1 00:00:00,000 --> 00:00:01,976 [SQUEAKING] 2 00:00:01,976 --> 00:00:03,952 [RUSTLING] 3 00:00:03,952 --> 00:00:06,916 [CLICKING] 4 00:00:11,380 --> 00:00:13,940 JONATHAN GRUBER: All right, let's get started. 5 00:00:13,940 --> 00:00:19,370 Today, we are going to complete our discussion of consumer 6 00:00:19,370 --> 00:00:22,760 choice by actually coming back and deriving the demand 7 00:00:22,760 --> 00:00:24,890 curve that we started the semester with, 8 00:00:24,890 --> 00:00:27,970 actually showing you how from the limited set of tools 9 00:00:27,970 --> 00:00:30,470 we've given you we can actually derive the underlying demand 10 00:00:30,470 --> 00:00:32,245 curves that we see in this class. 11 00:00:32,245 --> 00:00:34,370 I'm going to spend the rest of lecture then talking 12 00:00:34,370 --> 00:00:36,600 about the elasticity of demand-- 13 00:00:36,600 --> 00:00:39,380 what determines the shape of that demand curve. 14 00:00:39,380 --> 00:00:43,260 I'll talk about how changes in income affect demand. 15 00:00:43,260 --> 00:00:45,200 And then, we'll come back and talk 16 00:00:45,200 --> 00:00:46,700 about the effects of a price change, 17 00:00:46,700 --> 00:00:49,250 and we'll talk about the theoretical concepts 18 00:00:49,250 --> 00:00:52,010 underneath how you analyze a change in price 19 00:00:52,010 --> 00:00:53,820 in economics model. 20 00:00:53,820 --> 00:00:57,230 So let's start with deriving demand curves. 21 00:01:02,150 --> 00:01:04,670 So we started in this class with the demand supply curve, 22 00:01:04,670 --> 00:01:07,200 and I said we'd tell you where they came from. 23 00:01:07,200 --> 00:01:08,960 So, basically, we're now going to talk 24 00:01:08,960 --> 00:01:12,050 about how do you derive, from the tools we've 25 00:01:12,050 --> 00:01:16,250 learned so far, the relationship between price 26 00:01:16,250 --> 00:01:18,290 and quantity demanded-- 27 00:01:18,290 --> 00:01:19,760 the downward-sloping relationship 28 00:01:19,760 --> 00:01:22,010 between price and quantity demanded that we showed you 29 00:01:22,010 --> 00:01:24,300 in the very first lecture. 30 00:01:24,300 --> 00:01:27,710 So to do so, let's return to our example from last time. 31 00:01:27,710 --> 00:01:29,210 Remember, our example from last time 32 00:01:29,210 --> 00:01:35,600 is utility function was of the form u equals P times c. 33 00:01:35,600 --> 00:01:38,150 Your parents had given you an income 34 00:01:38,150 --> 00:01:44,520 of $72 with which you could buy pizza and cookies, pizza 35 00:01:44,520 --> 00:01:49,620 at a price of $12 and cookies at a price of $6. 36 00:01:52,250 --> 00:01:54,890 That was the parameters in are example from last time. 37 00:01:54,890 --> 00:01:58,310 And once again, remember, all I've done is giving you stuff 38 00:01:58,310 --> 00:01:59,330 here. 39 00:01:59,330 --> 00:02:01,167 Obviously, this part is non-controversial 40 00:02:01,167 --> 00:02:03,500 as a price for pizza in the market, the price of cookies 41 00:02:03,500 --> 00:02:04,400 in the market. 42 00:02:04,400 --> 00:02:05,510 There's an income that's the amount of money 43 00:02:05,510 --> 00:02:06,770 your parents give you. 44 00:02:06,770 --> 00:02:08,150 That's all non-controversial. 45 00:02:08,150 --> 00:02:09,740 And this is just a sensible assumption 46 00:02:09,740 --> 00:02:12,170 of what someone's preferences might look like. 47 00:02:12,170 --> 00:02:15,290 All I'm saying is with these four things, we are done. 48 00:02:15,290 --> 00:02:18,230 With these four things, we can now derive a demand curve. 49 00:02:18,230 --> 00:02:18,890 And how's that? 50 00:02:18,890 --> 00:02:24,200 Well, let's start by looking at it graphically in figure 4-1. 51 00:02:24,200 --> 00:02:28,040 Figure 4-1, on the left-hand side 52 00:02:28,040 --> 00:02:31,490 is exactly the kind of a difference curve analysis 53 00:02:31,490 --> 00:02:33,810 that we did last time. 54 00:02:33,810 --> 00:02:36,010 So we start with budget constraint bc1. 55 00:02:39,127 --> 00:02:40,710 That is something where you can either 56 00:02:40,710 --> 00:02:43,140 get up to 12 cookies and no pizza 57 00:02:43,140 --> 00:02:46,680 or up to 6 pizzas and no cookies. 58 00:02:46,680 --> 00:02:49,320 And we know, from our analysis last time, 59 00:02:49,320 --> 00:02:51,290 given this we showed you last time, 60 00:02:51,290 --> 00:02:53,880 and you went home and practiced and were so excited you told 61 00:02:53,880 --> 00:02:56,340 your mom and everything, we told you 62 00:02:56,340 --> 00:02:58,680 how you could show that you'd want 63 00:02:58,680 --> 00:03:02,990 6 cookies and 3 slices of pizza at a point like point a. 64 00:03:02,990 --> 00:03:04,712 We showed that last time. 65 00:03:04,712 --> 00:03:06,920 Now, we also talked about how when the price changes. 66 00:03:06,920 --> 00:03:10,460 So, for example, imagine that the price of cookies 67 00:03:10,460 --> 00:03:11,330 rises to $9. 68 00:03:14,230 --> 00:03:16,750 Well, we know if the price of cookies rise to $9 69 00:03:16,750 --> 00:03:19,870 is that you could still, on your budget, afford 6 pizzas. 70 00:03:19,870 --> 00:03:21,710 So the y-intercept does not change, 71 00:03:21,710 --> 00:03:24,080 but the x-intercept changes. 72 00:03:24,080 --> 00:03:29,120 Now, you can only afford 8 cookies, so you move to bc2 sub 73 00:03:29,120 --> 00:03:29,890 2. 74 00:03:29,890 --> 00:03:33,340 You used to be able to afford 12 cookies, 75 00:03:33,340 --> 00:03:35,020 now you can only afford 8 cookies. 76 00:03:35,020 --> 00:03:37,840 And most importantly, the slope of the budget constraint 77 00:03:37,840 --> 00:03:39,130 has steepened. 78 00:03:39,130 --> 00:03:42,520 Remember, what is the slope of the budget constraint? 79 00:03:42,520 --> 00:03:44,710 The slope of the budget constraint-- 80 00:03:44,710 --> 00:03:50,380 the slope is minus P c over Pp. 81 00:03:50,380 --> 00:03:51,640 That's the slope. 82 00:03:51,640 --> 00:03:54,490 And that steepened, because the price of cookies has risen. 83 00:03:54,490 --> 00:03:56,335 So you have a steeper budget constraint. 84 00:03:56,335 --> 00:04:00,590 The slope used to be minus 1/2, now it's minus 3/4. 85 00:04:00,590 --> 00:04:03,940 So now, that's gone from minus 1/2 to minus 3/4 86 00:04:03,940 --> 00:04:05,970 with this new higher price for pizza-- 87 00:04:05,970 --> 00:04:06,970 higher price of cookies. 88 00:04:06,970 --> 00:04:07,470 I'm sorry. 89 00:04:07,470 --> 00:04:09,350 The price cookies rose to $9. 90 00:04:09,350 --> 00:04:13,150 That budget constraint has steepened. 91 00:04:13,150 --> 00:04:15,280 What does this do to demand for cookies? 92 00:04:15,280 --> 00:04:19,720 Well, we find the highest tangency of your indifference 93 00:04:19,720 --> 00:04:22,089 curves with this new budget constraint, 94 00:04:22,089 --> 00:04:24,070 and you could solve mathematically 95 00:04:24,070 --> 00:04:28,750 to show that that will occur at point b, where you will choose 96 00:04:28,750 --> 00:04:31,250 to continue to have 3 slices of pizza 97 00:04:31,250 --> 00:04:34,260 but to only have 4 cookies. 