Eu-voluntary Exchange------Exchange is creation

Outline: This article talked about the interesting dorm location exchanges in Duke University. Student groups trade with each other for better dorms. However, when the exchange involves money, the school warned the student not to do so while they claim: we encourage trade, but no monetary exchange.


Economic concept: rationing, the advantage of price system


Three Rhetorical Questions:
i. If money is prohibited, what else will be the medium of exchange?
ii. Why would the University prohibit monetary exchange?
iii. Who benefits from the prohibition of monetary exchange?


My opinion: The announcement of Duke University is just ridiculous. Voluntary money system is the best way to allocate scarce resources. Simply emphasizing on "Fairness" will never change anything about the scarcity of good dorms. If money exchange is prohibited, there'll surely be other mechanisms allocating scarce dorms. What's more, consider the fact that this new mechanism can be physical force, or even black market，the outcome of these allocation can be much more inefficient than that under free market.

EWOT Twelve

Now, while writing this article, I’m in the Element Hotel in Time Square, New York; I just survived in the shopping crowd of Black Friday and I definitely found some interesting situations.

First of all is the difference between  Wednesday and Friday. When I went to the 5^th. Avenue on Wednesday, the avenue was almost empty, but when I went their on Friday, it’s corwded with people from all over the world (I have to admit that most of them are Chinese…). Why? The answer is simple: people expect the price of goods on 5^th. Avenue to decline on Friday, so their demand on Wednesday decreases.

However, when I walk around brands like Bur Berry and Channel, I see almost no difference. Why? Bur Berry and Channel, with no doubts, are luxuries. People know that brands like this will never discount as much as H&M; also even though they really did discount at 50% off, they’re still expensive, most people still cannot afford them.

In the end, instead of  keeping closed on Tuesday and make discount on Friday，some brands decided to keep open and start discounting just on Tuesday. Why? When you see the name of the brands, such as Quicksilver, Levi’s, you’ll nnotice that they are just somparative cheap. Yes, in this case, those brands are just inferior goods. Hence the sellers decide to avoid the demand increase f other brands on Friday, which increase suggets a demand decrease on their own goods.

Class Thirty One

The advantages of decentralized knowledge over centralized knowledge: centralized knowledge is an impossible dream for overall economic development (how do you develop it in a developing world) but decentralized knowledge tends (but not always) work. Well functioning markets and democracy help aggregate decentralized knowledge.

Supply curve: if its very easy for producers to draw titanium out of the ground, when the price of titanium goes up by a little bit, producers will respond by trying to dig a lot of it up. But if its really hard to draw titanium out of the ground, the supply curve will be steeper.

Czar of titanium: needs to know a lot of stuff he wouldn’t know (and couldn’t possible know) in a million lifetimes. And even if you figure it out, it changes instantly.

Prices solve the problem that the czar would be tasked to solve.

If someone can change their behavior, the price goes up less, and the quantity supplied doesn't have to increase as much to solve the problem when demand is elastic.

The market solves the problem just the way the czar would have (if they could). It steers resources into titanium excivation, into the hands of engineers and out of the hands of club makers and surgeons by using the knowledge that existing demanders can find substitutes. Prices reveal that someone can do the adjusting.

How markets use knowledge
The quality of substitutes for consumers and the cost of substitutes determine the shape of demand curve as I move away from the equilibrium point. The cost of production determines the shape of supply curve.

Titanium market: the equilibrium point is 10 billion pounds at 20 dollars each pound.
Now new demander seeks 6 billion pounds of Titanium at $20. So now the demand for titanium is 16 billion pounds at 20 bucks each pound.

Scenario #1
The supply curve and demand curve are both unit elastic.
When the equilibrium price rises to 25 dollars
                   Initial pounds               Final pounds      Change(absolute)
Old consumers          10                            8                  2
Suppliers              10                            12                 2
New consumers           6                             4                 2
The market rations the extra demand of titanium

Scenario #2
The demand curve is more elastic
When the equilibrium price is 25 bucks
                   Initial pounds               Final pounds      Change(absolute)
Old customers          10                            6                  4
Suppliers              10                            11                 1
New customers          6                             5                  1
Old customers behave strongly because they are very sensitive to the change of price, and they "contribute" more to the new buyers. Supplier don't change significantly because the price doesn't change so much.

