OR DOWN? LET'S START OFF WITH A SUPPLY CURVE S1. LET'S SAY THE WAGE RATE -- AND I'LL PUT MYSELF A LITTLE SUPERSCRIPT UP HERE, WAGE EQUALS -- LET'S SAY WAGE IS EQUAL TO EIGHT DOLLARS AN HOUR TO BEGIN WITH. AND LET'S SAY THAT SOMETHING HAPPENS TO PUSH WAGES UP FROM EIGHT DOLLARS AN HOUR TO TEN DOLLARS AN HOUR. BASICALLY -- LET ME DRAW THE CURVE FIRST AND THEN WE'LL TALK ABOUT IT, THE SHIFT. BASICALLY WHAT HAPPENS IS, THIS CURVE SHIFTS TO THE LEFT OR IT SHIFTS UP, AND WE CAN SORT OF DESCRIBE IT IN EITHER WAY. HERE'S HOW WE DO THIS. LET'S TALK ABOUT A LEFTWARD SHIFT IN THE SUPPLY CURVE. HERE'S WHAT WE WOULD SAY. FROM THE ENTREPRENEUR'S POINT OF VIEW, FROM THE BUSINESS MANAGER'S POINT OF VIEW, WHAT THEY WERE SAYING TO BEGIN WITH IS, "LOOK, WHEN THE PRICE IS P1" -- LET'S SET A PRICE FOR THAT PRODUCT, GOOD X, OF LET'S SAY FIVE

15 DOLLARS. "WHEN THE PRICE OF THAT PRODUCT WAS FIVE DOLLARS, WE 15 WERE WILLING TO SELL" -- I DON'T KNOW -- "SIX HUNDRED UNITS." LET'S LEAVE THE PRICE OF THE PRODUCT EXACTLY THE SAME, WHATEVER THIS WOULD BE THAT WE'RE SELLING -- BASEBALLS. LET'S LEAVE THE PRICE OF THE PRODUCT EXACTLY THE SAME AT FIVE DOLLARS, BUT THEN LET'S RAISE THE WAGE FROM EIGHT DOLLARS TO TEN DOLLARS AN HOUR. HERE'S WHAT THE EMPLOYER'S THINKING, THE MANAGER OF THE COMPANY. THE MANAGER OF THE COMPANY IS THINKING THIS: "LOOK, WHEN THE PRICE OF THE PRODUCT IS FIVE DOLLARS AND WAGES ARE EIGHT DOLLARS AN HOUR, WE WERE WILLING TO SELL SIX HUNDRED UNITS. BUT NOW THAT WAGES HAVE GONE UP, WE'RE NOT MAKING AS MUCH PROFIT AS WE USED TO. WE'RE PAYING AN EXTRA TWO DOLLARS AN HOUR FOR WORKERS. AND SINCE WE'RE NOT MAKING AS MUCH PROFIT AS WE USED TO, WE'RE NOT AS EXCITED ABOUT PRODUCING THIS PRODUCT AS WE USED TO BE." SO THIS CURVE SHIFTS TO THE LEFT, LET'S SAY, TO FOUR HUNDRED UNITS. AND THE NUMBER OF UNITS IS NOT IMPORTANT NOR THE AMOUNT OF THE WAGE CHANGE. BUT THE POINT IS IS THAT PRODUCTION IS NOT AS PROFITABLE AS PREVIOUSLY; AND SINCE IT'S NOT, LET'S SUPPLY FEWER PRODUCTS. AND ANOTHER WAY OF LOOKING AT THIS, WHERE THE CURVE SHIFTS UPWARD, IS JUST, "IT USED TO COST US A CERTAIN AMOUNT TO PRODUCE THE PRODUCT; NOW IT COSTS US MORE." BUT THE CURVE SHIFTS

