hi i'm adrian hill and i'm jacob
clifford and this is crash course
economics today we're going to talk
about a lot of stuff everything from
blundering planned economies to
heartless free markets from price
gougers to indolent apparatchiks but
it's not all bad news we're going to
learn that price signals indicate skinny
genes are on the way out
[Music]
we've talked about the difference
between free market economies where
supply and demand determine what gets
produced and centrally planned economies
where government agencies decide what
gets produced today we're going to
expand on that and discuss why
competitive markets have been more
successful at providing most of the
things people want central planning has
some upsides everyone who wants a job
has a job and production aims to meet an
idealized version of society's
collective goals but the reality of it
has been less ideal for consumers in
those societies in the soviet union
central planners were focused on
producing heavy equipment and military
hardware there were shortages of
consumer goods like soap sugar and
electronics it turns out people like
having smartphones and good coffee more
than they care about tractors and so
countries like china and cuba have moved
away from large-scale central planning
the problem with central planning is
that it's inefficient now when
economists talk about efficiency they're
talking about a couple different types
of efficiency that's different than the
efficiency that you might know the first
is productive efficiency the idea that
products are being made at their lowest
possible cost this means that there are
no wasted resources and that raw
materials workers and machines are being
used to their fullest potential central
planners in general aren't that focused
on costs but in the free market an
individual business owner has an
incentive not to be wasteful because
they want to maximize profit in the
words of milton friedman nobody spends
somebody else's money as carefully as he
spends his own the second type of
efficiency is called allocative
efficiency
this means that the things we're
producing are the things that consumers
actually want in other words our scarce
resources are being allocated towards
the things we value let's say a company
is producing only skinny jeans now if
they're not hiring too many workers and
if they're not ending up with a bunch of
extra materials they're producing at the
lowest possible cost and that's
productively efficient the problem is
they only make skinny jeans even though
the company might be productively
efficient they're probably not
allocatively efficient consumers don't
want only skinny jeans some want boot
cuts central planners are less likely to
be allocatedly efficient because they
have a harder time getting feedback
about what people want free market
producers of consumer goods collect a
lot of data about consumer preferences
through stuff like market research but
they can also learn a lot about
consumers wants by looking at prices
economists call these price signals
let's go to the thought bubble okay if
people are paying high prices for skinny
jeans it tells producers society wants
more skinny genes start making them if
no one wants skinny jeans producers make
something else instead here's another
example tablet computers weren't really
popular until apple introduced the ipad
after that boom the market exploded in
fact i know about 11 percent of you are
watching this video on a tablet right
now because i can see you and i can't
believe you're still wearing skinny
jeans when google samsung and microsoft
saw apple selling 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 tablets to the
people that value them the most for
example if someone's grandma doesn't
really want a tablet and she was only
willing to pay twenty dollars for one
she doesn't get it unless her grandkids
drag her into the 21st century by giving
her one for christmas some economists
love price signals so much that they
argue against the tradition of giving
gifts this argument was popularized by
economist joel waldfogel who argued that
gift giving is inefficient from a macro
economic point of view holiday shopping
boosts consumer spending gdp and
employment 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 in other implicit benefits of
gift giving like fostering love and
affection among family and friends but
the fact remains the ideal gift in terms
of efficiency is cash heartwarming cash
thanks thoughtbubble theoretically in a
free market producers cannot make
themselves better off without making
consumers better off if a company makes
too many units of a product or just
undesirable stuff they'll have to adapt
quickly or else they'll go out of
business competition between businesses
keeps prices and quality up this is our
old buddy adam smith's invisible hand
it's important to take a step back here
and point out that we're not saying that
free markets are always good and that
government involvement is always bad
most economists recognize that markets
aren't perfect and they often fail to
meet society's needs in these cases
economists encourage the government to
either regulate or take direct control
of markets to improve social welfare in
the united states which is often
mistaken for 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
pellets and or pellet fragments per
kilogram and the government directly
controls the markets for national
defense and public education the field
of public economics analyzes this very
thing now i love rodent excrement and
public education as much as the next
girl but let's get back to markets and
the role that prices play in determining
how we use our limited resources so
price signals help us use our resources
efficiently but that doesn't mean that
everyone agrees that they're always
right or just take price gouging price
gouging happens when sellers raise
prices for essential items like food
water or gasoline when there's something
like an emergency some argue that this
practice exploits consumers and is an
example of the cruelty of markets in the
u.s anti-price gouging laws have been
enacted in 34 states but many economists
say that these laws promote inefficiency
and actually make the problem worse they
argue that allowing prices to increase
in times of crisis encourages others
outside the disaster zone to haul in and
sell essential goods if prices aren't
allowed to increase then there's less of
an incentive to bring this stuff in
furthermore higher prices for things
like batteries sleeping bags and
generators mean that people who don't
really need them won't buy them making
them more available to people who do now
it might not always be government laws
that limit price gouging it may be the
desire to earn profit that actually
keeps prices down it's clear that
businesses can earn a ton of profit in
the short run by price gouging but what
happens in the long run consumers are
likely to remember how they were treated
this is part of the reason some
businesses like walmart has an emergency
operations center and an in-house
meteorologist to interpret weather
patterns this allows them to have goods
like water and batteries in stock when
they're needed not only is this
profitable it's also a pretty good
public relations move in fact in some
cases like hurricane katrina in 2005
private businesses were quicker to
provide disaster relief than government
agencies a different example of how the
price system is perceived as unjust is
below cost pricing sometimes called
predatory pricing this is the idea that
a business can drive out competitors by
charging lower prices even at a
short-term loss competitors that can't
sustain such low prices will be forced
out of the market giving the surviving
businesses market share and the ability
to raise prices let's talk about walmart
again walmart has been the target of
numerous predatory pricing lawsuits
their size allows them to squeeze
distributors and sell products at very
low prices although lots of consumers
like these low prices it's bad for
competitors especially small mom and pop
stores who are sometimes pushed out of
the market
but is it predatory pricing in the u.s
the courts have said it's not the
federal trade commission's website
states although the ftc examines claims
of predatory pricing carefully courts
including the supreme court have been
skeptical of such claims so predatory
pricing lawsuits are common but very
rarely successful in the u.s 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 going to need
to increase their prices above the
market price to make up for those losses
in the short run consumers would have to
pay more but eventually other businesses
would be attracted by the higher prices
and enter the market the end result is
that there's no guarantee that predatory
pricing is worth it in the long run
there's tons of examples of corporate
greed 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
now there are some examples of socially
conscious companies that make an effort
to protect the environment and help the
disadvantaged capitalism with its focus
on prices rather than fairness is often
characterized as the opposite of
altruism but the two can and do co-exist
but here's the big takeaway capitalism
with its system of price signals is
basically crowdfunding we collectively
choose what we want and how we want it
made when we spend our money after all
companies can't force you to buy their
stuff they have to earn your money now
if you want to see real changes in the
world don't just complain that
corporations are greedy expect more from
them we 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 do have the
lowest prices and convenient delivery
options if we as consumers want our
purchases to 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 central
planner sure some of our social
priorities come from governments but
they also come from each of us in the
decisions we make about how to spend our
time and energy and money it's also
worth remembering that it's a luxury to
have these discussions for many many
people around the world who live in
poverty and have trouble affording the
basic necessities of life paying a
higher price based on conscience isn't
an option thanks for watching we'll see
you next week
crash course economics is made with the
help of all these fine people you can
support crash course at patreon a
voluntary subscription service where
your support helps keep crash course
free for everyone forever and you get
great rewards thanks for watching and
dftba
[Music]