2 Chapter Highlights 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 ring apartments is endogen determined within the 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 othe C. Constructing the demand curve 1. line up the people by willingness-to-pay. See Figure 1.1 2. for large numbers of people, this is essentially a smooth curve as in 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 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 1.6 G. Other ways to allocate apartments 1. discriminating monopolist 2. ordinary monopoli H. Comparing different institutions 1. need a criterion to compare how efficient these different allocation methods are 2. an allocation is Pareto efficient if there is no way to make some group of people better off without making someone else worse off 3. if something is not Pareto efficient, then there is some way to make some people better off without making someone else worse off 4. if something is not Pareto efficient, then there is some kind of " waste"in Checking efficiency of different methods 1. free market - efficient 2. discriminating monopolist -- efficient 3. ordinary monopolist- not efficient 4. rent control not efficient2 Chapter Highlights 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. 2. for large numbers of people, this is essentially a smooth curve as in 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 H. Comparing different institutions 1. need a criterion to compare how efficient these different allocation methods are. 2. an allocation is Pareto efficient if there is no way to make some group of people better off without making someone else worse off. 3. if something is not Pareto efficient, then there is some way to make some people better off without making someone else worse off. 4. if something is not Pareto efficient, then there is some kind of “waste” in the system. I. Checking efficiency of different methods 1. free market — efficient 2. discriminating monopolist — efficient 3. ordinary monopolist — not efficient 4. rent control — not efficient