16 UP OR TO THE LEFT IF RESOURCE PRICES GO UP. 16 SO LET'S SORT OF DRAW A LITTLE PICTURE HERE. INCREASE IN RESOURCE PRICES RESULTS IN A DECREASE IN SUPPLY OF THE PRODUCT. AND MAKE YOURSELF A NOTE SO YOU DON'T GET CONFUSED BY WHAT WE'RE SAYING HERE. I'M NOT SAYING THAT HIGHER RESOURCE PRICES RESULT IN A DECREASED SUPPLY OF THE RESOURCE; I'M TALKING ABOUT A DECREASED SUPPLY OF THE GOOD PRODUCED WITH OR BY THE RESOURCE. OKAY. QUESTIONS ABOUT THIS? IT'D BE THE SAME THING IF INTEREST RATES CHANGED OR IF RENTS CHANGED, AND SO FORTH. AS RESOURCE PRICES BECOME HIGHER, THAT DECREASES THE SUPPLY OF THE PRODUCT. IF RESOURCES WOULD GO DOWN -- RESOURCE PRICES -- I'M SORRY -- WOULD GO DOWN, THEN THAT WOULD SHIFT THE CURVE TO THE RIGHT, S3. LET'S SAY HERE'S THE WAGE EQUALS SEVEN DOLLARS AN HOUR. NOW I'M WILLING -- THE ENTREPRENEUR IS WILLING TO OFFER MORE UNITS FOR SALE. EVEN THOUGH THE PRICE OF THE PRODUCT'S THE SAME, NOW AT THE LOWER WAGE THE COMPANY, THE EMPLOYER, SAYS, "WOW, WE'RE MAKING BIGGER PROFITS THAN WE USED TO BE. WE'RE SELLING THE PRODUCT FOR FIVE DOLLARS A UNIT AS BEFORE, BUT NOW WE'RE ONLY PAYING SEVEN DOLLARS AN HOUR, NOT EIGHT. PROFITS ARE GREATER. HEY, LET'S SELL MORE UNITS IN ORDER TO MAKE BIGGER PROFITS. WE'RE MAKING MORE PROFIT PER UNIT; LET'S SELL MORE UNITS." QUESTIONS

17 ABOUT THIS? 17 SOMETIMES WE PUT -- AH, I'M NOT GONNA GO THERE. NEVER MIND. TAXES IS NUMBER FOUR -- LET'S SAY CHANGES IN TAXES. OR LET'S SAY SUBSIDIES. WE'LL INCLUDE THAT. LET'S SAY THAT -- AH, WHAT'LL WE HAVE. X IN THIS CASE, LET'S MAKE THAT BUSHELS OF WHEAT. HOW ABOUT THAT? JUST THE KIND OF WHEAT THAT THEY TURN INTO THE BREAD YOU EAT. AND LET'S SAY WHEN WHEAT IS SELLING FOR FOUR DOLLARS A BUSHEL -- AND SO NOW X IS BUSHELS OF WHEAT -- WHEN WHEAT IS SELLING FOR FOUR DOLLARS A BUSHEL, MAYBE THE TYPICAL WHEAT FARMER PRODUCES, I DON'T KNOW, TEN THOUSAND BUSHELS OF WHEAT. OKAY. NOW, SOMETIMES WHAT WILL HAPPEN IS THE GOVERNMENT WILL COME ALONG WITH A CERTAIN LAW THAT WILL EITHER TAX OR SUBSIDIZE. TAXES, I THINK EVERYBODY KNOWS WHAT THAT MEANS. A TAX BASICALLY IS A LITTLE BIT OF A PENALTY THAT THEY IMPOSE ON PEOPLE FOR DOING CERTAIN THINGS. IT'S NOT DEFINED THAT WAY IN THE LAW. TAX IN THE LAW IS JUST A UNILATERAL TRANSFER OF DOLLARS FROM YOU TO THE GOVERNMENT. BUT IT'S SORT OF -- THEY TAX SOMETHING. IT'S NOT JUST LIKE A TAX ON -- "OH, OKAY. GIVE ME YOUR MONEY." WHEN WE'RE TAXED, WE GET TAXED ON OUR INCOME OR WE GET TAXED ON SOMETHING WE PRODUCE OR WE GET TAXED ON SOMETHING WE SELL, AND SO FORTH. SO IN THIS PARTICULAR CASE WHAT WE'LL BE TALKING ABOUT IS A TAX ON THE PRODUCTION OF GOOD X. THE GOVERNMENT COMES ALONG AND SAYS,

18 "OKAY, YOU'VE PRODUCED WHEAT, YOU'RE SELLING WHEAT; GIVE ME 18 MONEY." AND SO THE TAX IS ON X. SO LET'S TAKE AN EXAMPLE WHERE THE GOVERNMENT COMES ALONG AND BASICALLY SAYS, "WE'RE GONNA IMPOSE A TAX OF TEN CENTS PER BUSHEL ON WHEAT, TEN CENTS PER BUSHEL." THIS IS PRETTY MUCH THE WAY THAT WE SAW WITH RESOURCE PRICES A MOMENT AGO. AS SOON AS THE GOVERNMENT ADDS A TAX OF TEN CENTS PER BUSHEL -- LET ME PUT A TAX EQUALS ZERO TO BEGIN WITH. NOW, ALL OF A SUDDEN, THE GOVERNMENT SAYS, "WE WANT TEN CENTS PER BUSHEL OF WHEAT." NOW, HERE'S THE NEW SUPPLY CURVE, S2, TAX EQUALS TEN CENTS PER BUSHEL. AND THE IDEA, AS I SAY, IS JUST THE SAME AS IT WAS A MOMENT AGO. BEFORE THERE WAS A TAX, THE FARMER THOUGHT, "WOW, FOUR DOLLARS A BUSHEL. THE BEST THING I CAN DO FOR ME IS TO PRODUCE TEN THOUSAND BUSHELS." BUT ALL OF A SUDDEN NOW THE FARMER SAYS, "HMMM. I GET FOUR DOLLARS A BUSHEL FROM THE CUSTOMER, THEN I HAVE TO HAND OVER TEN CENTS A BUSHEL TO THE GOVERNMENT. I'M ONLY LEFT WITH THREE DOLLARS AND NINETY CENTS A BUSHEL. AND SINCE I'M LEFT WITH LESS, I'M NOT EARNING AS MUCH PROFIT AS BEFORE FROM WHEAT. SINCE I'M NOT EARNING AS MUCH PROFIT FROM GROWING THIS WHEAT, I'M GONNA PRODUCE LESS WHEAT." PRODUCE LESS WHEAT AND DO WHAT? "WELL, I CAN USE MY LAND AND I CAN USE MY TIME AND MY TRACTOR AND THE

