 What we're going to do in this talk is first start with what Joe Salerno was just speaking about. This is the demonstration of how it is that the human mind organizes the external world in such a way that production of goods satisfies this person's preferences or wants. And we'll do this, we'll provide a more detailed description of this process than Dr. Salerno did just so we can see the exact extent to which the human mind controls and organizes all of the different aspects of action. This is the crucial point. And then in the second half of the talk we'll discuss how this is, this process of economizing is replicated for society in general through the market pricing system. So this was, as Tom Woods pointed out last night, this was one of the awe-inspiring insights that economics provides us when we grasp this feature of the market economy, that the market economy permits us in the social arena to use resources in producing in such a way that we economize, that as we get the greatest value of the things produced and we produce each thing in the least cost away for society as a whole. And then we want to point out that the bridge, as Mark just pointed out, Mark Thornton pointed out, the bridge between these two realms of action, the action of Robinson Caruso isolated on his Desert Island and the interaction of all of us in society, the bridge between these two is exchange in the market. And so we want to show the interface between the two realms. Okay, as you'll learn in the lecture after this one, economic theory begins by reflecting on what it means to engage in human action. So as Mises pointed out, we can understand human action because we are human beings. We engage in human action. So we know what it means to formulate an end, to design action, to identify things in the world that are useful as means, to apply the means to the attainment of our ends, to succeed or fail and so on and so forth. So all economic theorizing begins with this basic unfolding that we can garner by reflection or introspection about the basic features or concepts of action. So we start with a definition of human action. Human action is purposeful behavior. This means that we aim our action to attain an end, or we say the desire to attain the end is our motive for action. And we recognize right away, because we are human beings, that when we engage in human action we have an end in mind that we're striving to attain. We also immediately understand that having an end does not constitute action, that formulating an end in our mind is not synchronous with the realization of the end. This is because we're finite beings, you know, infinite beings would make no distinction between ends and means. They would just will something to be, and it would be. But we are finite and therefore we make a distinction between ends and means. And we recognize right away that our means are inadequate to attain our ends. That is, our ends are not fully and continuously satisfied. We have desires, wants and preferences that we wish to attain, but we up to this point lack the means to do so. Or we say in economics that our means are scarce. Now for means are scarce we have to choose when we act between competing ends that we could attain with our scarce means. And then for each end that we select we would have to choose between different competing sets of means that could aid us in accomplishing the end. So we have two margins for choice. And as Professor Salerno already pointed out, human action, if we want to state the mode of human action in one word, it's economizing. Cats act on the instinct to catch mice, human beings act in an economizing way. That is to say given the choice between competing ends with a given means, we choose the more valuable end, whatever we anticipate being more valuable to us, and we set aside the less valuable end. All of our choices and thus all of our actions then are based upon a difference in value that we perceive between competing ends on the one side and then competing sets of factors of production on the other. So we economize across these two margins of choice. We choose the more valuable end, we set aside the less valuable with given means that we are using. For a given end that we choose, we select the least cost set of means and we allocate the more valuable means to other ends that would have the greater value that's being imputed to those means. Now we call this principle of valuing options a preference. So this is the word we use to refer to the fact that we rank, order the most valuable and the next most valuable alternative in action, a preferring one alternative to the other. Just another word about preference with respect to distinguishing the Austrian view from competing, like mainstream view and other positions on this whole process of understanding human action, when we use the term preference we're referring to the valuation that a person makes between competing ends or again competing sets of means that impels them to choose, that is it's bound up in their choice. So preference isn't our musings or deliberations upon action. Preference is the state of mind in which we choose and we say, okay I'm going to the Mises University this week and I'm forgoing other alternatives. Now on the subjectivity of value because that's in the title I want to mention the way in which we use this term subjective, we might alternatively just say that value is personal, value is of the human subject, what we mean by subjective, it's in our minds in other words value is just exists as a state of mind and so it's locked up in our minds, it has no extensive property value and therefore because it has no extensive property it cannot be measured, we cannot define a unit of it, as Professor Shlornam pointed out the idea that we could formulate utils of utility is just nonsense, all we have is a state of mind that resides only in the mind of the individual person. So this is what we mean by subjective, now it should also be pointed out that there's another feature of value that is important in analyzing action and this again is something we realize