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Who am I?

Who am I? Name: KATYA 2 nd year PhD student at Department of Economics Home country: Belarus Instructor for ECON4313 “Russian Economy” Economics of Shortages Resource Allocation Traditional Economy Centrally planned economy Market Economy Long-lived tradition of the past

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Who am I?

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  1. Who am I? • Name: KATYA • 2nd year PhD student at Department of Economics • Home country: Belarus • Instructor for ECON4313 “Russian Economy”

  2. Economics of Shortages

  3. Resource Allocation Traditional Economy Centrally planned economy Market Economy Long-lived tradition of the past Instruction from higher authority Market mechanism

  4. Focus • NOT traditional economies • NOT market economies • INSTEAD • Centrally planned economies

  5. Centrally planned economies of the recent past: the USSR, Poland, Romania, Bulgaria, Czechokoslovakia, Hungary, China; modern day examples: Cuba and North Korea

  6. Workings of Centrally Planned Economy • The central authority comes up with general plan (e.g. 5-year plan) • How to implement: “Material balance” tables • In the USSR were computed for as many as 15 - 28 thousand categories of goods and services

  7. Material Balance: An example

  8. Material Balance: An example

  9. Question • How often does it happen to you that you go to a store with a clear idea of what you want and you cannot find the item you are looking for?

  10. Follow-up Questions • Why do you think the item wasn’t there? • How quickly were you able to find it elsewhere? • How would you feel if the “search” for goods became your daily routine?

  11. Not just a product of imagination when one talks about shortage economies AND according to the Hungarian economist Janos Kornai, the centrally planned economy is an economy of shortage.

  12. P S P* P D Q QS Shortage QD What is a Shortage? Determinant: price

  13. Are shortages good or bad? • Can shortage of capital or labor in the economy tell us anything positive? • Why are shortages of inputs bad for producers?

  14. A Shortage Economy: Definition An economy where shortages: • Affect every market • Cause agents’ behavior to change • Permanent in nature

  15. Consumer in a Shortage Economy Option 1: consumer goes to a store, the good he is looking for is there, and he buys it right away • does not happen too often

  16. Option 2: the good is there but consumer has to stand in line to buy it Consumer in a Shortage Economy

  17. Option 3: the good is not available now and the buyer continues to look for it elsewhere Consumer in a Shortage Economy

  18. Where are the Shoes?

  19. Consumer in a Shortage Economy Option 4: the good is not available now and can only be purchased in the future as it becomes available and the buyer has to queue for it Example: Waiting lists

  20. Consumer in a Shortage Economy: Waiting lists

  21. Consumer in a Shortage Economy: Waiting lists

  22. Consumer in a Shortage Economy: Waiting lists

  23. Trabant (EasternGermany) Dacia (Romania) Lada (USSR) Wartburg (EasternGermany)

  24. Consumer in a Shortage Economy Option 5: the good is not available and buyer abandons the purchase

  25. Question • So why do shortages have to arise in the centrally planned economies and, moreover, it can’t be otherwise?

  26. Possible Explanations • General: incompetence of the planner • Supply side: poor contract performance • Demand side “road to take”

  27. Budget Constraint • Economic facts: • Have to pay for goods and services • Have limited funds to spend Budget Constraint

  28. Consumer’s Budget Constraint: Illustration bananas unaffordable Budget constraint Qb affordable apples Qa

  29. Consumer’s Budget Constraints: Hard or Soft • Can only spend as much as one has (e.g. with own current and future resources)  hard budget constraint; • Can spend more than one has  soft budget constraint

  30. Consumer’s Budget Constraint • Would we think of consumer as having soft or hard budget constraint? • Does this apply to consumers in both market economy and centrally planned economy? Observation 1: In the centrally planned economy consumer is faced with hard budget constraint

  31. Firm’s Budget Constraint • Does budget constraint exist for firms? • Hard BC: can spend only as much as it has • Soft BC: has a slack somewhere What would make firm’s budget constraint soft? Is there a difference between firms in market economies and those in the CPE?

  32. Market Economy Planned Economy State resources Firm Firm State Firm’s resources Market Firm’s resources Market Firms in Market and Centrally Planned Economies: Comparison

  33. Firm’s Budget Constraint in Centrally Planned Economy • State is the source of slack for firms in the centrally planned economy Observation 2: • Firms are faced with soft budget constraint

  34. Input 2 Budget constraint Firm’s Budget Constraint: Illustration Input 1

  35. Budget Constraint and Demand: Relationship • If we were to compare quantities demanded by the consumer or a firm under soft and hard budget constraint which would be higher? Soft budget constraint Greater resources

  36. Relationship between Demand and Budget Constraint: Illustration With more resources shift from D1 to the right, D2; in fact can choose any quantity between Q* andQ**, e.g. Q Price P D2 (demand with slack) D1 (demand without slack) Q* Q Q** Quantity

  37. Relationship between Demand and Budget Constraint: Price Changes Price With slackness in your budget constraint demand curve shifts to the right and quantity demanded Q2 is the same as before, even with higher price P2 P1 D2 (Demand with slack) D1 (Demand without slack) Q2 Q1=Q2 Quantity

  38. Occurrence of Shortages • When are shortages most likely to arise? Volume of goods in the market

  39. Firm with soft budget constraint Firms and Consumers Consumer with hard budget constraint

  40. Consumer-Firm: Consequences • When supply is fixed, in the presence of a firm with soft budget constraint: • availability of goods in the market for consumers Decreases • Likelihood of shortages Increases

  41. Firm with soft budget constraint Firms and Firms Firm with soft budget constraint

  42. Firm-Firm: Consequences • When supply is fixed, in the presence of a firm with soft budget constraint: • availability of goods in the market for firms Decreases • Likelihood of shortages Increases

  43. General Conclusion Presence of firms with soft budget constraint decreases availability of the good in the market for other firms and consumers

  44. Chain of reaction • Higher demand for good X by firm A • Shortage for consumer + shortage for firm B • Firm B cannot produce if uses good X as input • Shortage of firm B’s product • Shortage for consumer + shortage for firm C using firm B’ good as input …

  45. Results • Shortages spread through the economy • Shortages change behavior • Become permanent in nature Shortage economy

  46. Plausible???

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