19 19 WATER AND THE FERTILIZER, AND SO FORTH. I CAN USE ALL THAT TO GROW SOMETHING THAT DOESN'T GET TAXED -- LET'S SAY CORN. THIS IS A WHEAT TAX. SO WHAT I'LL DO IS, I'LL GO INTO THE CORN BUSINESS. AND SO I'M WITHDRAWING SOME RESOURCES FROM PRODUCING WHEAT DUE TO THIS TAX AND I'LL PRODUCE CORN INSTEAD, SELL CORN INSTEAD." AND SO HERE WE HAVE -- MAYBE THAT FARMER NOW IS PRODUCING NINETY-FIVE HUNDRED BUSHELS OF WHEAT, YOU KNOW, AND TAKES A FEW ACRES OUT OF PRODUCTION. SO A TAX -- AN INCREASE IN THE TAX -- LET ME DRAW A LITTLE PICTURE HERE. INCREASE IN THE TAX ON A PRODUCT RESULTS IN A DECREASE IN THE SUPPLY OF THAT PRODUCT. TAX ON X, SUPPLY OF X, GOES DOWN. A LEFTWARD SHIFT IN THE SUPPLY CURVE. I GUESS YOU CAN SEE PRETTY EASILY THAT ALL WE HAVE TO DO IS TALK ABOUT REVERSING THE TAX. OKAY, WE'VE GOT A TEN CENTS TAX ON WHEAT. LET'S TAKE THAT TAX AWAY. AND IF YOU TAKE AWAY THE TAX, IT WAS TEN CENTS AND NOW YOU MAKE IT ZERO, THEN THAT CURVE WILL SHIFT TO THE RIGHT. AND SO THE ARROWS THAT I JUST DREW HERE, WE CAN REVERSE THOSE. IF THE TAX IS REDUCED, THE SUPPLY OF THAT GOOD GOES UP OR INCREASES. THE CURVE SHIFTS TO THE RIGHT. QUESTIONS ABOUT THIS? A SUBSIDY IS SORT OF THE OPPOSITE FROM A TAX. IT'S A REWARD. IT'S A REWARD FOR DOING SOMETHING. A SUBSIDY ON WHEAT PRODUCTION, FOR EXAMPLE, THAT WOULD BE -- OR THE GOVERNMENT MIGHT COME

20 ALONG AND SAY SOMETHING LIKE THIS: "HEY, IF YOU'LL GROW WHEAT, 20 WE'LL GIVE YOU TEN CENTS FOR EVERY BUSHEL YOU GROW." LET'S PUT THAT SUPPLY CURVE UP THERE WITH THAT SAME FARMER GROWING THAT SAME TEN THOUSAND BUSHELS OF WHEAT. NO SUBSIDY. FOUR DOLLARS A BUSHEL, TEN THOUSAND BUSHELS OF WHEAT. AND NOW THE GOVERNMENT COMES ALONG AND SAYS SOMETHING LIKE THIS: "IF YOU'LL GROW WHEAT, WE'LL GIVE YOU TEN CENTS A BUSHEL." THIS CURVE IS GONNA SHIFT TO THE RIGHT -- WE'LL TALK ABOUT WHY IN JUST A SECOND HERE -- AND IT'S TWO SUBSIDY EQUALS TEN CENTS A BUSHEL. THE FARMER SAYS THIS: "YOU KNOW, I WAS GROWING TEN THOUSAND BUSHELS OF WHEAT WHEN THE PRICE WAS FOUR DOLLARS A BUSHEL AND I WAS MAKING THE MOST POSSIBLE PROFITS I COULD. BUT NOW THAT THERE'S AN EXTRA TEN CENTS A BUSHEL RETURN FROM GROWING WHEAT, I GET FOUR DOLLARS FROM THE CUSTOMER AND I GET TEN CENTS FROM THE GOVERNMENT. NOW THE BEST THING I CAN DO IS TO GROW MORE WHEAT. MAYBE NOW, WHAT, ELEVEN THOUSAND BUSHELS. IT'S MORE PROFITABLE TO GROW WHEAT THAN IT USED TO BE SO I'M GONNA GROW MORE THAN I USED TO." OKAY. SO AN INCREASE IN THE SUBSIDY, ON X, RESULTS IN AN INCREASE IN THE SUPPLY OF X. AND, OF COURSE, WE CAN REVERSE THE PROCESS. TAKE THE SUBSIDY AWAY AND THEN THE CURVE SHIFTS FROM S2 TO S1. SO IF THERE'S A SMALLER SUBSIDY, THERE'S A DECREASE IN THE SUPPLY OF THE

