IntermediateMicroeconomicsInstructor:HongjunZhongSchoolofEconomics,SHUFESpring20102023/7/201IntermediateMicroeconomicsIntroductionIntermediateMicroeconomics:AModernApproachHalR.Varian,UniversityofCalifornia,?2002

2023/7/202IntermediateMicroeconomicsChapterOneTheMarket2023/7/203IntermediateMicroeconomicsTheTheoryofEconomicsdoesnot

furnishabodyofsettledconclusions

immediatelyapplicabletopolicy.Itis

amethodratherthanadoctrine,an

apparatusofthemind,atechniqueof

thinkingwhichhelpsitspossessorto

drawcorrectconclusions

---JohnMaynardKeynes2023/7/204IntermediateMicroeconomicsEconomicModelingWhatcauseswhatineconomicsystems?Atwhatlevelofdetailshallwemodelaneconomicphenomenon?Whichvariablesaredeterminedoutsidethemodel(exogenous)andwhicharetobedeterminedbythemodel(endogenous)?2023/7/205IntermediateMicroeconomicsModelingtheApartmentMarketHowareapartmentrentsdetermined?Assumptionsapartmentsarecloseordistant,butotherwiseidenticaldistantapartmentsrentsareexogenousandknownmanypotentialrentersandlandlords2023/7/206IntermediateMicroeconomicsModelingtheApartmentMarketWhowillrentcloseapartments?Atwhatprice?Willtheallocationofapartmentsbedesirableinanysense?Howcanweconstructaninsightfulmodeltoanswerthesequestions?2023/7/207IntermediateMicroeconomicsEconomicModelingAssumptionsTwobasicpostulates:RationalChoice:Eachpersontriestochoosethebestalternativeavailabletohimorher.(optimum)Equilibrium:Marketpriceadjustsuntilquantitydemandedequalsquantitysupplied.2023/7/208IntermediateMicroeconomicsModelingApartmentDemandDemand:Supposethemostanyonepersoniswillingtopaytorentacloseapartmentis$500/month.Then p=$500QD=1.Supposethepricehastodropto$490beforea2ndpersonwouldrent.Then p=$490QD=2.2023/7/209IntermediateMicroeconomicsModelingApartmentDemandTheloweristherentalratep,thelargeristhequantityofcloseapartmentsdemanded

pQD

.Thequantitydemandedvs.pricegraphisthemarketdemandcurveforcloseapartments.2023/7/2010IntermediateMicroeconomicsReservationpriceNumberofApartmentsDemandcurve1234Thedemandcurveforapartments52023/7/2011IntermediateMicroeconomicsMarketDemandCurveforApartmentspQDDemandcurveforapartmentswithmanydemanders2023/7/2012IntermediateMicroeconomicsModelingApartmentSupplySupply:Ittakestimetobuildmorecloseapartmentssointhisshort-runthequantityavailableisfixed(atsay100).2023/7/2013IntermediateMicroeconomicsMarketSupplyCurveforApartmentspQS1002023/7/2014IntermediateMicroeconomicsCompetitiveMarketEquilibrium“l(fā)ow”rentalpricequantitydemandedofcloseapartmentsexceedsquantityavailablepricewillrise.“high”rentalpricequantitydemandedlessthanquantityavailablepricewillfall.2023/7/2015IntermediateMicroeconomicsCompetitiveMarketEquilibriumQuantitydemanded=quantityavailable

pricewillneitherrisenorfallsothemarketisatacompetitiveequilibrium.2023/7/2016IntermediateMicroeconomicsCompetitiveMarketEquilibriumpQD,QS1002023/7/2017IntermediateMicroeconomicsCompetitiveMarketEquilibriumpQD,QSpe1002023/7/2018IntermediateMicroeconomicsCompetitiveMarketEquilibriumpQD,QSpe100Peoplewillingtopaypeforcloseapartmentsgetcloseapartments.2023/7/2019IntermediateMicroeconomicsCompetitiveMarketEquilibriumpQD,QSpe100Peoplewillingtopaypeforcloseapartmentsgetcloseapartments.Peoplenotwillingtopay

peforcloseapartments

getdistantapartments.2023/7/2020IntermediateMicroeconomicsCompetitiveMarketEquilibriumQ:Whorentsthecloseapartments?A:Thosemostwillingtopay.Q:Whorentsthedistantapartments?A:Thoseleastwillingtopay.Sothecompetitivemarketallocationisby“willingness-to-pay”.2023/7/2021IntermediateMicroeconomicsComparativeStaticsWhatisexogenousinthemodel?priceofdistantapartmentsquantityofcloseapartmentsincomesofpotentialrenters.Whathappensiftheseexogenousvariableschange?2023/7/2022IntermediateMicroeconomicsComparativeStaticsSupposethepriceofdistantapartmentrises.Demandforcloseapartmentsincreases(rightwardshift),causingahigherpriceforcloseapartments.2023/7/2023IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe1002023/7/2024IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100Higherdemand2023/7/2025IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100Higherdemandcauseshigher

marketprice;samequantity

traded.2023/7/2026IntermediateMicroeconomicsComparativeStaticsSupposethereweremorecloseapartments.Supplyisgreater,sothepriceforcloseapartmentsfalls.2023/7/2027IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe1002023/7/2028IntermediateMicroeconomicsMarketEquilibriumpQD,QS100Highersupplype2023/7/2029IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100Highersupplycausesa

lowermarketpriceanda

largerquantitytraded.2023/7/2030IntermediateMicroeconomicsComparativeStaticsSupposepotentialrenters’incomesrise,increasingtheirwillingness-to-payforcloseapartments.Demandrises(upwardshift),causinghigherpriceforcloseapartments.2023/7/2031IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe1002023/7/2032IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100Higherincomescause

higherwillingness-to-pay2023/7/2033IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100Higherincomescause

higherwillingness-to-pay,

highermarketprice,and

thesamequantitytraded.

