HONORS ECONOMICS PATTERNS & NARRATIVES
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Transcript of HONORS ECONOMICS PATTERNS & NARRATIVES
HONORS ECONOMICSPATTERNS & NARRATIVES
DEMANDSUPPLY
PRICE
SUPPLY & DEMAND
SUPPLY & DEMAND BASICSIn a market system INTERSECTION of supply & demand curves = PRICES
Marginal COST (supply) = marginal VALUE (demand)
Price = y-axis / quantity = X-AXIS
ACCORD – 5 MODELSA uctioneer (Leon Walras)
= series of simultaneous equations solved by the “invisible hand” auctioneer.
C obweb (Nicholas Kaldor)= inward & outward spirals based on the mismatch of long-run & short-run supply / elasticities of supply & demand
CO rridor (Axel Leijonhufvud)= behaves like the “Rocking Horse” within range of the corridor, however, inflationary & deflationary traps exist outside its range. Equilibrium & Disequilibrium Special States
R ocking Horse (Ragnar Frisch – Jan Tinbergen)= shock-absorber & thermostat. Price system propagates exogenous shocks, but tends toward long-run equilibrium.
D isco (Peter Diamond)= Search Equilibrium; Matching & Pairing. Multiple equilibria with unstable optimal & stable-suboptimal equilbria. Often, what you want, you can’t have; what you have, you don’t want. Markets must be made.
DEMANDDemand curves slope DOWNWARDS –
buy more when prices are lowerShape of the aggregate DEMAND curve = WEALTH,
population, & the availability of SUBSTITUTES
SUPPLYSHAPE of the supply curve = FACTORS of production
(land, labor, & capital) + TECHNOLOGY + substitutesSupply curves slope UPWARDS –
produce more when prices are higherBr
ando
n’s A
pplau
se Su
pply
Curv
e
Francine’s Applause Supply Curve
Samantha’s Applause Supply Curve
Alyssa’s Applause Supply Curve?
$ 1 Mystery Item
$ 5 Mystery Item
INCREASING/DIMINISHING RETURNSSUPPLY & DEMAND ILLUSTRATE “NO FREE LUNCH”
EVERYTHING HAS OPPORTUNITY COSTS AS COSTS (PRICE) OF CONSUMPTION / PRODUCTION
INCREASE THEY CONSUME / PRODUCE LESS. INCREASING RETURNS:
– DIVISION OF LABOR: UNIT COSTS DECREASE AS PRODUCTION INCREASES– RESOURCE CONSTRAINTS: PRICE INCREASES AS RESOURCE STOCKS DIMINISH– EDUCATION: PREVIOUS KNOWLEDGE QUICKER ACQUISITION OF NEW
KNOWLEDGE– NETWORK EFFECTS: THE VALUE OF THE NEWORK = NUMBERS OF MEMBERS.
DECREASING RETURNS:– DECREASING MARGINAL UTILITY: THE 10TH SLICE OF PIZZA DOES NOT TASTE AS
GOOD AS THE 1ST – CROWDING/CONGESTION: TRAFFIC; CLUBS; FASHION – COST DISEASE: OVERBUREACRATIZATION / PROFESSIONALIZATION
DEMAND
SUPPLY
PRICE
A
BC
D
PRICE
Mr. Brunelli Demands Higher Grades, but the Supply Function for Students is a “kinked” step function
SUPPLY & DEMAND
;AUCTIONEER MODEL
8
6
2
15 F(d)Frieda = 8a + 1b + 2c = 1
“Outer” Beauty = A = -1“Inner” Beauty = B = 5 $$$$$ = C = 2
F(d)Lucy = 4a + 1b + 0.5c = 2
F(d)Marcie = 1a + 2b + -1.5c = 6 F(d)Patti = -2a + 1b + 1c = 8
F(d)Violet = 4a + 0.6b + 3c = 5
AUCTIONEER MODEL
Walrasian Auctioneer = individual consumer demand functions & individual producer supply functions
matrix of SIMULTANEOUS equations aggregate functions
Then, F(D) [Aggregate Demand) = F(S) (Aggregate Supply)
“ONE PRICE”Assumptions: Determinate, one unique solution, system in
equilibrium, no transaction costs.
A B C
PRICES & PHYSICS]
ROCKING HORSE MODEL
BIGSHOCK
ROCKING HORSE MODELFluctuations in price = EXOGENOUS shocks propagated
through the rocking horse.Exogenous Shocks =
• Supply shortages from War, Famine, & Weather • New Technology • Government Policy• Changes in Credit / Money• Structural Changes in the Economy (Agriculture Industry)
Market system tends toward long-run EQUILIBRIUM. Rocking Horse = SHOCK ABSORBER, internal economic mechanism (PRICE SYSTEM) never wrong.
Economy = CYBERNETIC = Self-Adjusting & Self-Regulating Thermostat
Friction = “PRICE DISCOVERY”
“DISCO” MODELl
BOYS
GIRLS
STABLE – SUBOPTIMAL EQUILIBRIUM
STABLE – SUBOPTIMAL EQUILIBRIUM UNSTABLE – OPTIMAL EQUILIBRIUM
“DISCO” MODELl
INSURERS
INSUREES
“DISCO” MODEL
Buyers, No SellersStable,
SuboptimalEquilibrium
Sellers, No BuyersStable,
SuboptimalEquilibrium
Sellers = BuyersUnstable, Optimal
Equilibrium
Small Shock
Small Shock
“DISCO” MODELSupply & Demand = SEARCH EQUILIBRIUM; Pairing
& Matching– Workers & Employers– Insurers & Insurees– Schools & Students– Entrepreneurs & Capital
Markets & Non-Markets: Markets cannot be assumed, they must be CREATED.