upon reflection when we think about our action we realize right away that our valuations with respect to the external world and the attainment of our ends are not constant. We don't formulate a value and then we say oh forevermore I value water in a particular way or I value a grape juice in a particular way or I value studying physics in a particular way that instead our valuations tend to change. Now that is neither here nor there with respect to subjectivity, we could imagine a person who had relatively stable values with respect to the external world and people who were wild and crazy and always did things differently and were very difficult for other people to anticipate. Subjectivity refers only to the fact that value is a state of mind. Because value though is not constant with respect to external conditions and the effect on our action, we can't theorize about utility or value by using mathematical functions because in order to have functional analysis we have to have constants and variables and we have no quantitative constants that we can apply to the relationship between features of the external world and the judgments of our minds by which we act and then we produce effects. So there are no constants between the external inputs into our action and the external effects of our action. Now it follows from our discussion that since we are preferring one thing to another in action that not only is the value of our selected alternative subjective but the value of the foregone alternative is subjective. That is the cost of our action is also fundamentally subjective. So you come to the Mises University, you choose this very wisely as the most valuable alternative and you gave up something less valuable, a week on the beach in Florida or hiking in the mountains or working and earning some income at a part time job or whatever it was. But the value of that too in your choice is subjective, that is to say you just value it in your mind and you rank order that value against the value of your alternative. It's also true then that profit that is the net benefit from action, the difference between the value of what you choose and the value of what you forego which we could call profit, Rothbard calls it psychic profit or we could call it subjective profit. That too is a fundamental feature of human action. Profit is not a wicked capitalist device for exploiting the working class or something. It's fundamental to all action because all action is based upon identifying a difference in value between alternatives and choosing the more valuable alternative and foregoing the less valuable. So now we want to get to my depiction of value imputation. Professor Salerno has given you a more robust diagram but this one I want to use just to make comparisons and so we can simplify it. The top line is the Austrian view of the relationship between value that exists in our minds, the value of consumer goods and then the value of producer goods that are causally related to the production of the consumer goods. So I'm hungry at lunchtime, I want a consumer good like a ham sandwich and because I value the ham sandwich I value the ham and the bread and the mayo and so on and so forth. That's the way value is judged and assigned by us as human beings. Notice that it has to be this way because as we already pointed out the whole point of engaging in action is to satisfy an end and the formulation of the end is in our minds. So if the consumer good doesn't satisfy her end we don't place value on it, it can't have value independent from the value we place on the satisfaction of our end to which we're putting this consumer good and the same would be true of producer goods. Now one difficulty arises here when we put the arrows in this direction and we think about this problem and again Professor Salerno pointed this out on his diagram, the vertical diagram with the bread and the stages of production for bread where he pointed out that production moves from the top of the diagram down but value from the bottom of the diagram up. Value moves from the mind to the consumer good to the producer good but right now all I have is the producer goods. I have all the ingredients to make the ham sandwich and I choose to make the ham sandwich then I'll have the consumer good then I'll realize the value of my end. So you see these two things seem to be non synchronous in time. Now what reconciles this of course is entrepreneurial anticipation. What reconciles this is I think at lunchtime here I am in my kitchen at lunchtime over at the game day and I get out the you know I say well I think I'd like a ham sandwich I think the realization of you know the end that I wish to attain is the eating of the ham sandwich and I have the producer goods available to me so I begin to assemble the ham sandwich I devote the producer goods to the production of the consumer good and then I take the consumer good and I realize my end and so it's only as I act it's only in anticipation of the realization of my end that I'm able to choose with respect to the producer goods how should I use them now and then the consumer good that I'll produce and then the use of the consumer good to satisfy my end and that and this is not you know indicative in the arrows right that I've used so I simply want to point this out now the the middle row shows us the cost of production theory so this would be the view that we reject that Professor Solarno again talked about a little bit in the British classical economics that producer goods have value intrinsically and then through production that that values transferred to the consumer good and then once the consumer good has this value our minds are sent to it the final arrow of the on the diagram now all sorts of analysis could be done of theories of this sort but you can see the basic mistake that's made by this theory right away the basic mistake is it ignores this ends mean structure of action we already know just by being human beings and engaging in action that all of our action is designed to attain our ends and therefore all the value that flows from action