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hi everyone what a quality video for you
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guys we know how important diagrams are
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to back up your analysis to back up your
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evaluation in essays but boy if you can
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bring in power diagrams deep stunning
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diagrams knock the socks off your
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examiners you're going to score even
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higher credit and that's exactly what
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this video is for stunning diagrams five
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diagrams here which you should way up in
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your a vision know really well if
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relevant bring them into your micro
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essays and watch those marks go up this
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video complement my my other video on
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power micro diagrams watch them both
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make sure you have them all in use them
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in your essays and you're going to be in
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a great position here we go what's the
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first diagram to consider well use the
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Monopoly diagram to showcase the
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difference between Monopoly Market
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outcomes and competitive market outcomes
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here we have a very simple Monopoly
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diagram to show Monopoly outcomes we
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assume profit maximization that will
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take us to qm M for Monopoly price from
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the AR curve takes us to PM but then
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compare that to competitive market
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outcomes firms who operate in very
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competitive markets we know will be
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allocatively efficient taking us to
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where P or ar equals MC that's over here
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call that QC competitive outcomes price
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PC so immediately we can see the harm of
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Monopoly on this diagram by comparing to
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competitive market outcomes how
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monopolies restrict output at qm and
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charge exploitative prices prices Beyond
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marginal cost we can also see that there
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is a dead welfare loss when they do that
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it's going to be this triangle here that
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enti triangle this little bit is your
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dead weight loss of consumer surplus
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this bit is your dead weight loss of
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producer Surplus so great to show the
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harms of Monopoly absolutely or any
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policies that maybe allows Monopoly
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outcomes to occur or if mergers or any
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kind of anti-competitive practices are
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being used taking you to Monopoly
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outcomes great to show the basic
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difference but also this diagram is
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great if you want to reverse the other
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way right so if if a monop Market is
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becoming more like a competitive market
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maybe through policy or otherwise then
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you can show the reverse from pm to PC
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qm to QC the gain of competitive market
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outcomes and also the gain of consumer
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surplus this trapesium here as we see
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that movement so yeah whether it's
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competition policy whether it's
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privatization deregulation
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nationalization or anything that's
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making markets more competitive a
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diagram you can use so very powerful
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thing to do here quite simple but to
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compare Monopoly outcomes and
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competitive market outcomes is something
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you're very likely going to have to do
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in your micro essays this is the diagram
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you can draw to Showcase that keep going
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next is one of my favorite evaluation
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points of a monopoly market and how we
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know in theory a monopoly is
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productively inefficient but despite
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that inefficiency given its size might
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be able to exploit significantly greater
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economies of scale than very small firms
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in highly competitive markets who
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themselves might be productively
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efficient but given that small size by
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not be able to exploit anywhere near the
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level of economy of scale that a
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monopoly can the way to diagrammatically
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Showcase that is by taking a long run
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average cost curve put a monopoly with
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that short run AC short run MC further
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down the L curve to show greater
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economies of scale exploitation compared
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to very very small firms in Cutthroat
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competitive markets who can grow to a
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very high size and therefore they're
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much higher up on the L curve so the
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economies of scale they're exploiting
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much less the end result is their costs
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and their quantity significantly in a
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worse position than than a monopoly who
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despite their inefficiency might have a
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lower cost and thus be able to price
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lower and produce higher quantities than
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teeny firms in very very competitive
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markets so a simple diagram really but a
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great way to Showcase that evaluation
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point the gains of Monopoly given
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greater economies of scale you could
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also use this diagram to illustrate the
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major benefits of a natural monopoly how
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one one firm that dominates the market
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in a natural monopoly where there are
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huge economies of scale are more likely
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to reach the minimum efficient scale
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reach kind of towards the bottom of this
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LC curve compared to if you had
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competitive market outcomes you can also
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draw this diagram to illustrate that
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benefit of natural monopoly but there
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you go great diagram one you're very
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likely to be using I'm sure next is
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something you must know and something
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you must be able to do and that is
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Shifting your cost curves with a
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business diagram or a market structure
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structures related diagram but know that
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if fixed cost change it's only the AC
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curve that will shift either up or down
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and that is because the rate of change
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of costs will not change so MC won't
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change in that situation whereas a
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change in variable costs will affect the
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rate of change of cost so you shift AC
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and you shift MC in that situation so
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imagine that you have to show a change
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in variable costs diagrammatically or
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you want to show that diagrammatically
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maybe because of a windfall tax which is
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a tax per unit or maybe a windfall tax
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on Revenue which again will affect
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variable costs the way you would do it
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is like this so take your bog stand and
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Monopoly diagram and to shift up your AC
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and your MC curve so shift up of AC like
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this maybe call it ac2 a shift off of MC
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but still cutting AC at its lowest point
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which will take us
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there now where mc2 equals Mr that's
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going to be profit Max that's over here
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so let's call that quantity Q2
