Jesse · Market Structures · Saul · Walter

Cooking Again

Back in the office of Saul Goodman, Walter and Jesse try to sort out some of their recent misunderstandings. In the process, Jesse finds out that Walter is soon to start producing methamphetamine without him and under the employment of their associate, Gus Fring. When Walter is asked about how much he stands to gain from this new partnership, he simply responds, “It is $3 million, for three months of my time.” Saul knows that this large amount of money needs to be laundered and immediately offers his services for a 15% fee. However, as a prospective customer for money-laundering services, Walter is well aware of his bargaining power and quickly counters Saul’s offer with a 5% fee. Saul attempts to negotiate a high-enough fee by sequentially proposing 14%, 13%, 12%, and 10% fees. In each scenario, Walter’s response is unchanged, “5%”. Single buyers, or monopsonists, have the market power to reduce the acquisition price, just as a monopolist has the market power to limit the quantity supplied and therefore increase market price to maximize profits.

This video clip is also instructive about the price elasticity of supply. More specifically, the video clip emphasizes Saul’s perfectly inelastic supply for money-laundering services over the observed range of prices (i.e., 5% to 15%). Despite the fact that the laundering fee (the price Saul receives) is adjusted from 15%, 14%, 13%, 12%, to 10%, and finally to 5%, Saul is still willing to supply his services. The negotiation between Walter and Saul also reveals some information about Saul’s “willingness to supply”, which seems to be somewhere under or at the 5% threshold. This is simply because even at 5%, Saul accepts the proposal.

Finally yet importantly, the dialogue between Jesse and Walter, located the end of the episode and included below, may be used to frame a discussion about contracts, contract enforcement, and the role of institutions in shaping the behavior of economic agents. Jesse: “You think that this will stop me from cooking?” Walter: “Cook whatever you like. As long as it’s that ridiculous Chili P or some other dreck … but don’t even think about using my formula.” Jesse: “Just try and stop me!” While Walter is indeed the one who discovered the formula for the “blue” methamphetamine, he might have a hard time preventing Jesse from using the same formula to produce a similar good. Had this formula involved any other legal product, such a dispute would have been prevented by the filing of a patent or by a contract regarding its use, both enforceable through a functioning judicial system. However, the use of institutions as a dispute-settling mechanism is not possible in this case – methamphetamine is an illegal good, produced and consumed within a black market. Consequently, violence and the use of force tend to replace institutions in solving such issues, a substitution that generates significant external costs to society.

This description comes from Duncan, Muchiri, and Paraschiv (Forthcoming)

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Costs & Production · Gus

A Real Professional

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.

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Jesse · Market Structures · Mike · Supply and Demand · Walter

Hire the Cook

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.

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Macroeconomics · Supply and Demand · Trade · Walter

Demand for Meth in the Czech Republic

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.

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Costs & Production · Gus · Walter

Walt’s New Facility

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.

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Costs & Production · Walter

Making Meth

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.

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Costs & Production · Hank · Supply and Demand

Biker Meth

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.

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Costs & Production · Jesse · Walter

Pseudo Substitute

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.

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Costs & Production · Jesse · Supply and Demand · Walter

Worth the Money

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!

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