Scenario #3
The supply curve is more elastic
When the equilibrium price is 25 dollars
                   Initial pounds               Final pounds      Change(Absolute)
Old customers          10                           9                   1
Suppliers              10                          14                   4
New customers           6                           5                   1
Supplier change behavior strongly because they are sensitive to the change of price. Customers are not because the change of price doesn't change a lot.

If a central planner wants to ration goods, he must be omnipotent and omniscient, knowing every single detail in the market, which is simply impossible.

With the self interest, not every one working in the public interest is actually thinking about public interest.

Class Thrity

Elasticity of supply and demand:

I.                    Supply and Demand

i.                     Demand curve tells you what: It’s a plot of people’s marginal value. It tells you people’s plans about whether they shall purchase a guitar or not at various prices.

ii.                   Supply curve is a plot a producer’s marginal opportunity cost of production.

iii.                  The actions of buyers and sellers on the supply-demand curve are completely independent of one another.  When I go out to buy a guitar, I have no impact on the price of guitar. When you’re jack who make guitar, you have no impact on people’s reference on guitar. Our buying and selling actions are independent of one another.

iv.                 Price is where supply and demand curve intersects. At that equilibrium point, something really interesting happens. The number of guitars demanded by the market is 1000, and the number of guitars sellers wish to produce at that market is also 1000. When you have this outcome this doesn’t mean more people wouldn’t like guitar. Just I tell you how much people want a guitar at that price; it doesn’t mean anything about how much people really like to have a guitar. Remember, demand curve captures both the willingness and ability to pay. The same thing, it doesn’t mean more than 1000 people wouldn’t like to sell guitars. It only means at the price of 500, only 1000 can be profitably sold. 

II.                  Ask yourself two questions when thinking about changes in supply and demand:

i.                     How does each half of the market respond? Buyers and sellers

People respond to incentives, when price goes up, producers try to produce more, and the quantity supplied (not supply) will increase. The new equilibrium is enough to cover the new opportunity cost since it cost more to make more. How would demanders respond? Quantity demanded will fall.

i.                     Whose plans are satisfied after those changes? Buyers and sellers

This question means if you have a particular goal, given the rules that you face, can you meet your goal. I don’t mean whether you are happy or not, I only mean can you meet the goal. For demanders, the answer is yes. At a price of $700, buyers want 800 guitars and they get them. There’re certainly enough guitars to satisfy demander’s requirement at that price. It only means when the price is $700, the requirement of demanders can be satisfied. For sellers, the answer is no. They are able to sell 2000. At the price of $700, the quantity supplied is going to exceed quantity demanded. There will be a surplus (at a particular price, the quantity supplied exceed quantity demanded) of guitar.

What shall we do? Producers cut prices. What happens when you cut prices:

i.                     It gives an incentive for other people to stop selling guitar. Quantity supplied will fall down. (sellers change their behavior)

*when somebody says price is “too high”, in economics, it doesn’t mean the absolute number is so huge. It only means the price is above the equilibrium.

ii.                   When the price is so low, quantity demanded will increase.

Buyers and sellers don't compete in a market, buyers compete against buyers and sellers compete against sellers. Being at equilibrium is not inherently good. It doesn’t mean anything saying “too high” or “too low”

A high price signifies that the good is relatively scarce. As prices are increasing, a shortage is being alleviated.

A low price signifies that the good is relatively not scarce. Scarcity talks about the relative abundance of a good, not its absolute abundance.

Equilibrium - At a price where neither buyers nor sellers have an incentive to change their behavior.

Two Types of Equilibrium:

1) Market Clearing ("good"): Quantity demanded = Quantity supplied

2) Non-Market clearing ("not good")

WWII posters

 Outline: the first poster appeals people to conserve materials (be thrift) so that military forces can meet their demand for materials better; the second poster encourages people to share their cars so that the reserved gasoline can be used to fulfill the desire of military forces; the third poster encourages people to join the U.S. military force by appealing to American idea; the fourth poster encourages to obey the rationing mechanism including price control and use of ration stamp during wartime so that military forces can get more resources.

Rhetorical question:

i.                Are these posters really incentivizing people to do what those posters want them to do?

ii.              Is price control reasonable during wartime?

iii.             What’s its impact on military forces?