98 00:04:34,260 --> 00:04:35,880 That is what happens if you take this, 99 00:04:35,880 --> 00:04:37,560 you do constrained optimization-- 100 00:04:37,560 --> 00:04:41,070 if you change this price to 9, re-optimize the way we showed 101 00:04:41,070 --> 00:04:43,170 you last time, you'd end up finding 102 00:04:43,170 --> 00:04:52,790 that you would want 3 slices of pizza and 4 cookies at point b. 103 00:04:52,790 --> 00:04:58,640 Now, what if instead the price of cookies fell to $4? 104 00:04:58,640 --> 00:05:00,840 So cookies got cheaper. 105 00:05:00,840 --> 00:05:02,670 Well, in that case, now, you could still 106 00:05:02,670 --> 00:05:04,470 only afford 6 slices of pizza. 107 00:05:04,470 --> 00:05:07,540 So the y-intercept once again doesn't change. 108 00:05:07,540 --> 00:05:10,230 But the x-intercept now moves out to 18, 109 00:05:10,230 --> 00:05:12,550 because now you can afford 18 cookies. 110 00:05:12,550 --> 00:05:14,860 So your new budget goes straight is flatter. 111 00:05:14,860 --> 00:05:17,153 It's bc sub 3. 112 00:05:17,153 --> 00:05:19,070 It's the flatter, outermost budget constraint. 113 00:05:19,070 --> 00:05:21,320 Your opportunity set is much larger 114 00:05:21,320 --> 00:05:22,487 because cookies are cheaper. 115 00:05:22,487 --> 00:05:24,653 You have the same amount of money from your parents, 116 00:05:24,653 --> 00:05:27,190 but it can buy more stuff, and you can buy more cookies. 117 00:05:27,190 --> 00:05:29,540 so your opportunity set is larger. 118 00:05:29,540 --> 00:05:33,560 So you now can re-optimize with a now flatter budget 119 00:05:33,560 --> 00:05:34,190 constraint. 120 00:05:34,190 --> 00:05:37,970 The slope, instead of being 1/2, has now fallen to 1/3. 121 00:05:40,510 --> 00:05:42,365 When the price of cookies is $4, the price 122 00:05:42,365 --> 00:05:45,110 of cookies over the price of pizza is now 1/3. 123 00:05:45,110 --> 00:05:50,030 So an absolute value, the slope is lower. 124 00:05:50,030 --> 00:05:53,300 So you can now-- and we say that if you take the same utility 125 00:05:53,300 --> 00:05:56,040 function and optimize at the new price, 126 00:05:56,040 --> 00:05:57,950 at a price of cookies of $4, you will find 127 00:05:57,950 --> 00:06:00,150 that you will choose point c. 128 00:06:00,150 --> 00:06:04,590 Still 3 slices of pizza, but now 9 cookies. 129 00:06:04,590 --> 00:06:07,500 So all three of those points we simply 130 00:06:07,500 --> 00:06:11,300 did by redoing optimization I did last time-- 131 00:06:11,300 --> 00:06:14,690 by taking this utility function, maximizing 132 00:06:14,690 --> 00:06:16,310 it subject to a budget constraint 133 00:06:16,310 --> 00:06:17,760 dictated by these parameters. 134 00:06:17,760 --> 00:06:20,270 And all I did was change this parameter twice. 135 00:06:20,270 --> 00:06:21,200 Once I changed it up. 136 00:06:21,200 --> 00:06:23,250 Once I changed it down. 137 00:06:23,250 --> 00:06:25,690 Questions about that? 138 00:06:25,690 --> 00:06:27,557 Well, you've now derived a demand curve. 139 00:06:27,557 --> 00:06:28,390 Oh, yeah, I'm sorry. 140 00:06:28,390 --> 00:06:29,740 Question. 141 00:06:29,740 --> 00:06:33,015 AUDIENCE: Will this also change the indifference curve? 142 00:06:33,015 --> 00:06:34,890 JONATHAN GRUBER: No, your indifference curves 143 00:06:34,890 --> 00:06:36,070 are determined by utility function. 144 00:06:36,070 --> 00:06:37,390 Your difference curves do not change. 145 00:06:37,390 --> 00:06:38,848 It changes which indifference curve 146 00:06:38,848 --> 00:06:41,258 you end up choosing, because the tangency point changes. 147 00:06:41,258 --> 00:06:43,300 But the only way to change the indifference curve 148 00:06:43,300 --> 00:06:44,850 would be to change utility function. 149 00:06:44,850 --> 00:06:47,058 Indifference curves purely come from this part of it. 150 00:06:47,058 --> 00:06:49,392 So indifference curves come from here, budget constraint 151 00:06:49,392 --> 00:06:50,830 comes from these three pieces. 152 00:06:53,620 --> 00:06:54,125 Yeah? 153 00:06:54,125 --> 00:06:55,625 AUDIENCE: Is it possible [INAUDIBLE] 154 00:06:55,625 --> 00:06:58,330 logical for different indifference curves 155 00:06:58,330 --> 00:07:01,660 in a quite long-range component, is that possible? 156 00:07:01,660 --> 00:07:02,800 JONATHAN GRUBER: Well, no. 157 00:07:02,800 --> 00:07:04,950 But it is possible to take a bunch of demand curves 158 00:07:04,950 --> 00:07:06,400 and conglomerate them to get one demand curve. 159 00:07:06,400 --> 00:07:08,122 And I'm going to talk about that later. 160 00:07:08,122 --> 00:07:10,330 But, no, indifference curves you can't really add up. 161 00:07:10,330 --> 00:07:12,290 Because, remember, utils are not a thing. 162 00:07:12,290 --> 00:07:13,990 So you can't add up indifference curves. 163 00:07:13,990 --> 00:07:16,657 But if we want to add up people, you would add up demand curves. 164 00:07:16,657 --> 00:07:18,510 And we've now derived the demand curve. 165 00:07:18,510 --> 00:07:19,427 How have we done that? 166 00:07:19,427 --> 00:07:20,830 Well, what's a demand curve? 167 00:07:20,830 --> 00:07:22,872 It's the relationship between price and quantity. 168 00:07:22,872 --> 00:07:24,288 Well, I just showed a relationship 169 00:07:24,288 --> 00:07:25,540 between price and quantity. 170 00:07:25,540 --> 00:07:28,890 When the price goes down, quantity of cookies goes up. 171 00:07:28,890 --> 00:07:31,140 When the price goes up, quantity of cookies goes down. 172 00:07:31,140 --> 00:07:34,180 Well, you just shift over to the right-hand side a figure 4-1. 173 00:07:34,180 --> 00:07:35,880 there's a demand curve. 174 00:07:35,880 --> 00:07:37,682 I just graphed these three points, 175 00:07:37,682 --> 00:07:39,640 I just graphed, for each of the different price 176 00:07:39,640 --> 00:07:44,390 of cookies I gave you, how many cookies are demanded. 177 00:07:44,390 --> 00:07:48,170 Well, at a price of cookies of 6, our initial price-- 178 00:07:48,170 --> 00:07:50,300 geez, this is really small-- 179 00:07:50,300 --> 00:07:53,390 6 cookies were demanded. 180 00:07:53,390 --> 00:07:56,360 When the price of cookies goes up to 8-- 181 00:07:56,360 --> 00:07:58,580 I'm sorry, when it goes up to 9-- 182 00:07:58,580 --> 00:08:00,440 only 4 cookies are demanded. 183 00:08:00,440 --> 00:08:03,560 When the price of cookies falls to 4 at point c, 184 00:08:03,560 --> 00:08:05,720 then 9 cookies are demanded. 185 00:08:05,720 --> 00:08:08,690 So literally, we've just derived the demand curve. 186 00:08:08,690 --> 00:08:12,585 Starting with these primitives-- your tastes, your preferences-- 187 00:08:12,585 --> 00:08:14,960 and your budget constraint, we've derived a demand curve. 188 00:08:14,960 --> 00:08:15,710 And That's it. 189 00:08:15,710 --> 00:08:18,990 That's where demand curves come from. 190 00:08:18,990 --> 00:08:24,863 And that's essentially what is underneath the demand curve. 