3 Scarcity, Work and Choice
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The Soft Budget Constraint
Acta Oeconomica, Vol. 64 (S1) pp. 25–79 (2014) DOI: 10.1556/AOecon.64.2014.S1.2 THE SOFT BUDGET CONSTRAINT An Introductory Study to Volume IV of the Life’s Work Series* János KORNAI** The author’s ideas on the soft budget constraint (SBC) were first expressed in 1976. Much progress has been made in understanding the problem over the ensuing four decades. The study takes issue with those who confine the concept to the process of bailing out loss-making socialist firms. It shows how the syndrome can appear in various organizations and forms in many spheres of the economy and points to the various means available for financial rescue. Single bailouts do not as such gener- ate the SBC syndrome. It develops where the SBC becomes built into expectations. Special heed is paid to features generated by the syndrome in rescuer and rescuee organizations. The study reports on the spread of the syndrome in various periods of the socialist and the capitalist system, in various sectors. The author expresses his views on normative questions and on therapies against the harmful effects. He deals first with actual practice, then places the theory of the SBC in the sphere of ideas and models, showing how it relates to other theoretical trends, including institutional and behav- ioural economics and theories of moral hazard and inconsistency in time. He shows how far the in- tellectual apparatus of the SBC has spread in theoretical literature and where it has reached in the process of “canonization” by the economics profession. Finally, he reviews the main research tasks ahead. -
Substitution and Income Effect
Intermediate Microeconomic Theory: ECON 251:21 Substitution and Income Effect Alternative to Utility Maximization We have examined how individuals maximize their welfare by maximizing their utility. Diagrammatically, it is like moderating the individual’s indifference curve until it is just tangent to the budget constraint. The individual’s choice thus selected gives us a demand for the goods in terms of their price, and income. We call such a demand function a Marhsallian Demand function. In general mathematical form, letting x be the quantity of a good demanded, we write the Marshallian Demand as x M ≡ x M (p, y) . Thinking about the process, we can reverse the intuition about how individuals maximize their utility. Consider the following, what if we fix the utility value at the above level, but instead vary the budget constraint? Would we attain the same choices? Well, we should, the demand thus achieved is however in terms of prices and utility, and not income. We call such a demand function, a Hicksian Demand, x H ≡ x H (p,u). This method means that the individual’s problem is instead framed as minimizing expenditure subject to a particular level of utility. Let’s examine briefly how the problem is framed, min p1 x1 + p2 x2 subject to u(x1 ,x2 ) = u We refer to this problem as expenditure minimization. We will however not consider this, safe to note that this problem generates a parallel demand function which we refer to as Hicksian Demand, also commonly referred to as the Compensated Demand. Decomposition of Changes in Choices induced by Price Change Let’s us examine the decomposition of a change in consumer choice as a result of a price change, something we have talked about earlier. -
Principles of Economics1 3
Income and working hours across time and countries Scarcity and choice: key concepts Decision-making under scarcity Concluding remarks and summary Principles of Economics1 3. Scarcity, work, and choice Giuseppe Vittucci Marzetti2 SCOR Department of Sociology and Social Research University of Milano-Bicocca A.Y. 2018-19 1These slides are based on the material made available under Creative Commons BY-NC-ND © 4.0 by the CORE Project , https://www.core-econ.org/. 2Department of Sociology and Social Research, University of Milano-Bicocca, Via Bicocca degli Arcimboldi 8, 20126, Milan, E-mail: [email protected] Giuseppe Vittucci Marzetti Principles of Economics 1/26 Income and working hours across time and countries Scarcity and choice: key concepts Decision-making under scarcity Concluding remarks and summary Layout 1 Income and working hours across time and countries 2 Scarcity and choice: key concepts Production function, average productivity and marginal productivity Preferences and indifference curves Opportunity cost Feasible frontier 3 Decision-making under scarcity Constrained choices and optimal decision making Labor choice Income effect and substitution effect Effect of technological change on labor choices 4 Concluding remarks and summary Concluding remarks Summary Giuseppe Vittucci Marzetti Principles of Economics 2/26 Income and working hours across time and countries Scarcity and choice: key concepts Decision-making under scarcity Concluding remarks and summary Income and free time across countries Figure: Annual hours of free time per worker and income (2013) Giuseppe Vittucci Marzetti Principles of Economics 3/26 Income and working hours across time and countries Scarcity and choice: key concepts Decision-making under scarcity Concluding remarks and summary Income and working hours across time and countries Figure: Annual hours of work and income (18702000) Living standards have greatly increased since 1870. -
What Impact Does Scarcity Have on the Production, Distribution, and Consumption of Goods and Services?