My opinion:

   I think this rationing mechanism is reasonable during wartime. Because, during peaceful time, the goal of nation is to enhance the living standard of citizens, so that it has to make sure the balance between industries, ensuring that sources are being used efficiently. But during wartime, the goal of nation becomes to defeat the enemy, so the government doesn’t need to consider the efficiency of society that much, they only need care about what could make the U.S. military forces more powerful in the short run. Think about supply and demand, these posters encourage people decrease their daily demand for certain military resources so that the increasing military demand could be fulfilled.

Class Thirty Two

Evaluate rationing mechanism:

i.                     How is that mechanism going to challenge competition? Constructive or destructive?

ii.                   Encourage people to make more staff because of that mechanism.

Advantages of the Price System
Markets organize themselves; prices force people to economize. Without the price system, there is no way to know anyone else's needs because there are no signals. If you price water, and its price rises, it incentivizes people to produce more water (develop new technologies). Rationing occurs through individual choice.

Healthcare
Kidneys: by banning the sale of kidneys. the profit opportunity is actually higher on the black market. Zero sum world when we talk about kidneys. When you're not selling kidneys, the marginal value of a kidney is much higher.

Transactions
Money changes the nature of the transaction as opposed to bartering. Bartering is really inefficient because of all the transaction costs you must endure (i.e. finding someone to trade with, dividing up your good). Money solves the double consequence of wants problem: suppose we didn't have money, over time, money emerges. Prices emerge to allocate goods - we use price sot assign a monetary value to goods because it lowers the transaction cost of engaging in market activity.

When you assert some positive economic rights, what you are also assuming is that some one's gonna be around to provide that.

Rights cannot exist separately from duties and obligations.

Once an efficient beuarocracy isn't collecting money, it will become incapable of doing things better.

Some people do need medical care more desperately than others, so jumping line is desirable.
Private payments to doctors actually call for more medical care and short line.

When you allow ration by price, what you actually do is set people free to make their own choices.

The beauty of market in the price system is that you don't have to ask folks whether they need certain stuff.(If goods are rationed rather than price, people may cheat or waste supply)


Price forces us to (1)evaluate cost trade-offs of buying a certain good (2)consider values that others place on the goods.


Is it possible or principal to make health care access independent of income, wealth, social status, and other characteristics?
No, because wealthy people can get into better hospital and get better service.

Even it's possible, is it desirable?
No, it's disgusting. You have to waste other resources (time, energy) to get free medical care.

Class Thirty One

We have challenge, consumers compare how much they value staff to the price, that’s how consumers make decisions.  Suppliers compare their cost to price. When I say price system allocate goods and services to people who need them most, I assume that it’s the best way to do it. I assume that’s the way we ration scarce good.

Before the lecture of rationing system, I want to remind you one thing about producer cost. Producer cost is opportunity cost. What other consumers are willing to pay for your product is the very opportunity cost to you. When you see a room priced $279, it tells you that somebody else is valuing it at $279. What will the price then force me to do? We economize!   The high price encourages much more to be delivered during a period of time if you permit that kind of pricing.

Moving on to rationing:

Think about how consumers value goods, and think about how we compare price to get what we want. There’re many ways you can imagine to allocate scarce resources to people. How do you get 5 fish in some reasonably fair, efficient way to those 12 people? I’ll tell you why price system works well and some other ways of doing it. 

Price System:

Goods is actually allocated through who PAYS and who DOESN’T pay, rather than who CAN pay and who CANNOT pay. So, it’s based on the ability and the willingness to pay.

Other ways than price:

I.                    Ration by need:

What does that mean? It seems right, but if you think about the arbitrary nature of the definition, you realize it might be really hard to do such a thing on a grand scale. Etc,

i.                     Who determines who is needy? You can’t just come and say I’m needy and I declare this amount. Someone has to be there to make that determination. What exactly is needy?

ii.                   How could we tell consumers to produce more based on changes of perceived need?

iii.                  How could people compete in that kind of world? Determining needy is very costly, it’s expensive. There’s certainly no way to ensure that those people who need the staff most will get it. We’re more certain that if you ration by need, the people who really want them more will certainly not get it.