191 00:08:24,863 --> 00:08:26,280 What's underneath the demand curve 192 00:08:26,280 --> 00:08:31,260 is the fact that the reason to demand curves slope down 193 00:08:31,260 --> 00:08:35,298 is that as the price goes up, you want less of the good. 194 00:08:35,298 --> 00:08:37,840 Because with the given utility functions, that price goes up, 195 00:08:37,840 --> 00:08:38,923 you want less of the good. 196 00:08:38,923 --> 00:08:41,010 And that's why demand curve slopes down. 197 00:08:41,010 --> 00:08:43,440 So we've just derived that. 198 00:08:43,440 --> 00:08:45,060 Questions about that? 199 00:08:45,060 --> 00:08:45,760 Yeah? 200 00:08:45,760 --> 00:08:48,680 AUDIENCE: Is it always true that regardless of your utility 201 00:08:48,680 --> 00:08:51,837 function, you will always want three [INAUDIBLE].. 202 00:08:51,837 --> 00:08:53,170 JONATHAN GRUBER: Great question. 203 00:08:53,170 --> 00:08:54,730 Did you peek at my notes? 204 00:08:54,730 --> 00:08:55,230 No. 205 00:08:55,230 --> 00:08:56,647 Because if you had, you would have 206 00:08:56,647 --> 00:08:59,030 seen that's exactly the question I would have asked you. 207 00:08:59,030 --> 00:09:00,613 So since you asked me, I'll answer it. 208 00:09:00,613 --> 00:09:02,260 No, it is not always true. 209 00:09:02,260 --> 00:09:05,880 In fact, that is a feature of this particular utility 210 00:09:05,880 --> 00:09:07,440 function I've chosen. 211 00:09:07,440 --> 00:09:09,660 This particular utility function I've chosen 212 00:09:09,660 --> 00:09:13,500 gives the feature that the demand for a good 213 00:09:13,500 --> 00:09:16,890 is a function only of your income and that good's price, 214 00:09:16,890 --> 00:09:18,750 not of the other good's price. 215 00:09:18,750 --> 00:09:19,840 That's a feature of this. 216 00:09:19,840 --> 00:09:21,980 That's why we like this utility function. 217 00:09:21,980 --> 00:09:23,490 It has that nice feature. 218 00:09:23,490 --> 00:09:25,760 In general, that's not true. 219 00:09:25,760 --> 00:09:28,220 In general, when the price of one good changes, 220 00:09:28,220 --> 00:09:31,310 it will affect the demand for all goods, not just that good 221 00:09:31,310 --> 00:09:32,013 itself. 222 00:09:32,013 --> 00:09:33,680 So with a more general utility function, 223 00:09:33,680 --> 00:09:34,700 that would not be true. 224 00:09:34,700 --> 00:09:36,560 With this utility function, it gives 225 00:09:36,560 --> 00:09:39,030 what's called the flat price consumption curve-- 226 00:09:39,030 --> 00:09:40,580 not a term you need to know, but just 227 00:09:40,580 --> 00:09:41,832 if you want be more technical. 228 00:09:41,832 --> 00:09:43,790 Which is basically, with this utility function, 229 00:09:43,790 --> 00:09:46,310 demand for any good is a function only of its own price 230 00:09:46,310 --> 00:09:47,180 and your income. 231 00:09:47,180 --> 00:09:48,680 Therefore, when other prices change, 232 00:09:48,680 --> 00:09:50,150 it doesn't affect the demand for that good. 233 00:09:50,150 --> 00:09:51,710 But that is not generally true. 234 00:09:51,710 --> 00:09:54,140 In general, when you change the price of one good, 235 00:09:54,140 --> 00:09:55,550 demand for all goods changes. 236 00:09:59,540 --> 00:10:02,135 Questions about that? 237 00:10:02,135 --> 00:10:02,635 Yeah? 238 00:10:02,635 --> 00:10:05,473 AUDIENCE: Is this why it shows 3 as a constant, and just-- 239 00:10:05,473 --> 00:10:07,390 JONATHAN GRUBER: Oh, it wouldn't have mattered 240 00:10:07,390 --> 00:10:08,830 what number I'd chosen. 241 00:10:08,830 --> 00:10:10,363 But the bottom line is as the price 242 00:10:10,363 --> 00:10:12,280 of cookies changes, the number of pizza slices 243 00:10:12,280 --> 00:10:13,540 would never change. 244 00:10:13,540 --> 00:10:14,800 Demand would never change. 245 00:10:14,800 --> 00:10:17,050 That's a feature of this particular utility function. 246 00:10:17,050 --> 00:10:18,850 It's a nice feature of it. 247 00:10:18,850 --> 00:10:22,480 Once again, that comes to this trade with modeling. 248 00:10:22,480 --> 00:10:25,470 I've chosen a simplified utility function with this nice feature 249 00:10:25,470 --> 00:10:27,910 that's almost certainly not true. 250 00:10:27,910 --> 00:10:30,910 But once again it allowed us to derive a very sensible demand 251 00:10:30,910 --> 00:10:35,310 curve without introducing other complications. 252 00:10:35,310 --> 00:10:41,010 Now, this demand curve's particular shape, 253 00:10:41,010 --> 00:10:43,510 what determines the shape of this demand curve? 254 00:10:43,510 --> 00:10:46,540 And that leads us to the second topic I want to cover today, 255 00:10:46,540 --> 00:10:48,690 which is the elasticity of demand. 256 00:11:00,520 --> 00:11:04,110 What determines the shape of a demand curve 257 00:11:04,110 --> 00:11:09,390 is what we call the elasticity of demand, which we define 258 00:11:09,390 --> 00:11:12,390 the elasticity of demand, epsilon, 259 00:11:12,390 --> 00:11:19,430 as delta Q over Q over delta P over P. 260 00:11:19,430 --> 00:11:21,990 It's the percentage change in quantity for a percentage 261 00:11:21,990 --> 00:11:24,170 change in price. 262 00:11:24,170 --> 00:11:25,810 So, for example, if quantity falls 263 00:11:25,810 --> 00:11:29,010 by 2% for every 1% increase in price, 264 00:11:29,010 --> 00:11:31,510 that's an elasticity demand of negative 2. 265 00:11:31,510 --> 00:11:33,640 So elasticity of demand, as long as demand curves 266 00:11:33,640 --> 00:11:36,210 are downward-sloping, is less than 0. 267 00:11:36,210 --> 00:11:37,960 Because the price goes up, quantity falls. 268 00:11:40,650 --> 00:11:42,720 So elasticity of demand is less than 0-- 269 00:11:46,150 --> 00:11:49,020 I'm sorry, less than or equal to 0. 270 00:11:49,020 --> 00:11:49,520 Yeah? 271 00:11:49,520 --> 00:11:50,790 AUDIENCE: Is this the change in quantity 272 00:11:50,790 --> 00:11:52,817 over the new quantity or the the old quantity? 273 00:11:52,817 --> 00:11:54,150 JONATHAN GRUBER: Great question. 274 00:11:54,150 --> 00:11:57,700 When we're doing this, if we did it in calculus, 275 00:11:57,700 --> 00:11:59,645 it would be infinitesimal epsilon change. 276 00:11:59,645 --> 00:12:01,770 So it wouldn't matter if it was new or old quality. 277 00:12:01,770 --> 00:12:05,310 When you do it discreetly, use the old quantity. 278 00:12:05,310 --> 00:12:08,013 So I should say, Q0 and P0. 279 00:12:08,013 --> 00:12:09,680 Once again, if you did this in calculus, 280 00:12:09,680 --> 00:12:10,630 which is the way we're sort of thinking 281 00:12:10,630 --> 00:12:12,040 about in our underlying intuition, 282 00:12:12,040 --> 00:12:12,998 it's an epsilon change. 283 00:12:12,998 --> 00:12:14,620 So Q0 and P0 are epsilon. 284 00:12:14,620 --> 00:12:15,890 It doesn't really matter. 285 00:12:15,890 --> 00:12:19,367 But if you do it discretely, you'd want to use Q0 and P0. 286 00:12:19,367 --> 00:12:20,450 These are great questions. 287 00:12:20,450 --> 00:12:22,280 Keep them coming. 288 00:12:22,280 --> 00:12:25,820 Now, whenever we think of constant elasticity, 289 00:12:25,820 --> 00:12:28,290 it's always useful to think about the extremes. 290 00:12:28,290 --> 00:12:29,998 So what are the extremes of this measure? 291 00:12:29,998 --> 00:12:34,380 One extreme would be if the elasticity demand was 0. 