Video Transcript: Subjective Value and Market Prices | Jeffrey M. Herbener

In this talk, we'll cover the topic of subjective value and market prices. In  particular, we'll talk about the role of subjective value in human action, covering  the complete theory of what Ludo von Mises calls valuation as a system for  decision making about the use of means to attain ends, and then we'll do the  main task, which is to show the relationship between subjective valuations that  we all have and act upon and prices in the market, and then the final thing that  we'll mention, and this is the topic of a later talk, also by Dr. Salerno on  economic calculation. We'll mention the role of prices in what Ludwig von Mises  calls appraisement, the use of money prices in decision making about the use of means to attain ends in the social settings. So that's the, that's the plan. Now,  let's begin with, as we always do in the Austrian tradition, we begin with what  Murray Rothbard called reflective facts about human action, facts about human  action that we ascertain by reflecting as human beings, upon action, we just  think about the logic of action, and of course, the first thing we hit upon is just  the definition of human action. Human action is purposeful behavior. Human  action is motivated behavior on the part of a person to attain an end, it has the  goal of the satisfaction of attaining the end. Another thing we recognize right  away about human action is that having an end does not constitute action,  contrary to to our lefty friends, as Dr. Woods was pointing out last night, we can't just think of having an end and have it accomplished. We can't just stamp our  feet and every.. and there are no more poor people in the world, or right? This  doesn't happen. We have to act with the use of means. We have to perceive the objects in the world, and then discover their cause and effect connection in  action to the attainment of our ends. Human action is the human mind  organizing the elements of the external world systematically in action to attain  ends. So we see right away that once we see the ends, means character of  action, we see right away the scarcity of means. We understand again, just by  introspection, that we're finite beings. We understand through our past actions  that when we act, we don't fully attain our ends, and we don't attain our ends  permanently through a single action, right, that the means are not capable of  creating bliss, where no action is ever then again necessary. We have unmet  ends, and to meet these ends, or satisfy these ends, we must apply the means  as we perceive them to the attainment of these ends, and this is where we then  get to the central organizing principle of human action. In the Austrian view, this  is the principle that's called economizing. This is what brings order and  systematic character to human action. All human action is economizing,  because means are scarce, we have to choose which ends out of the competing ones we'll pursue, and because it's possible for any particular end to be attained by different combinations of means, we have to choose which combination of  means to apply to any given end that we choose, and we do this according to  our purposes, or as again Ludwig von Mises would say, we do this according to  the way that we value the alternatives. So economizing is choosing to attain 

ends that we value more highly than other ends with given means and attaining  each end with a set of means that we value less highly, in other words, we try to  achieve the end with the low cost method of action, and this then is we're in a  position now to to talk about the idea of subjectivity in action and choice, when  we're choosing, making these choices, we're valuing the alternatives, we're just  judging in our minds our own personal assessment in our own minds of what the satisfaction would be of attaining one end versus another or applying. One set of means to attain an end, as opposed to an alternative set of means.  Economizing, then, is always choosing the more valuable alternative. We always choose the end that we find more valuable. We set aside the end we find less  valuable. We have, as again, the term in the literature would have it, we have a  preference, we have a value ranking as the basis of our choice, and as Murray  Rothbard is want to emphasize this, this preference that we have as human  beings in choosing and acting is always logically consistent with our actions.  This is what he calls demonstrated preference. So we know another person's  preference when they act, they demonstrate their preference, because action is  always choosing the more valuable alternative and setting aside the alternative  that's less valuable. Now, since value is a judgment of the human mind. It has  no extensive property, and since it lacks an extensive property, we can't define a unit of subjective value. We cannot measure subjective value. It's not a  substance to be measured, it's just a judgment of our mind, and since there is  no common unit that we could use for assessing the subjective value that I get  from doing an action, or the subjective value that you get from doing an action,  we cannot make interpersonal comparisons of our subjective valuations. We  can't say whether one person values one thing more or less than another person values another thing. This just is scientifically not possible, because of the  nature of the subjectivity of value. Hopefully, you can see right away this poses a gigantic problem for organizing social production. Right, we want to organize  social production and division of labor to get the greater productivity of the  division of labor, but we can't really know, as producers in the division of labor,  producing for the consumptive satisfaction of other people, what the greatest  value of different lines of production that we might engage in would be. We can't just sort of ask people, you know, what do you subjectively value, and then  produce according to surveys, or something of the sort, or have votes, you  know, we can't democratize this, because we're not measuring subjective value,  right, we're not getting an indication of the intensity of subjective value through  these make these makeshifts, as we'll see, of course. This is where the whole  system of market pricing comes in. Now, I want to mention, as an aside, there's  another element of valuing that needs to be mentioned, just for additional study  that you would do, more advanced study that you've done on these questions,  and this is the issue of constancy, so we also find again, just by reflection, just  by thinking about our own action, we find that our subjective valuations are not 

