20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. ·...
Transcript of 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. ·...
![Page 1: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/1.jpg)
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/
![Page 2: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/2.jpg)
Economics 2: Spring 2014: Scarcity and Choice
hBp://delong.typepad.com/sdj/econ-‐1-‐spring-‐2012/
January 27, 2014, 4-‐5:30 101 Barker, U.C. Berkeley
![Page 3: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/3.jpg)
How Much Does Market OrganizaAon MaBer?
• We have a 20th century “natural experiment”
• High Stalinist central planning – Marx’s suspicion of markets
as surplus-‐extracXon devices – Hence, the communists said,
we won’t have any – We will reproduce the
Rathenau-‐Ludendorff World War I Imperial German war economy
– Communes, economies of scale, GOSPLAN, etc.
• Effect: you throw away a five-‐fold amplificaXon of producXvity by eschewing the market
![Page 4: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/4.jpg)
Economic Models and Thought Experiments
• A deliberately oversimplified world • Analyze it to death, in the hope that the principles revealed will have much broader applicaXon to the real world
• So let’s set up a grossly oversimplified economy: ten people, two commodiXes. – Our commodiXes: espresso and yoga lessons – Our people: Black Widow, Tyrion Lannister, Captain America, Hannah Horvath, Arnold Schwarzenegger, WyldStyle, Beyoncé, Macklemore, Adam Sackler, and Jerry Brown
![Page 5: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/5.jpg)
Ten People Who Do Nothing But Drink Espresso and Give (or Take) Individual Yoga Lessons…
• Yoga Teachers – Black Widow (25) – Tyrion Lannister (15) – Captain America (10) – Hannah Horvath (5) – Arnold Schwarzenegger (0)
• Yoga Students – WyldStyle (20) – Beyoncé (16) – Macklemore (12) – Adam Sackler (8) – Jerry Brown (4)
![Page 6: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/6.jpg)
Concept of a “ReservaAon Price”
• For sellers, the price below which you think you got a really bad deal if you sell—you really, amer thinking about it, would rather not have sold at all…
• For buyers, the price above which you think you got a really bad deal—you really, amer thinking about it, would rather not have bought at all…
![Page 7: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/7.jpg)
Ways of Organizing Yoga Lessons
• BureaucraXc command-‐and-‐control – Some bureaucrat decides how many lessons to offer
– Some bureaucrat picks suppliers
– Some bureaucrat picks clients
• Thick-‐Xe reciprocity – Along social networks
• Market
![Page 8: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/8.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5:
![Page 9: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/9.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
![Page 10: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/10.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers:
![Page 11: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/11.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers:
![Page 12: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/12.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers: Tyrion Lannister and Arnold Schwarzenegger
![Page 13: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/13.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers: Tyrion Lannister and Arnold Schwarzenegger
• Pick two students
![Page 14: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/14.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers: Tyrion Lannister and Arnold Schwarzenegger
• Pick two students: Macklemore and Adam Sackler
![Page 15: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/15.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers: Tyrion Lannister and Arnold Schwarzenegger
• Pick two students: Macklemore and Adam Sackler
• What’s the outcome? – Macklemore happy
(+12), Adam happy (+8)
– Tyrion annoyed (-‐15), Arnold meh (0)
![Page 16: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/16.jpg)
To Your iClickers…
• Why is Macklemore happy? – A. Because WyldStyle didn’t get to take a yoga lesson – B. Because he is being taught by Tyrion, who is a beBer yoga teacher (15) than he is a student (12)
– C. Because he is geqng something he values as much as 12 cups of espresso, but he doesn’t have to give anything up for it because it’s a command-‐and-‐control rather than a market-‐price world.
– D. Because Jerry Brown, who doesn’t like yoga, doesn’t have to take a yoga lesson.
– E. Because Black Widow, who really does not like teaching yoga, does not have to teach a lesson.
![Page 17: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/17.jpg)
BureaucraAc Command and Control
• Pick a random number from 0-‐5: 2
• Pick two teachers: Tyrion Lannister and Arnold Schwarzenegger
• Pick two students: Macklemore and Adam Sackler
• What’s the outcome? – Macklemore happy
(+12), Adam happy (+8)
– Tyrion annoyed (-‐15), Arnold meh (0)
• Net hedonic calculus: +4
![Page 18: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/18.jpg)
“Thick Tie” Social Network Reciprocity
• How many students are there with thick Xes to and owed favors by teachers?
• At random…
![Page 19: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/19.jpg)
“Thick Tie” Social Network Reciprocity
• How many students are there with thick Xes to and owed favors by teachers?
• At random… – Black Widow owes Beyoncé a favor…
– Hannah Horvath owes WyldStyle a favor…
![Page 20: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/20.jpg)
“Thick Tie” Social Network Reciprocity
• How many students are there with thick Xes to and owed favors by teachers?
• At random… – Black Widow (-‐25) owes Beyoncé (+16) a favor…
– Hannah Horvath (-‐5) owes WyldStyle (+20) a favor…
![Page 21: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/21.jpg)
“Thick Tie” Social Network Reciprocity
• How many students are there with thick Xes to and owed favors by teachers?
