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Lecture 2 handout - Models and Markets

Lecture 2 handout - Models and Markets - Lecture 2 Handout...

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Unformatted text preview: Lecture 2 Handout: Models and Markets A model is a simplified representation of reality. All models are wrong! The point of a model is to aid our thinking by focusing attention on key factors. The art of economic modeling is choosing what factors to include and which to exclude. Economic models are mathematical because math…: – Forces clear thinking – Makes transparent the logical equivalence of seemingly‐diverse phenomena – Enables/forces the model to make quantitative predictions – Enables a simple model to be embedded within a larger, more complex model A market is a group of buyers and sellers with the potential to trade. When a buyer or seller has the power to influence the price of a product, we say that the market is imperfectly competitive. When there are so many buyers and sellers that each is too small to affect the price, the market is (perfectly) competitive. Supply and demand is the model that predicts what outcomes will occur in a competitive market: what the price will be, how many units will be traded, and which buyers and sellers will end up trading. 1 ...
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