Fire that Central Planner

Sellers should only worry about their own costs
Buyers: don't need to know reason behind price, just whether they value that good enough for that price

ex: suppose agreed fed gov't should have strong role in health care, 1 size fits all, same for all states
What if...wrong?
In market, have incentive to solve problems
In gov't, no plan B even though different states have diff. needs
Trial & error successful in markets but not in gov't--> should mimic experimentation

What's useful about market equilibrium?
Lines cross, all happy, can't do better
Those who value the most will get the product

Resources used are the cheapest to employ; Chicago school of econ says you'll walk past a $100? b/c markets efficient enough...silly

4 Problems For the Central Planner

(Imagine 5 Demanders, 5 Suppliers, Happy Point at 3 Guitars Produced)

1) Who Should Make Guitars? Don't Know Firm Costs

Should one producer make X amount or all? Maybe S4 make all guitars? (But oppor costs $25)

-Price to pay workers, rent, electricity

-Profit missed from doing something else

Only costs S2 $15 to produce, world would be poorer if allocated wrong

2) Suppose got the sellers right, S1 S2 S3 have lowest oppor. costs

Who decides who gets the guitars?

Prices force people to reveal themselves to show what they value the most

Imagine if the wrong people were forced to consume those guitars 

D4 gets $15 of pleasure from it, but D2 gets $25 of pleasure, world would be $10 richer

3) How know that 3 guitars is the right amount to produce in market?

Cent. Planner says to produce 1 or 2

Problem: too few guitars, still more deals to be made!

Markets are NOT about producing as much as possible

->Produce 5, demand low don't value the guitar, too much created

4)? Social Responsibility of business

Price = cost/values, what does society deem as important

How firms handle burden?

ex: MA premium incr. for policies; MA healthcare plan passed BUT did not measure the increased cost on suppliers

Consider: MA in better health, better education, & more people uninsured compared to the nation

-->entire country cannot match MA people, should have diff. plan

Problem: need for more doctors so costs went up

ex: 60 aired segment on huge amnt of Medicare fraud, health issues matched with list of ppl

1) health & human services

-big challenge pays out billions of claims a year

BUT medicare becomes bigger! 

2) Why took gov't so long to notice?

It was "well-intentioned", didn't think would attract fraud

Problem with Central Planner:

No incentive to produce; Markets provide financial incentives 

Accountability for aid

-->Some aid makes poor worse off or doesn't help at all

Knowledge problem-->Need feedback!

Lesson: Survive, must decentralize decision making

States should be humble in light of knowledge problem

ex: let states be unique in health care

"one size" does not necessarily fit all

-learn from mistakes & keep trying

-Need to be rightly oriented to issue

Rent Control: Price Ceilings

-Legislate rent control, can't raise price above some ceiling

-->landlords can't raise and sellers can't bid for a higher price; Should it apply to all?

Why is the moral responsibility of the landlords? Not only provide bed, but MUST provide cheaply

Exchange is Immoral

There is no perfect system or solution for an issue, like room assignments, that affect a large population of individuals with unique situations and needs. Reading the housing process of Duke university reminded me of our own college's policy; both have instituted a room lottery that favors groups. (Ours simply has become more exclusive with the points system). It appears that the administration has done its part to impose a system that is as "fair" as possible, but it seems the process may change in light of the monetary exchange between student groups to swap housing assignments.

I was surprised (and initially impressed) that the Duke administration allowed students to trade assignments amongst themselves. But I'm not sure I understand why that trade becomes a "disgraceful" problem when money is brought into the trade; as the author of the post pointed out, both groups benefited and obtained housing for less than they valued. And furthermore, no party was hurt in any way (the neighbors of the BSSG are probably grateful as well for the swap with the fraternity). 

I think college administrations forget that even though we are students, we are still technically adults and should be able to make mature decisions about where we choose to live. It is important to note that the Duke student groups had the right to turn down the money offers from other organizations; they did not have that right to refuse the assignment from the lottery. I also believe the administration would find LESS student complaints about neighbors if students have more flexibility of where they live and can share spaces with other groups that have similar living habits.

Don't Mess with the Price System

Other systems besides price fail because they do not provide incentives.
-->imagine if ration by height, nothing gained
Making things "law" is dangerous, forces someone to provide a service



ex: 64 yr breast cancer survivor, would have to wait 5 months to see doc about her back, but the visit is free
BUT she can pay to see a doctor sooner
-A cyst would be covered by nat'l health care, but she was denied because she could afford the sooner visit
-People complained that she used the price system to jump the line
Consider: some people do need medical care more desperately
-Eng doctor-->not incentivised to do more surgeries or to do the hard procedures

The beauty of the market system
1) don't have people determine if "needy" or not
2) Will not waste suppy
-NO vaccine police to solve; production/consumption solved by price system

ex: Water Ban
-Don't run water, take dog swimming, don't..
-shortages persist, persuasion doesn't work (sadly, proof is in the cheating on our test)
-little less becomes a lot less
-expect price to rise, buy more now and put more pressure
-people don't realize the full cost of water use

