hey internet this is Jacob Clifford and welcome to my YouTube channel now with 60 million views you might consider me a minor internet celebrity which means sometimes I get noticed in public and I get requests for shoutouts on Twitter and on my channel anyways last week I got an email from a student that no joke requested a lock of my hair my hair is not to be meddled with so what do you think should I give it to him it's totally reasonable that I say no because let's face it this is pretty creepy I mean I don't know this person maybe he's taking my hair is going to put in a crime scene and frame me for murder but if I say yes I have to decide if I should give it to him for free or sell it to him so obviously the cost of producing hair for me is zero so maybe it makes the most sense just to give it to him for free but I still have to cut my hair go to the Post Office and mail it out and of course he might not be the only person who values my hair I don't know maybe there's some other guy who's willing to pay $20 for it if I just give it to this other guy for free then I'm basically giving up that $20 my point here is even something that's free to produce like hair is not really free there's always an opportunity cost and if the guy that emailed me is going to get my hair then it makes sense that he cover my cost so the explicit cost of getting a haircut and going to the post office and mailing out the hair and the implicit cost of my time and my energy and if I ask him for any money at all that means I'm just selling him my hair so I have to figure out what price to charge to him and maybe the next person that asks for my hair which means I have to be able to understand and analyze a market the market demand curve that you learn about an econ is actually made up of individuals for example let's say there's four students and they're all interested in getting a lock of my hair so let's say the price is $100 the only person who would pay that much is Sam he'd be willing to buy one now if the price falls down to 80 then he'd still be willing to pay but so would Tyler so there'd be two people who want to buy my hair and if the price fell even further down to $60 then Sam Tyler and Sarah would all want to buy one unit and if the price fell all the way down to 40 then Sam would buy two Tyler would buy two Sarah would buy one and this new person Levi would also want to buy one you get the idea people are different so they have a different willingness to pay when you add up all these individual preferences you get the market demand and can draw a downward sloping market demand curve and the market supply curve is created the same way it's based on the cost and preferences of individual sellers now in this case I'm the only supplier of Clifford hair but the same principles apply if the price is anything below $20 and it's just not worth it it doesn't cover my opportunity cost if the price was $20 maybe I'd just sell one just for fun but if the price goes up to 40 I'd sell two if it goes up to 60 I'll sell three and it goes up to 80 and I'd sell four locks of my hair notice as price increases individual producers have an incentive to bring more products to the market which results in an upward sloping supply curve when you put the supply with the demand you get equilibrium that's easy you learn that in your class but what you probably haven't thought about is how ingenious and amazing this is for organizing society and distributing our scarce resources imagine instead that there wasn't a market and I randomly gave out locks of my hair to random students the chances that I would pick the exact students that want my hair the most is pretty low but a market solves that problem markets cause goods and services to flow to the consumers that want them the most and they prevent the inefficient use of our resources you might not think that's a big deal but I'm telling you it's like the biggest deal everything around you right now exists because of this market system your phone or your computer that you're watching this video on YouTube itself your clothes your house all this stuff exists because supply and demand allocated resources toward their production if there was an endless supply of resources then we wouldn't actually need markets every person would just get everything they want but now let's go back to the numbers do you remember Levi he was willing to pay $40 for lock of hair but he doesn't get a lock and you might feel bad for him but if somebody's going to miss out because of scarcity it's best that it's him he values the hair the lease in fact if he got one that would be extremely inefficient because the value he places on it that $40 is less than my opportunity cost of producing the fourth unit in other words markets tell producers exactly how much to produce they don't over allocate resources towards things that people don't really value which is amazing markets are awesome you can clap now in your standard microeconomics class you have to be able to take this a step further and identify and calculate consumer and producer Surplus remember that Sam was Will to pay $100 for a lock of hair but he didn't pay 100 he paid the market equilibrium of 60 the difference that $40 is Sam's consumer surplus it's the difference between what individual consumers are willing to pay for a good or service and what they do pay and it's not just Sam it's also Tyler remember he's will to pay up to $80 for the lock of hair but he didn't pay 80 he paid $60 so that $20 is Tyler's consumer surplus now what about Levi he was willing to pay up to $40 for a lock of