Elon Musk’s Basic Economics


This video was made possible by Hover. Buy your domain before its gone for 10% off
by going to hover.com/Wendover. Imagine a $2,000 car… or a $100 laptop…
or a $70 iPhone… or imagine any product ten times cheaper than it was. Imagine the fundamental market change that
would bring. Imagine the amount of demand there would be
for that $2,000 car or $100 laptop or $70 iPhone. That’s what Elon Musk imagined 15 years
ago when he sat on a pile of $165 million dollars. Elon Musk’s businesses are all centered
around some the most basic principles of economics out there. When he starts a business, he’s not necessarily
trying to do something new, he’s trying to do something right. Musk made most of his early fortune through
his involvement with PayPal. In 1999 he founded a company called X.com
which was quickly bought by Confinity—the creators of PayPal—so when PayPal was bought
by eBay in 2002, Musk’s 11.7% ownership of the company translated to $165 million
dollars. Elon Musk has always been deeply passionate
about space exploration and, as anyone knows, public interest in space has been falling
since the Apollo era. Therefore, Musk’s plan with his newfound
fortune was to launch a rocket to mars carrying a small greenhouse that would grow plants
on the surface of the red planet. Basically, he wanted to take all his money
and put it into a big publicity stunt for space exploration. But he had a problem—it was too expensive. The cost of launches was absolutely immense
and, even when Musk tried to buy decommissioned Russian ICBM’s, he couldn’t find a way
to pull off the project, but he had discovered something. The space launch industry was ripe for disruption. Here’s Joseph, the economics expert from
Real Life Lore to explain why. “The rocket development and space-launch
companies before Space X were essentially aggregators. They bought engines and guidance systems and
all the other various components from other companies to cobble together one completed
rocket. But all the different component suppliers
also had their own component suppliers to make their product. The suppliers of the suppliers not only had
to cover their development and manufacturing costs, they had to sell their components at
a markup in order to make a profit, and then the next component manufacturer had to do
the same which means that by the time the component gets to the company assembling the
rocket, it’s expensive. Not only that, but the assembly company also
has to pay for employees that work to actually figure out how to make all of the different
pieces work together. SpaceX however, works differently. It makes 85% of the components it uses itself,
which allows it to make cheaper parts. For example, if SpaceX had bought their radios
externally they would be paying $50,000-100,000 dollars each, but since they develop them
internally they only cost $5,000 each to build, a dramatic improvement in reducing cost.” Joseph from Real Life Lore has a brand new
book which includes two fantastic chapters explaining simple economic concepts like this
that I’ll link in the description, but let’s talk Tesla. Tesla’s economic strategy is fairly similar
to SpaceX’s. Tesla themselves makes about 80% of the 5,300
parts in a Tesla car, but for the most part they don’t make these, the batteries, at
least yet. Batteries are very difficult to make at a
competitive price so very few companies do. The largest three manufacturers—Panasonic,
BYD, and LG Chem—make a combined 63% of the world’s batteries. Tesla, therefore, has historically just bought
batteries from Panasonic at a cost of about $200 per kWh. But that means that Tesla’s smallest battery
pack, the 50 kWh version, costs $10,000 dollars just in components. When you’re trying to sell a $35,000 dollar
car and make a profit, that’s a significant cost that can be reduced. Therefore, Tesla is attempting to reduce the
cost of their batteries by 30% by building their own factory in a joint-venture with
Panasonic. Their long-term goal, however, is to drop
the battery price below $100 dollars per kWh which would either double the range or halve
the price of that 50 kWh battery pack. But the vertical integration of Tesla and
SpaceX isn’t all useful. The companies basically have to learn and
perfect each step in the manufacturing process and, if one step isn’t working, no cars
get made. For example, the Tesla Model 3, the low-cost
Tesla, is built using steel instead of aluminum like the Model S and X. With this change, the manufacturer is having
troubles properly welding the vehicle bodies together and so the entire production line
is slowed down massively. But there’s something else unique about SpaceX
and Tesla’s production lines—they’re in the US. Now this probably seems counterintuitive—why
would you put the production lines of two companies working to make the least expensive
products on the market in one of the most expensive labor markets in the world? Almost every US company has relocated their
production lines to cheaper labor markets in Asia and Africa but Musk has always had