• At random… – Black Widow (-‐25) owes Beyoncé (+16) a favor…
– Hannah Horvath (-‐5) owes WyldStyle (+20) a favor…
• Net hedonic calculus: + 6
![Page 22: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/22.jpg)
NoAce the Pairings…
• Bureaucracy – Adam-‐Arnold (+8)
– Macklemore-‐Tyrion (-‐3) – Where are Beyoncé and WyldStyle?
• Reciprocity – Black Widow-‐Beyoncé (-‐9)
– Hannah Horvath-‐Wyldstyle (+15) – Where is Arnold?
![Page 23: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/23.jpg)
To Your iClickers…
• Would the bureaucracy be beBer if it found a way to get Beyonce and WyldStyle into the yoga lesson taking group? – A. Yes. They value it the most. – B. No. Just because they value it the most doesn’t mean they deserve the opportunity.
– C. I don’t know. – D. I don’t think the quesXon makes sense. Where does this “beBer” come from? What’s “beBer” here?
![Page 24: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/24.jpg)
To Your iClickers…
• Would the reciprocity system be beBer if it found a way to get Arnold teaching yoga? – A. Yes. The fact that he would give it away for free and not feel put upon is a big reason why he ought to be teaching yoga.
– B. No. We shouldn’t impose upon him just because we don’t have to pay him to make him happy teaching yoga.
– C. I don’t know. – D. I don’t think the quesXon makes sense. Where does this “beBer” come from? What’s “beBer”here?
![Page 25: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/25.jpg)
Is There a System?
• That would avoid the defects of: – Bureaucracy
• Adam-‐Arnold (+8) • Macklemore-‐Tyrion (-‐3) • Where are Beyoncé and WyldStyle?
– Reciprocity • Black Widow-‐Beyoncé (-‐9) • Hannah Horvath-‐Wyldstyle (+15) • Where is Arnold?
• And get the right people teaching and the right people taking yoga lessons?
![Page 26: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/26.jpg)
There Is: A CompeAAve Market
• At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4…
![Page 27: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/27.jpg)
There Is: A CompeAAve Market
• At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4…
• At a price of 1: 1 teacher (Arnold), 5 students: excess demand of 4…
![Page 28: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/28.jpg)
There Is: A CompeAAve Market
• At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4…
• At a price of 1: 1 teacher (Arnold), 5 students: excess demand of 4…
• At a price of 16: 4 teachers (everyone except Black Widow), 1 student (WyldStyle): excess supply of 3…
![Page 29: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/29.jpg)
There Is: A CompeAAve Market
• At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4…
• At a price of 1: 1 teacher (Arnold), 5 students: excess demand of 4…
• At a price of 16: 4 teachers (everyone except Black Widow), 1 student (WyldStyle): excess supply of 3…
• At a price of 6: 2 teachers (Hannah and Arnold), 4 students (everyone except Jerry Brown): excess demand of 2…
![Page 30: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/30.jpg)
There Is: A CompeAAve Market
• At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4…
• At a price of 1: 1 teacher (Arnold), 5 students: excess demand of 4…
• At a price of 16: 4 teachers (everyone except Black Widow), 1 student (WyldStyle): excess supply of 3…
• At a price of 6: 2 teachers (Hannah and Arnold), 4 students (everyone except Jerry Brown): excess demand of 2…
• At a price of 11: 3 teachers (Hannah, Arnold, and Captain America), 3 students (WyldStyle, Beyoncé, and Macklemore): excess demand and excess supply of 0!
![Page 31: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/31.jpg)
There Is: A CompeAAve Market • Tatonnement:
– At a price of 21: 4 teachers (everyone except Black Widow), 0 students: excess supply of 4…
– At a price of 1: 1 teacher (Arnold), 5 students: excess demand of 4…
– At a price of 16: 4 teachers (everyone except Black Widow), 1 student (WyldStyle): excess supply of 3…
– At a price of 6: 2 teachers (Hannah and Arnold), 4 students (everyone except Jerry Brown): excess demand of 2…
– At a price of 11: 3 teachers (Hannah (-‐5), Arnold (0), and Captain America(-‐10)), 3 students (WyldStyle (20), Beyoncé (16), and Macklemore (12)): excess demand and excess supply of 0!
• Net hedonic calculus: +33
![Page 32: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/32.jpg)
ProperAes of a CompeAAve Market
• Everyone teaching has a reservaXon price lower than the market equilibrium price.
• Everyone taking lessons has a reservaXon price higher than the MEP.
• Every teacher with a reservaXon price lower than the MEP is teaching.
• Every student with a reservaXon price higher than the MEP is taking lessons.
• A higher price would have someone teaching someone with a lower reservaXon price than they have.
• A lower price would leave a deal to be made—a potenXal student would be lem with a higher reservaXon price than a potenXal teacher.
![Page 33: 20140127 Econ 2 Scarcity and Choice - Grasping Reality by Brad … · 2014. 1. 27. · To(Your(iClickers…(• Why#is#Macklemore#happy?# – A.#Because#WyldStyle#didn’tgetto#take#ayogalesson#](https://reader035.fdocuments.us/reader035/viewer/2022071418/61164a01344b9b2dd37a4208/html5/thumbnails/33.jpg)
ProperAes of a CompeAAve Market
• It does the very best we can do…
• It (almost) enforces itself… • WyldStyle and Arnold
think it’s great! • Captain America and
Macklemore think it’s nothing special
• Black Widow, Tyrion Lannister, Adam Sackler, and Jerry Brown don’t understand the excitement