must come from the value of the end that we satisfy it could not possibly be the case then that producer goods have a value independent of our ends in human action this is just a wrong-headed thinking from the very start now the last row is the neoclassical view of this relationship between the value of things that says that the value of a consumer good is jointly determined by the value our subjective preferences the value of the mind on the left-hand side and the independent value of producer goods on the right-hand side now again a lot could be said about this and we won't take the time to go into it it's not our purpose in this lecture I do this to kind of wet your appetite just to see you know how to categorize these things and so on but again you can see right away the basic problem with this is producer goods cannot have independent value they simply cannot unless you're willing to deny this ends mean structure of action this this basic fundamental conceptual understanding that we have of action as long as that is true then then that sort of reasoning process cannot be the case producer goods could not have value independent of the mind itself okay now as I said then what we want to turn to is a elaboration on what professor Salerno was talking about and we'll use Caruso again to illustrate this to bring out some additional points and to see the in more full view the way in which the human mind organizes all the external features of the world in such an in an economizing way to satisfy ends so let's suppose that we start to this way let's suppose we have Caruso he's on his island and he has two consumer goods available to him he has coconuts and he has berries and he has producer goods he has his labor and then he has a coconut groves their coconut trees and various configurations around the island that he can combine his labor with the coconut trees and produce coconuts and then they're berry bushes and again these are configured in a particular way he would find this out by investigating the nature of the island so you'd walk around just see the clumps of berry bushes over here and over there and so on and let's suppose then that that he he values that these these two goods in the following way now here we're not doing anything different than professor Salerno did we're just you know we just changed the goods a little bit so these are the his preferences that Caruso has for the consumer goods or his marginal utility as professor Salerno was calling it and we want to stress one point here that one important point that wasn't stressed in the earlier lecture and this is if we look at the top ranked item here and I'm just you know as as we do these imaginary constructs as we call them we can we can configure them however we wish right if we were doing a real example we just find Caruso and see what he did so so I'm just suggesting that Caruso does the following he has the first two coconuts that he gathers up he's going to use for drinking the milk he's going to split them apart and then drink the coconut milk now the point is this that we don't want to miss that the in every action this one in particular Caruso is choosing the amount of the consumer good that he deems suitable for the attainment of his end he chooses to drink to the milk of two coconuts he could choose one coconut he could choose three could use half a coconut that's a choice variable for him what the what the appropriate unit or amount of the good is is also a choice variable so let's say I'm just making this up let's say he chooses two coconuts and then he drinks and satisfies the most valued end that he can formulate in his mind for a unit of coconut a unit of this good that's two coconuts now once we've done that we can compare that value with the value that Caruso would get from another action that he would take also using two coconuts you see that is the lowest rank the second two coconuts he would break apart and he would mash up and he would eat the meat of the coconut and he also wants two coconuts to do that he doesn't want three or four ten he could but I'm just saying to for our analysis we keep the unit of the good the same in fact not only the same but we make the assumption if you will of equally serviceable units the two coconuts that he uses to drink would be the same as the two coconuts he uses to eat as professor Salerno in his example was pointing out the sacks of grain are the same right the person is not discriminating or valuing the sacks of grain or in my case the coconuts because they are more suited to one use and less suited to another they're interchangeably useful okay and then we have the principle of diminishing marginal utility right the first law of utility we see that the second two coconuts would be worth less to Caruso than the first two coconuts and we also have on this value scale or preference ranking the berries and the unit for berries that Caruso selects is two courts so that's how much he wants to eat he wants to eat a two court unit during the day and then once he does that he's done with eating and for us the second two court unit of berries he would do something else he would mash them up and drink the the berry juice and then for the third court he would make bait and then he would you know try to bait traps and catch small game or whatever else he might be doing okay so we see from this example the first law of utility diminishing marginal utility right would apply both to the berries and to coconuts and to any other good that we could conceive of that the person is using and the second law of utility we might also mention the second law of utility is that more of a good is preferred to less as long as something is a good it is not super abundant and it's a valuable means to an end having more of it a person would prefer to having less of it because more ends can be satisfied of course if you have more units of the means now the thing that professor Salerno did not point out about this this configuration is that we can see exactly now how Caruso would allocate all of the consumer goods available to him on the