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.
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.
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.
In this ad for Los Pollos Hermanos, the narrator speaks of the importance of quality in the production process. Higher quality inputs imply a higher quality of output, whether it’s rotisserie chicken or crystal meth. Walter uses only the finest ingredients, in a state-of-the-art facility to produce the most popular version of meth on the market. This scene highlights the relationship between inputs and outputs in the production process.
The video clip is also helpful for discussing the principal-agent contract. More specifically, the clip presents Gus Fring as he supervises the packaging and loading of methamphetamine into trucks for distribution purposes. Gus is the owner of Los Pollos Hermanos, the man running the methamphetamine production operation, and therefore the principal. The laborers packaging the methamphetamine and the truck drivers transporting it are the agents. Sometimes agents do not act in the principal’s best interest. This behavior is also known as shirking, and one can prevent or limit it through adequate monitoring activities, which is precisely what Gus does.
This description adaptaed from Duncan, Muchiri, and Paraschiv (Forthcoming)
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
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.
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.