Class#36 11/28/11

Rizzo started class by putting up a graph of a supply and demand curve overlapping with points along the curve. This graph represented the properties of a market equilibrium. The supply line represents the marginal costs of making a guitar. The demand line is the marginal value that each person places on a guitar.

A chart to represent the points on the graph is

Price	Quantity  Demanded	Quantity Supplied
$30	1 D1	5 S5
$25	2 D2	4 S4
$20	3=equilibrium D3	3=equilibrium S3
$15	4 D4	2 S2
$10	5 D5	1 S1

When the price is $20, only people that value the goods the most will buy it. Only the people that produce goods for a low cost do it.

S4 shows other profit opportunities. The total value of resources a person loses when person 4 makes a guitar. If you get Q right and supplier wrong, then money is left on the table. D2 gets $25 of pleasure from guitar. D4 gets $15 of pleasure.

The price system is important because prices economize on the knowledge of what is important.

The price of titanium can tell us what is going on in the market with titanium

In markets we get trial and error. In politics we don’t

THE THREE THINGS THAT A CENTRAL PLANNER HAS TO FIGURE OUT IS HOW MANY, WHO GETS THEM, AND WHO MAKES THEM.

If S2 and D2 trade, then $10 of wealth is created. Since D2 values the guitar at $25 and he buys it for $15.

The point of a market is to not produce too much. If S5 trades with D5, then there is a waste of $20. S5 produced too much at that price.

Kennedy didn’t allow US steel to raise prices when they needed to. This resulted in Us steel laying workers off.  Something interesting that Rizzo said today was, that $2.5 trillion was given from charities to poor African countries. There has been no correlation between aid and growth in these countries. Bill Easterly draws distinction between planners and searchers. If they assign quantitative plans to produce, then there is no incentive to produce. In markets there is a financial incentive to meet needs of appliance. Aid projects are run through the governments that are so corrupt, that there is a huge knowledge problem where planning can’t solve. Searcher can do this better. We give Africa Malaria  nets to prevent the spread of the disease, but people use them as fishing nets instead because they need to eat.

The best way to figure out if things works is to experiment and look at the results. Government needs to do more of this.