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and price from the AR curve P2 so we can
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see the impact of that just like a
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normal tax would do increasing prices
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and reducing quantity but we can also
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see the squeeze of profit so AR is where
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P2 is but now AC with the new AC curve
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is over there at profit Max Q2 call that
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C2 so the black box is the new level of
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profit considerably less than the blue
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box prior to it so all the outcomes you
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want to show being shown here higher
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price lower quantity lower profits being
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made brilliant the unintended
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consequences or the tradeoffs of a
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winfall tax per unit for example or a
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winfall tax on revenue or just more
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generally a rise in variable cost here's
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how you would do it but remember fix
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fixed costs only AC variable costs AC
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and MC if you have to do that you know
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how to do it now now a really critical
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diagram if you want to illustrate the
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benefits of a highly competitive labor
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market a labor market that's working
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well will give a lot of benefits this is
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the diagram you will draw draw your
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perfectly competitive labor market
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diagram we have the market on the left a
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firm who's a wage taker on the right we
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assume that these firms are profit
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maximizing employees so they're going to
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employ up until where MRP is equal to
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the marginal cost of Labor which is
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there that's going to give employment of
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call it Q2 that's your full diagram but
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from there you can derive the major
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benefits of a labor market working well
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for example how workers at Q2 are paid
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exactly equal to their MRP these are
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efficient wages if workers are not paid
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equal to that MRP they can go to their
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employer bargain for a higher wage or
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move to a different employer and get
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that higher wage that way so we like
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efficient wages workers are paid equal
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to their productivity that's a good
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thing but also on this diagram we can
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see that q1 is maximum employment no
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other wage rate whether above
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equilibrium or below equilibrium will
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give employment as high as q1 so again
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great news for workers looking to get
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into work looking to earn income and
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boost their living standards that's the
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beneficial outcome here we can also see
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how wages are determined by the forces
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of demand and Supply no one is setting
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wages whether a firm or the government
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and we get inefficient outcomes that way
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no wages are determined by the forces of
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demand and Supply so we're always going
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to get to equilibrium we're always going
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to get to efficient wages that way but
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also how there shouldn't be any
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long-term wage differentials if labor
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markets are working well because of
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Supply shifts so wages are low in one
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profession imagine there'll be an exodus
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of workers from that profession Supply
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left and an influx of workers into the
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profession where wages are higher Supply
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right closing the wage differential so
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this diagram can illustrate all of those
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benefits if you're talking about Labor
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markets working well or the benefits of
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competitive labor markets bam we now
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know the diagram to draw how to draw it
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how to use it fantastic let's finish
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strong shall we and lastly something
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that seems so basic right your demand
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and Supply shifts but there is a way for
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you to show off tremendously when you're
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drawing these shifts and that is to
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remember that when a curve shifts it
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shifts for nonprice reasons at the
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original price in the market and that
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will always create a disequilibrium that
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will cause prices to change when prices
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change there are functions that kick in
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right functions of the price mechanism
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that will move the market to a new
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equilibrium so if relevant when you're
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drawing these diagrams go into that full
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process take a very simple example this
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is a demand curve shifting to the right
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such a basic diagram we know the
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Market's going to finish at P2 Q2 we get
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that but if relevant go into the detail
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of how that works so this curve shifts
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at the original price of P1 the
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disequilibrium will now Supply at the
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price of P1 still is at q1 whereas
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demand is now at QD that's an excess
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demand that would put upward pressure on
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price let's say from P1 to P2 and then
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go into the functions of higher prices
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how higher prices will signal that there
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has been an excess demand but crucially
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the need for more resources in the
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market higher prices incentivize firms
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because of higher prices to produce more
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output now and make more profit that way
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that's the incentive function of higher
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prices and expansion along the supply
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curve makes that effect very clear
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higher prices also ration Resources by
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discouraging demand contraction along
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the demand curve makes that clear and
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low and beholders last two effects get
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us to that new equilibrium Q2 which is
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allocative efficiency where equals
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Supply no more access demand so if
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relevant go into all of that not just oh
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look we're at P1 q1 and then to P2 Q2 go
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into the functions of price go into the
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dise equilibrium at the original price
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and show how the market will return to a
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new equilibrium when there is a shift
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would be stunning if relevant when
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you're drawing these diagrams in your
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essays your micro essays so there you
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have it guys great diagrams to be able
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to draw there so there you have it five
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incredible diagrams for you to show off
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with in your micro essays use these well
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and see those marks go up know that this
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video compliments the other video I have
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on power diagrams for micro essays make
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sure you've watched that one as well
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there's so much more to come from me
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stay tuned to the channel make sure
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you're subscribe and just watch
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everything coming your way as we look
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forward to Smashing these exams together
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thanks for watching this one guys can't
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wait to see you in future videos
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[Music]