constant with respect to the means that we might apply to the attainment of our  ends, they don't stay constant over time, they're not the same from one person  to another person. There's no like a fixed quantitative relationship between  means, the use of means, and the attainment of the satisfaction of the end. This  is in flux, as far as we know, this is this is open to change. The implication of  this, of course, is that we can't think of value or utility in a functional way. We  can't make a mathematical function out of utility, right, because we have no  constants for the functional expression. All we have are variables and no  constants. Now let's go on to the, to the next step. We, this is the idea of value  imputation. Okay, so the Austrians say value is subjective, it's a state of mind,  but we also know that we, at least in common discourse, we make the claim that objects have value, so I value my, my iPhone, I value my, my 2007 Honda  Accord, right? I value my, my, my house, and so on. They have value to me. So,  how does that happen? Where does that value come from? So the Austrian  answer to this is in the first row of our slide, which is that value is imputed or  given to consumer goods by the person who's acting with the consumer good to  attain ends, so the arrow. Causality moves from our mind to the consumer good. I value my iPhone subjectively because I get satisfaction from employing it to  attain my ends. That's where its value comes from to me. It's this connection  between means and ends, right? This this claim of the cause and effect chain  here preserves the basic definition of human action. The human action is  applying means to attain ends, it's ends that are valuable, and means then have  value only as aids to attain the end. Then we can take the other step of the  causal chain, the connection between consumer goods and producer goods, so  value then would be imputed from the consumer good to the producer goods, by which the consumer good can be constructed. This again preserves the the the  cause and effect nature of human action. It must proceed in this way to to  preserve the cause and effect structure of things, we can't. Alternatively, we  can't think of the connection as reversing the cause and effect movement, right? We can't think that producer goods are have value in and of themselves, like the labor theory of value of Karl Marx, and then through production they transmit  this value to the consumer good, and then somehow our mind ascents to gives  assent to this, this value of the consumer good. If we are to hold the view that  human action is applying means to attain ends, and we understand reflectively  what that means, then then we have to reject this theory out of hand, right. This  cannot be true. The value of producer good could never be separate from its  usefulness as a means to attain ends in human action. The same thing would be true of an eclectic theory that claims that the consumer goods price or value is  mutually determined by our mind, and independently the value of the producer  goods. Again, this would, this doesn't work right logically as a, as a theory. It  could not be the case. It couldn't possibly be the case that there's some  independent value of producer goods, independent from human action. The 

argument is no, no, that it must be dependent upon the aid that the producer  goes, gives to the production of the consumer good, and then the satisfaction of  the end that's attained by the by the consumer good. By the way, you may  recognize this, some of you studied some economics, may recognize these  different patterns, right. The bottom one is the neoclassical theory, it's the Alfred  Marshall scissors theory, right. Demand is subjective value, supply is cost of  production, but notice it depends upon giving up in order to make this  acceptable. Logically, you have to give up the whole notion that there's a cause  and effect structure of action, you have to instead claim that there's something  like mutual determination, everything is synchronously mutually determined.  Now that raises one last point that we'll mention here, and again, these are  topics that'll be covered in more depth later in the week, it may be true.  Hopefully, we all accept this, right? It may be true that there's a logical flow from  the mind to producer goods, that's the flow of logic, but the chronological flow  does, in fact, move the other way around, right? In order to consume, I have to  have already produced the good, so the chronology is I apply my producer  goods to make something, and then I use the thing that I make to satisfy my  end. So there's logic flows one way, chronology flows the other. How are these  reconciled then in the Austrian view? In the neoclassical view, you don't have to  reconcile these because you're just assuming mutual determination, and so  there's no cause and effect, so there's no problem. Well, in the Austrian view, we reconcile this by again reflectively understanding the role of entrepreneurial  anticipations in human action, so the mind anticipates the satisfaction that will  accrue to a person who's about to begin to apply producer goods to make  consumer goods to satisfy ends, so it's that that binds the whole structure  together, entrepreneurial expectations or anticipations or entrepreneurial  foresight, however you want to say this. okay, so now having covered that basic  ground, let's move on to the to the laws of utility, and here, here we're going to  take an example from every Austrian's friend, Robinson Caruso. Now it's true  that Robinson Caruso is just an imaginary friend, but that's okay. He's very  helpful nonetheless, right? You can learn a lot from our imaginary friend  Robinson Caruso. So, let me, let me set this up for you. So, we have Robinson  Caruso, and he's on his, on his island, stranded all alone, and he finds he, you  know, using his human skills of perception and intellect, and so on and so forth.  He, he discovers consumable things that he can produce. He can, he can gather up coconuts, they're coconut trees, and he can gather up the coconuts, and  they're berry bushes on the island, and he can pick berries, he finds they're  edible, and he sees, you know, he watches to see animals eating them, make  sure they're not poisonous or whatever, and, and so he can produce those and  consume them, so we'll limit his consumer goods to these two, and then, of  course, he's going to make judgments of value with respect to what he prefers.  Does he prefer the coconuts? What uses can he, you know, ends can he attain?