hair and the market equilibrium price was 60 so he didn't get the product he gets no consumer surplus graphically the consumer surplus is this triangle right here and in some classes you have to actually calculate it so remember it's just the area of a triangle 1/2 base time height in this case the base is three units and the height is $40 so the consumer surplus is $60 I know I cover that quick make sure to watch the end of the video where I give you some practice multiple choice questions so you can do those calculations now producer Surplus is the exact same idea except we're looking at Sellers so it's the difference between the price and how much a seller is willing to sell a product for for example I'm willing to sell the very first lock of hair for $20 but I didn't sell it for 20 I sold it for the market price of $60 so that $40 that difference is my producer Surplus for that first unit for the second unit I was willing to sell it for $40 but I sold it for $60 so that $20 is my producer Surplus for the second unit what about the fourth unit that I had a super high opportunity cost you had to pay me a lot to go sell the fourth unit where's the producer Surplus there is none I wasn't actually able to sell that unit so just remember you can't get producer Surplus or consumer surplus from units that were never bought or sold the actual area of producer Surplus is this triangle down here and together consumer surplus and producer Surplus make up this area which is total Surplus and this shows why markets are so darn efficient they allow as many buyers and sellers as possible to benefit from voluntary transactions people who don't really want the product don't get it and high cost producers that have a high opportunity cost don't sell it it's a super efficient way to organize society and distribute scarce resources for example let's say I produce only one lock of hair this is inefficient because there's lost consumer and producer Surplus or total Surplus is less economists have a really cool name for this lost efficiency when you're producing the wrong output it's called Dead weight loss trust me you're going to see it over and over again in a microeconomics class you have to be able to identify it and calculate it so don't be afraid of dead weight loss let's look at the other side let's say I produce four units that too would be inefficient and cause dead weight loss the reason why is cuz the cost of producing that fourth unit is greater than what Society want to pay for it so the market saying don't put your resources in producing more hair Society doesn't want this stop producing produce less I'm sorry I get all geeked out on this but markets are awesome but except when they're not there's a detail I left out from the email from the guy who wanted my hair reason why was because his teacher said he'd give him a perfect score in the class if he did weird so now what should I do because there might be some unforeseen costs so if I go with the market solution and sell this student my hair then he's not really going to learn economics in fact the only thing he's going to learn is how to get around and cheat the system which sounds to me like the making of a serial killer that would definitely frame me for murder and never mind the fact the teacher would probably get fired for this because let's be honest so against the rules so now I have to decide do I want a market that's efficient or do I want to be ethical and that's exactly why sometimes markets need to be regulated or or abandoned for example human organs like the market for kidneys a free market purist would point out there's people out there that are on dialysis that really want a kidney and there's healthy people out there that at the right price are willing to sell a kidney they would argue that a market would maximize total Surplus and result in the most efficient outcome but there's a solid argument against selling kidneys for ethical reasons but let me point out this is not the norm in the vast majority of cases markets the preferred way to allocate our resources but is it what I should do here in this situation with this guy that wants my hair I'm going to let my viewers decide so let me know in the comments if you think I should give him my hair or sell him my hair or if I shouldn't do any of that I want to know what you think because I don't want to be considered a sellout but don't go anywhere because it's time for a pop quiz before I do that let me give you the memory tool that's going to go on the back wall for this episode well actually there's going to be two of them the first one I need some scissors for horrible scissors for this oh boy a lock of my hair this right here is going to remind you about markets and efficiency and consumer and producer Surplus and the whole idea that a demand curve is made up of individuals and their willingness to buy and a supply curve is made up of individuals and their willingness to sell and the other one is going to be this right here this represents the idea of dead weight loss and inefficiency and the idea that when a Market's not producing what it's supposed to produce you get dead weight loss now I'm going to give you the quiz keep in mind that the questions won't be on the screen for very long so you have to pause the video answer the question then look in the comments below for the answer key and if you like my videos and they're helping you learn in love economics please like And subscribe and also check out my ultimate review packet it's going to help you learn and do awesome in your class thanks for watching until next time