This is how they should function. And he's the guy who really taught us how real markets should function like this. And that's why he gets to go to Stockholm. So that's very exciting for our economics department, very exciting for the profession. And it's just a great moment, really, in taking economics-- I saw it described very well in one article-- these last few Nobel Prizes are the beginning of recognizing that economics is not what we teach in this course anymore. You need what we teach in this course to go on in economics. But probably the first couple dozen Nobel Prizes were for about what we teach in this course. And the last few have been about what you teach in the subsequent courses. And that's a real evolution of Freakonomics , to understand that we need to mature as a science and move beyond the basics that you learn in 14.01 and move beyond to these other things. So we're
giving you the basics here. But the excitement happens elsewhere. So it's a very exciting time for our department and for the profession as a whole. Now with that little diatribe aside, let's go back. So we have these. So now, having said all that, forget it. Forget Peter Diamond existed. We're now going back to perfect competition. And, once again, as I said in the first lecture-- and Peter would be the first guy to say it, this is how he taught me to do economic theory-- you've got to make simplifying assumptions if you want to get anywhere. So we're going to make a simplifying assumption of perfect competition. We'll weaken that as we go along. But, for now, imagine it's perfect competition. And we have the situation of perfectly competitive firms. Now a very important distinction to draw-- and that's why it's important to remember that these are little q's not big Q's-- is the distinction between firm demand and market demand, firm versus market. And this is something which is confusing. It confuses me at times. I may even get it wrong at times. I'll need you to correct me. Even if a given firm faces perfectly elastic demand, it doesn't necessarily mean that market demand is perfectly elastic. That is the overall demand for little, fake Statues of Liberty around Port Authority in New York is not perfectly elastic. As the price goes up, fewer people will buy them. As the prices goes down, more people will buy them. But for any given vendor selling them, it is perfectly elastic. Because there's always someplace next door you can go. So it's very important to distinguish between the demand facing the firm being perfectly elastic and the demand facing the market not being perfectly elastic. And the way to think about this is to think about the concept of residual demand. We have a demand function for market D of p. We have a demand function for a market which is that as the price goes up demand goes down.
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- Summer '20
- Economics, Peter Diamond