Intermediate Microeconomics
A Modern Approach
Eighth Edition
THE MARKET
The conventional first chapter of a microeconomics book is a discussion of
the “scope and methods” of economics. Although this material can be very
interesting, it hardly seems appropriate to begin your study of economics
with such material. It is hard to appreciate such a discussion until you
have seen some examples of economic analysis in action.
So instead, we will begin this book with an example of economic analysis.
In this chapter we will examine a model of a particular market, the market
for apartments. Along the way we will introduce several new ideas and tools
of economics. Don’t worry if it all goes by rather quickly. This chapter
is meant only to provide a quick overview of how these ideas can be used.
Later on we will study them in substantially more detail.
the “scope and methods” of economics. Although this material can be very
interesting, it hardly seems appropriate to begin your study of economics
with such material. It is hard to appreciate such a discussion until you
have seen some examples of economic analysis in action.
So instead, we will begin this book with an example of economic analysis.
In this chapter we will examine a model of a particular market, the market
for apartments. Along the way we will introduce several new ideas and tools
of economics. Don’t worry if it all goes by rather quickly. This chapter
is meant only to provide a quick overview of how these ideas can be used.
Later on we will study them in substantially more detail.
1.1 Constructing a Model
Economics proceeds by developing models of social phenomena. By a
model we mean a simplified representation of reality. The emphasis here
is on the word “simple.” Think about how useless a map on a one-to-one
model we mean a simplified representation of reality. The emphasis here
is on the word “simple.” Think about how useless a map on a one-to-one
scale would be. The same is true of an economic model that attempts to describe
every aspect of reality. A model’s power stems from the elimination
of irrelevant detail, which allows the economist to focus on the essential
features of the economic reality he or she is attempting to understand.
Here we are interested in what determines the price of apartments, so
we want to have a simplified description of the apartment market. There
is a certain art to choosing the right simplifications in building a model. In
general we want to adopt the simplest model that is capable of describing
the economic situation we are examining. We can then add complications
one at a time, allowing the model to become more complex and, we hope,
more realistic.
The particular example we want to consider is the market for apartments
in a medium-size midwestern college town. In this town there are two
sorts of apartments. There are some that are adjacent to the university,
and others that are farther away. The adjacent apartments are generally
considered to be more desirable by students, since they allow easier access
to the university. The apartments that are farther away necessitate taking
a bus, or a long, cold bicycle ride, so most students would prefer a nearby
apartment . . . if they can afford one.
We will think of the apartments as being located in two large rings surrounding
the university. The adjacent apartments are in the inner ring,
while the rest are located in the outer ring. We will focus exclusively on
the market for apartments in the inner ring. The outer ring should be interpreted
as where people can go who don’t find one of the closer apartments.
We’ll suppose that there are many apartments available in the outer ring,
and their price is fixed at some known level. We’ll be concerned solely with
the determination of the price of the inner-ring apartments and who gets
to live there.
An economist would describe the distinction between the prices of the two
kinds of apartments in this model by saying that the price of the outer-ring
apartments is an exogenous variable, while the price of the inner-ring
apartments is an endogenous variable. This means that the price of
the outer-ring apartments is taken as determined by factors not discussed
in this particular model, while the price of the inner-ring apartments is
determined by forces described in the model.
The first simplification that we’ll make in our model is that all apartments
are identical in every respect except for location. Thus it will
make sense to speak of “the price” of apartments, without worrying about
whether the apartments have one bedroom, or two bedrooms, or whatever.
But what determines this price? What determines who will live in
the inner-ring apartments and who will live farther out? What can be
said about the desirability of different economic mechanisms for allocating
apartments? What concepts can we use to judge the merit of different
assignments of apartments to individuals? These are all questions that we
every aspect of reality. A model’s power stems from the elimination
of irrelevant detail, which allows the economist to focus on the essential
features of the economic reality he or she is attempting to understand.
Here we are interested in what determines the price of apartments, so
we want to have a simplified description of the apartment market. There
is a certain art to choosing the right simplifications in building a model. In
general we want to adopt the simplest model that is capable of describing
the economic situation we are examining. We can then add complications
one at a time, allowing the model to become more complex and, we hope,
more realistic.
The particular example we want to consider is the market for apartments
in a medium-size midwestern college town. In this town there are two
sorts of apartments. There are some that are adjacent to the university,
and others that are farther away. The adjacent apartments are generally
considered to be more desirable by students, since they allow easier access
to the university. The apartments that are farther away necessitate taking
a bus, or a long, cold bicycle ride, so most students would prefer a nearby
apartment . . . if they can afford one.
We will think of the apartments as being located in two large rings surrounding
the university. The adjacent apartments are in the inner ring,
while the rest are located in the outer ring. We will focus exclusively on
the market for apartments in the inner ring. The outer ring should be interpreted
as where people can go who don’t find one of the closer apartments.
We’ll suppose that there are many apartments available in the outer ring,
and their price is fixed at some known level. We’ll be concerned solely with
the determination of the price of the inner-ring apartments and who gets
to live there.
An economist would describe the distinction between the prices of the two
kinds of apartments in this model by saying that the price of the outer-ring
apartments is an exogenous variable, while the price of the inner-ring
apartments is an endogenous variable. This means that the price of
the outer-ring apartments is taken as determined by factors not discussed
in this particular model, while the price of the inner-ring apartments is
determined by forces described in the model.
The first simplification that we’ll make in our model is that all apartments
are identical in every respect except for location. Thus it will
make sense to speak of “the price” of apartments, without worrying about
whether the apartments have one bedroom, or two bedrooms, or whatever.
But what determines this price? What determines who will live in
the inner-ring apartments and who will live farther out? What can be
said about the desirability of different economic mechanisms for allocating
apartments? What concepts can we use to judge the merit of different
assignments of apartments to individuals? These are all questions that we
Do you want to learn all the following content
1 The Market2 Budget Constraint3 Preferences4 Utility5 Choice6 Demand7 Revealed Preference8 Slutsky Equation9 Buying and Selling10 Intertemporal Choice11 Asset Markets12 Uncertainty13 Risky Assets14 Consumer’s Surplus15 Market Demand16 Equilibrium17 Auctions18 Technology19 Profit Maximization20 Cost Minimization21 Cost Curves22 Firm Supply23 Industry Supply24 Monopoly25 Monopoly Behavior26 Factor Markets27 Oligopoly28 Game Theory29 Game Applications30 Behavioral Economics31 Exchange32 Production33 Welfare34 Externalities35 Information Technology36 Public Goods37 Asymmetric Information
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