II.                  Queuing: first-come-first-serve

Doing this is at least as costly as charging money prices, even if the money price of standing in a line is zero. In a queue, the price you pay is the time and effort to get what you want, etc. not going to bed, not studying. The length of the line is a signal that tells you how long it takes to get sth. Some of you may still want to go, but you have other things to do so that you cannot stay in the line. What’ll happen? Queue-waiting-for-money kids! You may have to pay for the kids $15 for a ticket worth %20. In the second market, the price is always higher than the original price. Thus queuing is at least the same costly and certainly less convenient. People who value the most may get it, but only with greater effort.  What’s more? Again, how do people compete and what’s the incentive that encourages producers to produce more.

III.                Lottery:

We might say that this is really fair. However, people who value them the most may or may not get it and people who need the most may or may not get it. It’s totally a random issue that you see when it comes to standing in line. Every time you set lottery, you see secondary market, black market, all kinds of that.

IV.                All in equal amount (pure communism)

It tends to appeal us on fairness ground. It’s a very low cost rule, it’s very clear. It does have advantages over the previous ones. But there’re still two problems:

i.                     What if the good cannot be cut up?

ii.                   The value of certain things is diminished when you share them.

V.                  Free for all-might be right (physical force)

i.                     It might be good for people who are tall and strong. But not really, even for this kind of people he still has to fight each single time. It’s not only costly for people who cannot get the car; it’s also costly for people who win the fight in terms of medical care problem and all the other things.

ii.                   You cannot make you plan since yon don’t know who you are going to fight.

VI.                Merit (have a moral connections)

So you ration scarce goods to people who deserve them. How do you find merit? What constitutes it? Who decides it? How many merits does each person possess? Merit is just a moral allocation of who deserve it most. It says nothing about who value it the most. People may just aim to make a maximum of merit rather than efficiency. People may do the staff that’s exactly opposite to what society wants.

Evaluations of rationing system:

i.                     Where does competition come from: competition doesn’t come from the rationing mechanism, it can’t. Competition derives from scarcity. Every rationing mechanism set up rules to people and you are going to compete according to that rule! You compete because things are scarce and you want them. So when we value rationing mechanism, we need to think about the rule set by the mechanism is destructive or constructive. EG. Date of Kelly, only one can get her. All people go to the gym to get big bichop. Only one can get, and the other people cannot get other girls for their big bichop. This competition is destructive. One winner, the others are loser. All other effort to make people stronger left no value to the society. Price system might be not really fair, but at least it’s constructive. In price system, you compete by produce sth. of value to society.

ii.                   Is there any incentive that makes producers to deliver more because of the way you ration?

Class Thirty

* Why do supply curves slope up?

i. Diminishing retunes- its harder to make more; cheaper to grow the first 10 arces of land than next 10.

ii. Additional factors of production; if any additional factors of production have diminishing returns, you incur those returns.

I. What can you read?

(1)individual cost

(2) Total costs

(3) Total revenue: PxQ

(4) Producer surplus

II. What changes supply?

i.                 Own price: “quantity supplied”

ii.               Something else:

“Supply shifts”

III. Supply Elasticity

 N=%Delta Q/%Delta Price, >1 elastic; <1 inelastic

*Change in supply:

i. Cost (workers, energy)

ii. Technology changes

iii. Substitutes

iv. Expectations

EWOT Eleven

Yesterday, astounding news draws my eyes: the NBA season this year is now canceled. I felt really terrible when I hearted that news. But it definitely inspired me some thinking into the market of NBA players?

First of all, I think the market of NBA players is not necessarily competitive, at least not as competitive as market of toothpaste. In a competitive market, no individual can have any impact on the price of goods. In the market of NBA players, however, every individual player has essentially different level of wages, ranging from 20000000$ dollars per year to 600000$ annually.  Why? The answer to this question is simply: the ability of every individual player is essentially different. That’s one reason amount to the various levels of wages within NBA.

But the different levels of individual ability cannot completely account for the lockout this year. There’re numerous players in Europe, Africa, Asia who are also capable of playing in NBA; the owners of NBA teams also want them since local players refuse to serve at lower wage. Why don’t the NBA owners just find some international players to substitute some of their employees? The answer is the transaction cost is too high: first, they have to help the international players with their visa, green card problem; second, they don’t actually know how well they can perform in NBA; third, even if the international players agree to come to U.S., whether the current owners of those international players will let them go still remains debatable.

What’s more, the union of NBA players also plays an important role in affecting the general levels of wage.

