adriene: hi, i'm adriene hill - jacob: and i'm jacob clifford, and this is crash course economics. today we're gonna talk about a lot of stuff. adriene: everything from blundering plannedeconomies to heartless free markets from price gougers to indolent apparatchiks. but it'snot all bad news. we're going to learn that price signals indicate skinny jeans are onthe way out.
apple stock price over time, [theme music] adriene: we've talked about the differencebetween free market economies, where supply and demand determine what gets produced, andcentrally planned economies, where government agencies decide what gets produced. todaywe're gonna expand on that, and discuss why
competitive markets have been more successfulat providing most of the things people want. central planning has some upsides. everyonewho wants a job has a job, and production aims to meet an idealized version of society'scollective goals. but the reality of it has been less ideal for consumers in those societies. in the soviet union, central planners werefocused on producing heavy equipment and military hardware. there were shortages of consumergoods, like soap, sugar and electronics. it turns out that people care more about smartphonesand good coffee than they care about tractors. and so countries like china and cuba havemoved away from large-scale central planning. jacob: the problem with central planning isthat it's inefficient. now, when economists
talk about efficiency, they're talking abouta couple different types of efficiency that's different than the efficiency that you mightknow. the first is productive efficiency: the ideathat products are being made at their lowest possible cost. this means that there are nowasted resources and that raw materials, workers, and machines are being used to their fullestpotential. central planners in general, aren't that focusedon cost. but in the free market an individual business owner has an incentive not to bewasteful because they want to maximize profit. in the words of milton friedman; "nobody spendssomebody else's money as carefully ashe spends his own." the second type of efficiency is called allocativeefficiency this means that the things we're
producing are the things that consumers actuallywant. in other words, our scarce resources are being allocated towards the things wevalue. let's say a company is producing only skinnyjeans, now if they're not hiring too many workers and if they're not ending up witha bunch of extra materials they're producing at the lowest possible cost and that's productivelyefficient. the problem is they only make skinny jeans. even though the company might be productivelyefficient they're probably not allocatively efficient. consumers don't want only skinnyjeans some want boot cuts. central planners are less likely to be allocatively efficient becausethey have a harder feedback about what people want. adriene: free market producers of consumergoods collect a lot of data about consumer
preferences through stuff like market research.but they can also learn a lot about consumer's wants by looking at prices. economists callthese price signals. let's go to the thought bubble. okay, if people are paying high prices forskinny jeans, it tells producers "society wants more skinny jeans, start making them."if no one wants skinny jeans, producers start making something else instead. here's another example: tablet computers weren'treally popular until apple introduced the ipad. after that, boom! the market exploded.in fact, i know about 11% of you are watching this video on a tablet right now. because i can seeyou. and i can't believe you're still wearing skinny jeans. when google, samsung, and microsoft saw appleselling millions of ipads at $500 and up,
they had an incentive to jump into the market.price signals not only tell producers what to make, but they also help distribute tabletsto the people that value them the most. for example: if someone's grandma doesn'treally want a tablet and she was only willing to pay $20 for one, she doesn't get it. unlessher grandkids drag her into the 21st century, by giving her one for christmas. some economistslove price signals so much that they argue against the tradition of giving gifts. thisargument was popularized by economist joel waldfogel who argued that gift giving is inefficient.from a macroeconomic point of view, holiday shopping boosts consumer spending, gdp, andemployment. but, if too many people are purchasing items that the end consumers don't value,then resources are being wasted.
of course, this analysis doesn't factor inother implicit benefits of gift giving like fostering love and affection among familyand friends. but the fact remains: the ideal gift in terms of efficiency is cash. heart-warmingcash. thanks thought bubble. theoretically, in afree market, producers cannot make themselves better off without making consumers betteroff. if a company makes too many units of a product or just undesirable stuff, they'llhave to adapt quickly, or else it will go out of business. competition between businesseskeeps prices and quality up. this is our old buddy adam smith's invisible hand. it's important to take a step back here andpoint out that we're not saying that free
markets are always good and that governmentinvolvement is always bad. most economists recognize that markets aren't perfect andthey often fail to meet society's needs. in these cases, economists encourage the governmentto either regulate or take direct control of markets to improve social welfare. in the united states, which is often mistakenfor a free market economy, it turns out just about everything is regulated. for example,fda regulations reject any wheat that contains nine milligrams or more rodent excreta pelletsand/or pellet fragments per kilogram. and the government directly controls the marketsfor national defense and public education. the field of public economics analyzes thisvery thing.
