Who am I

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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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Economics of Shortages
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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

• 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
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Material Balance An example
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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?

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Follow-up Questions

• Why do you think the item wasnt 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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What is a Shortage?

Determinant price
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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?

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A Shortage Economy Definition

• An economy where shortages
• Affect every market
• Cause agents behavior to change
• Permanent in nature

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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

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Consumer in a Shortage Economy

• Option 2 the good is there but consumer has to
  stand in line to buy it

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Consumer in a Shortage Economy

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

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Where are the Shoes?
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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

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Consumer in a Shortage Economy Waiting lists
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(No Transcript)
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Consumer in a Shortage Economy Waiting lists
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Consumer in a Shortage Economy Waiting lists
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• Trabant (Eastern Germany) Dacia (Romania)
• Lada (USSR) Wartburg (Eastern Germany)

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Consumer in a Shortage Economy

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

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Question

• So why do shortages have to arise in the
  centrally planned economies and, moreover, it
  cant be otherwise?

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Possible Explanations

• General incompetence of the planner
• Supply side poor contract performance
• Demand side road to take

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Budget Constraint

• Economic facts
• Have to pay for goods and services
• Have limited funds to spend
• Budget Constraint

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Consumers Budget Constraint Illustration
bananas
unaffordable
Budget constraint
Qb
affordable
apples
Qa
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Consumers 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

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Consumers 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

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Firms 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 firms budget constraint soft?
  Is there a difference between firms in market
  economies and those in the CPE?

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Firms in Market and Centrally Planned Economies
Comparison
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Firms 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

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Firms Budget Constraint Illustration
Input 1
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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

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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
and Q, e.g. Q
Price
P
D2 (demand with slack)
D1 (demand without slack)
Quantity
Q
Q
Q
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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)
Quantity
Q1Q2
Q2
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Occurrence of Shortages

• When are shortages most likely to arise?

Volume of goods in the market
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Firms and Consumers

• Firm with
• soft budget
• constraint

Consumer with hard budget constraint
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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

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Firms and Firms

• Firm with
• soft budget
• constraint

Firm with soft budget constraint
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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

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General Conclusion
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

• 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 Bs product
• Shortage for consumer shortage for firm C using
  firm B good as input

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Results

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

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Plausible???