Download Powerpoint - Ryan Safner

The Market Process
Microeconomics
Lecture 5
Summer2012
ICES High School Workshops
Paul Mueller & Ryan Safner
Review of Equilibrium Models
• Qd < Qs: Shortage
Price
– Buyers bid prices up
10
9
8
7
6
5
4
3
2
1
Market
Supply
• Qd > Qs : Surplus
– Sellers slash prices
• Qd = Qs : Equilibrium
Market
Demand
1 2 3 4 5 6 7 8 9 10
Quantity/Time
– No pressure to change
Price
Review of Equilibrium Models
10
9
8
7
6
5
4
3
2
1
Market
Supply
Market
Demand
1 2 3 4 5 6 7 8 9 10
Quantity/Time
• Supply & Demand
curves relate only P
and Qs or Qd
• Ceterus Paribus
violations shift curves
• Affects equilibrium
price and/or quantity
Equilibrium in the Real World
Equilibrium Prices
Disequilibrium Prices
(Surplus!)
Price
Equilibrium in the Real World
10
9
8
7
6
5
4
3
2
1
1 2 3 4 5 6 7 8 9 10
Quantity/Time
• Equilibrium models
are a snapshot of a
market frozen in time.
• Ceterus paribus never
holds in reality.
• The market is a
process, not an endstate
Price
A Note on Equilibrium Models
10
9
8
7
6
5
4
3
2
1
≠
≯
1 2 3 4 5 6 7 8 9 10
Quantity/Time
Uncertainty
Uncertainty
• Ex ante: Before the action
– Expected Benefits > Expected Costs: Do it!
– All trades are ex ante beneficial
• Ex post: After the action
– Realized Benefits > Realized Costs: Profit!
– Possibility of error
Market Testing
Markets as Emergent Extensions of
Human Action
This division of labour, from which so many advantages
are derived, is not originally the effect of any human
wisdom, which foresees and intends that general
opulence to which it gives occasion. It is the necessary,
though very slow and gradual, consequence of a certain
propensity in human nature which has in view no such
extensive utility; the propensity to truck, barter, and
exchange one thing for another.
Book I, Chapter 2
Adam Smith
(1723-1790)
Wealth of Nations (1776)
Markets as Knowledge Generators
The market process…is set in motion
by the results of the initial marketignorance of the participants. The
process itself consists of the
systematic plan changes generated by
the flow of market information
released by market participation –
that is, by the testing of plans in the
market.
(1973) p.10
Israel Kirzner
(1930-)
Competition and Entrepreneurship (1973)
Markets as Knowledge Generators
[T]he efficiency of the pricesystem…does not depend upon the
optimality (or absence of it) of the
resource allocation pattern at
equilibrium; rather it depends on the
degree of success with which market
forces can be relied upon to generate
spontaneous corrections in the
allocation patterns prevailing at times
of disequilibrium.
(1973) p.6
Israel Kirzner
(1930-)
Competition and Entrepreneurship (1973)
Markets as Knowledge Coordinators
The economic problem of society is thus not merely a
problem of how to allocate “given” resources—if “given”
is taken to mean given to a single mind which
deliberately solves the problem set by these “data.” It is
rather a problem of how to secure the best use of
resources known to any of the members of society, for
ends whose relative importance only these individuals
know. Or, to put it briefly, it is a problem of the
utilization of knowledge which is not given to anyone in
its totality.”
(1945) “The Use of Knowledge in Society.” AER: I
Friedrich August von Hayek
(1899-1992)
Two Types of Knowledge
Scientific
Tacit
The Function of the Price System
The marvel is that in a case like that of a scarcity of a
raw material, without an order being issued, without
more than perhaps a handful of people knowing the
cause, tens of thousands of people whose identity
could not be ascertained by months of investigation,
are made to use the material or its products more
sparingly.”
(1945) “The Use of Knowledge in Society.” AER: IV
Friedrich August von Hayek
(1899-1992)
Sources & Further Reading
• Buchanan, James. “What Should Economists
Do?” Southern Economic Journal.
• Hayek, F.A. 1948. Individualism and Economic
Order.
• _______. Competition as a Discovery
Procedure.
• Kirzner, Israel. 1973. Competition and
Entrepreneurship.
• Reed, Leonard. I, Pencil.