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  • Voiceover: We've now thought a lot about

  • the orange juice market,

  • at least at a firm-specific level

  • within the last few videos.

  • We talked about what our average total costs

  • and average variable costs

  • and marginal costs are,

  • if we are running an orange juice making business.

  • Now let's think about what happens

  • at the market level.

  • We're going to go back

  • to some of what we've thought about in the past

  • in terms of just supply and demand curves.

  • This is the orange juice,

  • orange juice market,

  • and let's just draw some supply and demand curves

  • right over here.

  • This is going to be,

  • this is going to be the price per gallon,

  • price per gallon,

  • and let's say that this right over here is $1.

  • This right over here is 50 cents,

  • and this is 0,

  • and let's say that this is the quantity,

  • quantity,

  • quantity in gallons per week,

  • and gallons per week.

  • We're going to talk about the entire

  • orange juice market,

  • so this is going to be in millions of gallons per week.

  • Millions of gallons per week,

  • per week.

  • That is, let's say this is 1, 2, 3, 4, 5, and 6.

  • Let's just say, and I'm going to simplify it

  • relative to what we saw in the last video.

  • Let's just say that the supply curve

  • for the orange juice market,

  • and I'll be careful this time.

  • This is the near-term supply curve,

  • or the short-term supply curve,

  • looks like,

  • looks something like this.

  • that is the supply curve.

  • This is the entire market.

  • These are all of the orange juice producers.

  • So to get them to produce even that first gallon,

  • it looks like they need about 20 cents

  • for that first gallon,

  • and then each incremental gallon,

  • they need more and more money.

  • The marginal cost of that incremental gallon

  • and for the market as a whole

  • is going higher and higher and higher.

  • They have to get oranges from futher away

  • and transport them further and further.

  • This right over here is the supply curve,

  • or you could view it as the marginal cost,

  • marginal cost curve.

  • Now let's just draw an arbitrary demand curve here.

  • The demand curve,

  • let's say it looks something like this.

  • Let's say that's our current demand,

  • that is our current demand curve,

  • and then what I'm going to add to this

  • is I'm going to add the price at which firms,

  • the suppliers of the orange juice make

  • are neutral with returns to economic profit,

  • or when economic profit is equal to 0.

  • Let's say right over here,

  • which happens to be our current equilibrium price,

  • this is the price,

  • so 50 cents per gallon,

  • this is the price at which economic profit is 0.

  • so I'll just write economic profit is equal to 0.

  • I want to remind you,

  • economic profit being 0

  • does not mean that the accounting profit is 0.

  • People could be making money at this price,

  • it just says that they're neutral

  • whether or not they should be doing this business.

  • That the amount of money that they're making

  • is roughly comparable to their opportunity cost

  • to be doing other things.

  • When I say economic profit is 0,

  • sometimes that's called the normal profit,

  • when economic profit is 0.

  • This is the price at which people are neutral

  • between shutting down and starting up

  • their business.

  • If you have positive economic profit,

  • that means that more people

  • will want to go into this market

  • and if you have negative economic profit,

  • that means that people are going to want to

  • essentially use up their fixed expenses,

  • their equipment

  • and any labor contracts they might have

  • and then go out of business.

  • This is where,

  • this is that point right over there.

  • Now let's think of a couple of scenarios.

  • Let's say a research paper comes out

  • and in that research paper,

  • for whatever reason,

  • we don't know if it was well-done research.

  • It says oranges are bad for you,

  • for whatever reason.

  • When the research paper comes out

  • and says oranges are bad for you,

  • what happens to demand?

  • Well, at any given price,

  • demand will go down.

  • At any given price,

  • demand will go down,

  • and the new demand curve might look

  • something like this.

  • Now, in the near term,

  • we have a new equilibrium price,

  • and we have a new equilibrium quanitity.

  • This was the old equilibrium price,

  • the way I set that up,

  • it just happened to be the price

  • at which economic profit is 0,

  • and this was our old equilibrium quantity,

  • a little over 3 million gallons a week.

  • Now we have a new, lower equilibrium price.

  • We have a new lower equilibrium price.

  • I don't know, this looks about 40 cents per gallon,

  • and we have a new lower equilibrium quantity.