his in the US. Believe it or not, this isn’t a PR move. It actually makes sense for the two companies. Tesla and SpaceX’s production processes
are constantly being tweaked and optimized as the companies learn to make their products. While China might be able to build Tesla cars
at the same price by using cheaper human labor, Tesla’s US factory is just miles away from
its headquarters in Palo Alto meaning that the executive, development, and production
staff are all heavily integrated and can make changes fast. SpaceX even takes this a step further. It’s offices and manufacturing lines are
all under one roof. The Tesla factory in particular is also heavily
automatized and the US excels in production line automation with its abundance of highly
skilled workers, but just how much is Musk dropping the price on his products? The United Launch Alliance, which historically
has won most of the highly lucrative US government launch contracts, is believed to charge more
than $400 million dollars all-in for a military satellite launch while SpaceX charges about
$80 million dollars. So, SpaceX is already at a fifth of the price,
but as mentioned, Elon Musk wants that to fall to a tenth. Here’s the key for that—the fuel used
in the Falcon 9 rocket only costs about $200,000 dollars per launch—it’s practically a
non-factor in the launch price. The real cost is of the rockets themselves,
so that’s why SpaceX is making them reusable. The first stage of the rocket is now being
designed to land back on earth and be put back into service with dozens more launches. Once this system becomes reliable, it’s
believed that the cost savings will drop the launch price to $40 million dollars—a full
10 times cheaper than United Launch Alliance’s military launch price. SpaceX’s long-term goal is to get the launch
price down to about $10 million dollars per launch. While the company has already made a significant
impact on the space industry, a launch price as low as this would fundamentally change
what’s possible in space. Real space tourism would become feasible,
commercial satellites would become downright commonplace, and Space would become closer
than it’s ever been. But SpaceX does have a bit of a problem—people
aren’t really buying more rocket launches even though prices are down. It’s what’s known as a price inelastic
market. That’s the opposite of Tesla and the electric
vehicle market where lower prices lead to huge increases in sales. The problem with the space launch market is
that it is not a consumer market—normal people don’t buy rocket launches. Governments buy rocket launches and they don’t
care about price nearly as much as people since it’s not the decision makers’ money. The US Air Force, for example, decides they
need to launch a certain number of satellites each year for the national security reasons
and they’ll pay whatever it takes. But Elon Musk’s life goal is to get humanity
to Mars—that’s why SpaceX exists—and he needs money to do it. Lots of money. So, SpaceX is getting into the internet business. The company is actively developing a satellite
constellation that would provide high-speed internet to anywhere on earth. Thousands of small satellites would be put
into low earth orbit and then anyone worldwide could hook into the network using an inexpensive
ground receiver. If SpaceX got just 50 million users out of
the 7 billion in its proposed service area, this business could bring in $30 billion dollars
a year. Since SpaceX would be building and launching
the satellites themselves, costs would be dramatically lower than the competition’s. The whole commercial aspect of SpaceX essentially
exists to fund Musk’s future space exploration projects. For that reason, SpaceX is not a public company
like Tesla. Elon Musk does not want to make money with
SpaceX, he wants to get to Mars. He does not want to be beholden to shareholders
and profitability. Musk has therefore publicly said that SpaceX
will not go public until the company achieves regular flights to and from mars and thanks
to the entrepreneur’s understanding of basic economics, that might not be too far off. If you’re looking to start a company, you’ll
need not only an understanding of basic economics but also a domain. Hover makes finding and purchasing your domain
super simple. They have over 400 domain extensions that
let you create unique domains like mine—wendover.productions. It literally takes minutes to find and buy
your domain, but if you do ever have an issue they have amazing, best-in-class customer
support that will help you with anything and everything. If you have a name you want to use for your
business, your YouTube channel, or anything else you should buy the domain now before
it’s gone. You can also set up custom, professional email
addresses using those domains for very reasonable prices and what’s best is that you can do
all of this for 10% off by heading over to hover.com/Wendover and you’ll be supporting
the channel while you’re at it. Hover is what I use for my domains since it
just works and you should too by heading over to Hover.com/wendover.