island not just one thing or another thing we can see that what Caruso would do again if he has this particular value scale is that he would he would take the first two coconuts and he would drink the coconut milk and then the value of doing more things with coconut falls fairly dramatically and so he would go to the next highest valued alternative and he would take two quarts of berries and eat them but now he satisfied that end and he would move on to a less valued thing right and so on and so forth so you can see that at the marginal utility of one action or one good is up here and the marginal utility of another is down here a person allocates toward the higher valued alternative but as they do diminishing marginal utility lowers further use that they would get out of that thing until the marginal utility of something else is now above the marginal utility of the first thing so you can see that the maximizing of utility would come about the greatest economizing that Caruso can do to get the greatest value out of his consumer goods he will allocate them to different activities so that the marginal utility is roughly the same now you'll see right away that the same thing exactly the same thing happens in the market the only difference is in the market we have monetary value so for rates of return on tablet computers is way up here like it was a few years ago and rates of return on producing steel is down here then resources will move away from lower valued toward higher valued but as you produce more and more of the good where the rates of return are high those rates of return will be pushed down how far do things get allocated toward those things well until the rates of return come into conformity until the marginal utility of things is roughly the same so this principle too is not just something that happens in the capitalist system it happens in all of our lives doing this all of the time now let's take the case of production let's put in production explicitly and see some of the principles here the basic principles the law of returns the law of returns comes from the finitude of the productive capacity the complementary factors of production so every production process Caruso on his island that we're using to illustrate would have complementary factors of production factors of production used together and so Caruso is producing coconuts he's he's got the coconut trees he and he has his labor but the coconut trees have finite capacity to produce in combination with labor and more than likely the coconut trees are configured in a particular way that would cause something like this schedule of marginal MPP is marginal physical product of labor so if Caruso applies one unit of labor let's say it's a half hour of coconut gathering if he wants to economize if the point is to get the most coconuts he can he'll gather the coconuts from the shortest most robust coconut trees closest to him but once he exhausts all of those then he has to go either to taller trees more difficult to climb with less less robust fewer coconuts on them and his output will decline and then he goes to even taller trees are more difficult ones to get or he goes to trees farther away and he has transportation costs is walking time that lowers the number of coconuts he can pick in a half hour that's the law of returns in fact this is what we call diminishing returns every production processes it process reaches a point of diminishing returns because there's a finite productive capacity of the complementary factors of production that you're using in combination with the variable factor adding more and more labor to the fixed set of complementary factors you can see why this would be important right because as Caruso produces more coconuts his marginal physical product goes down then eventually he's going to allocate his labor towards something else because the marginal physical product and the marginal utility of coconuts goes down as he allocates more labor to producing coconuts eventually then the marginal physical product of berries or the we would say the marginal value product of berries would would be higher ranked than the marginal value product of coconut production so the same thing happens in berry production he applies the first half hour of labor to the most robust berry bushes closest to him he gets two quarts of berries but now when he goes back to pick some more he has to go to berry bushes that are less robust or further away and his production his marginal productivity falls okay so this is the law of returns and again what this means is that when he establishes his preferences for the use of his labor when he's allocating his labor now so now we're moving for Caruso allocating his consumer goods to his producer goods showing again how Caruso's mind organizes all of this so he's allocating his labor how does he do this he allocates it to the highest marginal value product activity so this is six coconuts he can get with a half hour of labor because because he values the coconuts highly and he can get a lot of coconuts with his first unit of labor so that's where his first unit of labor goes but once he does that then then doing more coconut gathering gives him much less marginal value product you can get you can get as we said before five more coconuts with his second unit of labor but he doesn't value these very highly because six coconuts he can attain quite a few of his ends and so that makes room for berry production now the next unit of labor would be applied to berry production it would have the marginal value product the marginal utility of the two quarts of berries and then the third unit of labor he also goes for berries and this marginal value product is diminishing and then once he gets done with four units of labor in these two activities he allocates to other activities that I'm not putting on the on the preference scale so this is how he organizes the allocation of his labor according to value differences most valuable thing first then moving down the scale other marginal value product a high marginal value product activities then