21 GOOD. 21 NOW, THE GOVERNMENT USED TO HAVE QUITE A FEW SUBSIDIES ON FARM PRODUCTS, BUT A LOT OF THOSE SUBSIDIES IT'S BEEN PHASING OUT IN RECENT YEARS. IT STARTED BACK IN, WHAT, AND THE WHOLE PROCESS TOWARD FARMS HAS BEEN TO PHASE OUT SOME OF THESE SUBSIDIES. SO WE DON'T SEE AS MANY OF THOSE AS WE USED TO. WE DO SEE SUBSIDIES OF OTHER THINGS, HOWEVER. SOMETIMES THOSE SUBSIDIES ARE HIDDEN. FOR EXAMPLE, WE HAVE SOMETHING CALLED AN EXPORT/IMPORT BANK OR THE EX-IM BANK, EXPORT/IMPORT. AND WHAT THIS IS IS A GOVERNMENT AGENCY THAT'S ENCOURAGING EXPORTS. FOR EXAMPLE, LET'S SAY THAT AN AIRLINE IN THE PHILIPPINES IS THINKING ABOUT BUYING AIRPLANES. YOU KNOW, THEY WANT TO BUY JUMBO JETS, BOEING 757S OR THE AIRBUS, WHATEVER THE COMPARABLE UNIT IS. AND SO THEN WHAT WILL HAPPEN IS, BOEING MIGHT GO TO THE PHILIPPINES, TO THIS AIRLINE, AND SAY, "HEY, IF YOU BUY OUR AIRPLANE, THE UNITED STATES GOVERNMENT WILL SEND YOU THE MONEY TO BUY THIS AIRPLANE THROUGH THE EXPORT/IMPORT BANK, THE EX-IM BANK." IT'S NOT REALLY A BANK LIKE WHERE WE'D PUT OUR DEPOSITS. IT'S A BANK WHERE IT'S LIKE THE GOVERNMENT MAKING LOANS. SO BOEING MIGHT SAY TO THIS AIRLINE IN THE PHILIPPINES, "IF YOU'LL BUY OUR AIRPLANE, RATHER THAN BUYING THAT COMPETING AIRPLANE THAT

22 WAS PRODUCED OVER IN EUROPE, THEN YOU CAN GO TO THE 22 EXPORT/IMPORT BANK AND GET A LOAN TO BUY THE AIRPLANE." AND MAYBE THE AIRPLANE COSTS FORTY MILLION DOLLARS. "OUR GOVERNMENT WILL LEND YOU THAT FORTY MILLION DOLLARS AND YOU JUST PAY IT BACK A LITTLE BIT AT A TIME UNTIL IT'S PAID OFF. AND BETTER STILL, THEY WON'T MAKE YOU PAY A MARKET INTEREST RATE. THEY'LL LEND YOU THAT MONEY AT A BELOW-MARKET INTEREST RATE, SOMETHING REALLY ATTRACTIVE -- FOUR PERCENT, OR WHATEVER." NOW, WHAT WE HAVE AT THIS POINT IS WE HAVE THE GOVERNMENT -- OUR GOVERNMENT'S GOING OUT AND BORROWING MONEY AND PAYING AT A HIGHER INTEREST RATE -- FIVE, SIX, SEVEN PERCENT -- AND TAKING THE MONEY AND LENDING IT OUT TO THIS AIRLINE IN THE PHILIPPINES SO THE AIRLINE IN THE PHILIPPINES CAN BUY A BOEING AIRPLANE. AND THAT IS REALLY -- INDIRECTLY, IT'S SORT OF LIKE THE GOVERNMENT IS GIVING BOEING MONEY. NOW, THEY DON'T DO IT DIRECTLY. THEY GIVE IT TO BOEING'S CUSTOMER AND THEN BOEING'S CUSTOMER GIVES IT BACK TO BOEING. BUT THE POINT IS THAT THE UNITED STATES IS SUBSIDIZING THE PURCHASE OF AIRPLANES. SO WE STILL HAVE THESE SUBSIDIES ON THE BOOKS. AND THE RESULT IS TO SHIFT THE SUPPLY OF THOSE AIRPLANES TO THE RIGHT, IF AIRPLANES IS WHAT WE HAPPEN TO BE TALKING ABOUT AS OPPOSED TO WHEAT. OKAY.

