Class Thirty Three

Price ceiling:

Suppose the rent is $800. Everything is ok, and then a boom happens so that increases the demand, driving up rents to $1,000. The term “rent” in economics has a very particular meaning:

i.                     When we say “rent” for an apartment, we mean a payment for a piece of the use of equipment, a payment for the use of capital.

ii.                   Something (unearned rent) that accrues to you that is not a result of your productive activity.

Let’s of the value in society we get in every single day, comes from rent, comes from the staffs we ourselves have little hand on producing. (so we cannot accuse the landlords for the unearned rent)

Rent control usually starts by freezing where it is today (when demand drives the price up) when you freeze the price, the market is not clearing.

The first impact is that the quantity of apartment supplied will be less and all potential units that may become part of an apartment when prices rose will never come to the market. The Second thing we need to think is what happens in the long run. I’ll argue the supply of apartment is much more elastic than you think it is.

The quantity demanded will increase when the price is lowered.

We get a weird equilibrium (not clearing) in this market.

Price ceiling results in shortage. (We say that this price ceiling is binding with the result of shortage)

Who in this case is being able to satisfy their plans? Sellers!

Question: Scarcity vs. Shortage (not the same thing. When the price of sth. falls in the free market, it does become less scarce. But in control, not really)

Consequence of rent control:

i.                     Reduced availability: If you cannot ration by price, some other rationing mechanisms must be there to get rid of the other demanders. Some other costs are going to arise:

(1)    Queue: time and effort

(2)    Favored group: you have to impress the landlord, which may be costly.(bribe, race, gender, sex, size of family, etc.

(3)    Black market: more cost.

ii.                   The deterioration of quality: When we talk about supple, generally we assume identical quality. If we decrease quality, it’s the same as reducing quantity. It’s not free to maintain the quality, you may are just not able to pay for the improvement.

iii.                  Black market will emerge: Other money just may be paid by someone in somewhere. The price in black market is at least the same as that in free market, only higher.

iv.                 Misallocations: People who value the most are not ensured to get it.

v.                   Impact on other market: If you post a price control, 4000 people need place to stay. All the people who cannot afford or cannot find house in New York City finally turned to neighborhood. You increase the price of houses in surrounding areas. You make fewer apartments available globally, so it must be the case that price rise globally.

vi.                 Fairness:  Who’s most able to pay for the black market fee? Who’s most able to travel far away? First, the binding price ceiling is unfair to landlords, who cannot charge a higher price. Second, the price ceiling law is intended to let poor people get houses, but the fact is that the poor will bear great loss. Price ceiling won't bother rich people because for them they can buy house in black market or become favored group of landlords easily, but the poor have to spend more time and energy looking for houses, and end up with living in bad quality houses.
Finally, the fucking stupid law is unfair to the whole society because it stops people from reaching an agreement in a higher price and quality. The social freedom and liberty will be hurt.

vii.                The reduced cost in discrimination:
Free market clearing: there is no customers right there when you refused one, you have to look for another one, advertise more and keep the house vacant longer. So it doesn't mean that there is no discrimination in the free market, but you have to pay for it. Even if you’re a discriminating bastard, you’re still doing social good because you’re offering houses (I don’t give you means I’ll give somebody else).

viii.              Monitoring/enforce costs
<1> long run rent supply will shift in and becomes flatter
<2> Regulations are costly. The people and resources spent monitoring are not producing goods and services that people want (not productive). Monitoring is destructive. It’s classic broken window. If destructive things following the price ceiling law, like riots, never happen, why do we pay for the monitoring? We enforce the law, we create the problems, and now we use resources to quell the problems, isn't it a cost?
<3> the government could have done something else more constructive. Tax itself is not costly (just a transfer).Raising tax, the action of taxing is costly.

Class Thrity Two

Properties of Market Equilibrium:
- When a market is at equilibrium there is no "Money on the table." [no profit opportunities]
-At equilibrium (clearing) the market is efficient, because the smallest number of suppliers will be employed and they will be the most efficient as well.
- Stopping the supply short of equilibrium is robbing the world of profit opportunity. [there is a potential trade that would profit both parties]

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.