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Introduction to labor markets | Microeconomics | Khan Academy - YouTube
Channel: Khan Academy
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we've spent a lot of time already
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thinking about markets for the goods and
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services that firms produce now we're
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going to talk about the markets for the
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factors of production
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often known as the factor
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markets what are those factors of
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production well we've talked about them
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multiple times things like land labor
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capital and in particular we're going to
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focus in this video on labor
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so what we have here are some axes where
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the vertical axis is labeled the wage
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rate you could view that as the price of
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labor it'd be per unit time and on the
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horizontal axis in both of these cases
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we have the quantity of labor which
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would be the number of workers in say
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that that unit of time and what we're
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going to do on the right
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hand side right here is think about it
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from the point of view of a firm and
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then on the left hand side we're going
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to think about it from the point of view
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of the market as a whole
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and to understand it first on the firm's
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point of view we can think about the
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demand from a firm how much is a how
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much benefit is a firm getting when it
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hires that incremental worker and to do
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that we're going to think about
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something called marginal revenue
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product now marginal revenue product
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sounds very fancy but i'm going to set
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up a little table here so that we can
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understand it in reasonable terms so
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let's say that this is our labor union
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i'm going to set up several columns here
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this is how much product
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the firm can produce based on the number
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of labor units then you have the
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marginal product of labor which is for
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each incremental unit of labor how much
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more are you able to produce so we make
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some columns here
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and i'm going to add more columns in a
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little bit
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so let's say we could have zero units of
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labor one unit of labor two units of
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labor
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when you have zero units you're
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definitely going to produce zero units
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in that time period let's say when you
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have one unit of labor one worker in the
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time period you're able to produce two
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when you have that second labor or that
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second worker you're now able to produce
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six and so we can think about the
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marginal product of labor that first
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that first worker is able to produce an
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incremental two we went from zero to two
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but that second worker by adding them
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now you're able to produce an
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incremental three units and so here this
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might be due to specialization things
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like that but over time you might have
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diminishing marginal products of labor
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but then if you want to think about
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what's the real benefit to the firm it's
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not just what is being produced but how
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much the firm can get for that so we
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could think about the marginal revenue
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and so let's just say that that is i
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don't know four dollars
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and it's just a constant four dollars
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and then we could think about the
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marginal
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revenue product which is just going to
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be the marginal product of labor times
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the amount of dollars or incremental
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amount of dollars per unit so it's just
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going to be 2 times 4 here which is just
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going to be 8
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so one way to think about it when the
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firm goes from zero laborers or zero
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workers to one worker you're going to
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have an incremental eight dollars of
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revenue based on what that worker can
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produce and then when you add another
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worker you get three times four you get
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an incremental twelve dollars of revenue
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and so we can graph this and as i said
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sometimes you might say initially you
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could get some benefits of
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specialization but then over time you
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get diminishing returns so it might look
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something like this
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typically in an econ class you'll just
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see a downward sloping line for
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simplicity
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but the firm's
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marginal
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revenue
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product you can view it as that
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individual firm's demand for labor at
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those first few units of labor it has a
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very high marginal revenue product but
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over time you have diminishing returns
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from adding more and more people onto
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the staff
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now how would this look at the market
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well what you could do is you could add
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up all the marginal revenue products
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from all the firms in the market and if
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you add them up you're going to get a
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market labor demand curve and let me do
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this in a slightly different color if
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you add all of these up you are going to
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get something
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like this let me write that out that is
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the market
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market
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labor
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demand
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demand
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curve
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now what is going to be the reasonable
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level of labor quantity both in the
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market and how much would be rational
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for this firm to hire well to think
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about that we think about the market
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labor supply curve and i'm going to
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focus on the market first and just like
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the market for most things the higher
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the wage you're going to have more folks
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willing to participate in that labor
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market so at a low wage not a lot of
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people are going to want to work in this
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industry but as wages get higher and
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higher
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well then more and more people are going
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to be up for participating in this labor
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market and so this right over here is
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the market
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labor
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supply curve
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supply
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curve
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and so what would be the equilibrium
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price of labor which was really just the
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wage rate
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well it's where your supply and demand
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curves intersect and we've seen this
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multiple times already so this is i'll
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just call that
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wage star like that and then the
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equilibrium quantity of labor we could
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just call that q star right over here
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now how would that impact what's going
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on in the firm
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well if we assume that this is a
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perfectly competitive labor market we'll
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assume that this firm can't set the wage
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it's just going to have to pay people
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whatever the equilibrium wage actually
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is
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and so this right over here
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is going to be the firm's what's known
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as marginal factor cost
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the cost per incremental unit of labor
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that's just the wage it's going to have
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to pay it can get as much of that labor
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as it as we need we assume because we're
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talking about a we're talking about a
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perfectly competitive labor market in
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this industry i'm just trying to draw a
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straighter line so this right over here
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is our marginal
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factor
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cost and so you could imagine what is
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the rational quantity for this firm to
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hire
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it would keep hiring all the way until
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the incremental revenue per unit of
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labor it gets is no longer higher than
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the incremental cost of that labor and
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that would happen right over here
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so this would tell us the rational
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quantity of labor i'll call that
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quantity for i'll call it q star for the
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firm
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right over there
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i'll leave you there now the important
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thing to realize this seems similar to
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what we've seen before when we talked
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about things like marginal revenue and
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marginal cost for a firm's goods but
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here we're talking about a firm's inputs
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and so instead of it being the marginal
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revenue and the price in a perfectly
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competitive firm that is defined by the
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equilibrium price
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here it is the firm's cost that is
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defined by the equilibrium wage in the
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market
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