23 IN THE LAST FIFTEEN, TWENTY YEARS, WHAT WE'VE SEEN IS THAT 23 WE'RE GENERALLY TRYING TO PHASE THESE SUBSIDIES OUT. IN THE LAST FIFTEEN OR TWENTY YEARS, THE GOVERNMENT GOT INTO FINANCIAL DIFFICULTIES, SORT OF HARD TIMES. SPENT A LOT OF MONEY IT DIDN'T HAVE AND HAD TO GO INTO HEAVY DEBT. THAT BEING THE CASE, NOW THE GOVERNMENT'S TRYING TO FIND A WAY TO REDUCE ITS EXPENDITURES AND ONE WAY OF DOING THAT IS TO PROVIDE FEWER SUBSIDIES -- EITHER TO FARMERS OR TO BOEING OR TO ANYBODY ELSE. THE EXPORT/IMPORT BANK, THOUGH, SUBSIDIZES MORE THAN JUST AIRPLANE PURCHASES. SO -- AND WE'RE STILL IN THIS BUSINESS. THERE ARE OTHER SUBSIDIES THAT YOU CAN THINK OF THAT OPERATE IN DIFFERENT WAYS. STUDENTS GET SUBSIDIZED, FOR EXAMPLE. THERE'S A LOT OF THINGS SUBSIDIZED. SMALL BUSINESSES GET SUBSIDIZED IN THE SMALL BUSINESS ADMINISTRATION, AND SO FORTH. OKAY. QUESTIONS ABOUT THIS? WHAT ELSE DO I HAVE ON MY LIST: ANYTHING? I THINK I'VE KIND OF FINISHED THAT UP. SO THESE ARE THE THINGS THAT WILL NORMALLY SHIFT THE SUPPLY CURVE EITHER TO THE RIGHT OR TO THE LEFT. WE ALREADY HAD A LIST THE OTHER DAY OF THINGS THAT WILL SHIFT THE DEMAND CURVE TO THE RIGHT OR TO THE LEFT. AND SO YOU NEED TO BE FAMILIAR WITH BOTH LISTS AND KNOW, FOR EXAMPLE, THAT IF THERE'S AN IMPROVEMENT IN TECHNOLOGY, THAT THERE'S AN INCREASE IN SUPPLY.

24 24 YOU SHOULD BE ABLE TO GO THROUGH THIS LIST AND IN EACH CASE SAY IF THERE'S AN INCREASE OR A DECREASE IN WHATEVER THIS VARIABLE IS. HOW DOES THAT AFFECT THE SUPPLY CURVE: SHIFT IT TO THE RIGHT, SHIFT IT TO THE LEFT? OKAY. NOW, LET'S WORK WITH THE SUPPLY AND DEMAND CURVES A LITTLE BIT. ALL WE WANT TO DO IS JUST BECOME FAMILIAR WITH THE SUPPLY AND DEMAND CURVES AND WHAT HAPPENS IF THE SUPPLY OR DEMAND CURVE SHIFTS. SO S1, D1, Q1, P1. SO THIS IS A NICE BEGINNING POINT. WHAT WE WANT TO DO IS SHOW THE IMPACT OF, LET'S SAY, NUMBER ONE, AN INCREASE IN DEMAND. IF THERE WAS AN INCREASE IN DEMAND, THE DEMAND CURVE SHIFTS TO THE RIGHT. AND WHAT WE SEE IS THE EQUILIBRIUM PRICE HAS GONE UP TO P2 AND THE EQUILIBRIUM QUANTITY HAS GONE UP TO Q2. WE'RE LOOKING AT THE EQUILIBRIUM, THE PRICE AND QUANTITY HAVE BOTH GONE UP. SO LET'S SORT OF KEEP A LOG OVER HERE. IF THERE'S AN INCREASE IN THE PRICE, THEN WHAT WE OBSERVE IS AN INCREASE -- THAT'S NOT RIGHT. IF THERE'S AN INCREASE IN DEMAND -- SORRY -- THEN WE'LL SEE AN INCREASE IN THE EQUILIBRIUM PRICE AND AN INCREASE IN THE EQUILIBRIUM QUANTITY. LET'S DRAW ANOTHER GRAPH. IT'LL LOOK EXACTLY THE SAME AT OUR BEGINNING POINT. WE'LL HAVE A PRICE OF P1 AND A QUANTITY OF Q1. AND NOW WHAT WE'LL DO IS, WE'LL SHIFT THE DEMAND CURVE TO THE LEFT, D2.

