1. Economics 2: Spring 2014 J. Bradford DeLong ; Maria Constanza Ballesteros ; Connie Min http://delong.typepad.com/sdj/econ-2-spring-2014/

2. Economics 2: Spring 2014: iClicker http://delong.typepad.com/sdj/econ-1-spring-2012/ January 27, 2014, 4-5:30 101 Barker, U.C. Berkeley

3. Power light shows when you turn it on Question: Have you registered your iClicker at iclicker.com? – A. Yes – B. Not yet – C. I don’t have an iClicker iClicker

4. Examples… Star Trek, Star Wars, Buffy the Vampire Slayer, Dharma and Greg, Sopranos are out… Who is in? Let me offer you five possibilities: – A. Top 100 iTunes performers – B. Avengers/Shield/True Detective characters – C. Game of Thrones/Girls characters – D. California politicians of the present and past – E. Lego movie characters… 4

5. Scarcity and Choice in a Multi- Person Economy Dharma and Greg – Greg is good at making coffee—can make, say, 10 cups a day But inept at yoga—one lesson a day max – Dharma is good at doing (and teaching) yoga—can teach 5 lessons a day But can only make two cups of coffee

6. Greg and Dharma in Autarky

7. There Is Something Wrong…

8. A Market with cu2 Yoga Lessons!

9. What the Market System Gets Us They have specialized in what they are most productive doing They have traded via this institution clled “market” It is win-win – Dharma benefits as long as the price of yoga lessons > cu0.40 – Greg benefits as long as the price of yoga lessons < cu10 Wealth Maximization – Any price between cu0.40 and cu10 produces a wealth-maximizing production outcome – Any price between cu0.40 and cu10 produces an efficient allocative outcome – Any price outside the range shuts the market—and specialization—down Distribution: – A price of cu10 gives all the surplus to Dharma – A price of cu0.40 gives all the surplus to Greg – A price of cu2 makes them equally well off Or does it?

10. In Order to Coordinate......in an economy with N commodities via the market, you have to... – 1. Find a whiteboard – 2. Write down N prices – 3. Laissez-faire – 4. Maybe you don’t have to write down the prices

11. 11 Why Don’t You Have to Write Down Prices? Because of supply and demand

12. 12 Why Don’t You Have to Write Down Prices? Because of supply and demand Dharma will have a demand for yoga lessons...

13. 13 Why Don’t You Have to Write Down Prices? Because of supply and demand And so will Greg...

14. 14 Why Don’t You Have to Write Down Prices? Because of supply and demand So we can say: if the price of yoga is 5 coc- equivalent, demand will be 3.5

15. 15 Why Don’t You Have to Write Down Prices? Because of supply and demand And if the price is 4, demand will be 3.75...

16. 16 Why Don’t You Have to Write Down Prices? Because of supply and demand And if the price is 3, 4.17...

17. 17 Why Don’t You Have to Write Down Prices? Because of supply and demand And if the price is 2, 5... And if the price is 1, 7.5...

18. 18 Why Don’t You Have to Write Down Prices? Because of supply and demand We can thus draw a demand curve... 18

19. 19 Why Don’t You Have to Write Down Prices? Because of supply and demand And we can draw a supply curve: Dharma is willing to teach 5 yoga lessons no matter what the price... 19

20. 20 Why Don’t You Have to Write Down Prices? Because of supply and demand And we have our market equilibriu m: P=2, Q=5 What if P ≠2?

21. 21 Why Don’t You Have to Write Down Prices? Because of supply and demand If P < 2, S < D And so producers raise their prices...

22. 22 Why Don’t You Have to Write Down Prices? Because of supply and demand If P > 2, S > D And so producers lower their prices...

23. 23 Why Don’t You Have to Write Down Prices? Because of supply and demand If P = 2, S = D And the situation is stable EQUILIBRI UM!!

24. In Order to Coordinate......in an economy with N commodities via a bureaucratic command- and-control hierarchy, you have to... – 1. Tell everybody what to do – 2. Tell everybody what they are going to consume – 3. Check up to make sure everybody is doing what they are supposed to be doing

25. Questions to Ask of Any Societal Calculating Mechanism Is it attainable? – i.e., China during the Great Leap Forward not attainable Peng Dehuai’s reprimand of Mao; Hai Jui’s reprimand of Shih Tsung Productive efficiency: will the right people be making the right things? Allocative efficiency: will anybody say “I don’t want that, I want this instead”? Will it be fair? – The cu0.40 price allocation might be Pareto-optimal Dharma teaches yoga Dharma: 2.5 yoga and 1 cup of coffee— and doesn’t want to teach more or less Greg consumes 2.5 yoga and 9 cups of coffee—if he doesn’t like yoga that much, he might not want to take any more yoga – But it doesn’t seem fair, does it? That is what we will look at next time...

26. Ladies and Gentlemen, to Your i>Clickers... The “economic problem”: – A. Is figuring out how to deal with the fact of scarcity in (at least some of) the things we care about. – B. Is the result of high opportunity costs. – C. Was solved for all time by the wave of technological innovation that was the Industrial Revolution. – D. Is that supply is not guaranteed to match demand. – E. Is that of figuring out what prices should be charged in markets