Question

1.2. What is the difference between a model of real-world behavior and the real world behavior being modeled?

1.3. What is the Walrasian model a model of, and what are the Walrasian model's main characteristics?

1.4a. Explain how the market demand function for good x is derived from the demand functions of the individuals participating in the market. b. Explain how the market demand curve for good x is derived from the market demand function for good x. c. How, if at all, does a change in the price of good x affect the market demand curve for good x? d. How, if at all, does a change in the price of different consumer good or a change in market participants' income affect the market demand curve for good x?

Answer 1

1.2) A model of real world behaviour is kind of dealing with ideas rather than events which simplifies the world and so that we people can be focused on specific thing. This way it automatically builds required structures for our studies. Real world behaviour being model is nothing but everything done already out there.

1.3) The Walrasian model is used in general equilibrium theory which determines how sellers and buyers interact in a market to derive a price which will lead to an equilibrium. This model is based on some of the characteristics as:

i. Fixed tastes and preferences.

ii. Fixed technology.

iii. Free entry and exit.

iv. No Unemployment, etc.

1.4a) Suppose demand function for a good 'x' by a person '1' is x1=h1(px,pyo,mo) and for good 'x' by a person '2' is x2=h2(px,pyo,mo) and by assuming only two individuals in a market, the market demand is the addition of their individual demand functions => x1+x2 = h1(px, pyo, m1o) + h2 (px,pyo, m2o)

1.4b) You will basically select values for py, m1, m2 and fix every other else's income for the price of all goods so=h(px, pyo, m1o, m2o,...,mno) and by taking the market demand and fix all the three variables you will get the market demand curve.

1.4c) If the price of a good goes up, demand will fall and there will be a leftward movement along the demand curve and the same will happen inversely if price goes down. So this means that change in the price of good 'x' affects the quantity demanded in the market but doesn't shift the curve.

1.4d) As the demand function is caught up the price of the other goods and income of the market participants fixed, a change in any of these constraints will cause a shift in the demand curve.