Curriculum: 2009 Pequea Valley SD Curriculum PEQUEA VALLEY SD Course: Social Studies 12 Date: May 25, 2010 ET Topic: Foundations of Economics Days: 10 Subject(s): Grade(s): Key Learning: The exchange of goods and services provides choices through which people can fill their basic needs and wants. Unit Essential Question(s): What impact does scarcity have on the production, distribution, and consumption of goods and services? Concept: Concept: Concept: Scarcity Factors of Production Opportunity Cost 6.2.12.A, 6.5.12.D, 6.5.12.F 6.3.12.E 6.3.12.E, 6.3.12.B Lesson Essential Question(s): Lesson Essential Question(s): Lesson Essential Question(s): What is the problem of scarcity? (A) What are the four factors of production? (A) How does opportunity cost affect my life? (A) (A) What role do you play in the circular flow of economic activity? (ET) What choices do I make in my individual spending habits and what are the opportunity costs? (ET) Vocabulary: Vocabulary: Vocabulary: scarcity, economics, need, want, land, labor, capital, entrepreneurship, factor trade-offs, opportunity cost, production markets, product markets, economic growth possibility frontier, economic models, cost benefit analysis Concept: Concept: Concept: Economic Systems Economic and Social Goals Free Enterprise 6.1.12.A, 6.2.12.A 6.2.12.I, 6.2.12.A, 6.2.12.B, 6.1.12.A, 6.4.12.B 6.2.12.I Lesson Essential Question(s): Lesson Essential Question(s): Lesson Essential Question(s): Which ecoomic system offers you the most What is the most and least important of the To what extent -
AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP)
AP Macroeconomics: Vocabulary 1. Aggregate Spending (GDP): The sum of all spending from four sectors of the economy. GDP = C+I+G+Xn 2. Aggregate Income (AI) :The sum of all income earned by suppliers of resources in the economy. AI=GDP 3. Nominal GDP: the value of current production at the current prices 4. Real GDP: the value of current production, but using prices from a fixed point in time 5. Base year: the year that serves as a reference point for constructing a price index and comparing real values over time. 6. Price index: a measure of the average level of prices in a market basket for a given year, when compared to the prices in a reference (or base) year. 7. Market Basket: a collection of goods and services used to represent what is consumed in the economy 8. GDP price deflator: the price index that measures the average price level of the goods and services that make up GDP. 9. Real rate of interest: the percentage increase in purchasing power that a borrower pays a lender. 10. Expected (anticipated) inflation: the inflation expected in a future time period. This expected inflation is added to the real interest rate to compensate for lost purchasing power. 11. Nominal rate of interest: the percentage increase in money that the borrower pays the lender and is equal to the real rate plus the expected inflation. 12. Business cycle: the periodic rise and fall (in four phases) of economic activity 13. Expansion: a period where real GDP is growing. 14. Peak: the top of a business cycle where an expansion has ended. -
1 Unit 4. Consumer Choice Learning Objectives to Gain an Understanding of the Basic Postulates Underlying Consumer Choice: U
Unit 4. Consumer choice Learning objectives to gain an understanding of the basic postulates underlying consumer choice: utility, the law of diminishing marginal utility and utility- maximizing conditions, and their application in consumer decision- making and in explaining the law of demand; by examining the demand side of the product market, to learn how incomes, prices and tastes affect consumer purchases; to understand how to derive an individual’s demand curve; to understand how individual and market demand curves are related; to understand how the income and substitution effects explain the shape of the demand curve. Questions for revision: Opportunity cost; Marginal analysis; Demand schedule, own and cross-price elasticities of demand; Law of demand and Giffen good; Factors of demand: tastes and incomes; Normal and inferior goods. 4.1. Total and marginal utility. Preferences: main assumptions. Indifference curves. Marginal rate of substitution Tastes (preferences) of a consumer reveal, which of the bundles X=(x1, x2) and Y=(y1, y2) is better, or gives higher utility. Utility is a correspondence between the quantities of goods consumed and the level of satisfaction of a person: U(x1,x2). Marginal utility of a good shows an increase in total utility due to infinitesimal increase in consumption of the good, provided that consumption of other goods is kept unchanged. and are marginal utilities of the first and the second good correspondingly. Marginal utility shows the slope of a utility curve (see the figure below). The law of diminishing marginal utility (the first Gossen law) states that each extra unit of a good consumed, holding constant consumption of other goods, adds successively less to utility. -
Scarcity, Work, and Choice ECONOMICS