292 00:12:34,380 --> 00:12:40,830 We would call that perfectly inelastic demand. 293 00:12:40,830 --> 00:12:43,410 It would be epsilon equals 0. 294 00:12:43,410 --> 00:12:46,950 Now, extremes never exist in the real world. 295 00:12:46,950 --> 00:12:49,950 But there are cases that come very close. 296 00:12:49,950 --> 00:12:52,407 So can someone, without flipping the page of the handout-- 297 00:12:52,407 --> 00:12:54,990 don't do it, because before you flip the page of the handout-- 298 00:12:54,990 --> 00:12:56,365 give me an example of a good that 299 00:12:56,365 --> 00:13:00,150 might have perfectly, in a very, very, very inelastic demand, 300 00:13:00,150 --> 00:13:03,730 where no matter the price, you'd still want the same quantity. 301 00:13:03,730 --> 00:13:04,370 Yeah. 302 00:13:04,370 --> 00:13:05,270 AUDIENCE: Water. 303 00:13:05,270 --> 00:13:07,823 You have to consume it to live. 304 00:13:07,823 --> 00:13:09,240 JONATHAN GRUBER: Water-- something 305 00:13:09,240 --> 00:13:10,740 that's essential to life like water. 306 00:13:10,740 --> 00:13:11,280 What else? 307 00:13:11,280 --> 00:13:12,210 Yeah, in the way back. 308 00:13:12,210 --> 00:13:13,290 AUDIENCE: Insulin. 309 00:13:13,290 --> 00:13:15,720 JONATHAN GRUBER: Insulin is the classic example we use. 310 00:13:15,720 --> 00:13:16,220 Yeah? 311 00:13:16,220 --> 00:13:17,422 AUDIENCE: Sewage removal. 312 00:13:17,422 --> 00:13:19,380 JONATHAN GRUBER: Sewage removal is interesting. 313 00:13:19,380 --> 00:13:22,560 Although, not quite, because we see a lot of variation 314 00:13:22,560 --> 00:13:24,210 around the world in sewage removal. 315 00:13:24,210 --> 00:13:26,430 But something like that-- basic essentials of life. 316 00:13:26,430 --> 00:13:28,200 Insulin's a class example we use. 317 00:13:28,200 --> 00:13:30,653 Indeed, that's the example I do you use in the next-- oh, 318 00:13:30,653 --> 00:13:32,070 I guess I didn't list it ion here. 319 00:13:32,070 --> 00:13:33,503 So you could have turned the page. 320 00:13:33,503 --> 00:13:35,670 We think about perfectly inelastic demand-- someone, 321 00:13:35,670 --> 00:13:37,320 once again for those of you who don't 322 00:13:37,320 --> 00:13:38,910 know about the medical science here, basically, 323 00:13:38,910 --> 00:13:40,650 if you're diabetic, you have trouble controlling your blood 324 00:13:40,650 --> 00:13:41,340 sugar. 325 00:13:41,340 --> 00:13:43,020 Insulin is a medicine you need to take to help 326 00:13:43,020 --> 00:13:44,228 you control your blood sugar. 327 00:13:44,228 --> 00:13:46,060 Without it, you die. 328 00:13:46,060 --> 00:13:48,100 So you'd think that's pretty inelastic demand. 329 00:13:48,100 --> 00:13:49,720 Like, I want to live, so I'm going 330 00:13:49,720 --> 00:13:51,100 to want to have my insulin. 331 00:13:51,100 --> 00:13:52,475 And if the price goes up, I'm not 332 00:13:52,475 --> 00:13:54,430 going to say, nah, I'll just die. 333 00:13:54,430 --> 00:13:56,410 You're going to want to still have the insulin. 334 00:13:56,410 --> 00:13:58,070 So we think in that case, quantum 335 00:13:58,070 --> 00:14:01,870 would be fixed at some Q, which is insulin you need to live, 336 00:14:01,870 --> 00:14:04,280 and it wouldn't really matter what the price is. 337 00:14:04,280 --> 00:14:05,830 So your elasticity would be 0. 338 00:14:05,830 --> 00:14:10,840 You have a perfectly inelastic curve. 339 00:14:10,840 --> 00:14:13,720 Quantity would not change with price. 340 00:14:13,720 --> 00:14:16,470 Basically, that would happen when there 341 00:14:16,470 --> 00:14:19,928 is no plausible substitute. 342 00:14:19,928 --> 00:14:22,220 The reason water is not as good as insulin is because I 343 00:14:22,220 --> 00:14:24,230 can drink something else. 344 00:14:24,230 --> 00:14:26,810 And sewage removal, I can do other things 345 00:14:26,810 --> 00:14:28,460 to deal with the sewage in my house. 346 00:14:28,460 --> 00:14:29,990 But insulin, there is no substitute. 347 00:14:29,990 --> 00:14:31,700 I die. 348 00:14:31,700 --> 00:14:35,720 So basically, the bottom line is, 349 00:14:35,720 --> 00:14:37,890 when there's no plausible substitute, 350 00:14:37,890 --> 00:14:40,710 demand will be perfectly inelastic. 351 00:14:40,710 --> 00:14:43,690 Likewise, we consider-- yeah? 352 00:14:43,690 --> 00:14:46,320 AUDIENCE: Can there be multiple companies that sell insulin? 353 00:14:46,320 --> 00:14:48,103 So if one, say, increased the price, 354 00:14:48,103 --> 00:14:49,270 they would shift to another. 355 00:14:49,270 --> 00:14:51,000 JONATHAN GRUBER: OK, but this is a market-- 356 00:14:51,000 --> 00:14:51,875 that's a great point. 357 00:14:51,875 --> 00:14:54,180 I'm just doing this as-- 358 00:14:54,180 --> 00:14:56,190 let's actually image just one company for now. 359 00:14:56,190 --> 00:15:00,390 You're right, I'm not doing choice across companies. 360 00:15:00,390 --> 00:15:02,580 So that would be inelastic. 361 00:15:02,580 --> 00:15:04,920 We could also do the other extreme, perfectly elastic. 362 00:15:04,920 --> 00:15:05,820 So what's an example? 363 00:15:05,820 --> 00:15:14,340 Perfectly elastic demand is that epsilon 364 00:15:14,340 --> 00:15:18,330 equals negative infinity. 365 00:15:18,330 --> 00:15:22,840 So what would cause perfectly inelastic demand? 366 00:15:22,840 --> 00:15:25,690 So people raise their hand and tell me. 367 00:15:25,690 --> 00:15:28,810 Perfectly elastic demand-- I'm sorry. 368 00:15:28,810 --> 00:15:31,771 What would cause perfectly elastic demand? 369 00:15:31,771 --> 00:15:33,208 What would cause it? 370 00:15:33,208 --> 00:15:35,500 I'm just going to try to spread it around a little bit. 371 00:15:35,500 --> 00:15:36,120 You two have been-- 372 00:15:36,120 --> 00:15:36,200 Yeah 373 00:15:36,200 --> 00:15:38,820 AUDIENCE: Would it be something that's very unnecessary, 374 00:15:38,820 --> 00:15:40,760 like diamonds? 375 00:15:40,760 --> 00:15:44,250 JONATHAN GRUBER: Well, that's interesting. 376 00:15:44,250 --> 00:15:46,167 I mean, that's not-- 377 00:15:46,167 --> 00:15:47,250 I'm going to come to that. 378 00:15:47,250 --> 00:15:49,667 But that wouldn't-- that's something where demand would be 379 00:15:49,667 --> 00:15:51,990 less elastic, but not close to perfectly elastic. 380 00:15:51,990 --> 00:15:54,900 Because, basically-- well, let me ask the question this way-- 381 00:15:54,900 --> 00:15:57,840 what would drive a good to very, very elastic demand in general? 382 00:15:57,840 --> 00:15:58,340 Yeah? 383 00:15:58,340 --> 00:16:00,510 AUDIENCE: When it has perfect substitution-- 384 00:16:00,510 --> 00:16:00,870 [INTERPOSING VOICES] 385 00:16:00,870 --> 00:16:01,912 JONATHAN GRUBER: Exactly. 386 00:16:01,912 --> 00:16:02,820 Perfect substitutes. 387 00:16:02,820 --> 00:16:04,913 Diamonds don't have perfect substitutes. 388 00:16:04,913 --> 00:16:07,080 I mean, we're increasingly making fake diamonds that 389 00:16:07,080 --> 00:16:08,550 are better and better substitutes, 390 00:16:08,550 --> 00:16:10,440 but a real diamond still doesn't have a perfect substitute. 