Chapter one The Market Appreciating Economic Modeling
Chapter One The Market --- Appreciating Economic Modeling
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
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
The Purpose of an Economic Model The purpose of an economic model is to help provide precise insights(a 确的洞察力) on a specific economic phenomenon Thus: Different phenomena needs different model: Simplification by assumption is necessary
The Purpose of an Economic Model The purpose of an economic model is to help provide precise insights (精 确的洞察力）on a specific economic phenomenon. Thus: –Different phenomena needs different model; –Simplification by assumption is necessary
An Illustration: Modeling the partment market A Purpose: How are apartment rents determined? Are rents“ desirab|e”? Simplifying assumptions: apartments are close or distant, but otherwise identical distant apartments rents are exogenous(外生变量) and known many potential renters and landlords
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 (外生变量） and known –many potential renters and landlords
Two Very Common Modeling Assumptions Rational choice(理性选择):Each person tries to choose the best alternative available to him or her - Equilibrium(均衡): economIc agents interact with each other, resulting in an equilibrium, in which each person reaches an optimal decision given others decisions
Two Very Common Modeling Assumptions –Rational Choice (理性选择）: Each person tries to choose the best alternative available to him or her. –Equilibrium （均衡）: economic agents interact with each other, resulting in an equilibrium, in which each person reaches an optimal decision given others’ decisions
Modeling Apartment Demand Demand: Suppose the most any one person is willing to pay to rent a close apartment is $500 /month Then $500→Q〓1. Suppose the price has to drop to $490 before a 2nd person would rent Then $490→Q=2
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 QD = 1. Suppose the price has to drop to $490 before a 2nd person would rent. Then p = $490 QD = 2
Modeling Apartment Demand The lower is the rental rate p, the larger is the quantity of close apartments demanded p→Q个 The quantity demanded vs price graph is the market demand curve for close apartments
Modeling Apartment Demand The lower is the rental rate p, the larger is the quantity of close apartments demanded p QD . The quantity demanded vs. price graph is the market demand curve for close apartments
Market demand Curve for apartments
Market Demand Curve for Apartments p QD
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)
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)
Market Supply curve for apartments 100
Market Supply Curve for Apartments p QS 100