Economics 2: Spring 2014
J. Bradford DeLong <[email protected]>; Maria Constanza Ballesteros <[email protected]>;
Connie Min <[email protected]>
hBp://delong.typepad.com/sdj/econ-‐2-‐spring-‐2014/
Economics 2: Spring 2014: iClicker
hBp://delong.typepad.com/sdj/econ-‐1-‐spring-‐2012/
January 27, 2014, 4-‐5:30 101 Barker, U.C. Berkeley
• Power light shows when you turn it on
• QuesSon: Have you registered your iClicker at iclicker.com? – A. Yes – B. Not yet – C. I don’t have an iClicker
iClicker
Examples…
• Star Trek, Star Wars, Buffy the Vampire Slayer, Dharma and Greg, Sopranos are out…
• Who is in?
• Let me offer you five possibiliSes: – A. Top 100 iTunes performers – B. Avengers/Shield/True DetecSve characters – C. Game of Thrones/Girls characters – D. California poliScians of the present and past – E. Lego movie characters…
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Scarcity and Choice in a MulS-‐Person Economy
• Dharma and Greg – Greg is good at making coffee—can make, say, 10 cups a day • But inept at yoga—one lesson a day max
– Dharma is good at doing (and teaching) yoga—can teach 5 lessons a day • But can only make two cups of coffee
Greg and Dharma in Autarky
There Is Something Wrong…
A Market with cu2 Yoga Lessons!
What the Market System Gets Us • They have specialized in what they
are most producSve doing
• They have traded via this insStuSon clled “market”
• It is win-‐win – Dharma benefits as long as the price of
yoga lessons > cu0.40 – Greg benefits as long as the price of
yoga lessons < cu10
• Wealth MaximizaSon – Any price between cu0.40 and cu10
produces a wealth-‐maximizing producSon outcome
– Any price between cu0.40 and cu10 produces an efficient allocaSve outcome
– Any price outside the range shuts the market—and specializaSon—down
• DistribuSon: – A price of cu10 gives all the surplus to
Dharma – A price of cu0.40 gives all the surplus to
Greg – A price of cu2 makes them equally well
off • Or does it?
In Order to Coordinate...
• ...in an economy with N commodiSes via the market, you have to... – 1. Find a whiteboard – 2. Write down N prices
– 3. Laissez-‐faire – 4. Maybe you don’t have to write down the prices
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• Dharma will have a demand for yoga lessons...
13
Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• And so will Greg...
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• So we can say: if the price of yoga is 5 coc-‐equivalent, demand will be 3.5
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• And if the price is 4, demand will be 3.75...
16
Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• And if the price is 3, 4.17...
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• And if the price is 2, 5...
• And if the price is 1, 7.5...
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• We can thus draw a demand curve...
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19
Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• And we can draw a supply curve: Dharma is willing to teach 5 yoga lessons no maBer what the price...
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20
Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• And we have our market equilibrium: P=2, Q=5
• What if P ≠2?
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• If P < 2, S < D
• And so producers raise their prices...
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• If P > 2, S > D
• And so producers lower their prices...
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Why Don’t You Have to Write Down Prices?
• Because of supply and demand
• If P = 2, S = D
• And the situaSon is stable
• EQUILIBRIUM!!
In Order to Coordinate...
• ...in an economy with N commodiSes via a bureaucraSc command-‐and-‐control hierarchy, you have to... – 1. Tell everybody what to do
– 2. Tell everybody what they are going to consume
– 3. Check up to make sure everybody is doing what they are supposed to be doing
QuesSons to Ask of Any Societal CalculaSng Mechanism
• Is it aBainable? – i.e., China during the Great Leap
Forward not aBainable • Peng Dehuai’s reprimand of Mao; Hai
Jui’s reprimand of Shih Tsung
• ProducSve efficiency: will the right people be making the right things?
• AllocaSve efficiency: will anybody say “I don’t want that, I want this instead”?
• Will it be fair? – The cu0.40 price allocaSon might be
Pareto-‐opSmal • Dharma teaches yoga • Dharma: 2.5 yoga and 1 cup of coffee—
and doesn’t want to teach more or less
• Greg consumes 2.5 yoga and 9 cups of coffee—if he doesn’t like yoga that much, he might not want to take any more yoga
– But it doesn’t seem fair, does it?
• That is what we will look at next Sme...
Ladies and Gentlemen, to Your i>Clickers...
• The “economic problem”: – A. Is figuring out how to deal with the fact of scarcity in (at least some of) the things we care about.
– B. Is the result of high opportunity costs. – C. Was solved for all Sme by the wave of technological innovaSon that was the Industrial RevoluSon.
– D. Is that supply is not guaranteed to match demand.
– E. Is that of figuring out what prices should be charged in markets