391 00:16:10,440 --> 00:16:11,010 So what does? 392 00:16:11,010 --> 00:16:13,200 What's an example of something with a good-- 393 00:16:13,200 --> 00:16:15,148 with a very good substitute? 394 00:16:15,148 --> 00:16:16,159 AUDIENCE: I don't know. 395 00:16:16,159 --> 00:16:17,076 JONATHAN GRUBER: Yeah? 396 00:16:17,076 --> 00:16:18,808 AUDIENCE: A spork. 397 00:16:18,808 --> 00:16:19,850 JONATHAN GRUBER: A spork. 398 00:16:19,850 --> 00:16:21,980 [LAUGHTER] 399 00:16:21,980 --> 00:16:23,060 There is no sub-- 400 00:16:23,060 --> 00:16:28,130 I am insulted that you would suggest that the great spork! 401 00:16:28,130 --> 00:16:30,775 You need two different things to replace a spork! 402 00:16:30,775 --> 00:16:32,900 AUDIENCE: You're never using both at the same time. 403 00:16:32,900 --> 00:16:35,493 So if the price increases-- you never-- 404 00:16:35,493 --> 00:16:36,410 JONATHAN GRUBER: Yeah. 405 00:16:36,410 --> 00:16:37,820 But then you have to buy a spoon and a fork. 406 00:16:37,820 --> 00:16:39,380 No, I reject your spork suggestion. 407 00:16:39,380 --> 00:16:42,423 [LAUGHTER] 408 00:16:42,423 --> 00:16:43,090 I'm just joking. 409 00:16:43,090 --> 00:16:43,890 No, but what else? 410 00:16:43,890 --> 00:16:44,910 What else? 411 00:16:44,910 --> 00:16:46,350 What is something that has really good substitutes? 412 00:16:46,350 --> 00:16:46,510 Yeah? 413 00:16:46,510 --> 00:16:48,100 AUDIENCE: Off-brand medication. 414 00:16:48,100 --> 00:16:48,710 JONATHAN GRUBER: Yeah. 415 00:16:48,710 --> 00:16:50,502 Something which is an off-brand medication, 416 00:16:50,502 --> 00:16:53,210 or I like to think of a fast food, 417 00:16:53,210 --> 00:16:56,270 like fast food burgers have pretty good substitutes 418 00:16:56,270 --> 00:16:58,710 with fast food pizza. 419 00:16:58,710 --> 00:17:01,360 Basically, once again, it's hard to think an extreme example. 420 00:17:01,360 --> 00:17:03,050 Nothing's ever perfectly elastic. 421 00:17:03,050 --> 00:17:06,579 But things which have very good substitutes-- 422 00:17:06,579 --> 00:17:09,020 typically this works well when we think across brands. 423 00:17:09,020 --> 00:17:11,250 If you think about different brands of gum. 424 00:17:11,250 --> 00:17:11,750 Jeez. 425 00:17:11,750 --> 00:17:13,310 I mean, who the hell cares? 426 00:17:13,310 --> 00:17:15,109 Or different brands of fast food. 427 00:17:15,109 --> 00:17:15,626 Yeah? 428 00:17:15,626 --> 00:17:17,501 AUDIENCE: What about something like a $5 gift 429 00:17:17,501 --> 00:17:21,432 card, where after $5 nobody's going to buy it. 430 00:17:21,432 --> 00:17:23,140 JONATHAN GRUBER: That's a separate issue. 431 00:17:23,140 --> 00:17:23,569 Let's come back. 432 00:17:23,569 --> 00:17:24,986 That's sort of a separate-- that's 433 00:17:24,986 --> 00:17:27,069 like a weird, kinked budget constraint. 434 00:17:27,069 --> 00:17:28,760 That's not really about substitution. 435 00:17:28,760 --> 00:17:32,120 But the bottom line is-- we don't need any more examples-- 436 00:17:32,120 --> 00:17:35,060 the key element-- and we show that in figure 4-3. 437 00:17:35,060 --> 00:17:37,820 That's going to be a horizontal demand curve. 438 00:17:37,820 --> 00:17:39,320 With a perfectly elastic demand, you 439 00:17:39,320 --> 00:17:40,612 have a horizontal demand curve. 440 00:17:40,612 --> 00:17:43,825 And therefore, price never changes. 441 00:17:48,130 --> 00:17:49,750 It's sort of a weird way to think 442 00:17:49,750 --> 00:17:50,917 of perfectly elastic demand. 443 00:17:50,917 --> 00:17:54,340 The way it works is if I ever charge 444 00:17:54,340 --> 00:17:59,140 a price 1 epsilon above someone else, I'd lose all my business. 445 00:17:59,140 --> 00:18:01,970 And if I charge a price 1 epsilon below everyone else, 446 00:18:01,970 --> 00:18:04,250 I would have the entire market. 447 00:18:04,250 --> 00:18:05,780 Because if it's perfectly elastic, 448 00:18:05,780 --> 00:18:07,083 like if one pack of gum-- 449 00:18:07,083 --> 00:18:08,750 I don't what-- these stupid gum things-- 450 00:18:08,750 --> 00:18:10,640 Orbits and Ellipse or whatever, if they 451 00:18:10,640 --> 00:18:13,400 charge a penny more than someone else, no would buy them. 452 00:18:13,400 --> 00:18:14,900 They'd go out of business. 453 00:18:14,900 --> 00:18:15,950 That's the idea here. 454 00:18:15,950 --> 00:18:17,798 And that's why the price can't change. 455 00:18:17,798 --> 00:18:18,590 The price is fixed. 456 00:18:18,590 --> 00:18:21,110 So if anyone deviates from that price, boom, 457 00:18:21,110 --> 00:18:22,460 they lose the whole market. 458 00:18:22,460 --> 00:18:22,960 Yeah? 459 00:18:22,960 --> 00:18:25,430 AUDIENCE: So wouldn't the market for dollar bills 460 00:18:25,430 --> 00:18:28,160 be perfectly elastic? 461 00:18:28,160 --> 00:18:29,110 Like-- 462 00:18:29,110 --> 00:18:29,540 JONATHAN GRUBER: There's not really 463 00:18:29,540 --> 00:18:30,623 a market for dollar bills. 464 00:18:30,623 --> 00:18:31,457 [INTERPOSING VOICES] 465 00:18:31,457 --> 00:18:32,530 AUDIENCE: --dollar bills. 466 00:18:32,530 --> 00:18:33,260 JONATHAN GRUBER: There's not really-- 467 00:18:33,260 --> 00:18:35,930 I mean, you could say the demand for cash in general 468 00:18:35,930 --> 00:18:38,180 might be fairly elastic, because you have credit cards 469 00:18:38,180 --> 00:18:38,810 and things like that. 470 00:18:38,810 --> 00:18:39,980 That's an interesting idea. 471 00:18:39,980 --> 00:18:40,880 Yeah. 472 00:18:40,880 --> 00:18:43,910 So, basically, when you have perfectly elastic demand, 473 00:18:43,910 --> 00:18:45,860 you end up with sort of this constant price, 474 00:18:45,860 --> 00:18:50,270 and quantity changes but price doesn't change. 475 00:18:50,270 --> 00:18:52,760 So that's kind of the extremes. 476 00:18:52,760 --> 00:18:59,060 Now, in general, we have goods that are more and less elastic. 477 00:18:59,060 --> 00:19:01,900 In general, we end up with this range between perfectly elastic 478 00:19:01,900 --> 00:19:02,960 and perfectly inelastic. 479 00:19:02,960 --> 00:19:05,600 The bottom line is-- here's the intuition I want you to have-- 480 00:19:05,600 --> 00:19:08,870 what determines elasticity is substitutability. 481 00:19:08,870 --> 00:19:10,640 The more substitutable goods are, 482 00:19:10,640 --> 00:19:14,260 the more elastically demanded they are. 483 00:19:14,260 --> 00:19:21,310 So now, I want to go on to another topic which is related. 484 00:19:21,310 --> 00:19:24,300 Which is, we talked in our example 485 00:19:24,300 --> 00:19:26,890 about what happened when I change prices. 486 00:19:26,890 --> 00:19:29,100 What about when I change income? 487 00:19:29,100 --> 00:19:31,050 So the third topic I want to talk about 488 00:19:31,050 --> 00:19:34,680 is what happens when income shifts, 489 00:19:34,680 --> 00:19:37,230 and how does that affect demand curves? 490 00:19:37,230 --> 00:19:41,400 When income shifts, how does that affect demand curves? 491 00:19:41,400 --> 00:19:43,947 Well, we could do the same exercise we did before. 492 00:19:43,947 --> 00:19:45,030 We did an exercise before. 