MULTIPLE equilibria: Stable, SUBOPTIMAL equilibria + Unstable, optimal equilibrium.
Disequilibrium = natural state of affairs.
Economic Agents ≠ PERFECT INFORMATION. Information / Transactions = Costly
CORRIDOR MODELCORRIDOR
ACCELERATING INFLATION
ACCELERATING DEFLATION
INFLATION 2% -- 10%
UNEMPLOYMENT 10% -- 5%
INFLATIONARY SHOCK
• DEFAULT
• CURRENCY SPREAD
• WAGE SPIRAL
• COMMODITY PUSH
DEFLATIONARYSHOCK
• DEBT
• REDUCTION IN SPENDING
• REDUCTION IN CREDIT / INVESTMENT
• LEISURE / TECHNOLOGY SHOCK
DEFLATIONARY TRAPa.k.a. “LIQUIDITY” TRAP
INFLATIONARY TRAPa.k.a. “GALLOPING” INFLATION
CORRIDOR MODELMost fluctuations occur in narrow BANDS or “corridors” The Federal Reserve = control interest rate = SPEED-BUMP
or guardrail.Within these ranges, economy = “rocking horse” model,
but . . . High and low levels of INFLATION / UNEMPLOYMENT = runaway feedback effects.
EXPECTATIONS are important. SELF-FULFILLING PROPHECIESThe economy behaves normally, IF we believe it behaves normally. Expected Inflation InflationExpected Deflation Deflation
Shocks = not SELF-CORRECTING
ELASTICITYELASTICITY = sensitivity of quantity to priceVertical = perfectly INELASTIC (e = 0)
Demand = addictive behavior– ADDICTIONS – Your life / health
Supply = TECHNOLOGICAL / Resource Constraint– In this house we obey the laws of thermodynamics!– Water in a desert
Horizontal = perfectly elastic (e = ∞)demand = fixed price
– Perfectly SUBSTITUTABLE GOODS = paper clips– BUDGET CONSTRAINT
supply = fixed costs– Commodities – identical production processes– LIQUIDITY TRAPS– “COST – DISEASE” of service workers / professionals
INELASTIC DEMAND
SUPPLY
PRICE
INELASTIC DEMAND
“New” Diagnoses
DEMAND
SUPPLY
PRICE
GIFFEN GOODS / CONSPICUOUS CONSUMPTION
POSITIONAL & NON-POSITIONAL
Demand = positively elastic GIFFEN GOODSHigher price higher quantity demanded
Use vs. Exchange value: (fetish commodities) demand ≠ value, price value demand
CONSPICUOUS consumption: consume for others’ benefit: flowers/chocolates, perfume, WEDDING REGISTRIES.
Food / consumption staples: largest budget item displaces others as price increases.
Status/POSITIONAL goods: is the best worth it?– Is private school worth the tuition?– Is expensive healthcare better healthcare?– McMansions anyone?
Positional goods = socially sanctioned MASOCHISMSocially INEFFICIENT use of resources
COBWEBS
If slopesupply > slopedemand INWARD spiral to PRICE STABILITYIf slopesupply < slopedemand OUTWARD spiral to PRICE
INSTABILITY
Caused by time LAG between supply & demand decisions• Agriculture – planting (costs) & HARVESTING (benefits) • LABOR MARKETS – education (costs) & compensation (benefits)• Stock markets (esp. Technology) – investment (costs) & return (benefits)
COBWEBS & PRICE FLUCTUATIONS
TIME
PRICE
CONSUMER & PRODUCER SURPLUSCONSUMER SURPLUS = AREA BETWEEN DEMAND CURVE
& EQUILIBRIUM PRICE PRODUCER SURPLUS (PROFITS) = AREA BETWEEN THE
SUPPLY CURVE & EQUILIBRIUM PRICE
***IN A CAPITALIST – COMPETITIVE – MARKET ECONOMY, THERE SHOULD BE NO LONG-TERM PROFITS***
INEQUALITY & DISTRIBUTIONSINEQUALITY = DISPROPORTIONATE OR “UNFAIR” CONCENTRATION
OF VALUED ITEMS – INCOME, JOBS, GRADES – IN ONE GROUP INCOME INEQUALITY = MEASURED BY GINI COEFFICIENTGINI = GAP BETWEEN “PERFECT EQUALITY” & THE ACTUAL
LORENZ CURVE CUMULATIVE SHARE OF INCOME
EQUALITY = LEPTOKURTIC, HOMOSKEDASTIC DISTRIBUTION MODE MEAN MEDIAN
INEQUALITY = PLATYKURTIC, HETEROSKEDASTIC DISTRIBUTION MEAN MEDIAN (SKEW) & MULTIPLE MODES
KURTOSIS = SINGULAR OR MULTIPLE MODESSKEWNESS = MEAN VALUE RELATIVE TO MEDIAN VALUE
MEAN > MEDIAN SKEW RIGHTMEAN < MEDIAN SKEW LEFT
GINIGINI