Overview
Solving a one-time constrained optimum problem might be useful in certain contexts, but the dynamics of change are far more interesting and useful: how do people optimally respond to changes in constraints? The remaining few classes before Exam 1 are about how people respond to changes in prices and income.
An individual’s demand function (often just called “demand”) for a particular good describes how that person optimally responds to changes in market conditions. While in truth, many things factor into one’s demand for a good, we are simplifying the model to relate a person’s quantity demanded of a good to three things: the price of that good (“own” price), the price of other goods, and the person’s income. When we look only at the relationship between quantity demanded and the good’s price (holding constant the other two things — other prices, and income), this is the familiar demand curve you see on supply and demand graphs from principles.
Today, we look only at how changes in income or changes in the prices of other goods can affect your quantity demanded for a good.
In doing so, we also introduce a major empirical tool that we will return to many times: an elasticity. You’ve seen one elasticity before: the price elasticity of demand, and probably calculated it using the “midpoint formula.” There’s a lot more to elasticity (and a lot of other kinds of elasticities!) than that. We will see two varieties today, and will spend most of a lecture on price elasticity, two class periods from now.
Readings
- Ch. 5.1, 5.2, 5.4 in Goolsbee, Levitt, and Syverson, 2019
Practice
Today we will be working on practice problems. Answers will be posted later on that page.
Slides
Below, you can find the slides in two formats. Clicking the image will bring you to the html version of the slides in a new tab. Note while in going through the slides, you can type h to see a special list of viewing options, and type o for an outline view of all the slides.
The lower button will allow you to download a PDF version of the slides. I suggest printing the slides beforehand and using them to take additional notes in class (not everything is in the slides)!
Assignments
Problem Set 1 Due Wednesday February 16
Problem set 1 (on 1.1-1.4) is due by class time Wednesday February 16.