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.
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.
No comments:
Post a Comment