The price system motivates Gus to purchase the equipment for the chemistry lab, hire the resources needed and take the risk to produce and distribute the methamphetamine. Gale is shocked by the investment, but profit motives are often used as the incentive for investments. Firms only invest in resources if they believe they can lower the cost of production (given a fixed output) or to increase production either of which would increase profits.
Walter tries operating the facility by himself and he’s struggling to move a barrel with Jesse gone. Normally, the two would work together to specialize in particular tasks to reach their intended goal. Having only one worker means that they aren’t able to gain from specialization.
Walter brings in the first batch of money for Skyler to launder, but she’s shocked by the amount coming in. Walter brings in $274,000 for her to get through the system, but she quickly realizes he’s earning millions of dollars each year, which is far more than what she can reasonable hide in a car wash. Both are frustrated because they have specialized in their own part of the operation and can’t control the other portions of the setup
Walter, Jesse, and Mike and splitting the proceeds from a new, methamphetamine-production business. The scene demonstrates how businesses incur various expenses while providing instructors and students with a lively example about the different cost types. Once Mike divided the revenue into three equal stacks, he goes on to do an accounting of all the costs they have incurred while producing their latest batch. One can observe that some the costs such as the ongoing expense with keeping former collaborators quiet are fixed, while others, such as the cut to the dealers or the fee for the drug mules (i.e., those who transport the methamphetamine from its production to distribution location) are variable. Actually seeing each pile of cash shrinks, as they account for the costs of the business, provides a visceral example about costs, profit, and the relationship between the two.
This clip may also serve as a catalyst for discussing, once again, the role of institutions in shaping the behavior of economic agents and the consequences brought about by their lack of reach into black markets such as that for methamphetamine. Walter is surprised to find out that the cost with the mules is 20% of the revenue. However, Mike adds that transporting the methamphetamine involves risks (i.e., of being robbed by a rival gang or being caught by the police and sent to jail) and the cost is justified – in economics jargon, such costs represent the compensating differential for hazardous work conditions. Outside black markets, a robbery is solved by simply reaching out to the police or other specialized authorities. In other words, property rights may be enforced through the judicial system. However, in the case of methamphetamine this is not possible. This way, those who move the drug must also guard it and enforce the property rights over it through violence. Hence, the steep cost of transportation that characterizes the methamphetamine-producing business.
This clip also provides a detailed account of various activities that form the underground economy and underpin the $1,392,800, methamphetamine business. For example, dealers receive $13,240, mules (the ones who transport the methamphetamine for distribution purposes) get a flat 20% (after the dealers have been paid) or about $278,560, miscellaneous production-related expenses total $120,000, expenses with concealing the laboratory add up to $165,000, while the lawyer/money-laundering fees are $54,000. As part of the methamphetamine production, all these activities are illegal, thus not recorded officially, and hence part of the underground economy. The figures associated with such activities may find their way into official data, however, as fictional activities/services conjured by money launderers. This illustrates once more the difficulty that arises from accurately measuring the volume of the economy be it as the gross domestic or gross national product.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: accounting, black markets, compensating differential, dispute resolution, fixed costs, fixed inputs, gross domestic product, institutions, judicial system, money laundering, profit, property rights, revenue, risk premium, total costs, transaction costs, underground economy, variable costs, variable inputs
After running out of their primary ingredient, Mike suggests that they go back to producing using pseudoephedrine. Walter quickly points on that their equipment isn’t designed for this and it will reduce their yield significantly. Mike argues that the alternative is not making anything at all and that making some product is better than making no product at all. This scene serves as a nice example of why firms may operate at a loss rather than shut down. As long as the price of the product is greater than average variable costs, firms will operate in the short run.
This clip represents a wonderful account of all the moving parts of Walter’s methamphetamine enterprise. Walter and Jesse cook, Lydia arranges and oversees the international shipments of methamphetamine, which are disguised as shipments of various chemicals between the subsidiaries of the multinational enterprise she works for, Todd coordinates the transportation operations, and Skyler is in charge of accounting and money laundering. Here, the division of labor and the comparative-advantage based specialization is what makes their enterprise successful. If one or two individuals tried to run the same operation (like when it was just Jesse and Walter), they would not be able to produce as efficiently. The downward sloping portion of the average total cost curve is the area where the benefits of specialization outweigh diminishing returns from adding additional workers.
