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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
Who am I?
  • Name: KATYA
  • 2nd year PhD student at Department of Economics
  • Home country: Belarus
  • Instructor for ECON4313 “Russian Economy”
slide3

Resource Allocation

Traditional Economy

Centrally planned economy

Market Economy

Long-lived tradition of the past

Instruction from higher authority

Market mechanism

focus
Focus
  • NOT traditional economies
  • NOT market economies
  • INSTEAD
  • Centrally planned economies
slide5

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

workings of centrally planned economy
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
question
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?
follow up questions
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?
slide11
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.

what is a shortage

P

S

P*

P

D

Q

QS

Shortage

QD

What is a Shortage?

Determinant: price

are shortages good or bad
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?
a shortage economy definition
A Shortage Economy: Definition

An economy where shortages:

  • Affect every market
  • Cause agents’ behavior to change
  • Permanent in nature
consumer in a shortage economy
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
slide16
Option 2: the good is there but consumer has to stand in line to buy it

Consumer in a Shortage Economy

slide17
Option 3: the good is not available now and the buyer continues to look for it elsewhere

Consumer in a Shortage Economy

consumer in a shortage economy19
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

slide24
Trabant (EasternGermany) Dacia (Romania)

Lada (USSR) Wartburg (EasternGermany)

slide25

Consumer in a Shortage Economy

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

question26
Question
  • So why do shortages have to arise in the centrally planned economies and, moreover, it can’t be otherwise?
possible explanations
Possible Explanations
  • General: incompetence of the planner
  • Supply side: poor contract performance
  • Demand side “road to take”
budget constraint
Budget Constraint
  • Economic facts:
    • Have to pay for goods and services
    • Have limited funds to spend

Budget Constraint

consumer s budget constraint illustration
Consumer’s Budget Constraint: Illustration

bananas

unaffordable

Budget constraint

Qb

affordable

apples

Qa

consumer s budget constraints hard or soft
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

consumer s budget constraint
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

firm s budget constraint
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?

firms in market and centrally planned economies comparison

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
firm s budget constraint in centrally planned economy
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
budget constraint and demand relationship
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

relationship between demand and budget constraint illustration
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

relationship between demand and budget constraint price changes
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

occurrence of shortages
Occurrence of Shortages
  • When are shortages most likely to arise?

Volume of goods in the market

firms and consumers
Firm with

soft budget

constraint

Firms and Consumers

Consumer with hard budget constraint

consumer firm consequences
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

firms and firms
Firm with

soft budget

constraint

Firms and Firms

Firm with soft budget constraint

firm firm consequences
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

general conclusion
General Conclusion

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

chain of reaction
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

results
Results
  • Shortages spread through the economy
  • Shortages change behavior
  • Become permanent in nature

Shortage economy

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