Chapter 1 – The Market: Key Vocabulary

These vocabulary flashcards cover the essential terms introduced in Chapter 1 on the apartment market model, including concepts of demand, supply, equilibrium, different market structures, and Pareto efficiency.

Economic Model

A simplified representation of reality that eliminates irrelevant detail to focus on essential economic features.

Exogenous Variable

A variable whose value is taken as given by a model; determined by factors outside the model.

Endogenous Variable

A variable whose value is determined within the model by the interaction of forces described in the model.

Optimization Principle

The assumption that people choose the best consumption patterns they can afford.

Equilibrium Principle

The idea that prices adjust until the quantity demanded equals the quantity supplied.

Reservation Price

The maximum price an individual is willing to pay for a good; the price at which they are indifferent between purchasing and not purchasing.

Demand Curve

A graphical relationship showing the quantity of a good that consumers will buy at each possible price.

Supply Curve

A graphical relationship showing the quantity of a good that producers will offer at each possible price.

Competitive Market

A market with many independent sellers and buyers where no single participant can influence the price.

Market Equilibrium

The price–quantity pair where the amount demanded equals the amount supplied.

Equilibrium Price (p*)

The market price at which quantity demanded equals quantity supplied; no participant has an incentive to change behavior.

Short-Run Supply

The quantity of a good available when production capacity is fixed; depicted as a vertical supply curve for apartments.

Long-Run Supply

The quantity of a good that can be provided when firms can adjust capacity and new suppliers can enter the market.

Comparative Statics

Analysis that compares two equilibrium states after a change in an exogenous variable, ignoring the transition path.

Monopoly

A market structure with a single seller of a product.

Discriminating Monopolist

A monopolist who charges each customer a different price equal to their reservation price.

Ordinary Monopolist

A monopolist who must charge the same price to all customers and chooses the price that maximizes total revenue.

Revenue Box

In monopoly analysis, the rectangle whose height is price and width is quantity sold; its area equals total revenue.

Rent Control

A policy that sets a maximum legal rent below the competitive equilibrium price, creating excess demand.

Gains from Trade

The net benefits to participants from voluntary exchange, arising when goods move to those who value them most.

Pareto Improvement

A change that makes at least one person better off without making anyone else worse off.

Pareto Efficiency (Economic Efficiency)

A situation where no further Pareto improvements are possible; all gains from trade have been exhausted.

Pareto Inefficient Allocation

An allocation where some Pareto improvement is possible; someone can be made better off without harming others.

Inner-Ring Apartments

Units located adjacent to the university; more desirable and the focus of the pricing model.

Outer-Ring Apartments

Units located farther from the university with a fixed exogenous rent, serving as the outside option for renters.