Prices Force:

1) Value Cost; plan to use water when deem worth it
-cheap, use more $$ give up least valued uses of water
-Doesn't require force from police
2) Consider value others place on water
-If price jumps to $10/gal, says someone out there reallly wants it
-->make decision not to buy the water

Price gives chance for people to gain from transaction
-Price water & it rises, incentivises producers to make more
-entrepreneurs find to ways to produce water
-w/out price, not enough water
Allocated wealth, right people produce/consume

Why kidney transplants 4?
-lack of specialization, kidneys buried
-people dying from kidney failure
Obj: legalize kid. sales
Would unethical methods increase because of chance to make $?
Imagine, ban sale of kidneys
-->profits HUGE on black markets, marginal value highter

People thing of healthcare as a sep. good
-Scarce, how distribute to society?
What should determine who gets health service?
-w/ burritos, no objection
--> those value, get them, why different in health care?
-No one argues we should all eat same, wear same, live same

Founders of Eng. health care system wanted ALL equal, rich and poor alike
BUT inequality greater today
1)Impossible to make healthcare indep. of income, occupation, education
2) Even if possible, is it always worth it?
3) Why do so many people talk about it?

Consider: some heart surgeons better than others
-->depending where you go, some get better care than others
Imagine if line for best surgeon is across the country
-not everyone can afford the plane ticket to get there, the hotel etc

"Free Education"
-Must be able to buy home in that area, get to work from that house
=>therefore, access to education is not equally distributed

Make choices by flipping a coin?
90 yr old lady vs 20 yr old student, who gets the new liver?
-yes, veil of ignorance;

Imagine world without money
Guitar maker, need materials to build and stuff to live
    -money changes the nature of the transaction
Guitar maker wants a toothbrush, have to go around and find someone who makes toothbrushes
Does that producer want to exchange for a guitar?
-->Bartering takes time, waste chances to make more guitars or toothbrushes

1)Double Coincidence of Wants
2) Divisible: in barter world, have to divide stuff
-ticket=$200, guitar $2,000, give 1/10 of a guitar?
--inconvenient, hard to divide,
imagine paying for car with guitars, costs 100s of guitars
-->$ allows us to exchange more easily

why use price=assign monetary value

What Were They Thinking?

Well before I had step foot into an economics class, my friends and I were puzzled about a supply issue. Wendy's of course, offers delicious frostys and looking to save calories but still enjoy the cool dessert, my friends and I would get the kiddie size. Last summer, small frostys were offered at 99 cents, but the kiddie size was $1.50 (or something like that). Now, as much as I like conserving calories, I also like saving money, so I opted for the LESS expensive but the BIGGER size. This completely contracts the Law of Supply and common sense in my opinion. The only reason I could see why Wendy's would charge less for a larger size of the same drink would be if customers are more likely to buy more food when they buy more drink. For example, some people enjoy dipping their fries in the frosty (not me). Perhaps if they have a larger frosty, they would be willing to buy MORE french fries, or opt to get a burger too. In any case, I settle for paying less and eating half of my small (when I have the self control).

Supply Propoganda

 

During World War II there was serious rationing of goods nationwide; people donated scrap metal, created victory gardens and reduced the use of gas. At that time, demand for a variety of goods remained consistent while the amount of supply was greatly diminished due to the needs of the American army. These posters demonstrate another way to change people's consumption besides the price system. In this case, the public was inspired to demand less to be patriotic; it was their contribution to the war effort. By eating less meat or by using alternative materials for aluminum,there was enough for the army and people felt they were helping the nation. People respond better to positive persuasion rather than negativity or force. (But arguably, fear also is a significant inspiration) This campaign was successful because children, women and the elderly felt were a part of a bigger effort.

Another type of opportunity costs: what other customers are willing to pay
ex: hotel raised price of room during golf tournament
-gouged?! What if put out sign saying incr. b/c of tragic accident? Does the reason matter?
Price a business charges is what people are willing to pay, what they value at that price
-->Rizzo didn't like $$, shared bed instead of pay money for own room
-incentives for homeowners to step in and offer rooms for cheaper

Many ways to allocate scarce goods to people
ex: How get 5 fish to 12 people?
-all 12 can't have a fish
-price system = the rule to follow

ex: Pres Obama criticized insurance companies for rationing coverage
consider, # of people who need healthcare compared to amount of health care provided
BUT we ration everything else

Sample Rationing Criteria

1) Need

-vague, subjective, hard on a grand scale

-Who determines what is need? $? physical pain?

