Modeling Regional Environment

Chapter 1 - The Market

constructing a model
model : simplified version of reality, eliminating irrelevant details.
exogenous variable : a factor in a causal model whose endogenous variable : a factor in a causal model
value is independent from the states of other causal
whose value is determined by the states of other
system under study.
variables in the system.
optimization and equilibrium
optimization prinsciple : people try to choose the best
patterns of consumption that they can afford.

equilibrium prinsciple : prices adjust until the amount

that people demand of something is equal to the
amount that is supplied.

the demand curve

reservation price: a person's maximum willingness to pay for something.
fig. 1
as the price of
apartments
decreases
more people
will be willing
to rent
apartments
fig. 2
demand curve
if there were
many people
who want to
rent the
apartments

the supply curve

vertical supply curve : same number of apartments rented at whatever price is being charge
fig. 3
supply curve in
the short-run.
whatever price
is being
charged, the
same number
of apartments
will be rented

market equilibrium
equilibrium price : a price where quantity demanded equals the quality supplied. No change in behavior will be
observed.
fig. 4
the equilibrium
price is
determined by
the intersection
of the supply
and demand
curves

Modeling Regional Environment

Chapter 1 - The Market

comparative statics
comparing two 'static' equilibria without worrying about how the market moves from one equilibrium to another
increase of supply will result in the decrease of
equilibrium price

decrease of supply followed by decrease of

demand in the same amount will resiult in the
equilibrium price being unchanged

fig. 5
an increase in
number of
supply results
in the
decrease of
equilibrium
price
fig. 6
if demand and
supply both
shift left by the
same amount
the equilibrium
price is
unchanged

fig. 7
imposing tax
does not
change the
demand and
supply curve,
hence the
price stays the
same

implementation of tax will not change the equilibrium

price because the number of supply and demand stays
the same. the landlords could not raise the prices

ways of resource allocation

competitive market
discriminating monopolist
many independent seller who are each out to sell their market is dominated by a single seller, but different
resources for the highest price the market will bear
people would end up paying different prices for the
same things.
ordinary monopolist
rent control
market is dominated by a single seller of a product
a maximum price is imposed through a regulation
which he has to sell on the same price. The revenue is
the number of demand times the number of supply
fig. 8
the revenue
received by the
monopolist is
just the price
time the
quantity, which
can be
interpreted as
the area of the
box illustrated

Modeling Regional Environment

Chapter 1 - The Market

pareto efficiency
is a useful criterion for comparing the outcomes of different economic institutions, also known as economic
efficiecy.
pareto improvement is a situation in which we can find a way to make some people beter off without making
anybody worse off.
example of pareto improvement: Abi has an apartment close to TUT that he feels is worth . Marie lives
far from TUT and she will be willing to pay for Abi's apartment. If they swap apartment and arrange a
side payment from Marie to Abi between and . both gain from the trade.
pareto inefficient
pareto efficient
if an allocation allows a pareto improvement. indicating if an allocation is such that no pareto improvements
there is a 'waste' in the system.
are possible

efficiency analysis of resource allocation

competitive market
discriminating monopolist
many independent seller who are each out to sell their market is dominated by a single seller, but different
resources for the highest price the market will bear
people would end up paying different prices for the
same things.
the market mechanism asigns the people with the
resources are assigns to exactly the same way as in a
highest reservation prices in apartments close to the competitive market.
campus. no further gains from the trade to be had.
pareto efficient

pareto efficient

*both generate pareto efficient, but each may result in quite different distributions of income. parento efficiency
is only concerned with the efficiency of the trade and does not have much to say about distributions of gains
from the trade
ordinary monopolist
a situation where a market is dominated by a single
seller of a product which he has to sell on the same
price
renter can still increase his profits by renting an
apartment to someone who does not have one at any
price.

rent control
a maximum price is imposed through a regulation

parento inefficient

parento inefficient

arbitrary assignment of renters will involve someone

living close to campus and willing to pay less for an
apartment than someone living far from campus.

equilibrium in the long run

in the long run, the supply of resources may change. market price for resources will depend on the interaction
of supply and demand
in order to analyze the behavior of a certain resources market in the long run, we have to examine the
behavior of suppliers as well as demanders