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1、Chapter OneThe Market - Appreciating Economic ModelingThe Purpose of this ChapteruTo begin to understand the art of building an economic modeluTo begin to understand three basic elements of modeling in economics: Purpose Simplification through assumptions Value judgmentThe Purpose of an Economic Mod
2、elu The purpose of an economic model is to help provide precise insights (精 确的洞察力）on a specific economic phenomenon.uThus: Different phenomena needs different model; Simplification by assumption is necessaryAn Illustration: Modeling the Apartment MarketuPurpose: How are apartment rents determined? A
3、re rents “desirable”?uSimplifying assumptions: apartments are close or distant, but otherwise identical distant apartments rents are exogenous (外生变量） and known many potential renters and landlordsTwo Very Common Modeling AssumptionsRational Choice (理性选择）: Each person tries to choose the best alterna
4、tive 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 DemanduDemand: Suppose the most any one person is willing to pay to rent a close apartment
5、 is $500/month. Then p = $500 QD = 1.uSuppose the price has to drop to $490 before a 2nd person would rent. Thenp = $490 QD = 2.Modeling Apartment DemanduThe lower is the rental rate p, the larger is the quantity of close apartments demanded p QD .uThe quantity demanded vs. price graph is the market
6、 demand curve for close apartments.Market Demand Curve for ApartmentspQDModeling Apartment SupplyuSupply: 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 ApartmentspQS100Competitive Market Equilibrium (竞争性市场均衡）uQu
7、antity demanded = quantity available price will neither rise nor falluso the market is at a competitive equilibrium.Competitive Market EquilibriumpQD,QSpe100People willing to pay pe for close apartments get close apartments. People not willing to pay pe for close apartmentsget distant apartments.Com
8、parative Statics （静态比较分析）uWhat is exogenous in the model? price of distant apartments quantity of close apartments incomes of potential renters.uWhat happens if these exogenous variables change?uNote： We are not analyzing the transition process or dynamic process.Comparative StaticsuSuppose the pric
9、e of distant apartment rises.uDemand for close apartments increases (rightward shift), causinguA higher price for close apartments.Market EquilibriumpQD,QSpe100Higher demand causes higher market price; same quantity traded.More Comparative Statics (Do Them Yourself)uSuppose there were more close apa
10、rtments.uOr, renters income rises;Elaboration of the Basic Model: Taxation Policy AnalysisuLocal government taxes apartment owners.uWhat happens to price quantity of close apartments rented?uIs any of the tax “passed” to renters?Taxation Policy AnalysisuMarket supply is unaffected.uMarket demand is
11、unaffected.uSo the competitive market equilibrium is unaffected by the tax.uPrice and the quantity of close apartments rented are not changed.uLandlords pay all of the tax.Imperfectly Competitive Market Case 1： A Monopolistic LandlorduLandlord sets a rental price p he rents D(p) apartments.uRevenue
12、= pD(p).uHe chooses p to maximizes p D(p), subject to D(p) = S (total number of apartments in his hands)uTypically, his optimal p is such that D(p) S, that is, there are vacant apartments.Monopolistic Market EquilibriumpQD,QSMiddle priceMiddle price, medium quantity demanded, larger revenue. Monopol
13、ist does not rent all the close apartments.100Vacant close apartments.Imperfectly Competitive Market Case 2： Perfectly Discriminatory Monopolistic LandlorduImagine the monopolist knew willingness-to-pay of everybody,uCharge $500 to the most willing-to- pay,ucharge $490 to the 2nd most willing- to-pa
14、y, etc.Discriminatory Monopolistic Market EquilibriumpQD,QS100p1 =$5001Discriminatory Monopolistic Market EquilibriumpQD,QS100p1 =$500p2 =$49012Discriminatory Monopolistic Market EquilibriumpQD,QS100p1 =$500p2 =$49012p3 =$4753Discriminatory Monopolistic Market EquilibriumpQD,QS100p1 =$500p2 =$49012p
15、3 =$4753Discriminatory Monopolistic Market EquilibriumpQD,QS100p1 =$500p2 =$49012p3 =$4753peDiscriminatory monopolist charges the competitive market price to the last renter, and rents the competitive quantity of close apartments.Rent Control (房租管制）uLocal government imposes a maximum legal price, pm
16、ax pe, the competitive price.Market EquilibriumpQD,QSpe100pmaxExcess demandThe 100 close apartments are no longer allocated by willingness-to-pay (lottery, lines, large families first?).Value Judgement （价值判断）uWhich of the following is better? Rent control Perfect competition Monopoly Discriminatory monopolyuBut, what do you mean by “better”?Pareto Efficiency （帕累托效率
