INTERMIC_LPPT_Ch1_Student.ppt for BUdinrddx

Business

1. CHAPTER 1 The Market Copyright © 2019 Hal R. Varian

2. Economic Modeling A model is a simplified representation of reality. When developing an economic model we need to think about: What causes what? Which variable (or variables) causes change in another variable? At what level of detail shall we model an economic phenomenon? Which variables are determined outside the model (exogenous) and which are to be determined by the model (endogenous)? Copyright © 2019 Hal R. Varian

3. Modeling the Apartment Market – 1 How are apartment rents determined? Suppose: Apartments are close or distant, but otherwise identical. Distant apartments’ rents are exogenous and known. There are many potential renters and landlords. Copyright © 2019 Hal R. Varian

4. Modeling the Apartment Market – 2 Who will rent apartments? At what price? Will the allocation of apartments be desirable in any sense? Can we construct an insightful model to answer these questions? Copyright © 2019 Hal R. Varian

5. Economic Modeling Assumptions Two basic principles: Optimization : Equilibrium : Copyright © 2019 Hal R. Varian

6. Modeling Apartment Demand – 1 Demand : Suppose the most any one person is willing to pay to rent an apartment is $500/month. Then, p = $500  Q D = 1. Suppose the price has to drop to $490 before a second person would rent. Then, p = $490  Q D = 2. Copyright © 2019 Hal R. Varian

7. Modeling Apartment Demand – 2 The lower the rental rate (p), the larger the quantity of apartments demanded : The quantity demanded vs. price graph is the for apartments. Copyright © 2019 Hal R. Varian

8. Market Demand Curve for Apartments Copyright © 2019 Hal R. Varian

9. Modeling Apartment Supply Supply : It takes time to build more apartments. So, in this short run the quantity available is fixed (at say 100). Copyright © 2019 Hal R. Varian

10. Market Supply Curve for Apartments Copyright © 2019 Hal R. Varian

11. Market Equilibrium – 1 At a “low” rental price, the quantity demanded of apartments the quantity supplied. Therefore, the price will . At a “high” rental price, the quantity demanded of apartments is than the quantity supplied. Therefore, the price will . Copyright © 2019 Hal R. Varian

12. Market Equilibrium – 2 When quantity demanded = quantity supplied, the price will neither rise nor fall so the market is at a . Copyright © 2019 Hal R. Varian

13. Competitive Market Equilibrium – 1 Copyright © 2019 Hal R. Varian

14. Competitive Market Equilibrium – 2 Copyright © 2019 Hal R. Varian

15. Competitive Market Equilibrium – 3 Copyright © 2019 Hal R. Varian

16. Competitive Market Equilibrium – 4 Who rents the apartments? . So the competitive market allocation is by “ . ” Copyright © 2019 Hal R. Varian

17. Comparative Statics – 1 What is exogenous in the model? of distant apartments of close apartments of potential renters What happens if these exogenous variables change? Copyright © 2019 Hal R. Varian

18. Comparative Statics – 2 What if the price of apartments in a nearby city rises? Demand for close apartments ( shift), causing a price for close apartments. Copyright © 2019 Hal R. Varian

19. Market Equilibrium – 3 Copyright © 2019 Hal R. Varian

20. Market Equilibrium – 4 Copyright © 2019 Hal R. Varian

21. Comparative Statics – 3 What if there is an increase in available apartments? Supply for apartments ( shift), causing a price for apartments. Copyright © 2019 Hal R. Varian

22. Market Equilibrium – 5 Copyright © 2019 Hal R. Varian

23. Market Equilibrium – 6 Copyright © 2019 Hal R. Varian

24. Comparative Statics – 4 What if the incomes of potential renters increase (thereby increasing their willingness to pay)? Demand for apartments ( shift), causing a price for close apartments. Copyright © 2019 Hal R. Varian

25. Market Equilibrium – 7 Copyright © 2019 Hal R. Varian

26. Market Equilibrium – 8 Copyright © 2019 Hal R. Varian

27. Taxation Policy Analysis – 1 Suppose local government taxes apartment owners. What happens to price? quantity of apartments rented? Is any of the tax “ passed ” to renters in the form of higher overall expenses associated with renting an apartment? Copyright © 2019 Hal R. Varian

