Shortage and Inflation: The Phenomenon

1. Shortage and Inflation:The Phenomenon Concepts and terminology. Causes discussed later.Concepts and terminology. Causes discussed later.

2. A Shortage Economy A shortage economy has the following characteristics: shortages are general, that is, in all spheres of the economy consumer goods and services means of production producer goods

3. frequent not exceptional or sporadic intensive having a strong influence on behavior chronic not temporary but applying constantly

4. A Buyer�s Choices Buyers have various possibilities facing them in a shortage economy event 0: buyer goes to a shop, the item sought is there, and the purchase is made immediately not a common occurrence

5. event 1: the item is there but buyer has to queue for it consumers spend a lot of time standing in lines for certain goods the queue is a waiting list that may be many years in length the wait for an apartment in the Soviet Union was typically 10 to 15 years

6. event 2: the item is not available so buyer accepts a forced substitution buying something else that is more or less a close substitute buyer must be worse off having to substitute distinct from voluntary substitution as when price changes or tastes change

8. event 3: the item is not available so buyer searches for the item elsewhere a form of forced saving to extent that search is lengthy event 4: the item is not available now but is known that it will be in the future and buyer decides to postpone the purchase a form of forced saving event 5: abandon purchase

9. Events 0, 1, 2, and 5 are alternative ends to the purchase process terminal events Events 3 and 4 do not end the process process keeps looping until it ends at a terminal event

10. Similar events occur with enterprises event 1: joins queue for an input event 2: substitutes another input for the one planned event 3: searches for needed input with other suppliers than one planned event 4: postpones use of input event 5: gives up

14. Equilibrium and Disequilibrium Notional demand refers to buyers� intentions in absence of supply-side constraints assuming price, income, tastes, etc. Adjusted demand refers to intentions given buyers� realistic expectations concerning constraints

15. Forced-adjustment equilibrium occurs when the aggregate quantity demanded, adjusted for supply, can be satisfied by the entire supply made available forced-adjustment equilibrium occurs along with a sense of consumer dissatisfaction and frustration consumers intentions are satisfied only after intentions are adjusted to what is generally known about waiting times, search costs, etc.

16. A forced-adjustment disequilibrium may occur when consumers are forced to postpone buying, in which there is a kind of forced saving funds accumulate ready to be spent this accumulation is a monetary overhang monetary overhang is a potential source of inflation during transition

17. forced-adjustment equilibrium (monetary overhang) may be soaked up by purchases on the parallel markets legal market at free prices gray or black markets

18. Shortage-Induced Surplus The shortage economy encourages surpluses in anticipation of future problems, buyers hoard whenever possible buyers learn to buy when goods are available, not just when needed stocks of inputs build up surplus labor builds up

19. Another source of surplus is bureaucratic allocation and control system not very responsive to changes in demand an unwanted output can continue to accumulate for a very long time

20. Buyers� and Sellers� Markets Classical socialist economies are sellers� markets Capitalist economies are buyers� markets, for the most part perfect competition is neither

21. Characteristics of Sellers�and Buyers� Markets Information buyers� market: seller provides seller advertises availability, characteristics, services, price, etc. sellers� market: buyers have to obtain the information needed to make purchasing decisions, often at considerable cost no advertising

22. Adjustment to the other side buyers� market: seller spends considerable resources determining buyers� needs and adjusting to them as they change sellers� market: seller ignores buyer buyer adjusts to whatever seller supplies forced substitution, postponement, and other forms of forced adjustment

23. Effort to win other side buyers� market: sellers compete for buyers� favor persuasive advertising not altogether a good thing friendly, faster service efforts to build brand identification and loyalty better selection higher quality

24. sellers� market: buyers compete for sellers� favor sellers unfriendly and impolite why bother to be otherwise? packaging plain and flimsy buyers often bribe sellers to make product available or to set aside a nicer item expeditors to secure needed supplies through connections, favors, and bribes sellers do not provide extra services no delivery services seller quotes long completion times on orders

25. Consequences of uncertainty buyers� market: seller holds inventory or spare capacity in case of an unanticipated increase in demand sellers� market: no reserves of output or capacity against unanticipated demand taut planning maximize output with minimal inputs and minimal inventory

26. producers hoard capacity and inputs in order to make plan fulfillment easier, not to accommodate unanticipated demand enterprises respond to the lack of sellers� excess capacity and stocks by hoarding and by producing vital inputs themselves vertical integration leads to large, unspecialized producers households respond in similar manner car owners become mechanical wizards

27. uncertainty causes producers in buyers� markets to keep output stocks as a buffer against unanticipated demand don�t want to risk having to turn customers away uncertainty causes producers in sellers� markets to hoard inputs as a buffer against unanticipated lack of supply no need to keep output stocks couldn�t care less about losing customers thus, ratio of inputs to outputs much larger in sellers� markets than in buyers� markets

29. The characteristics of buyers� and sellers� markets can be summarized by the relative power relationships between buyers and sellers in a buyers� market, buyers have the power to induce sellers to accommodate to the needs of buyers in a sellers� market, sellers have the power to induce buyers to accommodate to the needs of sellers

31. Normal Shortageand Surplus Classical socialist economies are always shortage economies the existence of certain kinds of surpluses is consistent with the concept of shortage economy

32. The intensity of shortage tends to exhibit a regularity similar to equilibrium when queues get longer than normal, the system responds to shorten queues and vice versa Normality varies across countries and across political regimes

33. Inflation Open inflation occurs when prices are permitted to rise without administrative resistance Repressed inflation occurs when the rise in prices is prevented from occurring via administered control Hidden inflation occurs when there is an increase in prices but official statistics do not reflect it

34. Official statistics indicate fairly firm control over prices, at least after WWII seen as a major accomplishment reflecting the superiority of planned socialism over capitalism There are at least five ways that prices may, in fact, have risen, even if not reflected in official statistics that is, hidden inflation

35. Conscious distortion of aggregate figures and the price index by central authorities this is pure fraud and there is no solid evidence that this occurred In the case of pseudo-administered producer pricing, the flow of information from below tends to distort price increases because subordinates evaluated in part by ability to hold down prices rises

36. Enterprises often hide price increases when costs rise by classifying products as new when all that has happened is a trivial design change new products get a new price that reflects the higher costs

37. Price indexes are based on standardized products whose prices tend to lag behind differentiated products in capitalist economies, prices of both move together if one lagged for long, it would stop being worth producing in socialist economies, standardized product prices do lag behind index based on standardized products biased downward

38. Price indexes do not cover the informal private sector prices are market based and free to rise a true, comprehensive index that reflects what it actually costs to live would cover both because rising prices of informal sector not reflected, price indexes biased downward