25 WHAT WE OBSERVE IS A NEW EQUILIBRIUM PRICE AND QUANTITY. THE 25 EQUILIBRIUM PRICE IS NOW LOWER AND THE EQUILIBRIUM QUANTITY IS NOW LOWER. SO AGAIN, IF WE JUST KIND OF KEEP TRACK HERE, DECREASE IN DEMAND -- WE GET A LOWER PRICE AND A LOWER QUANTITY. THESE ARE EQUILIBRIUMS. CHANGE IN EQUILIBRIUM PRICE AND QUANTITY. QUESTIONS ABOUT THIS? PRETTY STRAIGHTFORWARD. LET'S DO THE SAME THING WITH SUPPLY NOW. WE START OFF WITH OUR EQUILIBRIUM POINT. NOW WE'LL JUST INCREASE THE SUPPLY, SHIFT THE CURVE TO THE RIGHT, S2. WE SEE THE NEW EQUILIBRIUM PRICE IS NOW P2 AND THE NEW EQUILIBRIUM QUANTITY IS Q2. SO WHENEVER WE COME OVER TO RECORD THIS, WHAT WE WRITE DOWN IS INCREASE IN SUPPLY RESULTS IN A LOWER PRICE AND A LARGER QUANTITY. AND THE FOURTH CASE -- AND THE FINAL CASE, REALLY. WE START OFF WITH THE ORIGINAL EQUILIBRIUM. WE'RE GONNA DECREASE THE SUPPLY, SHIFT THE CURVE TO THE LEFT, S2. WHAT WE OBSERVE IS, THE EQUILIBRIUM IS NOW HIGHER AND THE EQUILIBRIUM QUANTITY IS NOT LOWER, Q2. SO A DECREASE IN SUPPLY -- WHAT DO WE GET? INCREASE IN PRICE AND A DECREASE IN QUANTITY. NOW, I'M TELLING YOU -- I'M NOT JUST TELLING YOU; I'M MORE OR LESS PROMISING YOU -- THAT I'M GONNA ASK YOU QUESTIONS ON THE TEST SO THAT YOU NEED TO BE REAL FAMILIAR WITH THIS. AND YOU CAN FOR SURE DRAW THE GRAPH AND SORT OF WORK YOUR WAY THROUGH IT SLOWLY AND

26 26 SO FORTH. BUT THE MORE FAMILIAR YOU ARE WITH THIS, THE EASIER IT'LL BE, THE QUICKER IT'LL BE, AND YOU'LL HAVE TIME FOR OTHER TYPES OF QUESTIONS. BUT YOU NEED TO FOR SURE BE FAMILIAR WITH THIS. NOW, I MAY SAY SOMETHING LIKE THIS ON THE EXAM: IF THE DEMAND FOR THE PRODUCT GOES UP, THE PRICE WILL BE WHAT AND THE QUANTITY WILL BE WHAT, UP OR DOWN? AND SO THEN WE START OFF HERE AND THEN WORK OUR WAY ACROSS. BUT IT MAY BE THAT I'LL TELL YOU SOMETHING LIKE THIS ON THE TEST: I OBSERVE THAT THE QUANTITY TRADE IN THE MARKETPLACE HAS GONE DOWN WHILE THE PRICE IS GOING UP. QUANTITY DOWN, PRICE UP. WHAT WOULD'VE CAUSED THAT? DID I SAY PRICE DOWN, QUANTITY UP? WHAT WOULD'VE CAUSED THAT? WELL, THERE'S ONLY ONE PLACE WHERE YOU SEE THE PRICES GOING DOWN AND THE QUANTITIES GOING UP, AND SO THERE'S ONLY ONE THING THAT WOULD'VE CAUSED THAT. THAT'S A GREATER SUPPLY. SO I'M SAYING I MAY START OFF HERE AND SAY, "SUPPOSE DEMAND OR SUPPLY SHIFTS, WHAT'S THE EFFECT?" I MAY ALSO TELL YOU THE EFFECT AND ASK YOU WHAT WAS THE COST. NOW, THE REALLY EXCITING CASES -- AH, I SHOULDN'T SAY "EXCITING" BECAUSE YOU'RE NOT AS EXCITED BY THIS AS I AM. BUT THE EXCITING CASES FOR ME, AT LEAST, ARE THE COMBINATIONS. AND THAT'S WHY I PUT ALL THESE UP HERE BECAUSE WE WANT TO GO TO A COMBINATION. SUPPOSE I SAY SOMETHING LIKE THIS HAPPENS. THERE WAS AN INCREASE