The Theory of the Leisure Class

Outline: the part that Rizzo asked us to read in this book mainly explained 3 types values toward labor and employment in a chronological sequence:

i. the emergence of leisure class: as wealth is accumulated, people's desire has transferred from the first desire, which is a desire toward more labor, to the second desire, which is a desire toward leisure, or exception from menial working.

ii. Differentiation of life style : after the desire for the exception from labor is fulfilled, the leisure class tend to purchase or gain luxuries only to show their wealth and advance the living standard. These luxuries are not permitted to be owed by the poor, who' re only permitted and able to consume necessities.

iii. Pecuniary employments: While still keeping the continence toward menial works, people now value those which have to do immediately with ownership on a large scale and those that are immediately subservient to ownership and financing, such as banking and the law.

Economic concept: Division of labor, job is a cost, self-interest.

Three rhetorical questions: 

i. the anther mentioned that people regard some diseased  condition as the pattern of wealth if the to reach these conditions cost a lot of money. Why there's no such things now?

ii.  Is leisure class still existing now?

iii. Does people's inclination toward big ownership represent we've gone so far from self-interest that we're now approaching greed? 

My opinion: since job is a cost, not profit, the emergency of leisure class or second desire is an inevitable path of human beings. People's desire for better living standard and more money is just a part of human nature. Yet we need to realize that when self-interest is being taken to an extreme, it becomes greed; the pattern that I asked in the first rhetorical question shows the greed of the leisure class. 

Class Twenty Seven

Economics lecture summary

1. How does the burrito market graph?

When ask each individual how many burritos would he buy at a variable price, and add this information, then form the graph of the world burrito market graph.

2. Notice

(1) the shape of the market. (Demand vs Individual)

The global burrito market graph is flatter than the US burrito market graph.

(2) Can we aggregate further?

If one person buy 100 lap tops if the price is $3 each and 3 burritos when the price is $3 too, in the one graph of the market of him, he buy 103 “things” when the price is $3.

3. In the individual graph, P means the trade-off.

4. Quantity Demand: it has only to do with the number of the goods you purchase when price changes

There is no change how you respond to the price.

     Demand: The entire relationship between the price and the quantity of the goods.

5. What change your consumption?

        (Take orange as an example)

     (1) Own price of the goods itself

        When price of an orange goes up, people buy fewer. The point moves along the demand curves.

     (2) Everything else (a kind of pressure)

·      Wage, Income

·      Substitute

These two factors affect people’s ability of purchasing.

·      Taste

·      Expectation

·      # of participants

These three factors affect people’s willingness of purchasing

When the price of the orange remains the same, but something out of the price make us want more, we purchase more. Then the demand shift out.(right means you purchase more, left means you purchase less)

6. There are two kinds of goods

(1) Normal goods: When the income goes up, Q(quantity demand) goes up.(or we can say the demand shift right)

(2) Inferior goods: when you have more money, Q goes down because you buy something inferior, which is better then that, to substitute, so Q goes down. (or we can say the demand shift left)

*we define the two kinds of goods based on how we respond and how we behavior. A may think that orange is inferior then apple, but B may think that apple is inferior than orange. So it is SUBJECTIVE!!

7. “Prices”(not money) of other good

(1) Substitutes: we can find something that can replace the previous goods with the same service. For example, when the price of pizza goes up, we may buy more burrito to take place of it.

(2) Complements (go together)

coffee & sugar

when the price of sugar goes up, we buy less coffee.

*there is no natural complements but it depends on how people behave.

EWOT Ten

Fairness and Transaction cost

Rizzo talked about the ultimatum game again in his review session audio, which inspired me some new thinking about ultimatum game. Last time I tried to interpret it with game theory; I argued that to accept is the dominant strategy. But in reality, people always sometimes really refute trade. Last time, I thought it was the rationality of the buyers that matters, now I think maybe I failed to put people’s value toward fairness into consideration.  

Since we know that trade can benefit other sides, what prevents the trade that benefits both sides come to reality? Transaction cost is the answer. In the ultimatum game case, the transaction costs that cause people to refuse the proposal is not a monetary trade-off, but their value of fairness. People generally believe that a typical 9-1 proposal is “unfair”. Let’s skip the discussion whether is view is right or not and see what happens so that this transaction is prevented. If all participates are all perfectly rational, the marginal cost is zero for the acceptor of 9-1 proposal while the marginal profit is 1. In this case, since marginal cost is less than the marginal profit, people will accept. Yet when we put people’s value toward fairness into computation, and transfer this intangible cost into mathematical figure, say 2. Then the marginal cost is 2, while the marginal profit, 1, is less than the marginal cost. As a result, the transaction will not happen.

