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Current time:0:00Total duration:5:53

Video transcript

in all of our conversations about demand curves so far I've been generally talking about price driving quantity so for example we've been saying using say this demand curve right here for a new car in terms of how many would be sold per day we would say things like well look if we price it at $60,000 per car this is in thousands of dollars we if we price it at $60,000 per car we are going to sell one car and if we price it at $50,000 a car we're going to sell two cars so the way that I've been talking about it is give it a price how many are we actually going to sell what I want to do in this video is think about it the other way around we're going to look at the exact same demand curve the exact same relationship between price and quantity but we're going to conceptualize it in our heads in a slightly different way we're going to think about it in terms of quantity quantity driving price and I think of it that way imagine that we are the producers of this given model of a new car and we we go the other way we don't say how many will we sell at a price of $60,000 or how many are we going to sell at a price of $50,000 we'll go from the point of view is what if we only produce one car week if we only produced one car week how much could we get for that car and let's say somehow you're able to figure that out you're able to read people's minds or you have some type of a market study and it when you ask that question you're like look if you only allowed one car to be sold each week you determine that on in that week there's going to be somebody somebody's going to think that it's worth $60,000 to buy that car and so that person their willingness to pay that person is going to be willing to trade $60,000 they're going to there they're going to be willing to forego what else they could have bought for that $60,000 and instead they want that car and so then you would plot that point right over there if you only had one unit you could sell it for $60,000 now let's go let's keep asking ourselves for more units now let's say what if we wanted to sell two units well if you if you wanted to sell two units you could definitely you could definitely sell one unit for $60,000 assuming that you you could get that first person but that second person this my been the person just wants your car so badly it just resonated with them in some way but for that second unit the the second person who's going to need to buy your car might not be that as excited about it and so that second person that second person will only will be willing to forgo $50,000 that second person would be willing to forgo 50 so if you wanted to sell two units if you want it if you insist on selling two units and if you're assuming you're going to give the same price for everyone we'll talk about in the future how you might give different prices to different people but assuming you want to give the same price to everyone you're going to have to sell your car for $50,000 now clearly that first person is definitely going to jump at it they're going to be able to get the car for more than they were willing to pay more than what it was worth to them more than their more than the benefit for them but if you want to people now you're going to have to set this up for fifty thousand now the same logic now what if we want to sell three cars what if we want to sell three cars a week well if we price it at fifty thousand we'll definitely get those first two but the third person isn't going to that third person might not jump the third person isn't going to be as excited about it or need it as much as these first two and so you do a market study or you're able to read people's mind you're like look the third person for the market the marginal benefit let me write this word down the marginal benefit the marginal benefit for this next for this for the next unit the next unit is going to be $40,000 to get that next buyer and it could be multiple buyers buying each unit or it could be one buyer buying all of the units maybe it's some type of a car rental company saying oh we don't need to get for three of these cars I'm not I'm not as excited about anymore my marginal benefit is lower and this is really the same marginal benefit that we talked about when we talked about the PPF the production possibilities frontier in that we talked about it very explicitly in terms of trade-offs in terms of opportunity cost here we're measuring the marginal benefit in terms of price but price really can be viewed as a forgone opportunity if you spend $40,000 on this car you're making the decision not to spend $40,000 on something else a down payment on a house or a nice boat or whatever else it might be so really what we're doing is at any point in this curve this really is the marginal benefit that next buyer that marginal benefit to the market of that next that next unit of whatever you are producing and so I really just want to make it this is a very different way of viewing the exact same demand curve before we said okay if we want to price it at 50,000 how many are we going to sell now we're saying if we want to sell only two units where can we price it we can price it at $50,000 and if we want to go from two to three units we're going to have to price it at the marginal benefit of that third unit to the market and it could be the marginal benefit to that next consumer convincing that next consumer to say hey it is worth it to buy this car let's price it at $40,000 now well I'm going to leave you there in this video but what I'm going to think about is the depending on where you price it let's say that we decide that we want to sell four units every week and so we say well look there's two get that fourth person to buy this car we have to price the car at $30,000 we're going to talk about in the next video is if you did that if this is where you decide to price it so that you can sell four units these other people got really good deals the first unit could have gone for much more the second unit could have still also gone for a good bit not as much as the first unit the third unit could have gone for a little bit less than the second unit but still more than what you ended up selling things for so we're going to talk about this idea right over here that some of these consumers are getting more for their money than what they have to pay or at least in their own minds they are