Who am I

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Who am I?

• Name KATYA
• 2nd year PhD student at Department of Economics
• Home country Belarus

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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 a plan
  (usually 5-year plan)
• How to implement Material balance (MB) tables
• USSR computed as many as 15 - 28 thousand
  material balances

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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 machines and equipment 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
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Where are the Shoes?
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Consumer in a Shortage Economy

• Option 3 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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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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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

• Supply side
• 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
Budget line
Qb
affordable
apples
Qa
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Consumers Budget Constraints Hard or Soft

• Can only spend as much as one has ?
• hard budget constraint
• Can spend more than one has ?
• soft budget constraint

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Consumers Budget Constraint

• Would we think of a consumer as having soft or
  hard budget constraint?
• Does this apply to consumers in both market
  economy and centrally planned economy?
• Observation 1 Consumers in both centrally
  planned and market economies face
• hard budget constraint

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Firms Budget Constraint

• Does budget constraint exist for firms?
• Only hard or 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
Planned Economy
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Firms Budget Constraint

• State is the source of slack for firms in the
  centrally planned economy
• Observation 2
• A typical firm in market economy is faced with
• hard budget constraint
• A typical firm in centrally planned economy faces
• soft budget constraint

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Budget Constraint and Demand Relationship

• With soft budget constraint quantities demanded
  by the firm would be higher.
• Logic
• Soft budget constraint
• Greater resources

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Shortages Supply side
Volume of goods in the market
demand by firm
demand by firm
Total supply
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Consequences

• When supply is fixed, in the presence of a firm
  with soft budget constraint
• Quantity of goods available for other firms
• Decreases
• Likelihood of shortages
• Increases

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Chain of reaction

• Higher demand for good X by firm A
• Shortage for firm B
• Firm B cannot produce if uses good X as input
• Shortage of firm Bs product
• 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???