What uses can he put them to? How about the berries? You know, what ends  can he attain? What would he do with them, and so on. And so, my, my  example, he would break open coconuts and drink the coconut milk, or  sometimes maybe he would break open the coconuts and mash, mash the  fibers right into, you know, eat the eat the mix, and then with berries he again  could eat the berries, just eat them, or maybe again for a variety he would mash  them up and drink the berry juice, maybe he creates a trap for small game, and  he uses the berries as bait, you know, to catch whatever, rabbits or squirrels, or  whatever's on the island, something like this. And then we asked the question,  logically, are there any laws of utility? Are there any laws of consumption, and  we use Robinson Caruso again to simplify the situation, so we can expose  these, these laws, if there are any, and obviously the answer is yes, there are  laws of utility, right, they're laws of consumption, and the first law of consumption says that the larger the stock of a good, the more units of a good a person has,  the lower the value of the marginal unit. So, if a person has, you know, if I have  10 iPhones, then the value I place on any one of them is lower than if I just have two. That's the first law of utility, right. The law of diminishing marginal utility.  Now, again, there's a technical point that needs to be made in order to see the  logic of this law, that there are no violations to this. It's actually, actually a law of  logic, and it can't be contradicted or contravened, and this is the notion of the  unit, so in my example, the first strength thing that Caruso wants to do, the  preferred thing, most preferred thing that he wants to do, is gather up two  coconuts, break them, and drink the coconut milk. This is because he has  chosen, as a human being, the unit of drinking coconut milk to coconuts. He  doesn't want to drink the coconut milk of one coconut, that doesn't satisfy him  fully. He wants two, not three, not four. So, in every human action, the person  acting chooses the unit. The unit is not limited to the technical units that exist in  nature that we manufacture. Right, I filled up my car with gasoline this morning.  The technical unit is, is a gallon, so it's probably right, it's doled out in gallons  and priced in gallons, and so on and so forth. I didn't buy a gallon, I bought the  amount I wanted, which was what I don't remember what, how much it was, six  gallons or whatever, that's I wanted to fill my tank, so I bought whatever was  that's my unit, that's my chosen amount that I bought. So, in every action, this is  the case, right? The unit is chosen, it's a choice variable, and so this is what  Caruso does. Now, it follows logically that if he fully satisfies his drinking end  with two coconuts, if instead he had four coconuts, another unit, he would have  to use the second two coconuts for some other end, right, and by choosing  drinking, he's demonstrated that that's more valuable to him than his second  ranked end. His second ranked end is eating, you know, mashing it up and  eating, so the preference rank here illustrates this law of utility. The same for the berries, so the ranking of the berries in the same order of diminishing marginal  utility. Now, of course, it could be the case that a person doesn't act in the face 