-How demonstrate more needy? (costly, uncertain)

2) Queue

-First come first serve; waiting inconvenient 

-Even if free, the line is cost

  --perhaps camp out, pay someone to wait for you

-CEO of company, poor working all hours, perhaps cannot afford to wait

3) Lottery

-Often considered "fair"

-Value/need goods but may/may not get it

4) Equal Shares

-Pure communism, divide equally and everyone gets some

-Low cost role

-Problem: not able to properly divide

  --If large number, barely receive anything and reduce the value

5) Might Makes Right

-Free for all! Biggest/strongest gets the fish by fighting for it

-Planning difficult, costly

6) Merit

-Ration scarce goods to people who "deserve" it

-est criteria (think college admission) social judgement

-says nothing about the value of achievment

   --Does intention matter over outcome? Problem: reward for duty rather than success

Evaluation of Rationing Mechanism

1) Where does competition come from?

-does not come from rationing 

-Derived from scarcity -->compete regardless of "rules"

2) What is the nature of competition?

-Destructive or Constructive

Destructive:

ex: Boys compete for Caroline, to get the date they need the biggest biceps

-->guys work out curls constantly;

Destructive, costly; they're not studying or doing what they enjoy

Competition: here, only focus on the self and produce nothing to sociey

ex: Rizzo does steroids to outcompete

-->BUT other guys do roids too and everyone gets bigger

-Still only one winner, nothing better produced

Constructive:

ex: Caroline wants the guys to bid for a date

-Boys compete by making $

-->teach econ, clean floors, bake goods

-->society is richer! Competition, something of value produced and the "losers" still have $

3) What are incentives for producers to make/deliver more?

-problem of supply

-compete over prices, people care about income

Consider: seem poorer, college will reward defect, dishonesty

Theory of Supply

All relevant costs for a producer are opportunity costs
--> more burritos, give up chance to make pizza

Quantity Supplied vs. Supply

 

Price	Quantity Supplied
$0	0
$0.50	0
$1.00	1
1.50	2
$2.00	3
$2.50	4

-Think of price as related to opportunity costs of producing that particular burrito
-Each pt =marginal oppor. cost (recall points on demand curve also marked margin)

So long as make each burrito 49 cents, will make a profit if sold for 50 cents
-Some prices are too low, could never earn a profit (perhaps it costs 80 cents to make 1st burrito)
NOTE: supply curve slopes up

"It costs more to make more"

How do producers change as prices change?

Do the cheapest, least costly way first

Supply: relationship of how respond to prices; marginal opportunity costs

Total Costs of Production: marginal costs of each unit produced added together

-area below to the supply curve up to that point

What can we learn from the supply curve graph?

1) Marginal

2) Total Cost

   = MC1 + MC2  ($1.00 + $1.50 = $2.50)

3) Total Revenues = P x Q

   2 x 1.50 = $3.00

4) Producer Surplus = total rev. - total costs

   -How much money is made, "profits"

Why do supply curves slope up?

"Law of Supply" 

Don't forget, violated, not always true

ex: labor supply, some usage may reduce work down the line, "backward bend"

1) Diminishing Return of Production

-harder to make more; tougher to make 5 vs make 1

ex: farmer owns 160 acres, which spot(s) to plant?

typically choose the best; imagine go from 10 acres to 20 acres

-next acres not as good, need more water, more fertilizer, more attention

  Consider, some technology doesn't matter, 10th download harder than 2nd?

2) Additional Resources

Imagine all the land is good, STILL have to buy more seeds, more machines, maybe more workers
-bid away tractors from other sources causes the price of tractors to rise

Changes in Supply

Quantity Supplied vs. Supply

Quantity Supplied: Change in Price -Move along the supply curve <--- only changes in price

Supply: changes in other stuff

-Supply curve shifts, causes a change in supply

 

<--Anything other than price that changes supply

ex: any change in factor (input) prices burritos need: land, labor capital

Rent falls: cheaper to produce

-expectations matter MORE for producers than consumers

ex:titanium on property; imagine that future prices will drop, dig up now to sell

-expect price to rise in future, wait

-->decr. production, also causes to bring up

(expect) change in technology -->supply curve based on constant

consider: improvement in technology improves production

-->shifts out

ex: changes in other markets

Pizza prices skyrocket, making big $$$

-> stop making burritos, start making some pizza!

Elasticity: changes in price to produce more

Price elasticity of Supply: how much more I will produce when price goes up

Relatively Elastic vs. Relatively Inelastic

Elastic: > 1
Inelastic: < 1
ex: longer time producers have to make decisions, more elastic (more choices)

Marginal vs. Average Costs

A	B	C	D = C / A
Burrito	MC	TC	Avg Cost
0	0	0	0
1	$1.00	$1.00	$1.00
2	$1.50	$2.50	$1.25
3	$2.00	$4.50	$1.50

ex: sell 2 burritos, market price $1.50

Sell next burrito if people willing to pay $1.75

-avg costs of production, $1.50, make a profit?

NOOOO

when producers think of unit #3, sell for $2.00, $2.01

could have lost 25 cents of 3rd

Consider: sunk costs 3rd burrito only matters when the ??? of last burrito, doesn't matter others

Avg costs matter for the long term

-firm entry/exit

marginal: incr/decr production

price system = way we ration goods in society