After having the family car repaired at a local maintenance shop, Walt decides its time to get rid of it. He’s worried that his car is too easily recognized and offers to sell it to the shopkeeper for $50. While Walt Jr. finds this crazy, Walter is willing to get rid of it even if it’s well below what he could get somewhere else.
There’s a fly in the facility and Walter doesn’t want to proceed until the fly is dealt with. Walter doesn’t want to contaminate the product in any way, but Jesse is confused because the customers don’t care about the quality of the product. If a small fly lands in the batch, Jesse believes it won’t be that big of a deal because the customers are highly inelastic. Jesse cites other examples of contamination in food (like hot dogs and candy bars) where people (and the government) don’t care about the quality.
Gale is asked to test the purity of Walt’s meth and finds that it’s 99% pure, while he can only produce a version that is 96% pure. From Fring’s standpoint, 96% is good enough, but Gale is impressed that another chemist can achieve a 99% purity level. It is apparent that Gus weighs the costs and benefits of producing 99%- or 96%- pure methamphetamine. After all, the equipment he just purchased is suited for producing both purities, which makes the two varieties substitutes in production. Nevertheless, Gus decides that a purity of 96% will suffice. From his perspective, the cost of working with Walter, who is regarded as unprofessional, outweighs the 3-percentage points increase in the purity of the drug. However, Gus’ methamphetamine, although 96% pure, is inferior to that of Walter and the logic of the Alchain-Allen theorem tells us that he might be losing out as long as it competes with the “blue” drug. In other words, the Alchian-Allen theorem states that, when the same transportation, distribution, tax, or sale-specific markup is added to the prices of two similar varieties of the same product, the relative consumption of the higher quality good will increase. Since from a legal perspective, the risks and costs of distributing methamphetamine are, more or less, the same, regardless of its purity, a relatively larger market share will be accounted by Walter’s “blue” methamphetamine. The scenes within the video clip are also useful for discussing product differentiation as a key characteristic of monopolistically competitive markets. The blue color of Walter’s methamphetamine represents a signal of quality as well as purity that bridges the seller- buyer information gap, a problem that plagues black markets such as those for drugs and other illicit goods or services.
This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)
See more: Alchian Allen Effect, cross-price elasticity, demand, diminishing returns, elasticity of demand, marginal benefit, marginal cost, monopolistic competition, potency effect, product differentiation, substitutes
In an attempt to get Walt Jr to like him again, Walter tries to buy him a used car. Recognizing that his dad is trying to purchase his approval, he convinces his dad to buy him a new sports car instead. This clip shows Walter’s willingness to pay for his son’s happiness.
After a failed first attempt to gain full control over a key production input and get the blue methamphetamine off the market, Declan, a Phoenix-based dealer, meets with Jesse, Mike, and Walter. Right from the start, Walter tries and appears to succeed in convincing Declan that collaboration is the best path forward. This way, Walter’s superior blue methamphetamine remains in production and the methylamine, the key input, is used in the most efficient and profitable way. Further, Declan and his crew would serve as their distributor. This way the parties specialize according to their comparative advantage while all parties economize and gain from trade.
See more: barriers to entry, black markets, collusion, comparative advantage, efficiency, elasticity of demand, elasticity of supply, inputs, mergers, monopolistic competition, monopoly, oligopoly, quality, substitutes
Lydia presents Walter with the opportunity of expanding into a new market (the Czech Republic). Lydia goes further and points out that entry should not be difficult given Walter’s high-purity “blue” methamphetamine and the inferior alternatives available there. Also, it is worth noting that such overseas expansion would not have been possible without Lydia’s expertise regarding global supply chains.
See more: comparative advantage, demand, elasticity of demand, elasticity of supply, expansion, exports, intra-firm trade, market entry, middleman, monopolistic competition, multinational enterprise, opportunity cost, product differentiation, trade barriers, transaction costs
Todd cooks a methamphetamine batch of only 76% purity and not the distinct blue color expected by European customers. Lydia comments that consumers expect the “blue”, which is a signal of quality and purity, and will pay top dollar only for it. So while even though they are getting better, they aren’t as good as Walter’s blue meth. The blue coloring is important to signal to the European market that the product is high quality (even though it isn’t). If customers believe the meth is the same, they will pay top dollar for the product. Lydia recognizes that without the color, her profits are about to fall.
Walter drives to the desert to hide the cash generated by his methamphetamine enterprise but he runs out of gas. As he rolls one of the money-full barrels, he comes by a house and asks to buy the truck sitting in the driveway. Initially, the truck is not for sale but after he offers the man a large stack of money this changes. Next, we see Walter load the barrel in the back of the recently purchased vehicle. Each person/business has a reservation price at which they’re willing to sell products or services. For this lucky resident, it appears $10,000 was at or above his reservation price. If his reservation price was lower than $10,000 then he would hear producer surplus.
Walter loves peanut butter and jelly sandwiches. This simple meal is often the textbook example for complements in consumption. There are a variety of items that are often consumed alongside other items. When the price of one complement increases, it negatively impacts the consumption of the other.
Walter has found a new friend in Gale and is surprised that a well-trained chemist decided to become a drug producer. The two of them aren’t the most obvious criminals. Gale believes his importance in the process is to help people get a clean product. Addicts will buy drugs without knowing what’s in them (asymmetric information), but at least Gale’s product is pure.
Family meals are a great chance to see all the different complements and substitutes in a market. While milk and cereal are often consumed together (complements) there are other options people can decide upon to fulfill their breakfast need. Walter Jr opts for eggs and bacon (substitutes). The decision process involves weighing costs and benefits of alternatives.
There’s a lot of different complements and substitutes that go into a meal. Fries and ketchup are complements, while sushi and burgers are substitutes. The collective decisions we make are influenced by a variety of different products and aren’t isolated to a single market.
Even drug manufacturers love peanut butter and jelly. This video clip shows Walter preparing himself a peanut butter and jelly sandwich. The two items are often the most common examples used when discussing complements in consumption.
The RV needs to be stored, and Jesse is hoping that the person who helped him tow the RV away before the DEA could find it would also be willing to let him store it on his property. The issue at hand is that Jesse had earlier stolen the RV and destroyed part of the property in the process. Jesse is hoping that they can come to a new agreement on storing the RV. As before, Jesse is in a bind and needs to store the RV. He doesn’t have time to shop around, so the tow operator has the upper hand in the negotiating process. When consumers don’t have a lot of time to shop around, their demand for services is often pretty inelastic.
After getting kicked out of his parents’ house, Jesse is on the hunt for a new apartment. After the potential landlord realizes Jesse doesn’t have a legal job, she raises the rent on the apartment. Part of her ability to do this comes from the fact that Jesse is a rental risk and she needs to be compensated for the additional risk she takes on from renting to someone without a legal job. Jesse’s demand is also pretty inelastic because he needs a place to live and there aren’t many places willing to lease to a person without a formal job.
The DEA is close to catching Jesse and Walter, which means Jesse needs to get the meth equipment out of his house fast. Badger knows a guy who owns a tow company and will tow away the RV, but it’s going to cost Jesse. This is a great example of inelastic demand for services. The DEA is close behind, and Jesse doesn’t have a lot of time to shop around for a better deal. The tow truck driver knows this, which is why he mentions the price is so high because of the cargo, not the miles. This means Jesse will need to pay a hefty sum to get his discrete services.
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.
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