of real, as Barry Rothman called them, equally serviceable units. It might be. We just act with one unit, right? I only have one house, and so on. I'm not thinking of other units. That's why we need economic theory. That's why our imaginary  friend is helpful, because he allows us to do useful imaginary constructs,  thought experiments, right, of what must, in fact, be the logic of all action. The  second law of utility, of course, is that a larger stock of a good is preferred to a  smaller stock. So, as long as the, as the object is a good, as long as it's scarce,  mean having more of it is preferable to having less. Of course, Caruso could  have so many coconuts that it wasn't a good to him anymore, in which case the  law of utility doesn't apply, because the law applies only to goods, only to scarce means. But given that, yes, it's true that having more of a good is preferable to  having less. This is the second law of utility, and then the last thing that's  illustrated here by Caruso is the allocation of his consumption, he's got these  two different goods that he can use for consumption, the marginal utility, the  marginal utility, the rank order of each of these units is given on the preference  rank, and so Caruso would prioritize his action. The first thing he would do is  drink the coconut. When I say first thing, I mean logically that's he doesn't have  to do that the first thing when he wakes up in the morning, right? The timing of  things, the chronology of his action is something again we'll talk about later in  the in the week. In the lecture on time preference, we'll talk about the temporal  and intertemporal allocation of things. Here we're just speaking logically. This is  what he does first, but then once he does that, the marginal utility of the first unit of berries is the second most highest ranked thing, right? He doesn't act with  coconuts again for quite a while, because with six coconuts he can do quite a  few of his - I mean, with the two coconuts, he satisfied his most valued end, and  so it becomes clear then that the way in which Caruso, or any of us, balances  our consumption is to continue using each particular good until there are no  more value differences at the margin between shifting between using berries,  the fourth unit of berries, or the second unit of coconuts, we don't see any value  in shifting between the two. We don't see a value difference where we could  give up one thing of less value and get something else of greater value. Those  have been exhausted by our allocation. Okay, now let's do production real  quickly with Caruso, and then we have the full picture for valuing, and so these  are schedules to the marginal physical product of labor in coconut gathering and berry picking, so MPP sub L for marginal physical product of labor, and these  these schedules exhibit the law of returns, and once again, this is a - we think of this in a logical way - we need, we need to stipulate the conditions under which  the logic falls out, right, and then see in the real world where these stipulations  apply, how we apply them to the real world. So it's the same thing here. We  have our imaginary construct, and the idea would be something like this: Caruso has the natural resources of the island, there are coconut trees and there are  berry bushes, and so he can, he can apply his labor to given a given set of what 

we'll call complementary factors of production, in this case just natural  resources, he has no capital goods to aid his production, but what he'll find, of  course, is that the complementary factors of production have diverse production  possibilities. This would be the typical case, right? In other words, if he, if he  searches around the island for coconuts, what he'll find is the following: there's  some usable coconuts on the ground, they've already ripened and fallen out of  the tree, there's some usable coconuts up in short coconut trees that he can  climb fairly readily, and get some of the short coconut trees are robust, lots of  coconuts at the top, some sparse, they're taller coconut trees, harder to get to,  right, and so on. So, if Caruso's, Caruso's intention is to produce coconuts, if  that's the only goal he has in mind, then, of course, economizing means that  he's going to pick up coconuts on the ground first, he's going to maximize his  marginal physical product, and when he does that, he gets six coconuts, but  once he does that, then that production possibility is exhausted, now he has to  go to something else that's less physically productive. This is the typical case, of course. Of course, in the real world, we could have increasing returns and  constant returns and diminishing returns to different production processes, right? We could have a more robust set of possibilities, but the law of return says  eventually we always get decreasing returns, right? Or, strictly speaking, it says  there's an optimal amount of a variable input with given complementary factors  of production. Optimal amount means a maximum output per unit of the variable input, that must always be the case. That's a law of production. There can't be  any exceptions to this. There can't be any exceptions to this, because in our  development of the law we fix the complementary factors of production, they're  given, and so since they're finite material, finite things, their productive ability is  finite and can be exhausted if we just add more and more of the variable input,  we eventually exhaust it, and so this is the idea, so the same thing would be true of berries, right? He's got more lush berry bushes and spars, he's got berry  bushes closer to his shelter and farther away, where he has transportation costs  to engage in production, and so on. So he faces this diminishing marginal  physical product, and we would face this, all of us, you know, in the in our social  life, in the division of labor, face the same principle of the law of returns, and  then the question is, well, how, how given the given this technical feature of  production, how will Caruso value his labor in, in the different endeavors, and of  course, he'll value it according to the ends that he can satisfy with the product  produced by the labor and the amount of the product produced. This is what we  call the marginal value product of his labor. So, the marginal value product is  just the marginal utility of the output he produces with a unit of his input. So, if  one unit of his labor produces six coconuts. The marginal value product of that  marginal physical product is the subjective value that Caruso places on the ends that he can attain with the six coconuts, and this is how he ranks things. He  ranks the first unit of his labor most valuable in coconuts, but then once he 

