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01.The_Market 1.12.10

01.The_Market 1.12.10 - The Market Professor John W Diamond...

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1 The Market Professor John W. Diamond ECON 370: Microeconomic Theory Lecture 1
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2 Microeconomics Analyzes behavior of economic “agents” Consumers (households, individuals) Businesses (firm managers, stockholders) Government (benevolence or self-interest) Most essential assumption: Optimization Objective function Constraints Control variables
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3 Microeconomics Essential concept: Equilibrium Prices adjust to equate supply and demand Results in market equilibrium All markets equilibrate so all factors employed No unemployment in most micro models Usually no inflation only relative prices Evaluate characteristics of alternative outcomes “Comparative statics” analysis Transition often ignored
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4 Constructing Economic Models Which phenomena to analyze? What causes what in economic systems? What level of detail is necessary, tractable? Nature of variables determined outside the model ( exogenous ) determined within the model ( endogenous ) Obtain empirical data on parameters Parameters are exogenous Econometrics is empirical branch of economics
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5 Example of Model: The Apartment Market Two types of apartments surround university Apartments are identical, but for location “Close” apartments are more attractive Close apartments are fixed in supply “Distant” apartments available at fixed price Many potential renters and landlords (competitive markets) Simple, but like basic urban economics model How are apartment rents determined?
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6 Modeling the Apartment Market Questions to resolve What will be price of close apartments Who will rent close apartments? Is the allocation socially “desirable”? Issue: How to construct model to provide insightful answers to these questions?
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7 Modeling Apartment Demand Demand for close apartments Reservation price (RP) max willingness to pay Suppose RP of highest demander is $500/month Then, when p = $500 Q D = 1 Suppose RP for 2nd highest demander=$490/mo Then, when p = $490 Q D = 2 Trace out rest of (negatively-sloped) demand curve in Q-P space
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8 Market D Curve for Apartments p Q D
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9 Modeling Apartment Supply Supply : Always depends on time frame chosen Short-run example Quantity available is fixed (e.g., Q S = 100) In a long run model, quantity would change New construction Remodeling Depreciation Conversion between apartments and condos
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10 Market S Curve for Apartments p Q S 100
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