Introduction Supply Choices Demand Choices Decision-making under scarcity Income & Substitution Effects Technological change Scarcity, Work, and Choice ECONOMICS Dr. Kumar Aniket UCL Lecture 3 c Dr. Kumar Aniket Introduction Supply Choices Demand Choices Decision-making under scarcity Income & Substitution Effects Technological change CONTEXT Unit 1: Labour is work. Unit 2: Labour is an input in the production of goods and services. Unit 3: New technologies raise the productivity of labour leading to higher per-hour wage. ◦ How would technological progress affect living standards across the world? ◦ How would technological progress affect the individual’s choice between free time and consumption? c Dr. Kumar Aniket Introduction Supply Choices Demand Choices Decision-making under scarcity Income & Substitution Effects Technological change FREE TIME AND LIVING STANDARDS Living standards have greatly increased since 1870 but some countries still work more than others. c Dr. Kumar Aniket Introduction Supply Choices Demand Choices Decision-making under scarcity Income & Substitution Effects Technological change FREE TIME AND LIVING STANDARDS How people across countries choose between consumption and working hours (free time) c Dr. Kumar Aniket Introduction Supply Choices Demand Choices Decision-making under scarcity Income & Substitution Effects Technological change EXAMPLE:GRADES AND STUDY HOURS What is the production function of grade? Student choose how many hours to study Grade increases if number of hours studied increases. Grade increase with better environment. Source: Plant et. al. (Contemporary Educational Psychology, 2005). c Dr. Kumar Aniket Introduction Supply Choices Demand Choices Decision-making under scarcity Income & Substitution Effects Technological change PRODUCTION FUNCTION Production functions: inputs (hours) ! outputs (grade) c Dr. -
Rebound Effects
Rebound Effects Prepared for the New Palgrave Dictionary of Economics Kenneth Gillingham Yale University November 11, 2014 Abstract In environmental and energy economics, rebound effects may influence the energy savings from improvements in energy efficiency. When the energy efficiency of a product or service improves, it becomes less expensive to use, income is freed-up for use on other goods and services, markets re-equilibrate, and there may even be induced innovation. These effects typically reduce the direct energy savings from energy efficiency improvements, but lead to improved social welfare as long as there are not sufficiently large externality costs. There is strong empirical evidence that rebound effects exist, yet estimates of the different effects range widely depending on context and location. Keywords Energy efficiency; climate policy; take-back effect; backfire; emissions; welfare; greenhouse gases; derived demand 1 Introduction Energy efficiency policies are among the most common environmental policies around the world. Holding consumer, producer, and market responses constant, an increase in energy efficiency for an energy-using durable good, such as a vehicle or refrigerator, will unambiguously save energy. Rebound effects are consumer, producer, and market responses to an increase in energy efficiency that typically reduce the energy savings that would have occurred had these responses been held constant. The use of the term “rebound” is intuitive: the responses lead to a rebounding of energy use back towards the energy use prior to the energy efficiency improvement. For this reason rebound effects are sometimes also called “take-back” effects, for some of the energy savings are “taken-back” by the responses. -
A Macroeconomic Model with Financially Constrained Producers and Intermediaries ∗
A Macroeconomic Model with Financially Constrained Producers and Intermediaries ∗ Vadim Elenev Tim Landvoigt Stijn Van Nieuwerburgh NYU Stern UT Austin NYU Stern, NBER, and CEPR October 24, 2016 Abstract We propose a model that can simultaneously capture the sharp and persistent drop in macro-economic aggregates and the sharp change in credit spreads observed in the U.S. during the Great Recession. We use the model to evaluate the quantitative effects of macro-prudential policy. The model features borrower-entrepreneurs who produce output financed with long-term debt issued by financial intermediaries and their own equity. Intermediaries fund these loans combining deposits and their own equity. Savers provide funding to banks and to the government. Both entrepreneurs and intermediaries make optimal default decisions. The government issues debt to finance budget deficits and to pay for bank bailouts. Intermediaries are subject to a regulatory capital constraint. Financial recessions, triggered by low aggregate and dispersed idiosyncratic productivity shocks result in financial crises with elevated loan defaults and occasional intermediary insolvencies. Output, balance sheet, and price reactions are substantially more severe and persistent than in non-financial recession. Policies that limit intermediary leverage redistribute wealth from producers to intermediaries and savers. The benefits of lower intermediary leverage for financial and macro-economic stability are offset by the costs from more constrained firms who produce less output. JEL: G12, -
