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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?

  • Name: KATYA

  • 2nd year PhD student at Department of Economics

  • Home country: Belarus

  • Instructor for ECON4313 “Russian Economy”



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Resource Allocation

Traditional Economy

Centrally planned economy

Market Economy

Long-lived tradition of the past

Instruction from higher authority

Market mechanism


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Focus

  • NOT traditional economies

  • NOT market economies

  • INSTEAD

  • Centrally planned economies


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


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Workings of Centrally Planned Economy Poland, Romania, Bulgaria, Czechokoslovakia, Hungary, China; modern day examples: Cuba and North Korea

  • 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


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Material Balance: An example Poland, Romania, Bulgaria, Czechokoslovakia, Hungary, China; modern day examples: Cuba and North Korea


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Material Balance: An example Poland, Romania, Bulgaria, Czechokoslovakia, Hungary, China; modern day examples: Cuba and North Korea


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Question Poland, Romania, Bulgaria, Czechokoslovakia, Hungary, China; modern day examples: Cuba and North Korea

  • 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?


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Follow-up Questions Poland, Romania, Bulgaria, Czechokoslovakia, Hungary, China; modern day examples: Cuba and North Korea

  • 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?


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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.


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P shortage economies

S

P*

P

D

Q

QS

Shortage

QD

What is a Shortage?

Determinant: price


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Are shortages good or bad? shortage economies

  • Can shortage of capital or labor in the economy tell us anything positive?

  • Why are shortages of inputs bad for producers?


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A Shortage Economy: Definition shortage economies

An economy where shortages:

  • Affect every market

  • Cause agents’ behavior to change

  • Permanent in nature


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Consumer in a Shortage Economy shortage economies

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


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Option 2: the good shortage economies is there but consumer has to stand in line to buy it

Consumer in a Shortage Economy


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Option 3: the good shortage economies is not available now and the buyer continues to look for it elsewhere

Consumer in a Shortage Economy


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Where are the Shoes? shortage economies


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Consumer in a Shortage Economy shortage economies

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





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Trabant shortage economies (EasternGermany) Dacia (Romania)

Lada (USSR) Wartburg (EasternGermany)


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Consumer in a Shortage Economy shortage economies

Option 5: the good is not available and buyer abandons the purchase


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Question shortage economies

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


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Possible Explanations shortage economies

  • General: incompetence of the planner

  • Supply side: poor contract performance

  • Demand side “road to take”


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Budget Constraint shortage economies

  • Economic facts:

    • Have to pay for goods and services

    • Have limited funds to spend

      Budget Constraint


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Consumer’s Budget Constraint: Illustration shortage economies

bananas

unaffordable

Budget constraint

Qb

affordable

apples

Qa


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Consumer’s Budget Constraints: Hard or Soft shortage economies

  • 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


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Consumer’s Budget Constraint shortage economies

  • 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


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Firm’s Budget Constraint shortage economies

  • 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?


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Market Economy shortage economies

Planned Economy

State resources

Firm

Firm

State

Firm’s resources

Market

Firm’s resources

Market

Firms in Market and Centrally Planned Economies: Comparison


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Firm’s Budget Constraint in Centrally Planned Economy shortage economies

  • State is the source of slack for firms in the centrally planned economy

    Observation 2:

  • Firms are faced with soft budget constraint


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Input 2 shortage economies

Budget constraint

Firm’s Budget Constraint: Illustration

Input 1


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Budget Constraint and Demand: Relationship shortage economies

  • 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


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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


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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


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Occurrence of Shortages Changes

  • When are shortages most likely to arise?

Volume of goods in the market


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Firm with Changes

soft budget

constraint

Firms and Consumers

Consumer with hard budget constraint


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Consumer-Firm: Consequences Changes

  • 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


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Firm with Changes

soft budget

constraint

Firms and Firms

Firm with soft budget constraint


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Firm-Firm: Consequences Changes

  • 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


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General Conclusion Changes

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


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Chain of reaction Changes

  • 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


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Results Changes

  • Shortages spread through the economy

  • Shortages change behavior

  • Become permanent in nature

    Shortage economy


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Plausible??? Changes


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