now i love rodent excrement and public educationas much as the next girl but let's get back to markets and the role that prices play indetermining how we use our limited resources. so price signals help us use our resourcesefficiently, but that doesn't mean that everyone agrees that they are always right or just.take price gouging. price gouging happens when sellers raise pricesfor essential items like food, water, or gasoline. when there's something like an emergency.some argue that this practice exploits consumers and as an example of the cruelty of markets.in the us, anti-price gouging laws have been enacted in 34 states. but many economistssay that these laws promote inefficiency and actually make the problem worse. they arguethat allowing prices to increase in times
of crisis encourages others outside the disasterzone to haul in and sell essential goods. if prices aren't allowed to increase, thenthere's less of an incentive to bring this stuff in. furthermore, higher prices for thingslike batteries, sleeping bags, and generators mean that people who don't really need themwon't buy them, making them more available to people who do. now it might not alwaysbe government laws that limit price gouging. it may be the desire to earn profit that actuallykeeps prices down. it's clear that businesses can earn a tonof profit in the short run by price gouging, but what happens in the long run? consumersare likely to remember how they were treated. this is part of the reason some businesseslike walmart has an emergency operation center
and an in-house meteorologist to interpretweather patterns. this allows them to have goods like water and batteries and stock whenthey're needed. not only is this profitable, it's also a prettygood public relations move. in fact, in some cases like hurricane katrina in 2005, privatebusinesses were quicker to provide disaster relief than government agencies. a differentexample of how the price system is perceived as unjust is below-cost pricing. sometimescalled predatory pricing. this is the idea that a business can drive out competitorsby charging lower prices even at a short term loss. competitors that can't sustain suchlow prices will be forced out of the market, giving the surviving businesses market shareand the ability to raise prices.
let's talk about walmart again. walmart hasbeen the target of numerous predatory pricing lawsuits. their size allows them to squeezedistributors and sell products at very low prices. although lots of consumers like theselow prices, it's bad for competitors. especially small mom and pop stores, who are sometimespushed out of the market. but is it predatory pricing? in the us, the courts have said it's not.the federal trade commission's website states, "although the ftc exampines claims of predatorypricing carefully, courts, including the supreme court, have been skeptical of such claims."so predatory pricing lawsuits are common, but very rarely successful in the us. in germany,walmart faced the same sort of accusations in 2000 and was ordered to raise some of its prices.the company ended up leaving germany in 2006.
predatory pricing is difficult and risky.when a business successfully eliminates their competitors by selling products at a loss,they're eventually gonna need to increase their prices above the market price to makeup for those losses. in the short run, consumers would have to pay more. but eventually, otherbusinesses would be attracted by the higher prices and enter the market. the end resultis that there's no guarantee that predatory pricing is worth it in the long run. jacob: there's tons of examples of corporategreed, inequality, and disregard for the environment that make people wonder if markets are evil.and they are. thanks for watching! we'll see you next week! [endscreen music plays, stops]now, there are some examples of socially conscious
companies that make an effort to protect theenvironment and help the disadvantaged. capitalism, with its focus on prices ratherthan fairness is often characterized as the opposite of altruism. but the two can, anddo coexist. but here's the big takeaway: capitalism, with its system of price signals, is basicallycrowdfunding. we collectively choose what we want and how we want it made when we spendour money. after all, companies can't force you to buy their stuff, they have to earnyour money. now if you want to see real changes in the world, don't just complain that corporationsare greedy; expect more from them. you also need to expect more from ourselves.if you disagree with the way a retailer treats its workers, then don't buy from them. even if they dohave the lowest prices and convenient delivery options
adriene: if we as consumers want our purchasesto have a positive impact, it's on us to seek out companies that try to improve the world.this might mean paying more for the stuff we buy or it might mean buying less stuff.a market based society still has shared social goals. they just don't come from a centralplanner. sure, some of our social priorities come from governments, but they also comefrom each of us and the decisions we make about how to spend our time, and energy, andmoney. it's also worth remembering that it's a luxuryto have these discussions. for many, many people around the world who live in povertyand have trouble affording the basic necessities of life, paying a higher price, based on conscience isn't anoption. thanks for watching! we'll see you next week.
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