493 00:19:45,030 --> 00:19:46,680 We said, well, let's just use the tools 494 00:19:46,680 --> 00:19:49,040 we used before to solve for you new choices 495 00:19:49,040 --> 00:19:50,170 at different prices. 496 00:19:50,170 --> 00:19:51,880 Let's just solve for you new choice at a different income. 497 00:19:51,880 --> 00:19:52,963 So let's go to figure 4-4. 498 00:19:56,810 --> 00:20:01,280 Figure 4-4, once again we start with bc1. 499 00:20:01,280 --> 00:20:04,670 Same parameters as before-- same setup as before. 500 00:20:04,670 --> 00:20:06,770 We choose point a. 501 00:20:06,770 --> 00:20:14,100 Now, let's say I raise your income from $72 to $96. 502 00:20:14,100 --> 00:20:14,880 You've done well. 503 00:20:14,880 --> 00:20:16,547 Your parents are giving you more money-- 504 00:20:16,547 --> 00:20:17,610 $96. 505 00:20:17,610 --> 00:20:19,230 Well, in that case you will choose 506 00:20:19,230 --> 00:20:22,800 to have both more pizza and more cookies. 507 00:20:22,800 --> 00:20:27,475 Given this utility function, you will choose the point b. 508 00:20:30,640 --> 00:20:34,180 You will choose point b. 509 00:20:34,180 --> 00:20:40,190 Likewise, if I lower your income from $70 to $48, 510 00:20:40,190 --> 00:20:44,330 then you will choose point c. 511 00:20:44,330 --> 00:20:46,580 So as your income goes up, you'll choose more of both. 512 00:20:46,580 --> 00:20:50,270 As your income goes down, you choose less of both. 513 00:20:50,270 --> 00:20:53,237 Now, once again, you'll notice this-- 514 00:20:53,237 --> 00:20:54,320 well, let me come to that. 515 00:20:54,320 --> 00:20:57,380 So basically, what that says is I can trace out 516 00:20:57,380 --> 00:21:01,130 the relationship between how your income changes, 517 00:21:01,130 --> 00:21:02,690 how you demand for cookies change. 518 00:21:02,690 --> 00:21:05,450 I can then graph that on the next graph 519 00:21:05,450 --> 00:21:08,030 and generate what's called the Engel curve. 520 00:21:08,030 --> 00:21:10,520 The Engel curve is the relationship 521 00:21:10,520 --> 00:21:12,700 between income and quantity demanded. 522 00:21:12,700 --> 00:21:15,112 And we'll come back to why this matters. 523 00:21:15,112 --> 00:21:16,570 The Engel curve is the relationship 524 00:21:16,570 --> 00:21:17,420 between income and quantity demanded. 525 00:21:17,420 --> 00:21:19,015 Now, here the Engel curve is linear. 526 00:21:19,015 --> 00:21:20,390 Once again, that's just a feature 527 00:21:20,390 --> 00:21:22,140 of this utility function. 528 00:21:22,140 --> 00:21:24,002 In general, it doesn't have to be linear. 529 00:21:24,002 --> 00:21:25,460 But here the Engel curve is linear. 530 00:21:25,460 --> 00:21:27,835 That's just because of the way we structured this utility 531 00:21:27,835 --> 00:21:30,030 function. 532 00:21:30,030 --> 00:21:33,650 And the slope of the Engel curve is 533 00:21:33,650 --> 00:21:40,060 what we call the income elasticity of demand, gamma, 534 00:21:40,060 --> 00:21:42,915 which is delta Q over Q-- 535 00:21:42,915 --> 00:21:46,080 Q0 once again, if we're doing it discreetly-- 536 00:21:46,080 --> 00:21:49,210 over delta y over y0. 537 00:21:49,210 --> 00:21:51,610 That's the income elasticity of demand. 538 00:21:55,750 --> 00:22:01,380 Now, let me just say one comment here about this. 539 00:22:01,380 --> 00:22:03,720 Because there's sort of a big cheat 540 00:22:03,720 --> 00:22:05,850 that I'm doing here with all this 541 00:22:05,850 --> 00:22:07,550 that I need you guys to be aware of, 542 00:22:07,550 --> 00:22:12,970 which is constant elasticity versus linear curves. 543 00:22:12,970 --> 00:22:16,785 We know a constant elasticity curve will not be linear. 544 00:22:16,785 --> 00:22:18,660 If it's linear, it's not constant elasticity, 545 00:22:18,660 --> 00:22:20,940 because if it's linear, the elasticity 546 00:22:20,940 --> 00:22:23,400 will change along the curve. 547 00:22:23,400 --> 00:22:24,940 So the demand curve. 548 00:22:24,940 --> 00:22:28,020 I just drew in figure 4-1, that was 549 00:22:28,020 --> 00:22:29,910 a constant elasticity demand curve. 550 00:22:29,910 --> 00:22:31,790 That's why it was curved. 551 00:22:31,790 --> 00:22:34,070 This Engel curve I drew here would not 552 00:22:34,070 --> 00:22:36,070 be constant elasticity, because it's linear. 553 00:22:36,070 --> 00:22:40,100 You can calculate for yourself that the percentage change, 554 00:22:40,100 --> 00:22:43,350 the income elasticity will shift as you go along this curve. 555 00:22:43,350 --> 00:22:45,910 And you can show yourself that. 556 00:22:45,910 --> 00:22:47,930 What we're going to do in this class 557 00:22:47,930 --> 00:22:51,630 is we're going to draw linear constant elasticity curves, 558 00:22:51,630 --> 00:22:53,810 which is, of course, technically wrong. 559 00:22:53,810 --> 00:22:56,450 Just think of them as blown up versions of a large demand 560 00:22:56,450 --> 00:22:56,950 curve. 561 00:22:56,950 --> 00:22:58,370 Everything is locally linear. 562 00:22:58,370 --> 00:23:01,440 Once again, for an epsilon change, everything is linear. 563 00:23:01,440 --> 00:23:04,140 So the truth is we'll cheat a little bit 564 00:23:04,140 --> 00:23:06,540 and often draw a linear constant elasticity curves. 565 00:23:06,540 --> 00:23:09,550 And I want to own that that's a cheat. 566 00:23:09,550 --> 00:23:12,310 But if everything is really local, 567 00:23:12,310 --> 00:23:15,660 it's not that bad a cheat. 568 00:23:15,660 --> 00:23:17,035 So that's kind of how we're going 569 00:23:17,035 --> 00:23:19,035 to-- that's a cheat we're going to do constantly 570 00:23:19,035 --> 00:23:19,980 through this course. 571 00:23:19,980 --> 00:23:21,697 And we'll be very clear-- 572 00:23:21,697 --> 00:23:23,280 we make clear any problems or anything 573 00:23:23,280 --> 00:23:28,390 if we need you to deviate from that. 574 00:23:28,390 --> 00:23:32,530 Now, what we have here, in addition to a linear Engel 575 00:23:32,530 --> 00:23:35,800 curve, is we have an upward-sloping Engel curve 576 00:23:35,800 --> 00:23:37,840 or positive income elasticity. 577 00:23:37,840 --> 00:23:45,150 We call goods with a positive income elasticity normal goods. 578 00:23:45,150 --> 00:23:47,790 Goods where the more money you have, the more of them 579 00:23:47,790 --> 00:23:51,120 you want, we call normal goods. 580 00:23:51,120 --> 00:23:53,130 Because that's sort of normal. 581 00:23:53,130 --> 00:23:57,480 However, it is also true that a number of goods in the world 582 00:23:57,480 --> 00:23:59,850 actually have gamma less than 0. 583 00:23:59,850 --> 00:24:03,730 And we call those inferior goods. 584 00:24:03,730 --> 00:24:05,350 Why would a good be inferior? 585 00:24:05,350 --> 00:24:07,437 Why, when your income goes up-- yeah? 586 00:24:07,437 --> 00:24:11,138 AUDIENCE: [INAUDIBLE]. 587 00:24:11,138 --> 00:24:12,180 JONATHAN GRUBER: Exactly. 588 00:24:12,180 --> 00:24:13,800 Any examples anyone can think of? 589 00:24:13,800 --> 00:24:14,300 Yeah? 590 00:24:14,300 --> 00:24:17,130 AUDIENCE: Maybe at a fast food restaurant. 