V Markets, Prices and Cooperation
* Examples of astounding cooperation
V The pencil
* Uncle Miltiewww.youtube.com—watch
* The original article: www.econlib.org—rdPncl1.html
* Individuals interact - they economize based obn the relative scarcities they encounter
V Specialization - stuck in our little corner of the knowledge world
* Given the massive ignorance
* Prices are the nexus
V Prices
* Permit people to acquire appropriate information
* Permit people to acquire appropriate incentives
V Property rights and transaction costs
V Transaction costs
* The costs of arranging contracts or agreements between demanders and suppliers.
* They are as consequential as the costs of materials, labor, etc.
* Institutions in the US are established that keep transaction costs low and permit coordination between people.
V When transaction costs are high, people cannot cooperate and wealth is lost.
* Examples: The mortgage in the Czech Republic
* The internet
* Glass in the bike lane
* Open spaces in the hills
* Traffic on the freeways
V The role of well defined property rights
* The old Soviet economies - who owned what?
* Could the ownership be transferred when needed?
V Markets - A Process of Competing Bids and Offers
* Markets are people interacting with each other.
V The role of money in coordinating
* Barter has high transaction costs - the coincidence of wants problem
* Money as a medium of exchange solves the problem
* Money also permits adjustments of prices in small or large amounts.
* Coordination takes place because people are continually adjusting to changing money signals.
* Money changes permit the intricate processes required to produce something (the pencil)
* People are economizing - trying to "take advantage" of the new conditions indicated by price changes.
V Market Mechanics
* The graphs
V The intersection - the market clearing price (equilibrium)
* Harmony - buyers expectations and sellers expectations coincide - no disappointed expectations
V If price is below the market clearing price ...
* Shortage - def. At a certain price ...
* Buyers compete with other buyers
V If price is above the market clearing price ...
* Surplus - def - at a certain price
* Sellers compete
V Markets tend to clear
* Clearing is the result of individuals making choices
* With limited information
* Shifts
V Legally Imposed prices
V Ceiling - Sometimes we blame the thermostat for the heat
* Persistent shortage
* Craziness
* Overall the cost will not be lower. There will be both monetary and non-monetary costs
V Floors
* Persistent surplus
* Craziness
*
V Scarcity and Rationing
* Scarce is not rare
* If scarce - rationing is necessary
* People will compete to meet the rationing criteria - Joe College
* If we ration based on money, people have an incentive to earn money
* If we ration based on social connections, we will see very different behavior.
* Admission to Harvard - high-schoolers work to get good grades.
* Money rationing permits effective coordination (in most cases)
* Competition is a consequence of scarcity.
V Centrally Planned Economies
* Prices form an index of value that is essential for effective (and efficient) cooperation
* Without markets and prices, planners cannot have enough information to make economizing decisions.
* We live in a world of diffused, atomized information with price as the coordinating nexus. Without prices, this coordination is not possible.
* This is why the centrally planned systems were doomed to failure.