Soft Budget Constraint Theories from Centralization to the Market1
Economics of Transition Volume 9 (1) 2001, 1–27 Soft budget constraint theories From centralization to the market1 Eric Maskin* and Chenggang Xu** *Institute for Advanced Study, Princeton and Department of Economics, Princeton University. Institute for Advanced Study, Einstein Drive, Princeton, NJ 08540, USA. Tel: + 1 609-734- 8309; E-mail: [email protected] **Department of Economics and CEP, London School of Economics, London WC2A 2AE, UK. Tel: +44 (0)207 955 7526; E-mail: [email protected] Abstract This paper surveys the theoretical literature on the effect of soft budget constraints on economies in transition from centralization to capitalism; it also reviews our understanding of soft budget constraints in general. It focuses on the conception of the soft budget constraint syndrome as a commitment problem. We show that the two features of soft budget constraints in centralized economies – ex post renegotiation of firms’ financial plans and a close administrative relationship between firms and the centre – are intrinsically related. We examine a series of theories (based on the commitment-problem approach) that explain shortage, lack of innovation in centralized economies, devolution, and banking reform in transition economies. Moreover, we argue that soft budget constraints also have an influence on major issues in economics, such as the determination of the boundaries and capital structure of a firm. Finally, we show that soft budget constraints theory sheds light on financial crises and economic growth. JEL classification: D2, D8, G2, G3, H7, L2, O3, P2, P3. Keywords: soft budget constraint, renegotiation, theory of the firm, banking and finance, transition, centralized economy. -
Econ 337901 Financial Economics
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Spring 2021 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International (CC BY-NC-SA 4.0) License. http://creativecommons.org/licenses/by-nc-sa/4.0/. 1 Mathematical and Economic Foundations A Mathematical Preliminaries 1 Unconstrained Optimization 2 Constrained Optimization B Consumer Optimization 1 Graphical Analysis 2 Algebraic Analysis 3 The Time Dimension 4 The Risk Dimension C General Equilibrium 1 Optimal Allocations 2 Equilibrium Allocations Mathematical Preliminaries Unconstrained Optimization max F (x) x Constrained Optimization max F (x) subject to c ≥ G(x) x Unconstrained Optimization To find the value of x that solves max F (x) x you can: 1. Try out every possible value of x. 2. Use calculus. Since search could take forever, let's use calculus instead. Unconstrained Optimization Theorem If x ∗ solves max F (x); x then x ∗ is a critical point of F , that is, F 0(x ∗) = 0: Unconstrained Optimization F (x) maximized at x ∗ = 5 Unconstrained Optimization F 0(x) > 0 when x < 5. F (x) can be increased by increasing x. Unconstrained Optimization F 0(x) < 0 when x > 5. F (x) can be increased by decreasing x. Unconstrained Optimization F 0(x) = 0 when x = 5. F (x) is maximized. Unconstrained Optimization Theorem If x ∗ solves max F (x); x then x ∗ is a critical point of F , that is, F 0(x ∗) = 0: Note that the same first-order necessary condition F 0(x ∗) = 0 also characterizes a value of x ∗ that minimizes F (x). -
MODULE 1 ECONOMICS REVIEW 1.01 Scarcity, Opportunity Cost, and Incentives 1.02 Factors of Production
MODULE 1 ECONOMICS REVIEW 1.01 Scarcity, Opportunity Cost, and Incentives 1. What is economics? 2. What does it mean when people say that resources are scarce? 3. What is a shortage? 4. How is a shortage different from scarcity? 5. What is opportunity cost? Provide an example. 6. What is an incentive? Provide an example. 7. Why are incentives and opportunity cost important when you make a decision? 8. What does it mean to “think at the margin?” Provide an example. 1.02 Factors of Production; Comparative Advantage 1. What are resources? 2. Describe the economic term land. 3. Describe the economic term labor. 4. Describe the economic term capital. 5. What is the difference between physical capital and human capital? 6. What is an entrepreneur and why are they important in an economy? 7. What does it mean to specialize? 8. Why should an individual or business specialize? 9. Define the law of comparative advantage. 10. Why would it be beneficial to know one’s comparative advantage? 1.03 Circular Flow Model: Market Interactions 1. Who participates in a market? 2. Describe the factor market? (Who does what? Where? ) 3. Describe the product market? (Who does what? Where? ) 4. Describe physical flow through the market. 5. Describe monetary flow through the market. 6. Why do households and businesses trade with each other? 7. Explain how the government participates in the flow of the market. 8. Describe the role of financial institutions in the flow of the market. 9. Describe the circular flow diagram including the government and institutions.