591 00:24:17,130 --> 00:24:19,120 The minimum amount of food you have to eat. 592 00:24:19,120 --> 00:24:21,032 And then, like, [INAUDIBLE] your fast food, 593 00:24:21,032 --> 00:24:22,490 and then I have to get more money-- 594 00:24:22,490 --> 00:24:22,930 [INTERPOSING VOICES] 595 00:24:22,930 --> 00:24:23,590 JONATHAN GRUBER: Exactly. 596 00:24:23,590 --> 00:24:24,173 Great example. 597 00:24:24,173 --> 00:24:25,000 Yeah, in the back. 598 00:24:25,000 --> 00:24:29,055 AUDIENCE: Omega watches versus Rolex watches. 599 00:24:29,055 --> 00:24:31,180 JONATHAN GRUBER: I wouldn't think of either of them 600 00:24:31,180 --> 00:24:31,800 as inferior. 601 00:24:31,800 --> 00:24:33,502 Relative they may be inferior. 602 00:24:33,502 --> 00:24:35,210 But, obviously, when your income goes up, 603 00:24:35,210 --> 00:24:36,700 you're not going to suddenly-- 604 00:24:36,700 --> 00:24:39,190 you're going to want more of both. 605 00:24:39,190 --> 00:24:41,500 Whereas fast food you actually would want less of it 606 00:24:41,500 --> 00:24:42,550 as your income goes up. 607 00:24:42,550 --> 00:24:44,602 Literally, you will eat at McDonald's less 608 00:24:44,602 --> 00:24:45,310 if you're richer. 609 00:24:45,310 --> 00:24:47,890 You're not going to have fewer watches if you're richer. 610 00:24:47,890 --> 00:24:51,408 So the bottom line is that inferior goods, 611 00:24:51,408 --> 00:24:52,450 you're actually getting-- 612 00:24:52,450 --> 00:24:53,400 it's a bit subtle. 613 00:24:53,400 --> 00:24:55,150 You have different goods of the same kind. 614 00:24:55,150 --> 00:24:57,370 Let's think about classes of goods rather than brands 615 00:24:57,370 --> 00:24:57,912 of goods. 616 00:24:57,912 --> 00:24:59,620 Once you get across brands, you're right. 617 00:24:59,620 --> 00:25:01,078 Let's think about classes of goods. 618 00:25:01,078 --> 00:25:03,020 Watches-- luxury watches, in general-- 619 00:25:03,020 --> 00:25:04,960 are clearly not inferior. 620 00:25:04,960 --> 00:25:07,210 Fast food may be inferior. 621 00:25:07,210 --> 00:25:10,420 Literally richer people may eat probably less fast food 622 00:25:10,420 --> 00:25:12,380 than poorer people. 623 00:25:12,380 --> 00:25:13,588 Yeah. 624 00:25:13,588 --> 00:25:15,880 AUDIENCE: Would something like your refrigerator count, 625 00:25:15,880 --> 00:25:18,740 where after you buy one you don't really need more of them. 626 00:25:18,740 --> 00:25:20,740 JONATHAN GRUBER: Well, that's like a quan-- that 627 00:25:20,740 --> 00:25:21,690 could be right. 628 00:25:21,690 --> 00:25:24,790 But yeah. 629 00:25:24,790 --> 00:25:26,320 I think not, because the bottom line 630 00:25:26,320 --> 00:25:28,090 is rich guys are much more likely to have 631 00:25:28,090 --> 00:25:29,800 two refrigerators than one. 632 00:25:29,800 --> 00:25:31,360 So it's a discreteness problem. 633 00:25:31,360 --> 00:25:33,352 It's too discrete to really use as an example. 634 00:25:33,352 --> 00:25:35,060 But I think fast food is a great example. 635 00:25:35,060 --> 00:25:38,080 The class example we use is potatoes. 636 00:25:38,080 --> 00:25:40,540 Where in the old days, before fast food, 637 00:25:40,540 --> 00:25:44,500 that was the cheap, filling, shitty-tasting food stuff 638 00:25:44,500 --> 00:25:46,960 that guys sort of ate all the time. 639 00:25:46,960 --> 00:25:48,850 And now, when they have money, they say, 640 00:25:48,850 --> 00:25:52,390 I'm going to move on to steak, and they eat less potatoes. 641 00:25:52,390 --> 00:25:54,802 So something where essentially you'd 642 00:25:54,802 --> 00:25:57,010 rather shift to something else if you have more money 643 00:25:57,010 --> 00:25:59,750 is inferior. 644 00:25:59,750 --> 00:26:02,090 Now, moreover, within that, within normal, we're 645 00:26:02,090 --> 00:26:04,010 going to draw a distinction between what we 646 00:26:04,010 --> 00:26:08,870 call luxuries and necessities. 647 00:26:11,620 --> 00:26:15,310 Luxuries are going to be good where gamma is greater than 1. 648 00:26:15,310 --> 00:26:18,260 And necessities, gamma is less than 1. 649 00:26:18,260 --> 00:26:19,370 So we're going to say-- 650 00:26:19,370 --> 00:26:21,800 essentially, the question is, proportional 651 00:26:21,800 --> 00:26:24,450 to your budget, what happens if your income goes up? 652 00:26:24,450 --> 00:26:26,540 In other words, do you spend more and more-- 653 00:26:26,540 --> 00:26:27,800 they're both normal goods. 654 00:26:27,800 --> 00:26:29,900 The richer you are, the more you buy of it. 655 00:26:29,900 --> 00:26:32,960 But a luxury good is you spend even larger share 656 00:26:32,960 --> 00:26:35,390 of your budget on that good as you get richer. 657 00:26:35,390 --> 00:26:38,810 So that would be luxury, like watches, boats, maybe 658 00:26:38,810 --> 00:26:41,937 refrigerators, et cetera-- 659 00:26:41,937 --> 00:26:44,270 things where the richer you get, the more of your budget 660 00:26:44,270 --> 00:26:46,940 you spend on it. 661 00:26:46,940 --> 00:26:49,480 Necessities are things like food, 662 00:26:49,480 --> 00:26:53,470 where clearly rich people spend more on food than poor people. 663 00:26:53,470 --> 00:26:56,650 But they spend a smaller share of their budget on food 664 00:26:56,650 --> 00:26:58,570 than poor people. 665 00:26:58,570 --> 00:27:00,782 So it goes up, but doesn't go up proportionally 666 00:27:00,782 --> 00:27:01,490 with your income. 667 00:27:01,490 --> 00:27:03,323 It goes up less in portion with your income. 668 00:27:03,323 --> 00:27:04,010 Yeah? 669 00:27:04,010 --> 00:27:09,400 AUDIENCE: [INAUDIBLE] for as some sort of human necessities, 670 00:27:09,400 --> 00:27:12,013 in the sense of if you're more wealthy, 671 00:27:12,013 --> 00:27:14,430 you might buy more name brand food or something like that, 672 00:27:14,430 --> 00:27:15,250 instead of more-- 673 00:27:15,250 --> 00:27:15,490 JONATHAN GRUBER: Yeah. 674 00:27:15,490 --> 00:27:17,698 Once we get into brands, you can absolutely see that. 675 00:27:17,698 --> 00:27:20,230 You can think of luxury brands and necessity brands. 676 00:27:20,230 --> 00:27:20,890 Absolutely. 677 00:27:20,890 --> 00:27:24,010 But if we stay with categories of goods, 678 00:27:24,010 --> 00:27:28,240 then let's think of jewelry as the [INAUDIBLE] example here 679 00:27:28,240 --> 00:27:32,280 and food as the canonical example here. 680 00:27:32,280 --> 00:27:32,945 Yeah? 681 00:27:32,945 --> 00:27:34,820 AUDIENCE: Do you have an example of something 682 00:27:34,820 --> 00:27:37,842 that's near the border between luxuries and necessities. 683 00:27:37,842 --> 00:27:39,300 JONATHAN GRUBER: You know, there is 684 00:27:39,300 --> 00:27:42,247 a huge industry in estimating these elasticities of demand. 685 00:27:42,247 --> 00:27:43,830 So I'm sure there's an answer to that. 686 00:27:43,830 --> 00:27:45,890 I don't have it off of my head. 687 00:27:45,890 --> 00:27:46,390 All right. 688 00:27:49,470 --> 00:27:51,690 So now I've given you the underlying tools 689 00:27:51,690 --> 00:27:53,370 of consumer demand theory. 690 00:27:53,370 --> 00:27:56,940 I've told you how to decide what quantity a consumer wants. 691 00:27:56,940 --> 00:28:00,310 I've told you how you can use that to derive demand curve. 