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IntermediateMicroeconomicsInstructor:HongjunZhongSchoolofEconomics,SHUFESpring20102023/4/191IntroductionIntermediateMicroeconomics:AModernApproachHalR.Varian,UniversityofCalifornia,•2002
2023/4/192ChapterOneTheMarket2023/4/193TheTheoryofEconomicsdoesnot
furnishabodyofsettledconclusions
immediatelyapplicabletopolicy.Itis
amethodratherthanadoctrine,an
apparatusofthemind,atechniqueof
thinkingwhichhelpsitspossessorto
drawcorrectconclusions
---JohnMaynardKeynes2023/4/194EconomicModelingWhatcauseswhatineconomicsystems?Atwhatlevelofdetailshallwemodelaneconomicphenomenon?Whichvariablesaredeterminedoutsidethemodel(exogenous)andwhicharetobedeterminedbythemodel(endogenous)?2023/4/195ModelingtheApartmentMarketHowareapartmentrentsdetermined?Assumptionsapartmentsarecloseordistant,butotherwiseidenticaldistantapartmentsrentsareexogenousandknownmanypotentialrentersandlandlords2023/4/196ModelingtheApartmentMarketWhowillrentcloseapartments?Atwhatprice?Willtheallocationofapartmentsbedesirableinanysense?Howcanweconstructaninsightfulmodeltoanswerthesequestions?2023/4/197EconomicModelingAssumptionsTwobasicpostulates:RationalChoice:Eachpersontriestochoosethebestalternativeavailabletohimorher.(optimum)Equilibrium:Marketpriceadjustsuntilquantitydemandedequalsquantitysupplied.2023/4/198ModelingApartmentDemandDemand:Supposethemostanyonepersoniswillingtopaytorentacloseapartmentis$500/month.Then p=$500QD=1.Supposethepricehastodropto$490beforea2ndpersonwouldrent.Then p=$490QD=2.2023/4/199ModelingApartmentDemandTheloweristherentalratep,thelargeristhequantityofcloseapartmentsdemanded
pQD
.Thequantitydemandedvs.pricegraphisthemarketdemandcurveforcloseapartments.2023/4/1910ReservationpriceNumberofApartmentsDemandcurve1234Thedemandcurveforapartments52023/4/1911MarketDemandCurveforApartmentspQDDemandcurveforapartmentswithmanydemanders2023/4/1912ModelingApartmentSupplySupply:Ittakestimetobuildmorecloseapartmentssointhisshort-runthequantityavailableisfixed(atsay100).2023/4/1913MarketSupplyCurveforApartmentspQS1002023/4/1914CompetitiveMarketEquilibrium“low”rentalpricequantitydemandedofcloseapartmentsexceedsquantityavailablepricewillrise.“high”rentalpricequantitydemandedlessthanquantityavailablepricewillfall.2023/4/1915CompetitiveMarketEquilibriumQuantitydemanded=quantityavailable
pricewillneitherrisenorfallsothemarketisatacompetitiveequilibrium.2023/4/1916CompetitiveMarketEquilibriumpQD,QS1002023/4/1917CompetitiveMarketEquilibriumpQD,QSpe1002023/4/1918CompetitiveMarketEquilibriumpQD,QSpe100Peoplewillingtopaypeforcloseapartmentsgetcloseapartments.2023/4/1919CompetitiveMarketEquilibriumpQD,QSpe100Peoplewillingtopaypeforcloseapartmentsgetcloseapartments.Peoplenotwillingtopay
peforcloseapartments
getdistantapartments.2023/4/1920CompetitiveMarketEquilibriumQ:Whorentsthecloseapartments?A:Thosemostwillingtopay.Q:Whorentsthedistantapartments?A:Thoseleastwillingtopay.Sothecompetitivemarketallocationisby“willingness-to-pay”.2023/4/1921ComparativeStaticsWhatisexogenousinthemodel?priceofdistantapartmentsquantityofcloseapartmentsincomesofpotentialrenters.Whathappensiftheseexogenousvariableschange?2023/4/1922ComparativeStaticsSupposethepriceofdistantapartmentrises.Demandforcloseapartmentsincreases(rightwardshift),causingahigherpriceforcloseapartments.2023/4/1923MarketEquilibriumpQD,QSpe1002023/4/1924MarketEquilibriumpQD,QSpe100Higherdemand2023/4/1925MarketEquilibriumpQD,QSpe100Higherdemandcauseshigher
marketprice;samequantity
traded.2023/4/1926ComparativeStaticsSupposethereweremorecloseapartments.Supplyisgreater,sothepriceforcloseapartmentsfalls.2023/4/1927MarketEquilibriumpQD,QSpe1002023/4/1928MarketEquilibriumpQD,QS100Highersupplype2023/4/1929MarketEquilibriumpQD,QSpe100Highersupplycausesa
lowermarketpriceanda
largerquantitytraded.2023/4/1930ComparativeStaticsSupposepotentialrenters’incomesrise,increasingtheirwillingness-to-payforcloseapartments.Demandrises(upwardshift),causinghigherpriceforcloseapartments.2023/4/1931MarketEquilibriumpQD,QSpe1002023/4/1932MarketEquilibriumpQD,QSpe100Higherincomescause
higherwillingness-to-pay2023/4/1933MarketEquilibriumpQD,QSpe100Higherincomescause
higherwillingness-to-pay,
highermarketprice,and
thesamequantitytraded.
