The Market
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The Market A. Example of an economic model — the market for apartments 1. models are simplifications of reality 2. for example, assume all apartments are identical 3. some are close to the university, others are far away 4. price of outer-ring apartments is exogenous — determined outside the model 5. price of inner-ring apartments is endogenous — determined within the model B. Two principles of economics 1. optimization principle — people choose actions that are in their interest 2. equilibrium principle — people’s actions must eventually be consistent with each other C. Constructing the demand curve 1. line up the people by willingness-to-pay. See Figure 1.1.
RESERVATION PRICE
500 490 480
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Demand curve
2. for large numbers of people, this is essentially a smooth curve as in Figure 1.2.
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NUMBER OF APARTMENTS
Figure 1.1
The Market
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RESERVATION PRICE
Demand curve
NUMBER OF APARTMENTS
Figure 1.2
D. Supply curve 1. depends on time frame 2. but we’ll look at the short run — when supply of apartments is fixed. E. Equilibrium 1. when demand equals supply 2. price that clears the market F. Comparative statics 1. how does equilibrium adjust when economic conditions change? 2. “comparative” — compare two equilibria 3. “statics” — only look at equilibria, not at adjustment 4. example — increase in supply lowers price; see Figure 1.5. 5. example — create condos which are purchased by renters; no effect on price; see Figure 1.6. G. Other ways to allocate apartments 1. discriminating monopolist 2. ordinary monopolist 3. rent control
The Market
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RESERVATION PRICE
Old supply
New supply
Old p* New p*
Demand
S
S'
NUMBER OF APARTMENTS
Figure 1.5
RESERVATION PRICE
New supply
Old supply
p*
Old demand
New demand
S
S'
NUMBER OF APARTMENTS
Figure 1.6
H. Comparing different institutions
The Market
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