Tsinghua Micro Ch1 020913 - Chapter One The Market...

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Chapter One The Market --- Appreciating Economic Modeling
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The Purpose of this Chapter To begin to understand the art of building an economic model To begin to understand three basic elements of modeling in economics: Purpose Simplification through assumptions Value judgment
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The Purpose of an Economic Model The purpose of an economic model is to help provide precise insights ( 精精 精精精精精 on a specific economic phenomenon. Thus: Different phenomena needs different model; Simplification by assumption is necessary
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An Illustration: Modeling the Apartment Market Purpose: How are apartment rents determined? Are rents “desirable”? Simplifying assumptions: apartments are close or distant, but otherwise identical distant apartments rents are exogenous ( 精精精精精 and known many potential renters and landlords
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Two Very Common Modeling Assumptions Rational Choice ( 精精精精精 : Each person tries to choose the best alternative available to him or her. Equilibrium 精精精精 : economic agents interact with each other, resulting in an equilibrium, in which each person reaches an optimal decision given others’ decisions.
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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.
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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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Market Demand Curve for Apartments p Q D
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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).
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Market Supply Curve for Apartments p Q S 100
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