modelingnotes - 2011 - Steven Tschantz Notes on modeling...

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© 2011 - Steven Tschantz Notes on modeling Steven Tschantz 3/31/11 Summary We have had nearly ten weeks of lectures and labs illustrating specification and implementation of mathematical models in economics. Next we will have a test of your knowledge and proficiency with regards to the following. ± 1. Demand models. We have imagined consumer demand for a single product as a function of its price or for several (differentiated) products as functions of their prices. We have considered linear, constant elasticity, and logit demand forms, calibrating demand functions to a variety of given data. You need to know the definitions of own- and cross-price elasticity of demand. ± 2. Firm model. We have often supposed that one or a few firms sell to a large population of consumers, and that firms are price setters and consumers are price takers, with consumers unable to negotiate and firms unable to price discriminate. The profit a firm makes is a function of the price it charges for its products, the sales of those products as determined by the demand of the consumers, and the costs incurred in producing and selling that quantity of goods. The firm is assumed to be profit maximizing. You need to know the definition of marginal cost. ± 3. Competition. We have argued that when firms compete they set price to maximize their own profits assuming their competitors prices are given. This defines equilibrium conditions for prices which are best for each firm separately, given the prices of the other firms. If firms cooperate or merge, then the prices which maximize their total profits will be different. You need to be able to write down equilibrium conditions, and solve for equilibrium prices. You need to know the definition of pass-through rate. ± 4. Other market models. We have considered also a model where many producers sell identical goods to many consumers, describing the willingness to sell and buy by supply and demand functions, and imagining a single market clearing price. We have considered a model where a manufacturer sets wholesale price to retailers, each retailer setting price to their local consumers, comparing this to a vertically integrated firm. Given the organization of a market, the available actions of the players in that market, and the objectives of those players, we evaluate which actions best meet each players own objectives in competition with the others. By varying the assumptions and parameters of such a model we hope to better understand how real markets work.
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5. Estimation. Models will have parameters that need to be calibrated to observed data in order to make useful predictions about the real world. We have consider some general ideas for estimating parameters. We have discussed linear models and regression for explaining the connections between observed variables. We have considered some of the problems and limitations in data analysis. Sample questions
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modelingnotes - 2011 - Steven Tschantz Notes on modeling...

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