In reality, we should not only consider the rationality of potential buyers and sellers, but need to consider the intangible transaction cost that’s really hard to be transferred into monetary measures.

Class Twenty Eight

Elasticity (sensitivity)

M=% change in Quantity demanded/ % change in (whatever you interested in) own price (the most import we are going to talk today)

If m is…	Demand at that point is…	“Picture”	Words	Total Revenue changes
>1	“elastic”	Flat	Sensitive	Delta TR Move in the opposite direction as the changes in price
=1	unit elatic	/	/	/
<1	“inelastic”	Steep	Not very sensitive	Delta TR same in the direction of P

What impacts m?

(1)     Time short-term elasticity is much smaller than long ones (people have more time to response, to change their behavior that cannot be changed immediately)

(2)     Budgets

(3)     Substitutes (if the cost of being health get higher, you just don’t change your behavior to die, demand for health thus inelastic)

Examples: Apple

P(today)=$4/p    Q(today)= 6 bushels

P(tom)=$2/p     Q(Tom)= 2 bushels          m=Q*w.s/(2-4)=2 (which means if price change, you response as fiercely as twice, absolute value)

*Elasticity is relevant; it depends on current price and quantity. The elasticity of every point on the demand curve is different. 

B is more elastic: as you move down from demand curve, more inelastic

M= Big/Small=Big

Class Twenty Nine

Elasticity- Total Revenues

I.                    Total Revenues: Price X Quantity

When P rise, Q down and when P down, Q rise

Expenditure vs. Cost:

Expenditure is the total P X Q you spent

Cost is the things you sacrifice for a given quantity of good

II.                  “perfectly inelastic” (vertical line)

There are no such things as perfectly inelastic at all since perfectly inelastic implies there’re no substitutes at all.

III.                Income Elasticity of Demand

% change in quantity/ % change in income

>0 normal goods <0 inferior goods

IV． Cost (characterized from scarcity, since we need to do trade-off)

i.                     Actions

ii.                   To Whom?

The Economic Organisation of a P.O.W. Camp

Outline: In this article, the author demonstrated the economic activity within a specific P.O.W. Camp, in which he witnessed and the emergence of market, the transformation of cigarette from a good to currency, the development of paper money, the price fluctuation and the final outbreak of the market.
Economic Concept: 
i. Economic laws are the same no matter what situation it is.
ii. Price is determined by both supply and demand.
iii. Entertainment spending is on the basis of a general level satisfaction of necessities.
iv. Money paper needs the support of the level of general wealth.
There rhetorical questions:
i.  Since cigarette is both common good and currency, does its role as common good accounts for the failure of it as currency in the final life of the P.O.W.  ?
ii.  Is middleman really to blame in this situation?
iii. Since the shop is based on a non-profit standard, how would someone be willing to work in it?
My opinion:
The author definitely presented an interesting example of a simple society to illustrate the basic economic principles.It works well in presenting how market works in the simplest level. But I do have some doubts, as illustrated following, about the details of this mechanism.

Class Twenty Six

Transactions cost

Definition:

It is the cost of the original and negotiating contrast agreement.

There are many ways to minimize the transaction cost

Type of transaction cost

1. physical cost: distance. China has some goods and people in Europe trade with China by ship or land.

2. Ignorance: information. Ebay reduce the cost. Internet is the one way that reducing the cost. People got information they want from searching on it.

3. interference:

Middleman:

Anyone who gets buyers and sellers together to let them trade with each other.

Common middleman work: Wegmens. Apple is the same as the farmer’s. but it is more expensive. Why wegmens reduce your transaction cost? You cannot find the farmer at the first place. Then they may not sell you the apple. Wegmens just provide us the market place to trade by reducing the transaction cost.
They find a way to bring buyers and sellers together, and in doing so they substantially reduce transactions costs and therefore encourage trade. These middle men DO produce something of value, they happen to have a comparative advantage in generating information with low opportunity cost. 

Demanded supply:

Specialize.

