ECONOMIC PRINCIPLES II: MICROECONOMICS
I. The market
I. a. Economic modelling
- Economic model = hypothetical construct representing simplification of reality
Focus on essential features of economic reality eliminating irrelevant details for
facilitating understanding
- Key components of economic modelling
1) Determining exact object/aspect under study
2) Identifying essential variables + relations of causation between variables
3) Finding simplest economic model describing examined economic situation
4) Distinguishing exogenous/endogenous variables
Examining impact of change in variable on other variables
- Use of available mathematical toolbox for solving economic model
I. b. Case study: let market for students in Durham
- Situation: hundred identical flats to rent ; number of students looking for
apartments higher than number of available flats
- Economic modelling
o Optimisation principle: choosing best affordable patterns of consumption
o Equilibrium principle: prices adjusting until quantity of demand equal to
quantity supplied
- Demand
o Gathering data of each aspiring renter’s reservation price (= willingness to
pay) (i.e., highest: £500 ; next highest: £490)
- Demand curve
Increased
number of
consumers
- Supply curve: short-run fixed supply of apartments due to time required for
construction of new apartments vertical supply curve
, - Market equilibrium
Willingness to pay
pay pe / more than
pe obtaining
apartment rental
1) Case of low rental price: QD > QS
- Quantity demanded (QD) > quantity supplied (QS)
- Price adjustment through increase to pe
2) Case of high rental price: QD < QS
- Quantity demanded (QD) < quantity supplied (QS)
- Price adjustment through decrease to pe
Market eventually coming down to QD = QS
Determining factor of renting price = intersection supply/demand curves
Assignment of apartment rentals determined by willingness to pay
- Exogenous variables
o Quantity of available apartments in Durham
o Income of potential renters
o Price of apartments outside Durham (= substitute good)
o Number of students in demand
3) Increase in quantity of available apartments in Durham
- Increase QS shift supply curve to new quantity of available apartments
decrease of pe
I. The market
I. a. Economic modelling
- Economic model = hypothetical construct representing simplification of reality
Focus on essential features of economic reality eliminating irrelevant details for
facilitating understanding
- Key components of economic modelling
1) Determining exact object/aspect under study
2) Identifying essential variables + relations of causation between variables
3) Finding simplest economic model describing examined economic situation
4) Distinguishing exogenous/endogenous variables
Examining impact of change in variable on other variables
- Use of available mathematical toolbox for solving economic model
I. b. Case study: let market for students in Durham
- Situation: hundred identical flats to rent ; number of students looking for
apartments higher than number of available flats
- Economic modelling
o Optimisation principle: choosing best affordable patterns of consumption
o Equilibrium principle: prices adjusting until quantity of demand equal to
quantity supplied
- Demand
o Gathering data of each aspiring renter’s reservation price (= willingness to
pay) (i.e., highest: £500 ; next highest: £490)
- Demand curve
Increased
number of
consumers
- Supply curve: short-run fixed supply of apartments due to time required for
construction of new apartments vertical supply curve
, - Market equilibrium
Willingness to pay
pay pe / more than
pe obtaining
apartment rental
1) Case of low rental price: QD > QS
- Quantity demanded (QD) > quantity supplied (QS)
- Price adjustment through increase to pe
2) Case of high rental price: QD < QS
- Quantity demanded (QD) < quantity supplied (QS)
- Price adjustment through decrease to pe
Market eventually coming down to QD = QS
Determining factor of renting price = intersection supply/demand curves
Assignment of apartment rentals determined by willingness to pay
- Exogenous variables
o Quantity of available apartments in Durham
o Income of potential renters
o Price of apartments outside Durham (= substitute good)
o Number of students in demand
3) Increase in quantity of available apartments in Durham
- Increase QS shift supply curve to new quantity of available apartments
decrease of pe
