Chapter 1 - Chapter 1 The Market Starts with example of...

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Chapter 1: The Market Starts with example of economic analysis in action. Constructing a Model: o Model – simplified representation of reality. o Eliminates irrelevant detail, allowing economist to focus on essential features of economic reality he is attempting to understand. o Come up with simplest model that can describe economic situation we are examining. o Exogenous variable – one determined by factors not discussed in this model o Endogenous variable – one determined by factors described in this model. o All apartments are identical except for location. Optimization and Equilibrium o Optimization Principle: People try to choose the best patterns of consumption that they can afford. o Equilibrium Principle: Prices adjust until the amount that people demand of something equals amount that is supplied. o Only interested in equilibrium price, not how market got to equilibrium or how it changes over time.
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