2023/7/2034IntermediateMicroeconomicsTaxationPolicyAnalysisLocalgovernmenttaxesapartmentowners.Whathappenstopricequantityofcloseapartmentsrented?Isanyofthetax“passed”torenters?2023/7/2035IntermediateMicroeconomicsTaxationPolicyAnalysisMarketsupplyisunaffected.Marketdemandisunaffected.Sothecompetitivemarketequilibriumisunaffectedbythetax.Priceandthequantityofcloseapartmentsrentedarenotchanged.Landlordspayallofthetax.2023/7/2036IntermediateMicroeconomicsImperfectlyCompetitiveMarketsAmongstmanypossibilitiesare:amonopolisticlandlordaperfectlydiscriminatorymonopolisticlandlordacompetitivemarketsubjecttorentcontrol.2023/7/2037IntermediateMicroeconomicsAMonopolisticLandlordWhenthelandlordsetsarentalpricep,herentsD(p)apartments.Revenue=pD(p).Revenueislowifp

0RevenueislowifpissohighthatD(p)0.Anintermediatevalueforpmaximizesrevenue.2023/7/2038IntermediateMicroeconomicsMonopolisticMarketEquilibriumpQDLow

priceLowprice,highquantity

demanded,lowrevenue.2023/7/2039IntermediateMicroeconomicsMonopolisticMarketEquilibriumpQDHigh

priceHighprice,lowquantity

demanded,lowrevenue.2023/7/2040IntermediateMicroeconomicsMonopolisticMarketEquilibriumpQDMiddle

priceMiddleprice,mediumquantity

demanded,largerrevenue.2023/7/2041IntermediateMicroeconomicsMonopolisticMarketEquilibriumpQD,QSMiddle

priceMiddleprice,mediumquantity

demanded,largerrevenue.

Monopolistdoesnotrentallthe

closeapartments.1002023/7/2042IntermediateMicroeconomicsMonopolisticMarketEquilibriumpQD,QSMiddle

priceMiddleprice,mediumquantity

demanded,largerrevenue.

Monopolistdoesnotrentallthe

closeapartments.100Vacantcloseapartments.2023/7/2043IntermediateMicroeconomicsPerfectlyDiscriminatoryMonopolisticLandlordImaginethemonopolistkneweveryone’swillingness-to-pay.Charge$500tothemostwilling-to-pay,charge$490tothe2ndmostwilling-to-pay,etc.2023/7/2044IntermediateMicroeconomicsDiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$50012023/7/2045IntermediateMicroeconomicsDiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$490122023/7/2046IntermediateMicroeconomicsDiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$47532023/7/2047IntermediateMicroeconomicsDiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$47532023/7/2048IntermediateMicroeconomicsDiscriminatoryMonopolisticMarketEquilibriumpQD,QS100p1=$500p2=$49012p3=$4753peDiscriminatorymonopolist

chargesthecompetitivemarket

pricetothelastrenter,and

rentsthecompetitivequantity

ofcloseapartments.2023/7/2049IntermediateMicroeconomicsRentControlLocalgovernmentimposesamaximumlegalprice,pmax<pe,thecompetitiveprice.2023/7/2050IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe1002023/7/2051IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100pmax2023/7/2052IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100pmaxExcessdemand2023/7/2053IntermediateMicroeconomicsMarketEquilibriumpQD,QSpe100pmaxExcessdemandThe100closeapartmentsarenolongerallocatedby

willingness-to-pay(lottery,lines,

largefamiliesfirst?).2023/7/2054IntermediateMicroeconomicsWhichMarketOutcomesAreDesirable?Whichisbetter?RentcontrolPerfectcompetitionMonopolyDiscriminatorymonopoly2023/7/2055IntermediateMicroeconomicsParetoEfficiencyVilfredoPareto;1848-1923.AParetooutcomeallowsno“wastedwelfare”;i.e.theonlywayoneperson’swelfarecanbeimprovedistoloweranotherperson’swelfare.2023/7/2056IntermediateMicroeconomicsParetoEfficiencyAParetoinefficientoutcomemeansthereremainunrealizedmutualgains-to-trade.Anymarketoutcomethatachievesallpossiblegains-to-trademustbeParetoefficient.2023/7/2057IntermediateMicroeconomicsParetoEfficiencyCompetitiveequilibrium:allcloseapartmentrentersvaluethematthemarketpricepeormoreallothersvaluecloseapartmentsatlessthanpesonomutuallybeneficialtradesremainsotheoutcomeisParetoefficient.FirstWelfareTheorem!2023/7/2058IntermediateMicroeconomicsParetoEfficiencyDiscriminatoryMonopoly:assignmentofapartmentsisthesameaswiththeperfectlycompetitivemarketsothediscriminatorymonopolyoutcomeisalsoParetoefficient.