accomplishes that the marginal value product of the second unit of labor in  coconuts would go way down. Six coconuts is enough to satisfy most of his  highly valued ends, and when he applies another unit of labor to coconut  gathering, he gets fewer than six. So now the second most highly valued use for him is is berry picking picks berries, gets two quarts of berries, satisfies his  eating end for berries. Once that's satisfied, though, the second unit of labor  applied to berry picking has less value to him. Marginal value product goes  down, the marginal utility goes down, and the marginal physical product both go  down. So this would be the typical case, right, of allocating labor, and once  again Caruso does the same thing that all human beings do. He's got a choice  between two alternatives, the best one and the next best. He chooses the best.  When he satisfies the best, it drops out, and then he's got the next best. If he's  applying labor across different production activities, he's got these different  marginal value products, coconuts up here, berries down here. He applies the  coconuts first, then to apply more labor to coconuts, the marginal value product  goes way down. So now he logically shifts the berries, and so he's going to do  the same thing that he did in consumption, he's going to balance the marginal  value product of his labor across all the different production activity that he can  engage in. He's going to allocate his labor in such a way that he doesn't see that there's any value difference or gain to be had by shifting his labor away from  one thing and towards another, nothing to be gained, right. And this again is, is  how valuation would lead to economizing in the allocation of both consumer  goods and producer goods. Okay, so now the next step is just to see that this  process of valuation that Caruso uses to organize all of his production, his whole economy, right, is organized in his mind, given his perception of the means  available to him, applying his intelligence to see what the cause and effect  connection is to attain the ends by applying these means, and then the way that  he values the different ends that could be attained, the whole economy  structured this way, so now we ask the question, is it possible for the division of  labor to be structured this way, and I've already answered this question, no, it's  not possible. This is the nub of the great socialist calculation debate. We cannot, through central planning, have just one person or a small group of people make  economizing decisions for everyone in all production processes and  consumption throughout the division of labor. That just is not feasible. It's not  feasible for many different reasons, but the central point that Ludwig von Mises  stressed was this point that we made before, it is not possible to interpersonally  compare subjective values. If it's not possible to interpersonally compare  subjective values, then we're just at a loss to have a method by which we could  sort of directly assess which consumer goods are more valuable to people in  society at large, when different people in society value different things, so some  people want these things, some people want those things with the same means. How do we, how do we measure their subjective value to to accomplish that? So

this can't be done directly, subjective values cannot be interpersonally  compared, either by a grand Caruso, who, who would rise to the, to the, to the  height of the central planning board, or whatever, nor can it be done  democratically, just by all of us get together in a plebiscite, and we vote on what  things to produce. This will just give a result. Both of those methods would give  a result, but they would not be economizing results. The same argument Mises  applies to the question of what's the least cost method of production, and how  do we have a system in society by which we can decide what the least cost  means of production are, because to minimize the cost of production. We have  to minimize the opportunity cost of the workers and owners of the factors of  production throughout the entire division of labor. Again, we only have, you  know, a couple of logical options. Caruso, we could say let's have socialism, and Caruso and his, you know, friends on the planning board own all the factors of  production, and so then they're going to allocate them efficiently. Why, why is  this impossible? This is impossible because a division of labor, by definition, is a  system of production where not everyone does every task, that's what a division  of labor is, right. And so Caruso and his planning board members cannot, in fact, do every task in the division of labor. If they can't do every task in the division of  labor, then they cannot assess the subjective value to a human person of doing  the task. They can't actually exercise ownership in a experiential, you know, by  experience of every land site and every factory and every tool, and so on and so forth. This take, that's why we call it a division of labor, because it's divided  among us, so it's not possible to proceed this way. And, of course, again, we  can't do this by vote, because our opportunity costs that we have in our own  minds are not comparable interpersonally, so we can't say who is the low cost  coal miner, who is the low cost mechanical engineer, who is the low cost, right?  None of that, none of that works, and so how is this done? So this is a  schematic of the way in which this is done, the schematic of how subjective  values result in prices in the market. And then we'll, we'll go through a, we have  a little bit of time to go through some of the details of this, but the but the point is that this is just a transition to what Ludwig von Mises is called appraisement,  economic calculation and appraisement. It's once we have this system in place,  a market economy where prices are determined by by our demonstrated  preference of goods and opportunity cost of the different factors of production  that we own for and against money, then it's possible to have a method of  making economizing decisions. So notice we start at the top with preferences  that we said before, actually, of course, we have two things going on, and run  out of space to put all this on, here we've got the human mind, and we've got the circumstances of acting right, the external world, the circumstances in which we  all find ourselves, the objects or things outside of our mind, we have these two  things, we have ends and means, right, we have two elements, and then within  that we establish preferences, so whatever our circumstances are in life, we 