come in and so on and so forth so he allocates so that the marginal value product is roughly the same all across all the different uses of this of this item again you see the you see the very same thing happen in the market the price of a given input is the same in all the uses across the market so you know a basic manual labor it's the same in you know all the different uses to which it's put on all the different assembly lines and all the different construction tasks and so on because if there were differences in value if you could employ a worker and pay the market wage which is the same everywhere and get a value up here above it then as an entrepreneur you would do that the entrepreneurs would rush in to buy that labor and they would push the price up they would bid the price up and bring it and then these these two would come into conformity okay so this is the way in which the Caruso then comes to value the producer goods now let me say one last thing about this we'll talk about this in more detail this this afternoon in the lecture on the division of labor but Caruso you know this is a fairly simple explanation you know we don't have the time to go into all the nuances of all this but but it's not difficult to see that Caruso can engage in more complex production processes all organized by his mind so he can engage in these are what we call direct production processes right he's just one step of production he gets the coconuts one step of production he gets the he gets the berries but he can engage in multiple steps of production so this afternoon we'll talk about how he builds a net through saving and investing and each of the steps of that production is also organized by judgments of his mind by his intellect perceiving what the cause and effect connections are among the objects in the world and then his valuing of those things and this this activity this organizing a production it can extend you know to to certain limits and again we'll talk about those limits this afternoon now the next thing we want to discuss is why it isn't possible for this process that Caruso uses of valuation to organize in an economizing way a production in society just to state the the principle here so we we see that Caruso by this process of valuing things organizes all of the the production activity that he engages in and again we just call this valuation this is the process of valuation in society we have a process that's a called appraisement and appraisement is using monetary entries to make production decisions instead of just the valuations in our minds the entrepreneurs in the market use calculations of net income and net worth so they're using monetary entries and again the use of these monetary entries is called appraisement okay so why do we need appraisement why is valuation not a sufficient well the answer is that value as we spoke about before the values are subjective and so they're not comparable between individuals because the value in my mind is a product only of my mind it has no extensive property the value in your mind a product of your mind again with no extensive property no shared property by which we could define a common unit of value so if I say I get ten units of value from eating a chocolate ice cream cone and you say well I get twelve units of value from eating a vanilla ice cream cone we haven't objectively compared our utilities because we don't know that we're sharing the same size unit of value so because of this when we have social production in society if we're using resources to satisfy the consumptive ends of one group of people and therefore we can't use those resources to satisfy the consumptive ends of another group of people we can't by valuation decide which set of consumptive values is greater than the other because we simply can't make this comparison it's scientifically impossible or objectively impossible so valuation wouldn't would not be efficacious in this respect neither could we judge the opportunity cost this way because it too is just a product of each individual's subjective assessment in his or her own mind and we can't interpersonally compare these so if we want to have a coal miner in society and they're gonna select between you and me I would insist that my opportunity cost is very high and so would you presumably unless you just get a thrill out of being in the dark dungeon coal mine you would do the same and no no third party could ever objectively decide between us oh yes I see that your your subjective value is greater than than the other person's subjective value this is this is a non-starter right this cannot work so instead what what we what can be done in society is to have all of our preferences expressed in a common unit so if if we if we buy all things and express our preferences foreign against money then it does become possible to say that I value chocolate a chocolate ice cream cone relative to money more than you value a chocolate ice cream cone if I'm the one who buys the chocolate ice cream cone at a price of five dollars and you at the same time refuse to buy it then we know objectively who values this good more highly and we can use the these monetary results money prices in this process of economic calculation and then entrepreneurial appraisement now let me just make this other point that we made about valuation remember we said for Caruso when he's imputing value he he starts with producer goods and then he's going to allocate them right now he's going to say I'm going to use my labor to pick these berries and then I'm going to realize the value of the consumption in the future but right now I can only anticipate what it will be we the same in society right we have these resources we have labor and land and all these capital goods and entrepreneurs are making production decisions now in anticipation of what consumer value they will have in the future once the goods are produced but this but the point here is simply that this valuation has to be monetary okay this is the schematic that shows us how how all this is organized and this too is scaled down from what we