Greetings. This course is called markets and allocations, okay? We have to figure out, Consumer behavior. We thought about consumer behavior, we thought about understanding production and cost, not a lot of fun, but it's really important. And we looked at how a firm would maximize profits. That is, what output will the firm choose to produce given its understanding of its cost curves and given it was facing some exogenously given price? But that, Exogenously given price is a little bit unfulfilling, where'd that come from? And you say well, Larry, this is actually what this course is all about, right? Price theory, we're thinking about where prices come from. We looked at that InfoWorld example about how chip prices in 1990 were outrageous. A four megabyte chip would be $2,600 and now prices for that have just crashed, okay? And how did that happen? Okay, well, we're going to have to start thinking about markets and how markets work. And what that requires us to think about is we need to introduce markets and understand two things. First, we need to think about firm-to-firm interplay. How do firms play nice with each other or not play nice with each other, okay? What happens when firms come together in an industry? And what we're going to do as we think about this is we're going to have to think about not only how firms play with each other, but also how do firms and consumers interact, okay? What type of interaction happens between firms and consumers? Markets, and we're going to lay out a model of how to think about markets but markets can be very complicated. They can be as simple as having only one producer, we call that a monopoly, it could have millions of producers, okay? That's something that we typically refer to as a competitive environment. We're going to think about profit maximization. Profit maximization is our model, it works well with sole proprietorships. Remember, sole proprietorships is when some person decides to go in business for themselves, okay? So we talked earlier about Larry's tree-trimming shop, okay? So Larry's tree-trimming shop is an example where I decided, you know what? I'm going to start running a little tree-trimming business out of my house. I go out, and I get some capital, that's my chainsaw. I've got some labor that's me and my understanding about how to trim trees. And I go out and I trim trees and I keep the money, okay? I paid the cost, I keep the money. Profit maximization works real well when talking about partnerships too. Suppose in town, we've got Tim's landscaping service and we've got Larry's tree-trimming service. And the two of us decide to go together and form one company. We're a partnership now, so we're going to share the cost and we're going to share the revenue. Tim and Larry are going to go out and run this business and will be joint owners and share it. Now, how about corporations? We talked about corporations before, corporations are legal entities. But the thing about corporations are, that the owners, Are not the people who are running the firm, are not the managers. The managers are the people who are sitting in the C-suite, the CFO, the CEO, the CIO, all these sort of people met. This guys over here, owners are a diverse group of people, okay? You got ranchers from Missoula, Montana, who are owners of this company. You've got shrimpers from Galveston, who are owners in this company. You've got farmers from the Midwest who are owners in this company. All the owners are spread through these things called share prices, okay? And these owners, being owners, would like to get their share, okay? They want to know how much am I going to get from this business going forward? And so what we have to do is, we need to think about this problem. What we have to do is we need to think about the problem in a different way. And so I'm going to motivate this by talking about something that economists call assets. Suppose I tell you, you know what I want to do, I want to be a farmer, okay? So I get in my car and if I drive from Champagne here, if I just drive just ten minutes due West, I'm going to be in a sea of corn, okay? There are cornfields everywhere out there. And so I pull up to the farmer's house and I say hey, I'm interested in buying an acre of corn. Just one, I only want one acre of corn and the guy says well, I probably can sell that for you. And I say, I want to know how much did you make off that acre of corn? And the guy says, well, I just happened to be talking to my accountant and we made about $200 an acre last year as our profit and that's really a pretty accurate number. And I say to the farmer well, then how about if I give you $220 for that acre of land? Well, the farmer will just say get off my land, you're crazy. And I say wait a minute, I'm giving you more money than you earned for that. And he says well, the problem my friend is land is an asset in perpetuity. Land is an asset in perpetuity. And what that means is that you're going to get profits this year, but you're also going to get profits next year. That owner says, if I sell you this piece of land, I'm not going to get my profits next year. I say well, yeah, but I've given you more than you made this year. And says don't, no, I'm going to keep farming year after year after year. There's lots of those types of situations out there. The farmer would say, I can see out into the future what my expected profits are in year one, year two, year three, year four, year five. Now, of course, money in the future is not worth as much as it is today, okay? And so you might think it's $200, a year from now, if you get $200, given low interest rates these days that's about the same as if I put down $195 in the bank today, a year from now, it'll be worth 200. That's another way of thinking about money that's worth 200 a year for now. It's really only about the same thing as having $185 right now. So the farmer will think about that stream of returns to its asset in perpetuity. And come up with a number that he or she feels would compensate them for this pile of cash that you would give them. Would replicate the returns over the next 25, 30 years that this piece of land would give to the farmer. There's lots of markets like that, farmland, taxicab medallions. Take a look at New York City taxicab medallions. In New York City, you have to have a taxicab medallion on your car. There's like 13,000 taxicab medallions, that's it. Otherwise, if you don't have it on there, you can't give people rides. And if you do try to give people rides, you're going to get in trouble. So these taxicab medallions are assets in perpetuity and the market for that gets bid up and goes. So I did some looking at New York City prices and the medallion prices in 1947, A medallion cost $2500. In 2013, 2-0-1-3, medallions were $1.3 million per medallion, okay? Now that means that if you had one of those medallions, there is an open market. You can see these prices, the prices show up in the newspaper every now and then and that means that taxicab medallion, you could sell to somebody for $1.3 million. Now, obviously, probably most of us have not gotten into a cab in New York City and thought that the taxi driver was a millionaire. But that's because most of the people who own taxicab medallions are not actually the drivers. The owner of a taxicab medallion owns that car and the right to drive that car around. And what happens, so the way the taxicab market works in New York is that the people who want to drive the cab will come on any given day and they will bid for that. So they might say I'll give you $250 if I can have that car for eight hours, okay? And that's the way the owners of the taxicab medallions like it, because then they don't have risk on themselves. They take the cash upfront and the driver can work as hard or as little as he or she wants to. If the driver just kind of lounges around outside of doughnut shops, they're not going to get very much money, okay? They've already paid that cash upfront. But on the other hand, if the driver really hustles out there, they can certainly make much more money on any given day than what they actually paid the owner to drive that. $1.3 million in 2013 and 2015, that number had dropped to 650,000. And in 2018, according to the New York Times, it's approximately $200,000. This is called the Uber effect. Okay, the existence of Ubers or non taxi ride-sharing entities have basically destroyed most of the profitability for the yellow cabs in New York City. And a medallion now is worth right around, the last one that traded hands was like $180,000. So there's approximately $200,000 for a medallion. We're going to think about that when we think about ownership of corporations, because ownership of corporations is broken out into shares.