have these external things, and then we make a preference with respect to  them, so that's where we start logically, and then this gives demand for  consumer goods, so we start with, as we said before, the process of imputation  is from our mind to consumer goods. And then to producer goods, so we have  demand for consumer goods, we have then the supply of consumer goods, and  then economic theory explains how prices emerge from this, how prices emerge to clear the market, and we'll spend a little bit of time talking about that once we  get prices of consumer goods, then that generates revenue for the producer, so  the entrepreneur who's produced these consumer goods earns revenue. The  consumers who have purchased these goods make expenditures. Then the  revenue that entrepreneurs incur is a determinant of their demand, so if they're  earning a certain revenue stream from production, then they will have a  corresponding demand that is a payment that they're willing to make to hire the  factors of production that can produce the good to generate that revenue  stream, and that demand, along with the supply of the producer goods, which  again is just based upon preferences, your labor supply into different jobs, or if  you're a landowner, the supply of your acres of land, or whatever it might be, the supply of the producer goods, and then the same, the same argument applies,  right? What will happen in the market is the price will hit the point that clears the  market, and so we'll have prices of producer goods, wages for labor, prices for  acres of land, so on and so forth, and these will generate then costs for the  entrepreneur, and the entrepreneur can now tell how to arrange the factors of  production in the least cost way, because there'll be prices for all the factors of  production throughout the whole economic structure, just like the entrepreneur  can then match revenues and costs, right? Can tell if I produce this product, if  I'm Tim Cook and Apple Inc, and we produce the iPhone SE, and we generate a  revenue of $400 per phone, and we have a cost of whatever, $320 per phone,  then they can decide that whether or not that's a viable line of investment by  comparing it to the other lines of investment. We're going to do a similar  monetary calculation, so that's the process of appraisement. And again, you'll  hear a lot more about that during the course of the week. Now, with the time we  have remaining, let's just run through the the first, the first step of that chart. So  let's start with preferences and just see the logistics, the technical aspects of  how we go from preferences to demand and supply to the market clearing price, and then this would just be again repeated for factors of production, so these  are the preferences for this fiscal year 2017 iPad Pro. Most of you know that the, the, the tablet market has been going right in the last four or five years, there are half as many tablets sold, but there are some right, and somebody bought these things, and fiscal year 2017 includes the quarter of the Christmas selling season of 2016 right? So it's the last quarter of 2016 and the first quarter of, so these  are somebody got these as gifts for Christmas, or they bought them right back in November, or something like this, and now they're putting them out on eBay. So 