27 27 IN DEMAND AND A DECREASE IN SUPPLY OF THE PRODUCT. WHAT IF THOSE TWO THINGS HAPPENED? NOT JUST ONE OR THE OTHER. 'CAUSE YOU KNOW OUT THERE IN THE REAL WORLD THERE'S NO LAW THAT SAYS, "OH, YOU GOTTA HAVE A DEMAND CURVE SHIFT OR A SUPPLY CURVE, BUT NOT BOTH OF 'EM AT ONCE." WHAT IF THE DEMAND CURVE INCREASES, SHIFTS TO THE RIGHT, AND THE SUPPLY CURVE DECREASES, SHIFTS TO THE LEFT, THEN WHAT HAPPENS? AND LET'S COME OVER HERE AND SORT OF TRACE THIS OUT. THERE'S AN INCREASE IN PRICE AND AN INCREASE IN QUANTITY CAUSED BY THE SHIFT IN DEMAND. THE SHIFT IN SUPPLY, WHAT WE SEE, A DECREASE IN SUPPLY, WE HAVE A HIGHER PRICE AND A SMALLER QUANTITY. SO IF THIS OCCURS, INCREASE IN DEMAND, DECREASE IN SUPPLY, HERE'S WHAT I SEE. I SEE A PRICE INCREASE, I SEE A PRICE INCREASE, I THINK THERE'S GONNA BE A PRICE INCREASE. BUT WHAT ABOUT QUANTITY? THE GREATER DEMAND, THAT MEANS THAT WE'RE GONNA TRADE MORE IN THE MARKETPLACE. SO A GREATER QUANTITY WE'LL TRADE. BUT THE FACT IS A DECREASE IN SUPPLY MEANS THAT THERE'S GONNA BE A SMALLER QUANTITY OFFERED FOR SALE. SO, YEAH, PEOPLE WANT TO BUY MORE BUT OTHER PEOPLE WANT TO SELL LESS, AND SO THERE'S AN INCREASE IN QUANTITY TRADED AND A DECREASE IN QUANTITY, AND WHICH ONE OF THOSE IS GONNA DETERMINE THE OUTCOME? AND THE ANSWER IS, WE DON'T KNOW -- FROM THIS INFORMATION. WE JUST DON'T KNOW.

28 28 WE SAY THAT WHAT HAPPENS TO QUANTITY? THAT'S INDETERMINATE. WE'RE JUST NOT SURE. UNLESS SOMEBODY -- AND THAT WOULD BE ME, SINCE I MAKE UP THE TESTS -- BUT IF SOMEBODY WERE TO SAY SOMETHING TO YOU LIKE THIS: "THERE'S A BIG INCREASE IN DEMAND AND THERE'S A SMALL DECREASE IN SUPPLY." IF THEY'D TELL YOU SOMETHING LIKE THAT, THEY OR ME, BIG INCREASE IN DEMAND -- "OH, THIS QUANTITY INCREASE IS BIG" -- SMALL DECREASE IN SUPPLY -- THE DECREASE IN QUANTITY IS SMALL, SO I GUESS WHAT HAPPENS TO DEMAND, THAT MUST BE SORT OF THE DRIVING FORCE HERE. I THINK QUANTITY WILL GO UP. SO A TEST QUESTION OR EVENTS IN THE REAL WORLD, THOSE COULD INFORM YOU ABOUT WHETHER DEMAND OR SUPPLY IS SHIFTING BY MORE. BUT THE POINT IS IS THAT YOU'RE GONNA HAVE SOMETHING INDETERMINATE. AND BY THE WAY, THAT IS THE QUICK ANSWER TO THIS. EVERY SINGLE TIME THAT THERE'S TWO CURVES SHIFTING -- EVERY TIME, NOT SOMETIME; EVERY TIME THAT BOTH CURVES SHIFT, THERE'S SOMETHING THAT'S INDETERMINATE. AND IN THIS PARTICULAR CASE, IT WAS QUANTITY. AND THEN WE EITHER HAVE TO SAY, "I DON'T KNOW WHAT WILL HAPPEN TO QUANTITY," OR, IF WE HAD THE INFORMATION TO KNOW THAT IT WAS THE DEMAND THAT SHIFTED MORE THAN SUPPLY, OR SUPPLY THAT SHIFTED MORE THAN DEMAND, THEN WE CAN COME BACK AND GET RID OF THAT INDETERMINACY BY SAYING, "OH, HERE'S THE ONE THAT WINS OUT IN TERMS OF ITS MAGNITUDE, ITS SIZE."

