Lecture01_Spring2009_Mkt&amp;BudConst

# Lecture01_Spring2009_Mkt&amp;BudConst - The Market...

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1 The Market Molly W. Dahl Georgetown University Econ 101 – Spring 2009

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2 Economic Modeling Construct a model Choose simplifications Solve the model Come up with a prediction Set S = D, etc. Evaluate the model Was it too simple? Do we learn anything about the real world?
3 Modeling the Apartment Market How are apartment rents determined? Suppose apartments are close or distant, but otherwise identical distant apartments rents are exogenous (determined outside the model) and known many potential renters and landlords

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4 Modeling the Apartment Market Who will rent close apartments? At what price? Will the allocation of apartments be desirable in any sense? How can we construct an insightful model to answer these questions?
5 Economic Modeling Assumptions Two basic assumptions: Rational Choice : Each person tries to choose the best alternative available to him or her. Equilibrium : Market price adjusts until quantity demanded equals quantity supplied.

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6 Modeling Apartment Demand Demand : Suppose the most any one person is willing to pay to rent a close apartment is \$500/month. Then p = \$500 Q D = 1. Suppose the price has to drop to \$490 before a 2nd person would rent. Then p = \$490 Q D = 2.
7 Modeling Apartment Demand The lower is the rental rate p, the larger is the quantity of close apartments demanded p Q D . The quantity demanded vs. price graph is the market demand curve for close apartments.

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8 Market Demand Curve for Apartments
9 Market Demand Curve for Apartments p Q D

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10 Modeling Apartment Supply Supply : It takes time to build more close apartments so in this short-run the quantity available is fixed (at say 100).
11 Market Supply Curve for Apartments p Q S 100

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12 Competitive Market Equilibrium “low” rental price quantity demanded of close apartments exceeds quantity available price will rise. “high” rental price quantity demanded less than quantity available price will fall.
13 Competitive Market Equilibrium Quantity demanded = quantity available price will neither rise nor fall so the market is at a competitive equilibrium .

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14 Competitive Market Equilibrium p Q D ,Q S p e 100
15 Competitive Market Equilibrium Q: Who rents the close apartments? A: Those most willing to pay. Q: Who rents the distant apartments? A: Those least willing to pay. So the competitive market allocation is by “willingness-to-pay”.

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Comparative Statics What is exogenous in the model? price of distant apartments quantity of close apartments incomes of potential renters. What happens if these exogenous
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Lecture01_Spring2009_Mkt&amp;BudConst - The Market...

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