ch 1 the market

model

simplified representation of reality

endogenous variables

those that the model provides e.g. price and quantity of rentals

exogenous variables

all others outside the model e.g. income of renters, rent outside the ghetto

optimization

each person tries to choose best option acting in their own best affordable interest

equilibrium

market price adjusts until Qd = Qs (equilibrium price)

reservation price

highest price that someone will accept to make the purchase

at a given price, number of apts rented =

number of people with reservation price > given price

if price is higher than EP

Qd < Qs → price will fall

if price is lower than EP,

Qd > Qs → price will rise

competitive market allocation is by

willingness to pay

comparative statics

how does EP change when various market aspects change

always consider effects on both

supply and depend

if there is a tax

both supply and demand curves are unchanged, so landlords absorb the full cost (assuming supply is fixed)

single monopolist

finds a revenue maximizing price (p * D(p)), but some apartments are vacant

price discrimination

price changes depending on willingness to pay, rents competitive quantity at same allocation, but EP is only charged to the last renter

price ceiling

if smallar than EP, Qd > Qs and there is a shortage → same number of apts will be rented as under competitive

pareto efficiency

outcome such that no one can improve without having a detriment to otherscomp

competition is pareto efficient because

people with highest RPs get the apts, so no further gains from trade can be made

monopoly is not pareto efficient bc

vacant apts could be assigned to someone and benefit them without harming anyone else

price discrimination is pareto efficient bc

same competitive quantity is rented, and assignment is the same

price ceiling is not pareto effiicient bc

some apts go to renters willing to pay lower than PE, so people willing to pay higher don't get apts