After joining forces with Gus Fring, Walter learns about his new lab. The production facility is state of the art and includes some of the best equipment available on the market. This new equipment will allow Walt to produce even more of his blue meth than he could have previously imagined. Economies of scale are important in the production process. As facilities grow, their organization can begin producing large quantities, which lowers the average cost of production.
Jesse calculates that Fring is earning $93 million from Jesse and Walter producing meth, but he doesn’t feel adequately compensated. His focus on Fring’s revenue rather than his profits is causing him to feel vastly underpaid. What is Jesse forgetting? What about costs with the lab, packaging, distributing, and guarding the meth. In addition, the risk that Gus (the owner of the methamphetamine operation) takes represents an additional cost of doing business.
In a flashback to the pilot episode, Jesse and Walter are discussing the purchase of an RV to start cooking meth. The purchase of the famous RV would represent a fixed cost of production for their new business venture
Walter is shopping for primer for home renovations, but stumbles across a young man who is clearly purchasing the necessary inputs to start making meth. Because of his familiarity, Walter suggests that the young man change the type of matches he uses if he wants to make meth. These inputs are so specific to making crystal meth that Walter is able to recognize it immediately and even tells the young man that others will notice the combination of items he’s purchasing.
In order to start producing large quantities of meth, Walter comes up with a new chemical approach to producing a substitute for pseudoephedrine. This “old school biker” meth is a lost art, but it narrows down the number of people who understand how the chemistry works. When resources are in short supply, prices typically rise. The responsiveness of firms to their inputs often deals on how easily other resources can be acquired.
After promising their new distributor they could produce 4 pounds of meth, Jesse starts freaking out. When the original deal was 2 pounds, Jesse was concerned about being able to buy enough pseudoephedrine to produce that. After showing up at their earlier meeting with only half of a pound, it seems impossible that the two of them can make 4 pounds weekly. It turns out that Walter can chemically create the same effect, but he needs Jesse to pick up some supplies. The elasticity of supply often dictates that the responsiveness of a good depends on how easily other substitutes can be acquired.
Walter finds a distributor to sell his meth to, but it requires that the two of them produce two pounds per week when they were previously making only one pound. Walter doesn’t see the issue because it wouldn’t take that much more time, but he’s excited for the significant increase in income from this deal. What Walter doesn’t realize is that there are capacity constraints when it comes to the inputs. Jesse is responsible for acquiring pseudoephedrine, which is the necessary ingredient to produce meth. Because of various US laws aimed at preventing pseudoephedrine to be used in meth, customers at drugstores can only purchased a fixed quantity at a time. Jesse drives hundreds of miles to collect pseudoephedrine from “smurfs,” but that can only produce 1/2 pound of meth each week. He doesn’t realistically see how the two of them can find enough pseudoephedrine to produce the two pounds of meth per week their new distributor is requesting. Luckily, Walter is a VERY good chemist!
See more: capacity constraints, economies of scale, government regulation, incentives, inelastic, optimal output, profit, Resource market, scale of production, scarcity, supply elasticity, underground economy
Jesse brings in the revenue from the first batch of meth, and Walter is less than impressed with the amount of money that has come in. Walter had made a pound of meth (16 ounces), but Jesse has only sold 1 ounce because he’s selling it directly to users. Walter isn’t happy with the payoff because he feels the risk he is taking by breaking the law should result in a lot more profit. The two brainstorm ways to sell in larger quantities, but it turns out they had earlier killed the one person they knew who would be buy in bulk. By selling in larger quantities, the two can lower their average fixed costs (economies of scale), but it also means that they’re going to have to find a partner to do that because Jesse doesn’t have a big enough footprint to sell that much dope.
Jesse and Walter debate on the best way to start the business. At first, Walter is surprised that Jesse doesn’t want to cook in the garage, but Walter is just as reluctant to cook at his house. The two consider renting a storage unit, but eventually settle on purchasing a recreational vehicle. When starting a business, companies must decide whether to start by renting property, which may have lower costs initially or building and owning their own property.
There are tradeoffs to the two, and this situation is explored often in the decision for young adults to continue renting or purchasing their own home. The clip also serves as a good introduction to risk and uncertainty. Although it would be cheaper to begin production in their own homes, it is also VERY risky. Safe options often mean spending more money upfront.