One should differentiate between the demand for a good generally and the demand for a good from a particular producer. Think about the market for holiday apartments in Upper Styria (at some time of the year). As we discussed before we would expect that the demanded number of apartments will depend on the price of these apartments, the lower the price the more people would be interested in renting a holiday apartment. I don’t quite know what the slope (or shape) of this demand function is exactly, but we would expect to be properly downward sloping (as a function of the price).
Suppose you observe different prices for the same good at different times. Why would that be? How can we explain this? In fact there are lots of possible explanations for this, but they can mostly be grouped into two categories of explanations: explanations based on changes of the demand(function) for the good and explanations based on changes of the supply(function) for the good. [Another explanation could be that there are changes in the market structure, which is a point I will get to in a later lecture.] Let me give you what I believe are good examples for the two cases. First, Styrian white wine in different years. Second, Upper Styrian hotel rooms and apartments in winter versus summer.
Many university towns have problems with affordable student accommodation. In Graz things are not too bad, I think, but I guess things could also be better. Let me make the following policy proposal and let’s discuss whether we think this is a good idea. I suggest a law that states that students who rent an apartment or a room are not allowed to be charged more than €2 per square meter. At the moment gross rent prices in Graz are probably around €10 per square meter (if not more). Do you think this policy would have the desired effect?
Consider a pop music concert. For reasons that we do not necessarily have to go into, pop music stars do not always want to charge the highest possible (single-concert profit-maximizing) prices for tickets to their concerts. In fact ticket prices are often so “low” (I still find them rather expensive) that many more people would like to go to the concert (at these prices) than there are tickets. The economic term for this is that tickets are being “rationed”. What is the result of such rationing?
If tickets are sold offline in a single “brick-and-mortar”, as people like to say, ticket booth, then we get long queues and people starting to queue at 2am of the morning of the day ticket sales begin or they even get there earlier and camp out with sleeping bags. If the selling is done online, then you have about one second in which you can buy your ticket, with many people with a slower internet connection missing out. Is the final ticket allocation in such cases of rationing Pareto-efficient? Think about it.
When people say that markets are efficient then they mean the notion of Pareto efficiency I provided in a previous post: An allocation is Pareto efficient if there is no other allocation that is a Pareto improvement. An allocation is a Pareto improvement over another allocation if the former is at least as good as the latter for everyone involved and strictly better for at least one person. As we saw, Pareto efficiency has nothing to do with fairness. If I have everything there is to be had in the world and I want to have all this stuff then this is Pareto efficient. Because any other allocation would require me to give up something and, as I do not like to do this, this other allocation is not a Pareto improvement because I am not as happy as before.
This is a joke that I heard many times and once on a big stage at the 2014 annual meeting of the Verein für Socialpolitik where some supposedly important person from a supposedly important central bank (if I recall correctly) used it as a criticism of current economic methodology (as this person understood it) and generalizing it to mean it as a criticism of any economic methodology that uses math (if I understood this person correctly).