Hal, Varian notes - The Market 1 The Market A. Example of...

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Unformatted text preview: The Market 1 The Market A. Example of an economic model — the market for apartments 1. models are simplifications of reality 2. for example, assume all apartments are identical 3. some are close to the university, others are far away 4. price of outer-ring apartments is exogenous — determined outside the model 5. price of inner-ring apartments is endogenous — determined within the model B. Two principles of economics 1. optimization principle — people choose actions that are in their interest 2. equilibrium principle — people’s actions must eventually be consistent with each other C. Constructing the demand curve 1. line up the people by willingness-to-pay. See Figure 1.1. ...... ...... ...... ...... ...... ...... RESERVATION PRICE 500 490 480 1 2 3 ... ... Demand curve NUMBER OF APARTMENTS Figure 1.1 2. for large numbers of people, this is essentially a smooth curve as in Figure 1.2. The Market 2 Demand curve RESERVATION PRICE NUMBER OF APARTMENTS Figure 1.2 D. Supply curve 1. depends on time frame 2. but we’ll look at the short run — when supply of apartments is fixed. E. Equilibrium 1. when demand equals supply 2. price that clears the market F. Comparative statics 1. how does equilibrium adjust when economic conditions change? 2. “comparative” — compare two equilibria 3. “statics” — only look at equilibria, not at adjustment 4. example — increase in supply lowers price; see Figure 1.5. 5. example — create condos which are purchased by renters; no effect on price; see Figure 1.6. G. Other ways to allocate apartments 1. discriminating monopolist 2. ordinary monopolist 3. rent control The Market 3 Demand RESERVATION PRICE NUMBER OF APARTMENTS Old supply New supply S S' Old p * New p * Figure 1.5 RESERVATION PRICE NUMBER OF APARTMENTS Old supply New supply S S' Old demand New demand p * Figure 1.6 H. Comparing different institutions The Market 4 1. need a criterion to compare how efficient these different allocation methods are. 2. an allocation is Pareto efficient if there is no way to make some group of people better off without making someone else worse off. 3. if something is not Pareto efficient, then there is some way to make some people better off without making someone else worse off. 4. if something is not Pareto efficient, then there is some kind of “waste” in the system. I. Checking efficiency of different methods 1. free market — efficient 2. discriminating monopolist — efficient 3. ordinary monopolist — not efficient 4. rent control — not efficient J. Equilibrium in long run 1. supply will change 2. can examine efficiency in this context as well Budget Constraint 5 Budget Constraint A. Consumer theory: consumers choose the best bundles of goods they can afford....
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This note was uploaded on 08/25/2009 for the course SE E102 taught by Professor Prof.s.quimbo during the Spring '09 term at University of the Philippines Diliman.

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Hal, Varian notes - The Market 1 The Market A. Example of...

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