could make it so I just I just want us to see the basic construct here so we have preferences at the top everything emanates from preferences as professor Salerno said all the economy comes from human beings it comes just from us we through the process of acting we organize all the all the processes of production we value all the different elements of production and so on so we just start with preferences and then these preferences will lead to our buying and selling of consumer goods and then the prices of consumer goods will emerge and we're going we're going to talk about that that trilogy we want to go through the logistics of the theory of how our preferences through demand and supply determine prices now once we have prices of consumer goods these will infer costs for us as consumers and revenue for the entrepreneurs who sell the consumer goods with the revenue that the entrepreneurs have they can demand the factors of production or the producer goods so our preferences then constrain the entrepreneurs through the revenue that we provide by buying the goods that they produce to demanding the producer goods if we like these goods more we like the new iPad mini and so we we pay the 329 a lot of us when they sell 50 million units or something they anticipate selling this year then we'll generate revenue for Apple and they can use this revenue to to then by producer goods to produce what they anticipate in future will be valuable to us and so this creates demand for the producer goods and then our preferences determine supply of the producer goods so we have preferences for supplying our labor or if we own land we have preferences for supplying land and so on so once again our preferences come through to demand for producer goods through entrepreneurial agents and then our preferences also determine the supply of the producer goods and so preferences determine the prices of producer goods through demand and supply, and then the prices of producer goods determine income for the producers, determine the wages and the rent for land and so on, and then the costs for the entrepreneurs, or what they have to pay to buy their inputs. And economic calculation then, the entrepreneur compares these revenues for the value of the producer goods that he can make with the costs of the inputs. And if he thinks, well, I can bear these costs and produce this good and sell it at this price in the future, then this justifies the production, and the production would be undertaken, precisely because through this pricing structure, we have the indication of what is and is not economizing. What is generating greater value, monetarily speaking, that we're determining through our preferences for consumer goods produced in one line of production relative to another. Okay, now again, we don't have the time in this hour to go through all of this. As I suggested, we just want to go through the first three steps, just the show from preferences, how we get supply and demand, then to the prices of consumer goods, and we've suggestively entertained how the rest of this would be put together during the week some of this additional work will be done. Okay, so let's move to this example. A couple of weeks ago, I looked up on eBay. What the price for used iPad 2s happened to be. And so there's a reigning price on EAP. Well, when I looked it up, it was $300. And so I've configured my example to conform to that price. In other words, that's what we're really doing when we do economic analysis. We're saying, here's a price in the market for something. How do we explain this? Why isn't the price for used iPad 2, why isn't it $500? Why isn't it $100? Why is it $300? And our answer will be, most of you know this, right? Already you've studied a little bit of economics. Our answer is that, well, that happens to be the price that clears the market. And so we want to explain how that process comes about. Okay, so on the left hand side, we have just a person with preferences for the used iPad 2. Oh, by the way, I'm using a used good here just so we set aside for the moment the problem of what's the relationship of cost of production to these prices. We'll get that at the end, but here there's no question the cost of production could enter into this, right? The sellers of the used iPad 2 are just consumer. Just a consumer who bought it two years ago or two years ago. Okay, so let's say we have this person and has preferences for the used iPad. And these preferences are such that we see that this person would buy the iPad, what we call the first iPad 2, the most valuable one, if the price were $400 or less. But if the price were $500, this person would not buy. And if the price fell enough, then this person, if the price fell all the way to $100, if that happened to be the price, instead of, let's say it being 400 or 300, this person would buy two. And he'd use one and give one to, as Professor Salerno said, to a junior. Let junior use it. This of course then gives us the law of demand. So we see that the law of demand is a direct result of the first law of utility. Only at lower prices will people buy more of a good, as we say, Seder's Paribas, or if we wish to state the law in a slightly different way. For any given purchase a person makes, if the price would have been lower, then the quantity purchase would have been larger or the same. This is the law of demand. And then we can use the same preference rank, of course, since we're using a used good here to illustrate the law of supply. Let's suppose we had somebody who already owned both the first iPad and the second. And he goes on eBay to sell. Well, we see that he would sell the second iPad at a price $200 or above, but not if the price were 100. If the price were just 100, he'd keep them both because he has a use value for them. But he'd be willing to give up that use value for the, he'd be willing to take junior's iPad and sell it, right, if the price were 200 or above. So we get a quantity supplied of one at 200, at one at 400, if the price were anywhere between those levels, but if the price were 500, he'd sell two, he'd