1.7 Building a Demand Function - Class Notes
Contents
Tuesday, February 11, 2020
Overview
Solving a single constrained optimum problem might be useful in certain contexts, but the dynamics of change are more interesting: 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. If we can describe this set of behaviors in an equation and graphically, it is the origin of a demand curve.
Today, we look 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.
Slides
Practice Problems
Today you will be working on practice problems. Answers will be posted there after class.
Assignments: Problem Sets 1, 2, and Exam 1
Problem set 1 (on classes 1.1-1.6) is posted, and is due by Thursday February 13.
Problem set 2 (on classes 1.7-1.9) is also posted, and is due by Thursday February 20. You will not be able to do everything on it until we complete class 1.9.
We will do a review day on Thursday, February 20. Expect Exam 1 to be on Tuesday, February 25.