that's my scenario here. Let's suppose we have people who, who acquired  these, however they did, as a gift or whatever, and then now they now they  prefer the money that they can obtain to retaining ownership. Some of them do,  but then there's some others who would like to acquire these used iPad Pros, so my example notices for a used good I do this intentionally, just we can see the  kind of step by step nature in which the price analysis proceeds. We start with  the simplest case, right? Simplest case is we just have two people who have  exactly the same interests involved in whether they own the good or don't own  the good, they're going to use it as a consumer, and so they get the same kind  of interest in, you know, having it to do whatever people do with tablet  computers, and then then they have money, and they have an interest in money, having the money, or you know, holding it, or spending on something else, and  so on, and so here's my, here's my setup. Remember, the preferences have to  conform to the laws of utility. So, let's suppose we have a person who doesn't  own an iPad Pro. This is the old model, and the preferences look like this: they  wouldn't pay $500 to get the iPad Pro, but they would pay $450 So, there's a  demand, the quantity demanded this person would be one at $450 and if the  price was low enough, let's say $300 they'd actually buy two, and they'd give the second one to their, to their oldest son, or they right, or you know, put one in the  office and keep one at work, I mean, one at home, and so on, and so you know  things like that. And so the demand, the quantity demanded, could increase if  the price is lower. In this, would happen only because of the laws of utility, right?  Only at lower prices would the less valuable units be voluntarily purchased  compared to the price that the buyer is willing to pay for the for the more  valuable first unit and then we can we can construct the law of supply in exactly  the same way, just with the exact same preference rank, just assuming now that  this person, instead of not owning an iPad Pro, already has two. Again, how this  happened, we don't have to worry about that again. It's imaginary construct, so  you know they're they bought one, and then their, their rich uncle sent them one  for Christmas, and oh, I got two of these things, and so they're certain, you  know, they're in the market to sell, and now their marginal utility is down here,  right? So clearly this person would be willing to sell the second iPad, the least  valuable one, for $350 but you know he likes the first one, uses it, and you  know, wants to keep it, and wouldn't sell that one unless the price were $500 So  we see the law of supply only at higher prices would the quantity supply be  larger, right? So this is how we go from preferences to the laws of supply and  demand, and then we can go to the market clearing price. The last thing we'll  do, just by introducing a few other buyers and a few other sellers. So, again, this is just a reality of our world. We find that when we go into the world, that people  don't value things the same way we do, and so there would be buyers who are  more eager to buy goods, and buyers who are less eager. Buyer A would be the  most eager, willing to pay the highest price. Buyer B's willing to pay $450 Buyer 

C only $400 So, obviously, buyer A could out compete buyers B and C if it got  into a bidding war, right? And buyer B could out compete, outbid, buyer C, and  so on, and so we set up the same thing for the seller. We got three sellers, one  really eager to get rid of the iPad, one not so much, would only accept $400 This one would keep the iPad, even if the price were $450 and so we can construct  the chart of quantity demand, quantity supply, and we see the market clearing  price would be at $400 where two iPad Pros are sold and two bought. The  reason why the market clearing price would be at $400 the logic of this is that at  that price, and only that price, all of the preferences of all of the people involved  in this, in this activity are satisfied. Everybody who wants to buy at that price  buys. Everybody who wants to sell at that price sells. There's one seller who  doesn't want to sell at that price and so doesn't, that's Seller Z. And there's one  buyer that does not want to buy at that price and doesn't, that's buyer C, so  everybody's preferences are satisfied, that's why that price emerges, and not  another. If the price, instead, of course, were higher, if the price turned out to be  $450 then there would be dissatisfied sellers, there'd only be one buyer, but  three consumers who would want to sell, and these three consumers who want  to sell, instead of just saying, "Oh, what tough luck, woe is me, I can't get rid of  this dumb iPad, they would just, I mean, if they're entrepreneurial enough, right,  they would just lower the price, just lower the price, right, and clear their stock,  and then the market clears, and the same thing for demand, right? If, if the price  happened to be below the market clearing price, then the quantity demand  would be larger because of the law of demand. The quantity supply would be  smaller because of the law of supply, and the buyers who are, who can't find a  seller, would just up the bid. When they up the bid, the market clears. In fact, we pointed out earlier that it isn't even necessary to assume, and most of the time  this doesn't happen, right, that there's a kind of trial and error process, and  people grope toward this solution. Actually, this is just an entrepreneurial  question, as we suggested before. It's just a question of anticipation, right? If  people can anticipate where the market clearing point is, well, then they can hit  it right away. And so we're not making any assumption about the nature of the  process by which the market clearing point comes about. We just know that the  logic of action dictates that the market clearing price is the best price, right? It's  the price they would aim at in the market, since all the preferences of the buyers and sellers are satisfied. And let me end on this note. There could obviously,  there would be cultural differences as to how the market, how we, how people  interact in the market. So, in some markets they might interact in a kind of open  bidding activity, like you see on eBay or in flea markets, or things like this, right,  and there might be other markets where entrepreneurs take the lead in asking a  market clearing price, right, and then we as consumers express our preferences at that price, and the entrepreneur takes the burden of adjusting the price, and  we're okay with that as consumers, because maybe we just think entrepreneurs 

are in the business to do this, right? They're good at this, and we're not so good  at it, the negotiating, and you know, haggling and giggling, and trying to find the  price, but that again is just a sideshow for economic theory. Again, the point to  stress is this, this point of logic. All right, I've exhausted the time, so we'll stop  here. Thank you.