28. Taxation Policy Analysis – 2 In this particular scenario with fixed supply, the market supply is . So, the market equilibrium is by the tax. Landlords pay of the tax. Copyright © 2019 Hal R. Varian

29. Imperfectly Competitive Markets Imperfectly competitive markets come in many forms including: monopolistic landlords perfectly discriminatory monopolistic landlords rent controls Copyright © 2019 Hal R. Varian

30. A Monopolistic Landlord When the landlord sets a rental price ( p ), he or she rents D ( p ) apartments. Revenue = If p  0, revenue would be . If p is too high, D ( p )  . So, revenue would be here too. An intermediate value for p revenue. Copyright © 2019 Hal R. Varian

31. Monopolistic Market Equilibrium – 1 Copyright © 2019 Hal R. Varian

32. Monopolistic Market Equilibrium – 2 Copyright © 2019 Hal R. Varian

33. Monopolistic Market Equilibrium – 3 Copyright © 2019 Hal R. Varian

34. Monopolistic Market Equilibrium – 4 Copyright © 2019 Hal R. Varian

35. Perfectly Discriminatory Monopolistic Landlord Imagine the monopolist knew everyone’ s willingness to pay. Charge $500 to the most willing to pay, charge $490 to the second most willing to pay, etc. Copyright © 2019 Hal R. Varian

36. Discriminatory Monopolistic Market Equilibrium – 1 Copyright © 2019 Hal R. Varian

37. Discriminatory Monopolistic Market Equilibrium – 2 Copyright © 2019 Hal R. Varian

38. Discriminatory Monopolistic Market Equilibrium – 3 Copyright © 2019 Hal R. Varian

39. Rent Control Local government imposes a maximum legal price, p max < p e , the competitive price. This is often called a “ .” Copyright © 2019 Hal R. Varian

40. Market Equilibrium – 9 Copyright © 2019 Hal R. Varian

41. Market Equilibrium – 10 Copyright © 2019 Hal R. Varian

42. Which Market Outcomes Are Desirable? Which is better? perfect competition monopoly discriminatory monopoly rent control Copyright © 2019 Hal R. Varian

43. Pareto Efficiency – 1 Vilfredo Pareto; 1848–1923. A Pareto outcome allows no “ .” I.e. the only way one person’ s welfare can be improved is to lower another person’s welfare. Copyright © 2019 Hal R. Varian

44. Pareto Efficiency – 2 Jill has an apartment; Jack does not. Jill values the apartment at $200; Jack would pay $400 for it. Jill could sublet the apartment to Jack for $300. Both gain, so it was for Jill to have the apartment. Copyright © 2019 Hal R. Varian

45. Pareto Efficiency – 3 A outcome means there remain unrealized mutual gains to trade. Any market outcome that achieves all possible gains to trade must be . Copyright © 2019 Hal R. Varian

46. Pareto Efficiency – 4 Competitive equilibrium: All close apartment renters value them at the market price p e or more. All others value close apartments at less than p e . mutually beneficial trades remain. The outcome is . Copyright © 2019 Hal R. Varian

47. Pareto Efficiency – 5 Monopoly: Not all apartments are occupied. A non-renter could be assigned an apartment and have higher welfare without lowering anybody else’ s welfare. The monopoly outcome is . Copyright © 2019 Hal R. Varian

48. Pareto Efficiency – 6 Discriminatory monopoly: Assignment of apartments is the same as with the perfectly competitive market. The discriminatory monopoly outcome is also . Copyright © 2019 Hal R. Varian

49. Pareto Efficiency – 7 Rent control: Some apartments are assigned to renters valuing them at below the competitive price p e . Some renters valuing an apartment above p e don’ t get apartments. This is a outcome. Copyright © 2019 Hal R. Varian

50. Harder Questions Over time, will the supply of close apartments increase? rent control decrease the supply of apartments? a monopolist supply more apartments than a competitive rental market? Copyright © 2019 Hal R. Varian

51. Credits This concludes the Lecture PowerPoint presentation for Chapter 1 of Intermediate Microeconomics, 9e. For more resources, please visit http://digital.wwnorton.com/intermicro9media . Copyright © 2019 Hal R. Varian