sell them both. And then because he values the money more highly than the marginal utility of each of those iPads. So we see the law of supply, right? Only at higher prices will the quantity supply be larger, satyrous pair of us. And you can see right away that the law of supply and the law of demand would be consistent with one another only at a single price or at a small range of prices. If at higher prices, the buyers want to buy more and the sellers want to sell less. And if at lower prices, the buyers want to buy more and the sellers want to sell less, then we would find consistency between the buying and the selling only at a certain range, maybe even small range of prices. That range of prices we call market clearing. So let's go on to see this. To see this, we need multiple buyers and sellers. So we'll just introduce a couple more buyers. So we have buyer A, this is the person we showed on the last slide who's willing to pay 400, but not 500 to buy the first iPad. And we have buyer B, who is a little less eager to buy the iPad. He'd pay 300, but not 400. So buyer A could outbid him if it came to that. And buyer C is the least eager of our three buyers. He's willing to pay 200, but not 300. So both B and A could outbid him. Here we're just relying upon the auxiliary premise about the real world that different people have different preferences for things. So there's some buyers in markets who are more eager, some buyers who are less eager. And we're just building our example around that. So we see down here that at different hypothetical prices we get different quantity demands in the market. Buyer A at the high price, buyer A and B at the $300 price, buyers A, B and C at the $200 price. And then we have sellers, seller X, Y and Z, seller X is just the same person we had on the last slide, the one who would sell the second iPad, now we're calling it the first, but it's the first one sold, that he's selling it to 200, he preferred to get the 200 to the iPad. And he could outbid seller Y, but if the price were 300 they could both sell or both be willing to sell. And then seller Z will only sell if the price is 400. He prefers that to the iPad. So again, we have more eager and less eager sellers. And when these individuals come together and learn of each other's preferences in the market, they'll trade where the market clears. The reason they trade where the market clears is because that is the price at which all the preferences of all the traders are satisfied. And after all we engage in action in order to have our preferences satisfied. And so naturally we don't intentionally act in such a way that our preferences are thwarted. So at the market clearing price buyer A and buyer B want to buy iPads at the price of 300, buyer C does not. Seller X and seller Y want to sell, seller Z does not. So seller X and Y sell to buyers A and B and buyer C and seller Z stay out of the market because at that price that's what they wish to do. And so all the preferences of all the traders are satisfied. Notice if we had, to the contrary, if we had a price of $400 in this market, then there would be excess supply, right? All three sellers would want to sell, only one buyer would want to buy. Somebody's preferences will not be satisfied. Two of the sellers will not have their preferences satisfied. And so as Tom Woods was pointing out, since in Austrian economics we treat human beings as real people, we're just talking about real people, just you and I, real people don't just act in such a way that they're, with alternatives available to them, that their preferences are not satisfied. They creatively adjust to their situation. So naturally buyers, the buyers that are, excuse me, the sellers that are cut out of the market at the high price will not just sit still and say, well, you know, that's too bad. I guess I'll just have to go home and sit on my iPads. No, they lower their price. They preempt, they preempt this situation because they have entrepreneurial judgment. They can anticipate this. The sellers can think the market would clear at this price and they can then ask that price. And if it doesn't clear at that price, then they can adapt and adjust and do, you know, they can market the good. They can adjust their price and so on. And the same with the buyers, right? So if we had a price below the market clearing, then we would have frustrated buyers. All three would want to buy, only one of the sellers would want to sell. The buyers just don't sit there and say, well, you know, it's tough luck. I mean, it's just a, you know, it's an inevitable consequence of the technical conditions of the world that I can't buy an iPad. No, they just up the price. They just offer better terms, right? And see if this works. Yeah, so remember they're willing to do this. Buyers A and B are both willing to pay more than 200. And since they're willing to do this, if they're required to, to buy the good, then that's what they would do. This is what their preferences say, right? This is what we're saying that they're willing to do. So this is why the market clears. Why we can analyze the market by saying the price, you know, this eBay price of $300 was at that price because that's the price at that moment two weeks ago. That was the price that cleared the market. Now, maybe today it's different. Okay, so this gives us the analysis. Now let's deal with this other question that I mentioned about using the use good. What if we have a newly produced good? What if it's not, you know, just a former consumer of the iPad who bought it and is selling it? What if it's Apple, the producer? And we have newly produced iPads. Can't Apple somehow make its supply dependent upon cost of production? And here we wanna see the argument as to why this would not be the case. And again, I'm just giving you the general framework within which we would provide the specific argument about Apple. So the general framework is, again, now we have brand new iPads. We have the buyers and the seller. The supplier would be Apple. And the preferences of the buyers, of course, will always be the