Why do we need market:

1. In small group, information is easy to obtain. Problem is easy to overcome.

2. in large society, you won’t care some of the problems. You won’t care about what a stranger is thinking about you

Prices: what is it and why is it important?

What did $1.98 tell us:

1. tells the buyer scarcity.

2. Value of the goods.

Market

Goods market: Products that consumer buys

Everything in goods market we learned is the same as the factory market, labor market or any other market systems.

Prices drop our from the market process.

What is market: any collection of buyer and seller.

Virtue place. (Actual buyers and sellers)--Physical place(farmers’ market); stock market(stock trade);

Intrade. 

All markets have potential buyers and sellers.

E.g.: no one bought a watch last week. But we may buy it some day when shopping. So we are all the potential buyer of a watch.

It is any decentralized, unorganized, interaction between potential buyers and sellers.

What does market do?

Market—prices emerse—to produce order

Price emerse:

1. $3 of pizza. The price emerses in the pizza market to make the order. Buyer want cheaper pizza. The price produces the order because if it is $9, no one would go; if it free, everyone goes.

2. Non-money price: health care is free in many countries.

3. both money and non-money prices: we paid tuition to U of R. but the access to get into the school is non-money price, like SAT and paper to get the admission.

People who interact to produce the price

1. Buyer is called demander:

Good market: Household

Factory market: firms

2. Seller is called supplier:

Good market: firms

Factory market: Household

EWOT Nine

Having been in the U.S. for 2 months, I’ve recognized between China and here some genuine cultural difference, one of which is the way customers pay for the service of a waiter. In China, there are no such things as “tips”; while here, the charge for the service is not included in the food so that customers should pay extra fees to the waiter or waitress.

“Isn’t that unfair? ” as asked by some Chinese people who believe that service should be provided by the restaurant for “free.” Yes, it’s true that there is some unfairness here, but I argue that the way Chinese people pay for the bill is unfair.

First of all, is there really anything free in the world? Yes, it seems that Chinese don’t pay for the service fee, but the truth is, the charge for the service has already been allocated within the price of foods. You actually have to pay for the service every time you pay the bill.

Then, why do I they Chinese way of paying is unfair? Because Chinese people actually charge the same amount of service fee no matter the quality of the service. Since we know that value is subjective, the value of certain service should be charged according how much the consumer of that service values it. Flexible tips, the amount of which is totally determined by consumer’s opinion, represents the quality of the service. Hence, I argue that Chinese ways of paying is unfair since low quality service sometimes gain extra compensation that they don’t deserve.

Finally, how does this difference affect the general level of service within the country? The Chinese way posits a wrong incentive that no matter what the quality of the service is, waiters are always paid the same. Thus waiters have an inclination to gradually lower the quality of their service or at least, not to improve.

Class Twenty Five

I．               What effect we know about trade deficit on American economy?

*For the claim that

What must be causing this?

The rule of productivity improvement.

Why you should have no concern about employment when we trade with others.

Why would somebody accept something from me? They must give me something

I give “China” $10, in some ways the money come back to Ameica,

i.                     Buy American goods $10 (all)/$5 (part),

ii.                   Buy American Assets- eg. invest in IBM

iii.                  Buy Italian-spaghetti (then Italians do i. and ii.)

The best thing China can do for the U.S. is “Eating” the money.

It’ll be good if U.S. buy stuff from China and China burns that money. (the value of other money increases)

Follow the goods!

II．             11.18 What is related to the Trade Deficit?

People think U.S. is a good place to invest.

It’s more efficient for China to invest their capital to America, since their opportunity cost is lower (comparative advantage also true in investment)

FDI of U.S. is much larger than that of China

*There’s no such thing as positive or negative trade balance. It’s always zero-sum.

Theory and data all support that trade deficit doesn’t cause problem: the Britain ran great trade deficit, but it was the king of the world

**If domestic savings and investment promotes growth…why not foreign?

III．           Buying local

We all know that self-sufficient only cause poverty.

---What is local? You need to trade buttons, cottons to make a “local” suit.

What makes trading with local strangers more virtuous than trading with Chinese?

—what makes somebody “local” ? Toronto vs. New York City The notion is so arbitrary.

How do we determine free trade is really the way to go?

11:43 *Some people argue that the $2 benefit every American get from the trade is less than the $100 loss of every worker.