1、ContentsvInstructor and TAsvRequirementsvCourse outlinevAn example:market for apartmentsTextbookIntermediate Microeconomics:A Modern Approach(Sixth Edition)by Hal R.VarianW.W.Norton，2003The Theory of Economics does notfurnish a body of settled conclusionsimmediately applicable to policy.It isa metho
2、d rather than a doctrine,anapparatus of the mind,a technique ofthinking which helps its possessor todraw correct conclusions-John Maynard KeynesIs Economics Useful?vA thinking machinevChanges the way you view life and understand problemsvAn all round majorEconomics Graduates Type of EmployerPercent
3、of GraduatesTraditional Business 23.3Government 18.4Financial Business 17.7Graduate School 13.7Consulting Services 4.4Private/public School 3.9Law Firm 3.5Other 9.8Jobs for EconomistsvBusiness economistsvGovernment economistsvAcademic economistsMicroeconomicsvTheoryvApplicationsLabor economicsEconom
4、ics of educationAgricultural economicsIndustrial organizationsHealth economicsCourse OutlinevConsumer theory(1-15)vProducer theory(18-27)vMarket equilibrium(16-17,30-32)vSpecial topics on equilibriumEconomic ModelingvWhat causes what in economic systems?vAt what level of detail shall we model an eco
5、nomic phenomenon?vWhich variables are determined outside the model(exogenous)and which are to be determined by the model(endogenous)?Modeling the Apartment MarketvHow are apartment rents determined?vSuppose apartments are close or distant,but otherwise identicaldistant apartments rents are exogenous
6、 and knownmany potential renters and landlordsModeling the Apartment MarketvWho will rent close apartments?vAt what price?vWill the allocation of apartments be desirable in any sense?vHow can we construct an insightful model to answer these questions?Two Principles in EconomicsvOptimization:Each per
7、son tries to choose the best alternative available to him or her.vEquilibrium:Market price adjusts until quantity demanded equals quantity supplied.Modeling Apartment DemandvDemand:Suppose the most any one person is willing to pay to rent a close apartment is$500/month.Thenp=$500 QD=1.vSuppose the p
8、rice has to drop to$490 before a 2nd person would rent.Then p=$490 QD=2.Modeling Apartment DemandvThe lower is the rental rate p,the larger is the quantity of close apartments demandedp QD.vThe quantity demanded vs.price graph is the market demand curve for close apartments.Market Demand Curve for A
9、partmentspQDModeling Apartment SupplyvSupply: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 Equilibriumv“low”rental price quantity demanded of close apartments exceeds quantity a
10、vailable price will rise.v“high”rental price quantity demanded less than quantity available price will fall.Competitive Market EquilibriumvQuantity demanded=quantity available price will neither rise nor fallvso the market is at a competitive equilibrium.Competitive Market EquilibriumpQD,QS100Compet
11、itive Market EquilibriumpQD,QSpe100Competitive Market EquilibriumpQD,QSpe100People willing to pay pe for close apartments get closeapartments.Competitive Market EquilibriumpQD,QSpe100People willing to pay pe for close apartments get closeapartments.People not willing to pay pe for close apartments g
12、et distant apartments.Competitive Market EquilibriumvQ:Who rents the close apartments?vA:Those most willing to pay.vQ:Who rents the distant apartments?vA:Those least willing to pay.vSo the competitive market allocation is by“willingness-to-pay”.Comparative StaticsvWhat is exogenous in the model?pric
13、e of distant apartmentsquantity of close apartmentsincomes of potential renters.vWhat happens if these exogenous variables change?Comparative StaticsvSuppose the price of distant apartment rises.vDemand for close apartments increases(rightward shift),causingva higher price for close apartments.Marke
14、t EquilibriumpQD,QSpe100Market EquilibriumpQD,QSpe100Higher demandMarket EquilibriumpQD,QSpe100Higher demand causes highermarket price;same quantitytraded.Comparative StaticsvSuppose there were more close apartments.vSupply is greater,so vthe price for close apartments falls.Market EquilibriumpQD,QS
15、pe100Market EquilibriumpQD,QS100Higher supplypeMarket EquilibriumpQD,QSpe100Higher supply causes alower market price and alarger quantity traded.Comparative StaticsvSuppose potential renters incomes rise,increasing their willingness-to-pay for close apartments.vDemand rises(upward shift),causingvhig
