Class# 35 11/23/11

Rizzo started class by putting 5 different things on the board. The first one was “HOW MARKETS USE KNOWLEDGE” In the titanium market, he wrote down that

Initial EQ => P*=$20…….Q* 10 billion pounds of titanium bought. (the amount sold last year in the world) The second thing he put up was a graph of 2 demand curves and 1 supply curve. The one demand curve were for previous buyers of titanium. The other was the demand for a new consumer who requests 6 billion pounds of titanium to buy at the price of $20 per pound which is how much titanium cost per pound before the new consumer came into the market. Since there is a shortage of titanium with this order, the producer has to increase its price for titanium so that less titanium is bought.

You can assume what happens with the demand and supply of a product as you move away from the equilibrium point. Elasticity determines if products or gods change. When prices rise, there is an incentive for the producer to dig up more titanium in the ground. The marginal cost of digging up the next ton of titanium is compared to the marginal benefit of how much profit you will receive from that ton determines if this will happen. People use less of a product as the price increases. It depends how much less though that lets producers know how much they can raise the price and make the profits that they want.

3 questions to ask about this graph to consumers and producers are.

1.     Please dig up more to producers.

2.     Please use less to consumers.

3.     Ask the person requesting 6 billion tons of titanium to request less.

A possible test question that Rizzo told us about is that a Czar tries to solve problems. What does he need to know to solve these problems. The answer are things he couldn’t know in 1 million lifetimes!!! This relates to I pencil in that there are too many questions to answer for every user and producer of titanium around the world. AS soon as you find something out, another thing changes. Huge knowledge problem with this.

Rizzo didn’t know if he’d like his job until he tried it. He tried other jobs and taught at other schools to determine if this job was a good fit for him.

If there is a lot of titanium in the ground, companies are less incentivised to know how much it costs to get that next ton of titanium out of the ground. Raising the price of titanium gives them an incentive to know.

People can’t know everything. The great dig in Massachusetts was estimated to cost $4 billion. It ended up costing $14.7 billion. This is because things happen that you can’t predict. (ex. Huge rock being in the way, or flooding while doing construction). The knowledge for the possibility of these things happening is out there.

Medicare sets the prices for medicine.

When you add people to the market, its shifts the demand curve due to more demand. It makes prices rise. This causes existing users to cut back on consumption.

For the next graph the elasticity is greater for the increase in price to the amount of titanium sold. This allows the new consumer to get more of titanium because the former consumer consume less now since they are responsive to price change.  In this graph there is a better chance of getting what you want. The more elastic a product is to price increase. Price doesn’t have to go up as much to make you change which is why the price only goes up by $2 rather than $5.

People want a good deal. Price tells us that it’s easy for some one to do adjusting.

The third graph shows that that the supply curve is more elastic than before. Previous consumer don’t decrease that much when price increases a little, they end up getting titanium from elsewhere like Mexico. New consumers wanted 6 tons, they get 5 from this.

A chart to represent what happens on these graphs is

New EQ	Scenario #1	Scenario #2	Scenario #3
Orignal price =$20	P= $25	P= $22	P =$22
	Q= 10 à 12	Q= 11	Q=14

Existing users	Initial=10	Change of Q by 2 unit
Graph 1	End= 8
Graph 2	Initial=10	Change of Q by 4 unit
	End=6
Graph 3	Initial=10	Change of Q by 1 unit
	End=9
Suppliers	Initial=10	Change of Q by 2 unit
Graph 1	Final=12
Graph 2	Initial- 10	Change of Q by 1 unit
	Final=11
Graph 3	Initial=10	Change of Q by 4 unit
	Final=14
New Users	Want 6	Change of Q by 2 unit
Graph 1	Get 4
Graph 2 Graph 3	Want 6 Get 5 Want 6 Get 5	Change of Q by 1 unit Change of Q by 1 unit

Rizzo also let us know that centralized knowledge is impossible.

Decentralized knowledge can work well In a market economy.