ChapterOneTheMarket---AppreciatingEconomicModelingThePurposeofthisChapterTobegintounderstandtheartofbuildinganeconomicmodelTobegintounderstandthreebasicelementsofmodelingineconomics:–Purpose–Simplificationthroughassumptions–ValuejudgmentThePurposeofanEconomicModelThepurposeofaneconomicmodelistohelpprovidepreciseinsights(精确的洞察力)onaspecificeconomicphenomenon.Thus:–Differentphenomenaneedsdifferentmodel;–SimplificationbyassumptionisnecessaryAnIllustration:ModelingtheApartmentMarketPurpose:Howareapartmentrentsdetermined?Arerents“desirable”?Simplifyingassumptions:–apartmentsarecloseordistant,butotherwiseidentical–distantapartmentsrentsareexogenous(外生变量)andknown–manypotentialrentersandlandlordsTwoVeryCommonModelingAssumptions–RationalChoice(理性选择):Eachpersontriestochoosethebestalternativeavailabletohimorher.–Equilibrium(均衡):economicagentsinteractwitheachother,resultinginanequilibrium,inwhicheachpersonreachesanoptimaldecisiongivenothers’decisions.ModelingApartmentDemandDemand:Supposethemostanyonepersoniswillingtopaytorentacloseapartmentis$500/month.Thenp=$500QD=1.Supposethepricehastodropto$490beforea2ndpersonwouldrent.Thenp=$490QD=2.ModelingApartmentDemandTheloweristherentalratep,thelargeristhequantityofcloseapartmentsdemandedpQD.Thequantitydemandedvs.pricegraphisthemarketdemandcurveforcloseapartments.MarketDemandCurveforApartmentspQDModelingApartmentSupplySupply:Ittakestimetobuildmorecloseapartmentssointhisshort-runthequantityavailableisfixed(atsay100).MarketSupplyCurveforApartmentspQS100CompetitiveMarketEquilibrium(竞争性市场均衡)Quantitydemanded=quantityavailablepricewillneitherrisenorfallsothemarketisatacompetitiveequilibrium.CompetitiveMarketEquilibriumpQD,QSpe100Peoplewillingtopaypeforcloseapartmentsgetcloseapartments.Peoplenotwillingtopaypeforcloseapartmentsgetdistantapartments.ComparativeStatics(静态比较分析)Whatisexogenousinthemodel?–priceofdistantapartments–quantityofcloseapartments–incomesofpotentialrenters.Whathappensiftheseexogenousvariableschange?Note:Wearenotanalyzingthetransitionprocessordynamicprocess.ComparativeStaticsSupposethepriceofdistantapartmentrises.Demandforcloseapartmentsincreases(rightwardshift),causingAhigherpriceforcloseapartments.MarketEquilibriumpQD,QSpe100Higherdemandcauseshighermarketprice;samequantitytraded.MoreComparativeStatics(DoThemYourself)Supposethereweremorecloseapartments.Or,renters’incomerises;ElaborationoftheBasicModel:TaxationPolicyAnalysisLocalgovernmenttaxesapartmentowners.Whathappensto–price–quantityofcloseapartmentsrented?Isanyofthetax“passed”torenters?TaxationPolicyAnalysisMarketsupplyisunaffected.Marketdemandisunaffected.Sothecompetitivemarketequilibriumisunaffectedbythetax.Priceandthequantityofcloseapartmentsrentedarenotchanged.Landlordspayallofthetax.ImperfectlyCompetitiveMarketCase1:AMonopolisticLandlordLandlordsetsarentalpricepherentsD(p)apartments.Revenue=pD(p).HechoosesptomaximizespD(p),subjecttoD(p)=S(totalnumberofapartmentsinhishands)Typically,hisoptimalpissuchthatD(p)S,thatis,therearevacantapartments.MonopolisticMarketEquilibriumpQD,QSMiddlepriceMiddleprice,mediumquantitydemanded,largerrevenue.Monopolistdoesnotrentallthecloseapartments.100Vacantcloseapartments.ImperfectlyCompetitiveMarketCase2:PerfectlyDiscriminatoryMonopolisticLandlordImaginethemonopolistknewwillingness-to-payofeverybody,Charge$500tothemostwilling-to-pay,charge$490tothe2ndmostwilling-to-pay,etc.DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$5001DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$4753DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$4753DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$4753peDiscriminatorymonopolistchargesthecompetitivemarketpricetothelastrenter,andrentsthecompetitivequantityofcloseapartments.RentControl(房租管制)Localgovernmentimposesamaximumlegalprice,pmaxpe,thecompetitiveprice.MarketEquilibriumpQD,QSpe100pmaxExcessdemandThe100closeapartmentsarenolongerallocatedbywillingness-to-pay(lottery,lines,largefamiliesfirst?).ValueJudgement(价值判断)Whichofthefollowingisbetter?–Rentcontrol–Perfectcompetition–Monopoly–DiscriminatorymonopolyBut,whatdoyoumeanby“better”?ParetoEfficiency(帕累托效率)VilfredoPareto;1848-1923.AParetooutcomeallowsno“wastedwelfare”;i.e.theonlywayoneperson’swelfarecanbeimprovedistoloweranotherperson’swelfare.ParetoEfficiencyAParetoinefficientoutcomemeansthereremainunrealizedmutualgains-to-trade.Anymarketoutcomethatachievesallpossiblegains-to-trademustbeParetoefficient.ParetoEfficiencyCompetitiveequilibrium:–allcloseapartmentrentersvaluethematthemarketpricepeormore–allothersvaluecloseapartmentsatlessthanpe–sonomutuallybeneficialtradesremain–sotheoutcomeisParetoefficient.ParetoEfficiencyDiscriminatoryMonopoly:–assignmentofapartmentsisthesameaswiththeperfectlycompetitivemarket–sothediscriminatorymonopolyoutcomeisalsoParetoefficient.ParetoEfficiencyMonopoly:–notallapartmentsare