value of the good obtained. So we have the brand new iPad and then the value of the money given up, the $500. Now, there are two possible opportunity costs involved in the value of the money given up. In society, there are two possibilities, right? There's the value to the person in personal use of the $500. So if I'm gonna buy an iPad, that would be one thing that I would consider. I would say, I've got the $500 and there's an alternative use for it and I might value that more than the iPad, then I wouldn't buy. So that would be one thing. I might be saying here is how the value aligns. But the other could be that I could offer the $500 to one seller or another. That could be an opportunity cost foregone as well, right? Because there could be multiple sellers in the market that would value the $500. And so I can judge the value of that too. So maybe I can get, maybe from one of the sellers, I could get an iPad plus a new fancy adapter cord or plus an iTunes card because they value the money that I'm offering more than another seller. Okay, well then the same thing, the same consideration would be true on the supply side. So now we have Tim Cook, we have Apple, they're selling. So it's the value of the money they obtain, the $500, and they value that above the value the iPad they give up when they sell to me or to you. Now, what are the possibilities for the value of the iPad that they give up? Well, Tim Cook could use it personally or some employee of Apple could use it personally. But of course, I think in 2012, there was something like 58 million iPads sold. So again, the marginal utility of personal use would be extremely low for the 58 million iPad that's being sold that has no personal use value. So the other option is to one buyer or another. So if they offer it to me, then I would pay the $500. They might find somebody else, if they're selling it to me for $500, they might find somebody else who's willing to pay $525. Then what they give up if they sell it to me is the $525. So there's competition between the different buyers that represents really the value of the good given up and not the personal use value to the suppliers. So in brief, then it's exactly the same consideration, right? It's only preferences that determine both sides of this organization, both the supply and the demand side. It's preferences on me and you as buyers of the iPad. It's also just preferences of other consumers on the supply side. Or to put this in a slightly different way as we did at the beginning. Once the iPad is produced, then its production costs are foregone and they cannot be recouped by not incurring those production costs. They've been incurred. And so the opportunity for Apple is to either sell the iPad to me right now or to sell it to some other consumer in the future at what they anticipate might be a better price. And so the supply side is still just preferences. It isn't cost of production. Okay, then the last thing we'll cover is how this, we do have just a moment to hint at least at how this process moves of appraisement moves from the consumer goods to the producer goods. So we'll just mention this again and kind of whet your appetite for more of this. So I looked this up. This was a revenue that Apple got from selling iPads in 2012. They sold 58 million units. Now my price, of course, I'm simplifying here, right? There were different prices, depending on the memory and so on. So you'd have to, the calculation is a little bit more complicated, but that of course doesn't deter Apple in making the appropriate economizing decision. They just see whether or not consumers are willing to pay 6.25 or whatever it was to get the 32 gig iPad or 500 to get the 16 gig or whatever, however these things were configured, right? So that gives them $29 billion in revenue. And then I looked up the also, I think it's Wired Magazine or Gizmo or one of these places, they buy these electronics and then take them apart, and then they see all the components and they find out the prices of the components from the suppliers. And then they add up the prices. So it's a sum of the price of each input times the quantity used, the price of the screen times the quantity one, the price of the chip times one, so on and so forth. You get $375, if you add up all the component parts of the iPad, it would be their average cost, right? 375. So again, over 58 million units, it gives you 22 billion, so they earn 7 billion on an investment of 22. That's a rough calculation, right? The 375 doesn't include all costs. Now that calculation of what happened in, that result of what happened in 2012, gives Apple and Tim Cook the ability to make anticipations of what to do in 2013. And in 2013, things are different, right? Because they introduced the mini. And of the projected 88 million in sales, 50 million are minis. And only 38 are full-size iPads. So our preferences have changed. They've shifted. And Apple's anticipated this. And by anticipating this, they can bring forth the production of the things, again, that we desire. We're, again, $500, but again, it would be different prices, right? The mini is $329, and so I'm just simplifying here. But, and then in comparison with the costs. So this is the way appraisement is undertaken by the entrepreneurs. They look at their past results for a net income, and then they use those results as the basis for making anticipations of what they'll do now with their producer goods. What goods they'll produce, and is it the iWatch or some other consumer good, that they hope we will value once it's produced and offered to us. And that's the way our preferences get imputed through the pricing system to the factors of production. I'll end on this note. Apple buys the screens that it uses for the iPad from Samsung. They pay $87 for the screen. This shows you, by the way, how cooperation is the dominant feature of the market economy. Whereas in politics, these two firms are constantly fighting each other, right? Over IP and so on. Politics is the arena of conflict. The market, the arena of peace and prosperity. All right, thank you very much.