Notes
Chapter I: The Market
Fundamental Issues in Microeconomics:
● Consumers: (D - Demand Side), consumption theory
● Producers: (S - Supply Side), production theory
● Market (D meets S), various forms of market equilibrium
● Market failures, their welfare implications
Purpose of Economic Modelling:
● “Solving” the model you built
● Interpreting the solution of your model and using it to explain economic phenomena
and/or behavior of economic agents (consumers, producers, and government)
● The solution should be compatible with two “principles”
● Optimization principle: people try to choose the best patterns of consumption that they
can afford.
● Equilibrium principle: prices adjust until the amount that people demand of something is
equal to the amount that is supplied
A Simple Model in Micro Analysis:
● Modeling an apartment market
a. Supply side: landlords.
b. Demand side: renters.
c. Market equilibrium: # of apartment rented and rental price (thus far, sounds like Econ
160)
d. Specific model assumptions: the distance of apartment (to campus) is close or distant but
otherwise identical; distant apartments’ rents are exogenous and known; many renters
and landlords.
● We just outline the model and indicate some interesting issues of the model
● We do not solve the model
Preparing Notions:
● Exogenous variables: their values are determined outside the model in
consideration(sometimes they are called “parameters)
● Endogenous variables: their values are determined by solving the model
● Equilibrium: the economic agents’ actions must be consistent with each other. (loosely
speaking, the solution of the model).
Chapter I: The Market
Fundamental Issues in Microeconomics:
● Consumers: (D - Demand Side), consumption theory
● Producers: (S - Supply Side), production theory
● Market (D meets S), various forms of market equilibrium
● Market failures, their welfare implications
Purpose of Economic Modelling:
● “Solving” the model you built
● Interpreting the solution of your model and using it to explain economic phenomena
and/or behavior of economic agents (consumers, producers, and government)
● The solution should be compatible with two “principles”
● Optimization principle: people try to choose the best patterns of consumption that they
can afford.
● Equilibrium principle: prices adjust until the amount that people demand of something is
equal to the amount that is supplied
A Simple Model in Micro Analysis:
● Modeling an apartment market
a. Supply side: landlords.
b. Demand side: renters.
c. Market equilibrium: # of apartment rented and rental price (thus far, sounds like Econ
160)
d. Specific model assumptions: the distance of apartment (to campus) is close or distant but
otherwise identical; distant apartments’ rents are exogenous and known; many renters
and landlords.
● We just outline the model and indicate some interesting issues of the model
● We do not solve the model
Preparing Notions:
● Exogenous variables: their values are determined outside the model in
consideration(sometimes they are called “parameters)
● Endogenous variables: their values are determined by solving the model
● Equilibrium: the economic agents’ actions must be consistent with each other. (loosely
speaking, the solution of the model).
