1.5 — Demand — Class Content

Contents

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.

Today we will be working on practice problems. Answers will be posted later on that page.

Readings

Slides

Practice

Today we will be working on practice problems. Answers will be posted later on that page.

Assignments

Problem Set 1 Due Wed Feb 17

Problem set 1 (on 1.1-1.4) is due by 11:59 PM Wednesday February 17 by PDF upload to Blackboard Assignments.

Problem Set 2 Due Sun Feb 28

Problem set 2 (on classes 1.6-1.8) is due by 11:59 PM Sunday, February 28 by PDF upload to Blackboard Assignments.

Exam 1 Week of Mar 1

If you see on the schedule, we will quickly complete the materials needed for Exam 1. Expect it to be the week of March 1, with more details coming by early next week.