Comm 220 - Analysis of Markets

COMM        220

Analysis of        Markets

Final        Review

Arthur Schiller

comm220ta@gmail.com 

Disclaimer:

These slides do not cover all the material needed for the final exam. They are meant to serve as a review of some of the key concepts. Make sure you read the class notes, class slides, and practice answering

the quizzes.  

Topic 1

Building Economic Models

The Endowment Effect

•   Kahneman, Daniel; Jack L. Knetsch, and Richard H. Thaler, “The Endowment Effect, Loss Aversion, and Status Quo Bias,”

•   People ascribe more value to things merely because they own them

•   Goes against the idea of humans being perfectly raOonal economic beings[pic 2]

EXAMPLE: Find Equilibrium Price and Quan;ty In the Following Call Market

STEP 1 – REARRANGE ACCORDING TO PRICE

•          Arrange buyers in descending order
•          Arrange sellers in ascending order

STEP 2 – FIND EQUILIBRIUM

[pic 3][pic 4][pic 5][pic 6][pic 7][pic 8][pic 9][pic 10][pic 11][pic 12][pic 13][pic 14][pic 15]

Equilibrium Quan;ty = 14 + 11 + 11 = 36 Equilibrium Price = ($12 + $7)/2 = $9.50[pic 16][pic 17][pic 18][pic 19][pic 20][pic 21][pic 22]

STEP 3 – ADD/SUBTRACT TAX/SUBSIDY

•          Apply only to the price of the SUPPLIERS

e.x. $2 subsidy

STEP 4 – RE-CALCULATE EQUILIBRIUM

e.x. $2 subsidy[pic 23][pic 24][pic 25][pic 26][pic 27][pic 28][pic 29][pic 30][pic 31][pic 32][pic 33][pic 34][pic 35]

B1

$10

9        S5

$9[pic 36][pic 37][pic 38][pic 39][pic 40][pic 41][pic 42][pic 43][pic 44][pic 45]

X        S4

Equilibrium Quan;ty = 14 + 11 + 11 + 9 = 45 Equilibrium Price = ($10 + $9)/2 = $9.50

$12

Adding to the buyers vs. to the sellers

Note:

While the tax burden or subsidy is shared by the seller and buyer, apply the tax/subsidy only to the price of the seller.

Topic 2

Utility Theory

Consumption Optimum

[pic 46]

Where the slope of the indifference curve meets the slope of the budget line