Topic 1 - The market Flashcards
Exogenous variable
These are variables taken as given. They are not the problem of the model. Not aiming to change these just noting they exist.
Endogenous Variable
These variables are what we seek to explain. The variable being targeted by a model. It can change and we try to explain the change.
Optimization principle
This states that the individual will choose the best patterns of consumption they can afford.
Equilibrium principle
Prices adjust until the amount that people demand of something is equal to the amount supplied.
Reservation price
The maximum price someone will pay for a good. Often consumers don’t even know their reservation price.
The short run supply curve (apartments in glasgow)
In the short run there will be a vertical curve as adding additional capacity quickly isn’t an option. The rent in this market will be at the highest price it can bear.
Market equilibrium
To get the market equilibrium we put together supply and demand curves. Where these intersect is the equilibrium.
If apartment supply in Glasgow increased?
The equilibrium would decrease as the supply curve would shift to the right and therefore the point where supply and demand intersect would be lower and the new reservation price would be less than the old reservation price.
If the number of rentable apartments fell (due to converting to condominiums)?
This would mean the supply would decrease(shifting the curve to the left) but also the demand would decrease as some of the people previously renting will have bought a house. In this instance if the shifts were equal the reservation price wouldn’t change.
Discriminating Monopolist (landlord)
In the rental market a discriminating monopolist would charge each renter their reservation price. They are most concerned with accumulating wealth.
Ordinary monopolist (landlord)
The landlord would set a single price for all the apartments. As long as marginal costs are less than marginal revenue.
Rent control
The city imposes a maximum rent. This control price is often way below the market one.
To calculate revenue?
Revenue = price x quantity
Pareto improvement.
This is a change that is made that makes someone in the market better off without making anyone worse off. It is an improvement. Not everyone will win but no one will lose .
Pareto efficient allocation
No pareto improvements are possible.
