Greetings. In our previous video, we were able to establish the equilibrium in a perfectly competitive market, very important, right? It's our first venture into any market structure. Competitive markets are sort of a benchmark for us. As we said when we went through it, the assumptions on the condition a market has to meet in order to be a perfectly competitive market are pretty stringent. But on the other hand, all of microeconomics is essentially understanding what it would be like if market exactly fit perfectly competitive markets. Then let's modify it, like say maybe it's not really homogeneous products, maybe it's heterogeneous products, and we mentioned the case of what would happen if all the other conditions hold, but say products are differentiated, like ready to eat cereal. Well, it just explodes into all sorts of interesting and very rich research results that you couldn't show about how that market will have all sorts of interesting behaviors, and the equilibrium will be much different than say the market for a prototypical competitive industry like say corn. So anyway, we've established that market, and we're going to go forward and establish other markets as we go through future videos. But before we go that far, we need to really think about this issue of understanding. So is it equilibrium? How good is it? What we're going to do, is we're going to think about evaluating market equilibrium. In other words, we know what the equilibrium looks like. Now what we need to know is, is it good or bad? What are the characteristics of that? Remember, from the long, long time ago in the videos, we started talking about resource allocation, and we said over the vast history of recorded time, many resource allocation methods were basically just the king, or the emperor would decide who gets what. We said that contemporary modern economies use markets. So the question is, well, how good are markets? I mean, is that an outcome that we really like, or could there be something better? Could there be something else that will make it stronger? So we're going to evaluate market equilibrium, and our goal is going to be to build a metric to measure efficiency. We want to build some rule. So you think of this as essentially a yardstick. We want to build a yardstick that will allow us to measure how good or bad a certain outcome is. This yardstick, which we're going to build, is going to be great for us because we can keep it with us as we then go into other markets. Right now, you don't need to take a course in economics to understand monopolies, or not very efficient for most people. I mean, monopoly is great if you're the monopolist. You make an awful lot of money being a monopolist. But it's not really good from society's point of view, and that's why we have rules against monopoly. We have antitrust laws, Europe has very stringent antitrust laws, United States has also stringent antitrust laws, and we spend a lot of money taking people to court, who we think might be actually trying to either have established a monopoly, or trying to establish a monopoly, because the monopoly is not going to measure up very well with the yardstick that we're going to build. That's why there are laws put in place to that, but that's getting ahead of the game. We wanted just to think now about building this yardstick to help us evaluate what's going on. Initially, we're going to assume there is no government. That means that the implication is that there's two parties. The two parties are consumers and producers. What we want to do is figure out how this is market allocation, whatever it is, and then obviously, we're going to build a yardstick, and then we're going to hold it up against various allocations: monopoly, competition, oligopoly, all of these things that we want to talk about in terms of markets. Remember that real number line I drew that at one end had one, that's a monopolist, and the other end had n very large, that's competitive, and the middle, we have this area called oligopoly, competition amongst just a few big producers. The model that we've been talking about is mid-size automobiles and how Honda Accord and Toyota Camry are like the £900 gorillas in that market, and how they know a lot about each other. They know a lot about how each other strategies are and how do they compete in that century. So we're going to see results that will allow us to hold our yardstick up to it, and say, "Well, that's pretty good, or that's not too good." Then we'll move forward with that. So we have two groups, and we're going to do something here which economists call welfare analysis. So in economic, welfare analysis is basically the study of efficiency. When you hear welfare on the media, they oftentimes talk about things that are government grants, food stamps, or vouchers to help buy housing, or vouchers to go to schools, basically means income-related issues, less than what economists call welfare. Economists call welfare, how good is this outcome in the eyes of society? Has this outcome actually been efficient? So that's what we're going to do going forward. We're going to start with consumers. The definition of consumer surplus is this excess of consumer value, net of consumer expenditure. So think about this. Earlier, we talked about when a consumer buys something, they're giving up one of this little green sheet of paper. This green sheet of paper, of course, as I said before, they're really not worth much except for what they can give you when you buy things. But when I decide to go out and buy something, like let's say I want to buy a snickers bar, one of my favorite expenditures by the way, when I want to buy a snickers bar, I lay a dollar down, and they give me a snickers bar. Now, the reason I gave my dollar for the snickers bar is because I like that. In fact, I feel like that snickers bar, to me, my consumer value for the snickers bar is in excess of this dollar. Otherwise, I wouldn't have given it to you. I'd save the dollar for instead buying a cup of coffee, or a one dollar McChicken sandwich at McDonald's, or something like that. There's all sorts of alternatives I could use a dollar for, but without a gun pointed to my head, I am giving it to the producer and say, "Give me that snickers bar." Now, I do that because I believe in my head that that snickers bar is worth more than a dollar. So that's what we're trying to measure here. How much extra do consumers value these product? That's what we call consumer surplus. Suppose the value is $2.50. I shouldn't really reveal that to the to the salesperson, but it's really $2.50. What that means is, I'd be willing to pay up to that, but no more than that. You'd say, "Well, Larry, I've never pay $2.50 for a snickers bar." Yeah, I don't know about that. I was just talking to some friends of mine. I went to a cubs game the other night. I stayed in the hotel at night game. I went back to the hotel, and laying on the credenza in my hotel room, there's a bottle of wine there, with little opener, and then there was a snickers bar and a bag of M&M peanuts. Beside it was a little card that told me what the price was. It said that that's snickers bar, one snickers bar. I won't even tell you who owns this hotel, was six dollars. Now, guess what? I didn't eat that snickers bar. The value to me of a snickers bar is pretty high, but not six dollars. But the point is, they put that there because for somebody, it was worth six dollars. Then I just thought that they're not wasting time for the maid to have to clean it up in the morning, that somebody must be actually paying six bucks for that. So there's all sorts of people out there, and what we're trying to figure out is how much are people really willing to pay and when would they say, "No, I'm not going to give you this because there's alternative things I can choose." Thanks.
