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{{Economics_Lectures}}

{{Economics_Lectures}}

Lectures Two and Three we discussed how a government price control, or price ceiling, results in shortages. For example, government controls on the cost of medical services will cause a shortage of medical services, and then rationing of medical care to manage the shortage.

Consider this question:  why doesn't the government simply order people to provide more of the medical services, so there is no shortage? If government is powerful enough to limit and control the price, which causes a shortage, then why doesn't the government increase the supply by ordering people to provide more of the services at the lower price?

But here is a question: why doesn't the government simply order people to provide the services, so there is no shortage?  If government is going to set the price, why doesn't it increase the supply by telling people to provide more of the services at the lower price?

Think about that for a while. The answer is in this footnote.<ref>The Thirteenth Amendment to the U.S. Constitution, which was passed to ban slavery, generally prohibits compeling people to work.</ref>

Think about it.  The answer is in this footnote.<ref>The Thirteenth Amendment to the Constitution prohibits government from ordering people to work.</ref>

In this course we have already learned about the supply and demand curves, and examined the economic concept of “elasticity”.  Recall that elasticity measures the sensitivity of the quantity demanded to a change in price, as we discussed in the last lecture.

This time, we are going to focus on other aspects of “demand”.

 

The sensitivity of the quantity demanded to a change in price is measured by the elasticity, which we discussed in the last lecture.  This time, we are going to focus on other aspects of “demand”.

== Example: the NBA Draft ==

== Example: the NBA Draft ==

Every year the National Basketball Association (NBA) holds a "draft" for each team to pick a college or high school player who wants to play in the NBA.  The worst NBA teams are allowed to pick first (that is, pick the best incoming players) in order to even out the quality of the NBA teams.  That way the best new players go to the worst NBA teams, and hopefully improve them so that there is better competition in the NBA and the same teams (like Los Angeles) do not win the championship every year.

Let's begin with an example.  Every year the National Basketball Association (NBA) holds a "draft" for each team to pick a college (or even a high school) player who wants to compete in the NBA.  The worst NBA teams are allowed to pick first (that is, pick the best incoming players) in order to even out the quality of the NBA teams.  That way the best new players go to the worst NBA teams, and hopefully improve them so that there is better competition in the NBA and the same teams (like Los Angeles) do not win the championship every year.

A dilemma arises when a team is making its selection of a particular player:  should the team pick (draft) the very best player available, regardless of the team's own needs for a player at a particular position, or should the team draft someone who fills a particular need on the team.  For example, if the team has good guards but needs a good center, should it draft someone who plays the position of center even though the best player available for that selection is a guard?

There is a dilemma that often arises when a team is making its selection of a particular player:  should the team pick (draft) the very best player available, regardless of the team's own needs for a player at a particular position, or should the team draft someone who fills a particular need on the team.  For example, if the basketball team has good players at the position of guard but needs a good center, should it draft someone who plays the position of center even though the best player available for that draft selection is a guard?

That dilemma presented itself to the Portland Trailblazers at a time when it had good guards, but needed a center.  The best player available at the time of its selection was Michael Jordan, a guard, but the team felt it needed to pick a center to fill a particular need of the team.  It decided not to pick Michael Jordan and selected a center/power forward named Sam Bowie instead.  The next team in the draft, the Chicago Bulls, then selected Michael Jordan and he eventually led it to six NBA championships.  Sam Bowie struggled in the NBA and never attained the level of success of Michael Jordan, who many felt is the greatest NBA player ever.

That dilemma presented itself to the Portland Trailblazers at a time when it had good guards, but needed a center.  The best player available at the time of its selection was Michael Jordan, a guard, but the team felt it needed to pick a center to fill the bigger need of the team.  It decided not to pick Michael Jordan and selected a center/power forward named Sam Bowie instead.  The next team in the draft, the Chicago Bulls, then selected Michael Jordan and he eventually led it to six NBA championships.  Sam Bowie struggled in the NBA and never attained the level of success of Michael Jordan, who many feel was the greatest NBA player ever.

What does economics teach us about the decision by the Portland Trailblazers?  At the time of its decision, the team knew that there was a greater "market" demand for Michael Jordan than for Sam Bowie.  Had the team used economic analysis, it would have realized that Michael Jordan's "value" was higher due to the greater market demand for him, regardless of what the Portland Trailblazers' specific needs were.  Portland could have picked Michael Jordan and traded for Sam Bowie plus another good player, or Portland could have traded its draft slot and obtained extra value in addition to drafting Sam Bowie later.  But the team leaders did not view the selection in terms of the "market", but rather in terms of the team's own particular needs.  This mistake resulted in what some call "the single most collosal blunder in the history of basketball."<ref>http://www.bigbluehistory.net/bb/bowie.html</ref>

What does economics teach us about the decision by the Portland Trailblazers?  At the time of its decision, the team knew that there was a greater "market" demand for Michael Jordan than for Sam Bowie.  Had the team used economic analysis, it would have realized that Michael Jordan's "value" was higher due to the greater market demand for him, regardless of what the Portland Trailblazers' specific needs were.  Portland could have picked Michael Jordan and traded him for Sam Bowie '''''plus another good player''''', or Portland could have "traded down" in the draft and obtained value in addition to still drafting Sam Bowie later in the draft (because he would still likely be available).  But the Portland team leaders did not view the selection in terms of the "market", but rather in terms of the team's own particular needs.  This choice became what some call "the single most colossal blunder in the history of basketball."<ref>http://www.bigbluehistory.net/bb/bowie.html</ref>

The moral of the story:  learn to look beyond your own situation when making buying and selling decisions.  You may think a particular house is the best thing in the world, but if the market values that house less than you do, then you'll lose money if you buy it.

The moral of this story:  learn to look beyond your own situation when making buying and selling decisions.  You may think a particular house is the best thing in the world, but if the market values that house less than you do, then you'll lose money if you buy it based on your personal preferences rather than market demand.

==Income and Substitution Effects, and the Law of Demand==

==Income and Substitution Effects, and the Law of Demand==