  • Now, what happens at this price?

  • Obviously in the near term,

  • people are willing to produce there

  • because that's where their marginal cost is,

  • so, as we saw in multiple videos

  • that someone's willing to produce

  • when the price is equal to their marginal cost,

  • or they're willing to produce a quantity up to

  • when their marginal cost is equal to

  • the marginal revenue,

  • or the price that they're going to get.

  • But, I just said

  • that they need to be getting 50 cents a gallon

  • in order to make an economic profit.

  • Now if they get, I don't know,

  • this looks like about 40 cents a gallon,

  • they're going to be having an economic loss.

  • So no profit.

  • No profit there.

  • If there's no profit there,

  • it really doesn't make sense for them to continue,

  • or at least it doesn't make sense for all of them

  • to continue in that business.

  • What's going to happen is that over time,

  • it will make sense for them in the near term

  • to produce, to use up,

  • they've already put in their cost

  • for their equipment

  • and maybe labor contracts and whatever else.

  • But over time, when prices are this low,

  • as people use up their equipment,

  • there's no incentive for them to buy new equipment.

  • As the labor contracts expire,

  • there's no incentive for them to renew

  • the labor contract.

  • As those things expire,

  • they're just going to shut down the business.

  • So as they shut down the business,

  • as they shut down the business,

  • two things will happen.

  • Quantity produced in the market will go down,

  • and the price will go up.

  • We will essentially move along this curve

  • until we get to this point.

  • That's the point,

  • once the price is at 50 cents a gallon again,

  • then people are neutral now.

  • They're not going to shut down their firms.

  • We're going to get to this new equilibrium price

  • and equilibrium quantity in the long term,

  • in the long term.

  • Now let's think of another situation.

  • Instead of a newspaper report

  • saying that oranges are bad,

  • let's say a newspaper report comes out

  • saying oranges are very good.

  • They make you live longer.

  • They are the best thing that you can have.

  • Well, then, at any given price,

  • you're going to have more demand,

  • and so you'd have a demand curve

  • that looks something like that.

  • Then, you'd have a higher equilibrium quantity,

  • and a higher equilibrium price.

  • And, people are going to be making,

  • since the price is higher,

  • than the price at which the economic profit is 0,

  • people are going to be making

  • very positive economic profits,

  • which means that there's a strong incentive,

  • that people are neutral between

  • shutting down the business

  • or starting up the business.

  • At that point,

  • a lot of people are strongly motivated

  • to enter into the business.

  • What's going to happen is,

  • more and more people are going to

  • get more and more equipment,

  • hire more and more people,

  • and as they do that,

  • quantity is going to go up,

  • and the price is going to go down.

  • And so, over the long term,

  • you're going to shift back to this line.

  • Once the price gets down to that,

  • then there's no reason for more people to enter.

  • They're kind of neutral about it.

  • What you see happening is in the short term,

  • you would look at where the demand curve

  • intersects with the short-term supply curve,

  • but in the long term,

  • you care where it intersects with this

  • kind of horizontal line,

  • which is the price at which economic profit is 0.

  • That's why you will hear,

  • and this is kind of a more precise way

  • of thinking about it than we've done

  • in the previous videos,

  • this horizontal line right over here,

  • you could view this as the long run,

  • the long run,

  • long run supply curve,

  • long run supply curve.

  • That says look,

  • pretty much whatever we will always produce

  • over the long run,

  • we will always produce whatever supply

  • is kind of necessary,

  • given that people are neutral

  • when it comes to economic profit.

  • You go down here,

  • yes, people will try to use up their fixed costs,

  • but once they used up their fixed costs,

  • no incentive for them to stay in business,

  • then some of them go out of business.

  • Price goes up,

  • quantity goes down.

  • You get back to the long run supply curve,

  • where that intersects with the demand curve,

  • or if the opposite happens.

  • A lot of economic profit,

  • a lot of entrance into the market,

  • price goes down, supply goes up.

  • You get back to the long run supply curve.

  • I guess you could say,

  • you could go back to where the new demand curve

  • is intersecting the long run supply curve.

Voiceover: We've now thought a lot about

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