29 LET'S DO ANOTHER ONE OF THESE. SUPPOSE, FOR EXAMPLE, THAT 29 THERE'S A DECREASE IN DEMAND AND A DECREASE IN SUPPLY. THE DECREASE IN DEMAND, THAT PUSHES DOWN THE PRICE. LOWER DEMAND -- YOU CAN'T SELL IT FOR AS MUCH -- AND A DECREASE IN DEMAND MEANS THAT LESS WILL BE TRADED ALSO IN THE MARKETPLACE. PEOPLE DON'T WANT TO BUY AS MUCH AS BEFORE. A DECREASE IN SUPPLY SAYS PRICE WILL GO UP. THERE'S NOT SO MUCH AVAILABLE SO NOW ITS PRICE GETS BID UP. BUT THE DECREASE IN SUPPLY MEANS LESS IS OFFERED FOR SALE. WELL, THERE'S NO INDETERMINACY WITH RESPECT TO QUANTITY. BOTH THE DECREASE IN DEMAND AND THE DECREASE IN SUPPLY ARE BOTH PUSHING DOWN THE QUANTITY TRADED. BUT THE DECREASE IN DEMAND IS CAUSING PRICE TO FALL AND THE DECREASE IN SUPPLY IS CAUSING PRICE TO RISE. NOW IT'S PRICE THAT'S INDETERMINATE. I DON'T KNOW IF PRICE IS GOING UP OR DOWN UNLESS SOMEBODY WOULD TELL ME WHICH OF THESE TWO FORCES IS STRONGER. IF SOMEBODY SAID, "THAT'S A BIG DECREASE IN SUPPLY" -- BIG. THIS IS A SMALL DECREASE IN DEMAND. THEN WHAT I SAY IS, "AW, THE INDETERMINACY HAS BEEN DECIDED. THIS IS A BIG CHANGE IN SUPPLY. IT'S A SMALL CHANGE IN DEMAND. SO I THINK IT'S THE SUPPLY THAT'S GONNA DETERMINE THE PRICE CHANGE AND THAT'S GONNA BE A PRICE INCREASE." NOW, WHEN I WAS A STUDENT ON TEST DAYS, I'D BE SITTING THERE TAKING THE TEST AND I'D GET MY FINGERS OUT AND SORT OF SHIFT THOSE

30 30 AROUND -- INCREASE IN DEMAND, INCREASE IN SUPPLY, AND THAT SORT OF THING. WHATEVER WORKS FOR YOU. WHAT I WOULD SUGGEST IS THAT YOU SPEND SOME TIME JUST SORT OF DRAWING THESE LITTLE GRAPHS. YOU DON'T HAVE TO GO TO SO MUCH EFFORT TO LABEL ALL THE AXES AND THINGS LIKE THAT, BUT WORK THESE THROUGH. AND THESE ARE THE SIMPLE CASES HERE WHERE WE ONLY HAVE ONE CURVE SHIFTING, BUT YOU FOR SURE OUGHT TO BE ABLE TO DO THESE MAYBE IN YOUR SLEEP. MAYBE NOT QUITE IN YOUR SLEEP. BUT YOU FOR SURE OUGHT TO BE ABLE TO DO THESE EASILY. AND THESE OVER HERE THAT ARE MORE COMPLEX, WHERE YOU'RE SHIFTING TWO CURVES, YOU NEED TO BE FAMILIAR WITH THAT. QUESTIONS ABOUT THIS? YES, SIR. [STUDENT SPEAKING INAUDIBLE] WELL, WHAT YOU WOULD HAVE IS JUST THIS CONFLICTING INFORMATION. IN THE LIGHT OF THAT CONFLICTING INFORMATION, YOU JUST SAY I DON'T KNOW. THAT'S IN YOUR OWN MIND. AND THEN ON THE TEST, YOU WOULD LOOK FOR THE ANSWER WHERE YOU GET TO SAY "THE QUANTITY IS INDETERMINATE." AND IT'LL BE A MULTIPLE CHOICE KIND OF A DEAL SO -- I'LL GIVE YOU VARIOUS CHOICES AND THEN YOU'LL DECIDE WHICH ONE YOU WANT TO PICK. OKAY. EVERY SINGLE TIME THERE'S TWO CURVES SHIFTING, THOUGH, SOMETHING'S INDETERMINATE. IS THE TEST MULTIPLE CHOICE? YES, IT IS. HOW MANY QUESTIONS? DON'T KNOW. HAVEN'T MADE IT UP. HOW MANY DO YOU THINK IT OUGHT TO HAVE? MAYBE FIFTY, SIXTY?

31 LET ME SORT OF FINISH UP FOR TODAY AND THEN WE'LL PICK UP AT 31 THIS POINT NEXT TIME. AND REMIND YOU THAT IF THE PRICE CHANGES AND GOES UP FROM P1 TO P2, THAT WE GET A SMALLER QUANTITY DEMAND AT Q2, BUT THIS IS A CHANGE IN QUANTITY DEMANDED -- A CHANGE IN QUANTITY DEMANDED IS CAUSED BY A CHANGE IN PRICE. AND ANYTHING ELSE THAT AFFECTS CONSUMPTION SHIFTS THAT CURVE FROM ONE POINT TO ANOTHER. BE SURE THAT YOU DON'T FORGET ABOUT DISTINGUISHING BETWEEN A CHANGE IN DEMAND AND A CHANGE IN QUANTITY DEMANDED. AND THAT IS WHAT I WILL START TALKING ABOUT NEXT TIME. SO LONG.