16、her price for close apartments.Market EquilibriumpQD,QSpe100Market EquilibriumpQD,QSpe100Higher incomes causehigher willingness-to-payMarket EquilibriumpQD,QSpe100Higher incomes causehigher willingness-to-pay,higher market price,andthe same quantity traded.Taxation Policy AnalysisvLocal government t
17、axes apartment owners.vWhat happens topricequantity of close apartments rented?vIs any of the tax“passed”to renters?Taxation Policy AnalysisvMarket supply is unaffected.vMarket demand is unaffected.vSo the competitive market equilibrium is unaffected by the tax.vPrice and the quantity of close apart
18、ments rented are not changed.vLandlords pay all of the tax.Imperfectly Competitive MarketsvAmongst many possibilities are:a monopolistic landlorda perfectly discriminatory monopolistic landlorda competitive market subject to rent control.A Monopolistic LandlordvWhen the landlord sets a rental price
19、p he rents D(p)apartments.vRevenue=pD(p).vRevenue is low if p 0vRevenue is low if p is so high that D(p)0.vAn intermediate value for p maximizes revenue.Monopolistic Market EquilibriumpQDLowpriceLow price,high quantitydemanded,low revenue.Monopolistic Market EquilibriumpQDHighpriceHigh price,low qua
20、ntitydemanded,low revenue.Monopolistic Market EquilibriumpQDMiddlepriceMiddle price,medium quantitydemanded,larger revenue.Monopolistic Market EquilibriumpQD,QSMiddlepriceMiddle price,medium quantitydemanded,larger revenue.Monopolist does not rent all theclose apartments.100Monopolistic Market Equil
21、ibriumpQD,QSMiddlepriceMiddle price,medium quantitydemanded,larger revenue.Monopolist does not rent all theclose apartments.100Vacant close apartments.Perfectly Discriminatory Monopolistic LandlordvImagine the monopolist knew everyones willingness-to-pay.vCharge$500 to the most willing-to-pay,vcharg
22、e$490 to the 2nd most willing-to-pay,etc.Discriminatory Monopolistic Market EquilibriumpQD,QS100p1=$5001Discriminatory Monopolistic Market EquilibriumpQD,QS100p1=$500p2=$4901 2Discriminatory Monopolistic Market EquilibriumpQD,QS100p1=$500p2=$4901 2p3=$4753Discriminatory Monopolistic Market Equilibri
23、umpQD,QS100p1=$500p2=$4901 2p3=$4753Discriminatory Monopolistic Market EquilibriumpQD,QS100p1=$500p2=$4901 2p3=$4753peDiscriminatory monopolistcharges the competitive marketprice to the last renter,andrents the competitive quantityof close apartments.Rent ControlvLocal government imposes a maximum l
24、egal price,pmax pe,the competitive price.Market EquilibriumpQD,QSpe100Market EquilibriumpQD,QSpe100pmaxMarket EquilibriumpQD,QSpe100pmaxExcess demandMarket EquilibriumpQD,QSpe100pmaxExcess demandThe 100 close apartments areno longer allocated bywillingness-to-pay(lottery,lines,large families first?)
25、.Which Market Outcomes Are Desirable?vWhich is better?Rent controlPerfect competitionMonopolyDiscriminatory monopolyPareto EfficiencyvVilfredo Pareto;1848-1923.vA Pareto outcome allows no“wasted welfare”;vi.e.the only way one persons welfare can be improved is to lower another persons welfare.Pareto
26、 EfficiencyvJill has an apartment;Jack does not.vJill values the apartment at$200;Jack would pay$400 for it.vJill could sublet the apartment to Jack for$300.vBoth gain,so it was Pareto inefficient for Jill to have the apartment.Pareto EfficiencyvA Pareto inefficient outcome means there remain unreal
27、ized mutual gains-to-trade.vAny market outcome that achieves all possible gains-to-trade must be Pareto efficient.Pareto EfficiencyvCompetitive equilibrium:all close apartment renters value them at the market price pe or moreall others value close apartments at less than peso no mutually beneficial
28、trades remainso the outcome is Pareto efficient.Pareto EfficiencyvDiscriminatory Monopoly:assignment of apartments is the same as with the perfectly competitive marketso the discriminatory monopoly outcome is also Pareto efficient.Pareto EfficiencyvMonopoly:not all apartments are occupiedso a distan
29、t apartment renter could be assigned a close apartment and have higher welfare without lowering anybody elses welfare.so the monopoly outcome is Pareto inefficient.Pareto EfficiencyvRent Control:some close apartments are assigned to renters valuing them at below the competitive price pesome renters valuing a close apartment above pe dont get close apartmentsPareto inefficient outcome.Harder QuestionsvOver time,willthe supply of close apartments increase?rent control decrease the supply of apartments?a monopolist supply more apartments than a competitive rental market?
