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Notes for Lecture 13 _March 6_

Notes for Lecture 13 _March 6_ - LECTURE 13 MARCH 4 2010 SR...

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LECTURE # 13, MARCH 4, 2010. SR EQUILIBRIUM (§ 9.3) LR EQUILIBRIUM (§ 9.4) AUCTIONS (§ 15.5) I want to pick up where we left off last time. Topics are taking more time than I anticipated. It will be a relaxed schedule today but it should be interesting. Let me start off with something completely different. www.hsx.com is the Hollywood Stock Exchange, it is an exchange or a trading platform and is very active right now since the academy awards are on its way. I encourage you to participate in it (non graded assignment) and you get Hollywood Bucks (“funny money”) when you sign in and you can buy stakes in films and film scripts and also trade these Hollywood Bucks points for placing “bets” on Academy Awards winners. What is amazing is that there are number of sites like this of different kinds and they have a very good track record at making predictions. The oldest is Iowa Election Market http://www.biz.uiowa.edu/iem/index.cfm That virtual exchange is not for the Hollywood industry but for Candidates running for elected office. There is no “funny money” there, you trade with real money. For a $1 you can bet who will win the next California gubernatorial race. That exchange, like the Hollywood Stock Exchange, is very good at predicting the winners. The only thing at stake is your time, and a small amount of money (in the case of the Iowa Election Exchange) yet they are remarkably good predictors of what eventually happens. The Obama Administration is looking at these “prediction markets” as a means to forecast the effects of policy proposals. I don’t think they’ve had the time to predict the effects of TARP and other kinds of programs, but that’s what they are designed to do. We will look at the markets where real items are traded for real money where people have “skin in the game” so to speak. Keep in mind that the predictive power of markets is visibly present even when we set up these kinds of fake type exchanges with funny money. So the kinds of markets that we have in mind here are probably best illustrated by the NYSE which can be visualized by the image you see on the evening news when the stock market goes down or goes up a great deal. You have buyers and sellers on the floor that buy and sell stocks for brokers and individual investors alike. So just like the traditional demand / supply model, it is buyers who make the demand and sellers make the supply and the product here is shares in corporations. We are interested in all kinds of market not just this one, however this one pops to mind when we think of a stock exchange because of preconceived visual image that is very popular. We are interested in such a market because this (stock) market serves a couple of important functions: Price (How does the market decide what the price of the good is?) and then Quantity (How much is bought and sold at the going price?) Supply and Demand is designed to determine these two things: Price and Quantity. What do we mean by equilibrium? It means there is no
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Notes for Lecture 13 _March 6_ - LECTURE 13 MARCH 4 2010 SR...

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