Hal.Varian.-.Intermediate.Microeconomics(Mini.Fifth.Edition).pdf

The Market 1
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 .
2. for large numbers of people, this is essentially a
smooth curve as in Figure .
The Market 2
RESERVATION
PRICE
500 ......
490 ......
480
... ......
...... Demand curve
......
......
1 23... NUMBER OF APARTMENTS
Figure
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
The Market 3
RESERVATION
PRICE
Demand curve
NUMBER OF APARTMENTS
Figure
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
The Market 4
RESERVATION
PRICE
Old New
supply supply
Old p*
New p*
Demand
S S' NUMBER OF APARTMENTS
Figure
4. example --- increase in supply lowers price; see
Figure .
5. example --- create condos which are purchased by
renters; no effect on price; see Figure .
G. Other ways to allocate apartments
1. discriminating monopolist
2. ordinary monopolist
3. rent control
The Market 5
RESERVATION
PRICE New Old
supply supply
p*
Old
demand
New
demand
S S' NUMBER OF