2023/4/1934TaxationPolicyAnalysisLocalgovernmenttaxesapartmentowners.Whathappenstopricequantityofcloseapartmentsrented?Isanyofthetax“passed”torenters?2023/4/1935TaxationPolicyAnalysisMarketsupplyisunaffected.Marketdemandisunaffected.Sothecompetitivemarketequilibriumisunaffectedbythetax.Priceandthequantityofcloseapartmentsrentedarenotchanged.Landlordspayallofthetax.2023/4/1936ImperfectlyCompetitiveMarketsAmongstmanypossibilitiesare:amonopolisticlandlordaperfectlydiscriminatorymonopolisticlandlordacompetitivemarketsubjecttorentcontrol.2023/4/1937AMonopolisticLandlordWhenthelandlordsetsarentalpricep,herentsD(p)apartments.Revenue=pD(p).Revenueislowifp
0RevenueislowifpissohighthatD(p)0.Anintermediatevalueforpmaximizesrevenue.2023/4/1938MonopolisticMarketEquilibriumpQDLow
priceLowprice,highquantity
demanded,lowrevenue.2023/4/1939MonopolisticMarketEquilibriumpQDHigh
priceHighprice,lowquantity
demanded,lowrevenue.2023/4/1940MonopolisticMarketEquilibriumpQDMiddle
priceMiddleprice,mediumquantity
demanded,largerrevenue.2023/4/1941MonopolisticMarketEquilibriumpQD,QSMiddle
priceMiddleprice,mediumquantity
demanded,largerrevenue.
Monopolistdoesnotrentallthe
closeapartments.1002023/4/1942MonopolisticMarketEquilibriumpQD,QSMiddle
priceMiddleprice,mediumquantity
demanded,largerrevenue.
Monopolistdoesnotrentallthe
closeapartments.100Vacantcloseapartments.2023/4/1943PerfectlyDiscriminatoryMonopolisticLandlordImaginethemonopolistkneweveryone’swillingness-to-pay.Charge$500tothemostwilling-to-pay,charge$490tothe2ndmostwilling-to-pay,etc.2023/4/1944DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$50012023/4/1945DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$490122023/4/1946DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$47532023/4/1947DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$47532023/4/1948DiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$4753peDiscriminatorymonopolist
chargesthecompetitivemarket
pricetothelastrenter,and
rentsthecompetitivequantity
ofcloseapartments.2023/4/1949RentControlLocalgovernmentimposesamaximumlegalprice,pmax<pe,thecompetitiveprice.2023/4/1950MarketEquilibriumpQD,QSpe1002023/4/1951MarketEquilibriumpQD,QSpe100pmax2023/4/1952MarketEquilibriumpQD,QSpe100pmaxExcessdemand2023/4/1953MarketEquilibriumpQD,QSpe100pmaxExcessdemandThe100closeapartmentsarenolongerallocatedby
willingness-to-pay(lottery,lines,
largefamiliesfirst?).2023/4/1954WhichMarketOutcomesAreDesirable?Whichisbetter?RentcontrolPerfectcompetitionMonopolyDiscriminatorymonopoly2023/4/1955ParetoEfficiencyVilfredoPareto;1848-1923.AParetooutcomeallowsno“wastedwelfare”;i.e.theonlywayoneperson’swelfarecanbeimprovedistoloweranotherperson’swelfare.2023/4/1956ParetoEfficiencyAParetoinefficientoutcomemeansthereremainunrealizedmutualgains-to-trade.Anymarketoutcomethatachievesallpossiblegains-to-trademustbeParetoefficient.2023/4/1957ParetoEfficiencyCompetitiveequilibrium:allcloseapartmentrentersvaluethematthemarketpricepeormoreallothersvaluecloseapartmentsatlessthanpesonomutuallybeneficialtradesremainsotheoutcomeisParetoefficient.FirstWelfareTheorem!2023/4/1958ParetoEfficiencyDiscriminatoryMonopoly:assignmentofapartmentsisthesameaswiththeperfectlycompetitivemarketsothediscriminatorymonopolyoutcomeisalsoParetoefficient.2023/4/1959ParetoEfficiencyMonopoly:notallapartmentsareoccupiedsoadistantapartmentrenterco
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