Economics 2: Spring 2014
J. Bradford DeLong <jbdelong@berkeley.edu>; Maria
Constanza Ballesteros <mc.ballesteros@berkeley.edu>;
Connie Min <conniemin@berkeley.edu>
http://delong.typepad.com/sdj/econ-2-spring-2014/
Economics 2: Spring 2014:
Recap: The Importance of the
Market
http://delong.typepad.com/sdj/econ-1-spring-2012/
January 29, 2014, 4-5:30
101 Barker, U.C. Berkeley
To Your i>Clickers…
• We had a gigantic “natural experiment” in the
twentieth century. It was:
– A. Whether technology could be successfully
transferred by Europeans colonizing the rest of the
globe.
– B. Whether breaking up large firms would restore
competition.
– C. Whether population growth could be controlled by
government command.
– D. Whether an economy that got rid of markets could
thereby be more prosperous and more egalitarian
than one that did not.
– E. Whether eliminating communist regimes would
accelerate prosperity.
How Remarkably?: The High
Stalinist Experiment
How Much Does Market
Organization Matter?
What Happened?
•They threw away a
more than five-fold
amplification of
productivity by
eschewing the market
And in Long-Run Perspective…
• Things start to happen worldwide between 1500-1800…
• Straightforward extrapolation of 8000 BC to 1500 gets us to our 7138
million people in 5200—with probably 100 million people in California
with workers earning $2/day and 70% of us in the San Joaquin Valley on
our small rice plots…
• What happens then? More and more of the world starts to shift from old
(ancient, feudal, “Asiatic”, petty-bourgeois) to the “bourgeois” mode of
production.
• Science, yes. Two heads better than one, yes, but also market…
Why Do Markets Work So Well?
• Ways of Organizing:
– Bureaucratic command-and-control
– Thick-tie reciprocity
– Market
• What gives markets their edge?
Concept of a “Reservation Price”
• For sellers, the price below which you think
you got a really bad deal if you sell—you
really, after thinking about it, would rather
not have sold at all…
• For buyers, the price above which you think
you got a really bad deal—you really, after
thinking about it, would rather not have
bought at all…
Ten People Who Do Nothing But Drink Espresso
and Give (or Take) Individual Yoga Lessons…
• Yoga Teachers
– Black Widow (25)
– Tyrion Lannister
(15)
– Captain America
(10)
– Hannah Horvath
(5)
– Arnold
Schwarzenegger
(0)
• Yoga Students
– WyldStyle (20)
– Beyoncé (16)
– Macklemore (12)
– Adam Sackler (8)
– Jerry Brown (4)
Bureaucratic Command and
Control
• Pick a random
number from 0-5: 2
• Pick two teachers:
Tyrion Lannister and
Arnold
Schwarzenegger
• Pick two students:
Macklemore and
Adam Sackler
• What’s the outcome?
– Macklemore happy
(+12), Adam happy
(+8)
– Tyrion annoyed (-15),
Arnold meh (0)
To Your iClickers…
• Why is Macklemore happy with this
(bureaucratic) outcome?
– A. Because WyldStyle didn’t get to take a yoga lesson
– B. Because he is being taught by Tyrion, who is a
better yoga teacher (15) than he is a student (12)
– C. Because he is getting something he values as much
as 12 cups of espresso—plus he doesn’t have to give
anything up for it, because it’s a command-andcontrol rather than a market-price world.
– D. Because Jerry Brown, who doesn’t like yoga,
doesn’t have to take a yoga lesson.
– E. Because Black Widow, who really does not like
teaching yoga, does not have to teach a lesson.
A Competitive Market
• Tatonnement:
– At a price of 21: 4 teachers (everyone
except Black Widow), 0 students:
excess supply of 4…
– At a price of 1: 1 teacher (Arnold), 5
students: excess demand of 4…
– At a price of 16: 4 teachers (everyone
except Black Widow), 1 student
(WyldStyle): excess supply of 3…
– At a price of 6: 2 teachers (Hannah and
Arnold), 4 students (everyone except
Jerry Brown): excess demand of 2…
– At a price of 11: 3 teachers (Hannah (5), Arnold (0), and Captain America(10)), 3 students (WyldStyle (20),
Beyoncé (16), and Macklemore (12)):
excess demand and excess supply of 0!
• Net hedonic calculus: +33
Who Teaches and Who Takes…
• Yoga Teachers
– Black Widow (25)
– Tyrion Lannister
(15)
– Captain America
(10)
– Hannah Horvath
(5)
– Arnold
Schwarzenegger
(0)
• Yoga Students
– WyldStyle (20)
– Beyoncé (16)
– Macklemore (12)
– Adam Sackler (8)
– Jerry Brown (4)
Ladies and Gentlemen, to Your
i>Clickers
• Which of the following is not true of the competitive
market equilibrium?
– A. Everyone teaching has a reservation price lower than
the market equilibrium price.
– B. Everyone shares fairly in the surplus from the fact that
some people dislike teaching yoga less than other people
like taking yoga lessons.
– C. Everyone taking lessons has a reservation price higher
than the MEP.
– D. A higher price would have someone teaching someone
with a lower reservation price than they have.
– E. A lower price would leave a deal to be made—a
potential student would be left with a higher reservation
price than a potential teacher.
The Competitive Market in Equilibrium Acts as
Though It Starts by Making the Highest-Surplus Deal
It Can, and Then the Next Highest, and So On…
Ladies and Gentlemen, to Your
i>Clickers
• Who is happiest as a result of opening-up a
competitive market for yoga lessons?
–
–
–
–
A. Black Widow and Tyrion Lannister
B. Captain America and Macklemore
C. WyldStyle and Arnold
D. Adam Sackler and Jerry Brown
Ladies and Gentlemen, to Your
i>Clickers
• Who is happiest as a result of opening-up a
competitive market for yoga lessons?
–
–
–
–
A. Black Widow and Tyrion Lannister
B. Captain America and Macklemore
C. WyldStyle and Arnold
D. Adam Sackler and Jerry Brown
• Why are they happiest? (This is a real
question)
Ladies and Gentlemen, to Your
i>Clickers
• Who is happiest as a result of opening-up a
competitive market for yoga lessons?
–
–
–
–
A. Black Widow and Tyrion Lannister
B. Captain America and Macklemore
C. WyldStyle and Arnold
D. Adam Sackler and Jerry Brown
• Why are they happiest?
– Because: 20-11, and 11-0. They are in the right
place at the right time with the right skills
Ladies and Gentlemen, to Your
i>Clickers
• Who is happiest as a result of opening-up a
competitive market for yoga lessons?
–
–
–
–
A. Black Widow and Tyrion Lannister
B. Captain America and Macklemore
C. WyldStyle and Arnold
D. Adam Sackler and Jerry Brown
• Why are they happiest?
– Because: 20-11, and 11-0. They are in the right
place at the right time with the right skills
– Do they deserve their happiness? (That’s a
rhetorical question)
Ladies and Gentlemen, to Your
Emails…
• I have been driving this point about what markets
do in maximizing money-metric surplus home
with a pile driver.
• It’s the most important thing for you to
remember from this course: what markets in
commodities that are rival, excludible, known,
and internal are good at.
• But: Sometime this evening—not now, but
before midnight…
– Email me at jbdelong@berkeley.edu
– Econ 2—Spring 2014 in the subject line
– Write two sentences about what left you unconvinced, or what
questions you have, or what leaves you skeptical about this
demonstration…