Lecture Notes: Sept. 23

Econ. 103, Fall 2002, Prof. Nancy Folbre

Money Changes Everything

Cyndi Lauper, from Have Fun...Again

I said, I'm sorry baby
I'm leaving you tonight.
I've found someone new. He's waiting in the car outside.
How could you do it?
We swore to everlasting love.
I say, yeah but when we did,
There was one thing we weren't thinking of.
That's money. Money changes everything.
I said, money, money changes everything.
We think we know what we're doing.
That don't mean a thing.
It's all in the past now.
Money changes everything.
They shake your hand and they
smile and they buy you a dress.
They say, we'll be your friend.
We'll stick with you till the end.
Oh, but everybody is always
looking out for themselves.
And you say, who can you trust
I'll tell you, no one knows this...
Money, money changes everything.
I say money, money changes everything.
You think you know what you're doing...
We don't pull the strings.
It's all in the past now,
Money changes everything

Money, money changes everything.
I say, money changes everything
We think we know what we're doing.
We don't know a thing.
It's all in the past now.
Money changes everything

Second homework is due next week--on Chapter 3. Third homework is due week of October 7, as indicated on the main syllabus. There's a typo on the homework list, though, saying it's due the week of October 14. Please, please make a note of this.

This week: Main focus is Chapter 4, Supply and Demand. But I have a couple of points to finish up regarding Chapter 3, what I would call the "dark side" of specialization, and want to comment on the Charlie Chaplin clip.

Frank and Bernanke praise markets and criticize "central planning" or regulation.

Their main argument is that markets are more efficient--they do a better job matching the needs of buyers and sellers.

Pay attention. This is a historically momentous argument. It's an argument not only about capitalism versus socialism, but also about "unregulated" capitalism vs. "free market" capitalism.

In this chapter, Frank and Bernanke want to persuade you that regulations that restrict prices--such as rent control or minimum wages, hurt many more people than they help.

It's important for you to fully understand their argument, and also to gain some critical perspective on it.

First, what is a market?

many buyers and sellers, a price that is flexible

think of an auction (e.g. E-bay).

The buyers represent the "demand side."

The sellers represent the "supply side."

Take a look at Figures 4.1 and 4.2 in the text--they show you a hypothetical relationship between the price of something and the quantity that will be demanded or supplied.

These supply and demand curves are drawn with the assumption that everything is fixed except the relationship between price and quantity--income remains constant, technology remains constant, the prices of other goods and services remain constant. Etc.

Market "logic" applies to many situations that are metaphorical markets.

E.g. the demand for being an economics major, vs. the supply of services necessary for being an economics major.

Equilibrium price and quantity is where buyers and sellers are in perfect agreement;

quantity demanded equals quantity supplied. Markets "clear." See Figure 4.3

What does "equilibrium" mean? A balance, a tendency to move towards something and then stay there...if quantity supplied exceeds quantity demanded, prices tend to fall. If quantity demanded exceeds quantity supply, prices to increase. If quantity supplied equals quantity demanded prices tend to remain the same.

Is the "equilibrium" outcome of supply and demand always efficient?

What does efficiency mean? Nothing wasted, nothing you could do to make someone better off without making someone else worse off. (Note, this is a pretty narrow definition of efficiency).

Is the free market efficient?

Yes, under certain conditions.

I'll list 4.

1. If the market is perfectly competitive. So many buyers and sellers that no one individual can affect the price (no monopoly or oligopoly).

What are some examples of markets in which a seller has a lot of "market power"?

Microsoft.

Coca-Cola.

2. "Consumer sovereignty."
Each of these buyers and sellers has the information they need to make the best decisions, e.g. every buyer know the quality of the product.

What are some examples of a violation of consumer sovereignty?

Corporate accounting fraud--shareholders thought they were buying a share of a company that had made X amount of profits, but actually the company had made only Y amount (Y was generally considerably less than X).

3. There are no "spillover" effects--or unintended consequences for third parties

Examples of spillover effects:

environmental pollution--toxic waste, air pollution, global warming

social pollution--disruption of neighborhoods through sudden gentrification, or deterioration of living standards for workers through abrupt declines in wages

cultural and moral pollution--violation of moral values

4. Everyone affected by markets has access to or ability to participate in them.

(This relates to former point--those who can't participate have no "voice" and are likely to bear the brunt of "unintended consequences").

Economic is not just about the market. It is about the market and the family and the community and the state. We need to look at the logic of markets in this larger context. This comes back to "capitalism for consenting adults." How much of your life do you want to be ruled by market logic?

Let's go back to the workings of supply and demand.

What happens when regulation restricts prices? The example of rent control. Figure 4.7.

Housing shortages, which in turn lead to deterioration of housing quality.

But what are the spillover effects? Who is hurt, who is helped?

Another example of interference with supply and demand are zoning restrictions.

One purpose of these is to "protect property values." These have the effect of artificially raising the price of housing. Result--increased homelessness even while buildings lie empty.

So far, we've only looked at movements along supply and demand curves, along with forms of "interference" with the tendency to move toward "equilibrium." Remember that we drew those supply and demand curves under the assumption that "all else was equal" 

Now let's allow some other things to change--e.g. income, technology, prices of other goods.

There's an important distinction between movement along a supply or demand curve and a shift of one of these curves. Figures 4.9 and 4.10.