100 comments

2:40 * prices are not "cheaper" or "expensive." You don't buy prices.
Parts / things / services are cheaper or expensive.
Prices are low, or higher.

This is the first production by you guys that has been more opinion than fact. Moreover, everything you cover has been covered before. For a huge number of reasons, "Occupy Earth!" Is the only reasonable outcome. Nevertheless, I remain a devoted Elon Musk fan.

Between Elon's IQ and that of AOC and their respective understanding of economics, if they had a child together, then their kid would be of average intelligence with an average understanding of economics. He really needs to inform that woefully uninformed woman.

Well, this just sounds like we could cut out another middle man. Just have NASA build their own factories and plants and such, and build the rockets themselves. Research would go even faster, since new research ideas would be directly applied to new mission ideas, workers in the factories would be government employees and therefore not have to worry about Musk's union-busting, and all new tech would be immediately available for public use, rather than locked behind patents.

Summary: build a communistic company which is almost entirely self-dependant, make sure you don't enter the free market until you can own it all. The irony of American logic.

God Bless Musk and Canadian Economics! Muskonomics? (Oh, sure, when I do it, it's lame, because I don't owe a life debt to a million 12 year old wannabees, sheesh), no one chants my stupid neologisms…Anyway, brilliant! A company that doesn't need "Horiztonal or vertical integration," because it actually builds it's own products! XD

I worked at a warehouse that receives, inspects and stores parts for a factory I worked at…I mean, why doesn't the factory build, receive, and store the parts itself? Increased costs of the finished product; we just assemble it…STUPID.

I work for a company now that "RENTS" a fleet of delivery trucks, RENTS! By now, whatever it paid in rentals and repairs, for the 10 trucks it owns, could have been purchased by themselves. Eventually, you begin to overpay, you always do, it's how the business model was constructed. It goes from "loss" to "profit profit profit profit profit."

Why not just buy their own trucks, and send them to a prof. to be repaired, or hire a 3rd party mechanic? Since they don't own so many that they'd actually need a full-time mechanic for them? Eh? DUMB.

OH GOD I HATE THIS VIDEO "DING" – "Production is slowed down massively," production speed is not a real constraint/factor here, we'll run out of customers, eventually, and the trend hasn't really caught yet, they can wait, it'll be fine. Biggest pitfall of a company, overproduction. I work at a company that sells and produces tarp, it's hit the point where it's storing for inventory based on supposed/projected sales, eventually, their warehouse is going to fill, if demand doesn't meet production, which halts production….which means wasted labor time for employees, or wasted hours of facility ownership (land taxes, probably cheap though, low impact), employees that get laid off, etc.; eventually, despite all the pool liner and curtains we make, they'll fill up in stores…there is a maximum amount of product necessary to be produced; and once you do, you're sitting on nothing, basically, as far as "money" is concerned, and your employees become a burden, a useless cost, but you need them, to train new employees and operate machinery in the meantime…right? It's gonna get complicated.

Yay, Econ 110! Price Elasticity! Inelastic vs. Elastic, (like rubber, flexible), inelastic markets are not shown to change their demand regardless of price variances; in this case, arguably, utilization of Musks service should increase, as others decrease, ignoring company loyalty, faith in the "newbie/kickstart company," (gotta give 'em a shot to prove themselves, eh Launch Commander?); exceeept one problem, chances are at this time, most satellites companies or businesses need, are likely already in orbit, "late to the game," but still viable, satellites de-orbit eventually, even with corrections they will run out of fuel to escape earths gravity, and they have to crash land them in the ocean or the desert somewhere, lest they hit a city and manage to set it ablaze somehow, or destroy homes (scary, huh? fire will rain from the sky >_<); whereas elastic markets change demand with price, especially for consumable goods (goods that are used quickly, food, cosmetics, clothing; things with a limited lifespan or supply); markets like bluetooth speakers, for example, actually abuse this principle, with "brand loyalty" and "quality assumptions," charging higher markup for say, the "Beats Pill" as opposed to other brands; the desire is greater for a product with good quality and long battery life and features, so they charge a higher price, forcing consumers to pony-up the pocket change for a worthwhile product, "the best," as opposed to some comparable alternatives, check out the selection at WalMart, which are smaller, have shorter battery life, quieter (one speaker versus two); and the spec sheets are never useful; 8 hours versus 12 hours battery life, $100 price difference? Extra speaker even? I bet that thing costs you $5 total; at what volume? Max volume, medium volume? What's the decibel range? How loud can it go? It's so confusing, it isn't informative.

