1.7 Building a Demand Function - Class Notes
Contents
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 later today (along with last classes’ problems answers).
Assignments: Problem Sets 1 and 2
Problem set 1 is due by Thursday September 19 (for section 1 - TuTh) or Monday September 23 (for section 2 - MW)
Problem set 2 (on classes 1.7-1.9) will be posted shortly, and is due by Thursday September 26 (for section 1 - TuTh) or Monday September 30 (for section 2 - MW).