The Theory of Economics does not furnish a body of settled conclusions immediately applicable to pol

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The Theory of Economics does notfurnish a body
of settled conclusionsimmediately applicable to
policy. It isa method rather than a doctrine,
anapparatus of the mind, a technique ofthinking
which helps its possessor todraw correct
conclusions --- John Maynard Keynes
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Economic Modeling

• What causes what in economic systems?
• At what level of detail shall we model an
  economic phenomenon?
• Which variables are determined outside the model
  (exogenous) and which are to be determined by the
  model (endogenous)?

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Modeling the Flat Rental Market

• How are flats/apartments rents determined?
• Suppose
• flats are close or distant, but otherwise
  identical
• distant flats rents are exogenous and known
• many potential renters and landlords
• Price of close flats is endogenous.

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An Economists concerns Modeling the Apartment
Market

• Who will rent close apartments?
• At what price?
• Will the allocation of apartments be desirable in
  any sense?
• How can we construct an insightful model to
  answer these questions?

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Economic Modeling Assumptions

• Two basic postulates
• Rational Choice Each person tries to choose the
  best alternative available to him or her.
• Competitive Equilibrium Market price adjusts
  until quantity demanded equals quantity supplied.

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Solving

• What does the demand curve look like?
• Supply curve.
• Equilibrium.
• What if there isnt a competitive equilibrium?
• (If there is Monopolist or Rent Control)

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Discrete Demand

• If Jack has a willingness to pay of 300, what
  does that mean.
• Can get far flat at 200. With 100, travel and
  inconvenience costs.
• If pgt300, he wont buy.
• If plt300, he would buy and get surplus of

• Sample Demand
• Bill 200
• Sam 100
• George 300
• Pete 400
• Ted 200

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Pareto Efficiency/Optimality

• Vilfredo Pareto 1848-1923.
• A Pareto outcome allows no wasted welfare
• i.e. the only way one persons welfare can be
  improved is to lower another persons welfare.
• You cant make someone better off without making
  someone else worse off.

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Pareto Optimality/Efficiency

• An allocation is a possible distribution of goods
  in the economy.
• An allocation is Pareto optimal if there does not
  exist another allocation where no one is worse
  off and at least one person is strictly better
  off.
• Bill Ted have 10 between them. What are the
  P.O. allocations?

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Pareto Efficiency

• Jill has an apartment Jack does not.
• Jill values the apartment at 200 Jack would pay
  400 for it.
• Jill could sublet the apartment to Jack for 300.
• Both gain, so it was Pareto inefficient for Jill
  to have the apartment.

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Pareto Efficiency

• Competitive equilibrium
• all close flat renters value them at the market
  price p or more
• all others value close apartments at less than p
• so no mutually beneficial trades remain
• so the outcome is Pareto efficient.

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Pareto Efficiency

• Discriminatory Monopoly
• assignment of flats is the same as with the
  perfectly competitive market
• so the discriminatory monopoly outcome is also
  Pareto efficient.

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Pareto Efficiency

• Monopoly
• not all flats are occupied
• so a distant flat renter could be assigned a
  close flat and have higher welfare without
  lowering anybody elses welfare.
• so the monopoly outcome is Pareto inefficient.

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Pareto Efficiency

• Rent Control
• some close flats are assigned to renters valuing
  them at below the competitive price p
• some renters valuing a close flat above p dont
  get close flats
• Pareto inefficient outcome.