Well, let's hope that China doesn't steal Musk's technology and claims it has always been their property since ancient times.

$2000 dollar car??? I think he may have missed the fucking mark a little.. I tried buying a TESLA for 2000 dollars.. they told me they would call the police.. I think ELON needs to get down here and sort the mix up out.. ???? anyone????

If vertical integration were the way to make everything cheaper, everyone would be doing it. With vertical integration you create multiple points of failure that can sink your entire business and tie up billions of dollars in fixed cost infrastructure that you still have to pay for even if demand for your finished product drops.

>Video about economics
>Starts off by saying prices affect demand
The price of a product is defined by the intersection point of supply x demand. Price literally can't change demand by definition.

0:17 "Ten times cheaper" isn't a thing. 50$ multiplied by -10 (which is what ten times cheaper means) would be -500$.
You might be looking for 1/10th as expensive. That would be 50$ / 10 = 5$.

Space flight and especially a Mars flight might sound like a fantasy-come-true but the reality is that its got poor safety record. Even the Space Shuttle which was extensively engineered for safety was predicted to have a 1 in 75 catastrophic failure rate and, as shown by the Challenger and Columbia accidents the reality was 1 failure out of 80. Would you get in a vehicle knowing that you had a 1:80 ish chance of dying ???

You can get all those things now at those prices: smaller, lower cost, and used items.
Imagine the Savings you get when buying all used stuff off of eBay…

Peeps and peepets , we gotta just give our money to Elin c'mon if we don't we die earth ain't holding on to much longer , pick it trash up an elephant and a crow can do it and they do t even have to be told to , search it it's awesome

Elon is 48 years old.
Hearing how genuine his intentions are, it'd be hard to think his successor would have the same vision. I hope we see his vision before he steps down.

Elon can be the first trillion or qudrillion air if he can use his space X company to wxplore and harvest materials. Actually, the first person to own a company is space will own the world. I trully believe that. For example, If i was able to build a rocket that can attach itself to an asteroid the size of a bus. I will bring it the earth's orbit and let gravity do the rest. There is much business that can be done in space and i can't wait to see the next generation of business owners in space.

Wait, ur trying to tell me Elon musk is not trying to do anything new? Jesus that has to be the stupidest claim I’ve heard all year.

Who is still surprised that the main components of life were created by the US Military? GPS, internet, satellites, and a lot of other things too… I'm still surprised…

It's not really economics. Rather it's Wright's Law. Look it up. Kinda like Moore's law but for material production.

Elon Musk
Established a space manufacturing company so that he can send people to mars
just for that
jesus fucking christ
well, he is reminding me of someone

This is not about economics, its about Musk's biz model which is "business" not "economics". Econ is the study of how economies work. Biz is the study of how to make bank. Also, the robot-voices playing host make the whole thing, I dunno, eerie. I could not finish this. Tech bros are creepy.

Umm so we just aren't mentioning the huge subsidies Musk gets from the US government to keep him afloat? Look it up. Also try researching "exploding Teslas", they're actually more dangerous than Pintos ever were. I don't understand the cult of personality around this man. Did you see him smoke herb on JRE? Total light weight.

You can sling shot a craft using celestial bodies gravitational pull

Once you land on one of these celestial bodies outside of our earthly orbit you will never ever be able come back to Earth

Proof me wrong any Scientist, anyone ?

You know you're showing launch vehicles made by everybody other than SpaceX beginning at 1:20? 🤦‍♂️Pfft. Were supposed to believe that you guys are producing and presenting videos about things you've done journalistic reporting to become knowledgeable about? Really seems as if you're simply taking content professional journalists have worked on writing, rewording them to dodge abject plagiarism, and narrating it over images and video produced by others. 🤨 But, hey, you even get to shill additional in-video advertising on top of it. Clever, indeed, but pretty sleazy.

It's sad that 2.3 million people subscribe to a channel that doesn't understand the first thing about economics. Talk about disseminating false information.

Wow!! Tesla is ageing like fine wine. the more later you buy the more cost effective and better it is.
FYI: This comment was made after the launch of the Starlink sattelight launch

Leave a Reply