692 00:28:00,310 --> 00:28:02,840 I've explained the shape of the demand curve. 693 00:28:02,840 --> 00:28:05,890 I then talked about what happens as your income changes 694 00:28:05,890 --> 00:28:10,300 and talked about the shape of the income elasticity. 695 00:28:10,300 --> 00:28:11,800 Now, I'm going to put this together 696 00:28:11,800 --> 00:28:14,500 to come back to revisit something you think you already 697 00:28:14,500 --> 00:28:15,820 know the answer to. 698 00:28:15,820 --> 00:28:18,490 Which is, what happens when a price changes-- 699 00:28:18,490 --> 00:28:20,440 the effects of a price change. 700 00:28:20,440 --> 00:28:22,750 Now, you might say, well, that's sort of silly. 701 00:28:22,750 --> 00:28:24,730 We already did that once this lecture. 702 00:28:24,730 --> 00:28:27,660 We already did, when we derived the demand curve-- 703 00:28:27,660 --> 00:28:30,975 the effects of price change-- 704 00:28:30,975 --> 00:28:32,350 we did some price changes, right? 705 00:28:32,350 --> 00:28:34,767 I showed you what happened as the price of cookies change. 706 00:28:34,767 --> 00:28:36,760 But, in fact, we cheated a little bit. 707 00:28:36,760 --> 00:28:40,030 We didn't cheat-- we gave you sort of the bottom line 708 00:28:40,030 --> 00:28:42,820 but didn't get into the elements of why 709 00:28:42,820 --> 00:28:45,590 people react the way they do to price changes. 710 00:28:45,590 --> 00:28:48,733 Now, we're getting in some sort of deep theory. 711 00:28:48,733 --> 00:28:50,400 Now, I'm going to talk about something-- 712 00:28:50,400 --> 00:28:51,900 it's deeply theoretical in the sense 713 00:28:51,900 --> 00:28:53,710 that in some sense if all you care about 714 00:28:53,710 --> 00:28:55,513 is what happens in the real world, 715 00:28:55,513 --> 00:28:57,680 they just care about when a price change happens how 716 00:28:57,680 --> 00:28:59,263 does quantity change, I'm going to use 717 00:28:59,263 --> 00:29:01,100 some theoretical concepts, which are going 718 00:29:01,100 --> 00:29:04,300 to become very powerful later on in the course, which 719 00:29:04,300 --> 00:29:05,700 are important understand now. 720 00:29:05,700 --> 00:29:09,060 Which is, how is the underlying decision calculus 721 00:29:09,060 --> 00:29:10,470 changed by price-- 722 00:29:10,470 --> 00:29:12,420 changed when the price changes? 723 00:29:12,420 --> 00:29:14,100 And the way we're going to do that 724 00:29:14,100 --> 00:29:18,550 is that we're going to decompose your response to a price change 725 00:29:18,550 --> 00:29:20,190 into two effects-- 726 00:29:20,190 --> 00:29:25,500 the substitution effect and the income effect. 727 00:29:28,300 --> 00:29:30,760 We're going to separate your response into two effects. 728 00:29:30,760 --> 00:29:35,770 So the separation is going to become very important later on. 729 00:29:35,770 --> 00:29:37,390 The substitution effect, we're going 730 00:29:37,390 --> 00:29:44,980 to define as the change in the quantity of a good 731 00:29:44,980 --> 00:29:49,720 when the price changes holding utility constant. 732 00:29:49,720 --> 00:29:53,760 So it's delta Q-- 733 00:29:53,760 --> 00:29:58,440 d Q d p for shorthand-- but holding utility constant 734 00:29:58,440 --> 00:30:01,280 at some fixed level u bar. 735 00:30:01,280 --> 00:30:03,800 The change in quantities price changes-- 736 00:30:03,800 --> 00:30:05,270 so it's the elasticity of demand-- 737 00:30:05,270 --> 00:30:08,860 but at a constant level of utility. 738 00:30:08,860 --> 00:30:15,100 The income effect is the change in quantity of a good as income 739 00:30:15,100 --> 00:30:16,240 changes. 740 00:30:16,240 --> 00:30:17,890 Change in quantity, dy. 741 00:30:17,890 --> 00:30:21,210 Which is the income elasticity we talked about-- 742 00:30:21,210 --> 00:30:24,330 the change in quantity as the income changes. 743 00:30:27,280 --> 00:30:31,190 And this is actually multiplied by the initial level of income. 744 00:30:31,190 --> 00:30:32,990 We'll learn about this in a section. 745 00:30:32,990 --> 00:30:36,170 But that's technically how the income effect is defined. 746 00:30:36,170 --> 00:30:38,590 And you'll come into a section about why that is. 747 00:30:38,590 --> 00:30:41,320 But we're going to decompose this. 748 00:30:41,320 --> 00:30:42,650 So that's sort of confusing. 749 00:30:42,650 --> 00:30:45,440 So let me start with graphically to understand it. 750 00:30:45,440 --> 00:30:48,140 So let's go to figure 4-5, one of our more complicated 751 00:30:48,140 --> 00:30:50,570 figures. 752 00:30:50,570 --> 00:30:52,970 We start at budget constraint 1-- 753 00:30:52,970 --> 00:30:54,980 same parameters as always. 754 00:30:54,980 --> 00:30:56,240 All the math here-- 755 00:30:56,240 --> 00:30:58,220 all this graphic stuff follows from the math 756 00:30:58,220 --> 00:31:00,960 using that utility function and these price and income-- 757 00:31:00,960 --> 00:31:02,060 same as before. 758 00:31:02,060 --> 00:31:05,020 So we start, as before, at point a. 759 00:31:05,020 --> 00:31:09,570 Your tangency is the best package you can have, 760 00:31:09,570 --> 00:31:11,720 given that utility function, is 6 cookies 761 00:31:11,720 --> 00:31:15,200 and 3 slices of pizza. 762 00:31:15,200 --> 00:31:20,510 Now, let's imagine the price of cookies rises to $9. 763 00:31:20,510 --> 00:31:26,840 The price of cookies in our example goes from $6 to $9. 764 00:31:26,840 --> 00:31:29,190 That's the example we're going to analyze. 765 00:31:29,190 --> 00:31:31,340 Now, we know from before that will ultimately 766 00:31:31,340 --> 00:31:33,170 move you from 6 cookies to 4 cookies 767 00:31:33,170 --> 00:31:35,150 while holding pizzas constant at 3. 768 00:31:35,150 --> 00:31:36,500 So we know where you'll end up. 769 00:31:36,500 --> 00:31:38,510 You'll end up at point c. 770 00:31:38,510 --> 00:31:40,310 We did that before. 771 00:31:40,310 --> 00:31:44,460 But actually two things are happening to get you there. 772 00:31:44,460 --> 00:31:47,880 The first thing that's happening is the substitution effect, 773 00:31:47,880 --> 00:31:50,925 which is the change in prices with utility constant. 774 00:31:50,925 --> 00:31:52,050 And how do we measure that? 775 00:31:52,050 --> 00:31:55,670 We want to ask, given that the price changed 776 00:31:55,670 --> 00:31:57,480 but the utility is constant, what's 777 00:31:57,480 --> 00:31:58,650 the new quantity you choose? 778 00:31:58,650 --> 00:32:02,110 What does utility constant mean in this graph? 779 00:32:02,110 --> 00:32:03,940 What does it mean to hold utility constant? 780 00:32:03,940 --> 00:32:05,700 Let's get some other folks involved here. 781 00:32:05,700 --> 00:32:06,060 What is it mean? 782 00:32:06,060 --> 00:32:06,740 Yeah? 783 00:32:06,740 --> 00:32:07,620 AUDIENCE: Same indifference curve. 784 00:32:07,620 --> 00:32:09,328 JONATHAN GRUBER: Same indifference curve. 785 00:32:09,328 --> 00:32:12,540 So what we want to do is ask, given the new prices 786 00:32:12,540 --> 00:32:17,240 but the old indifference curve, what quantity would you choose? 787 00:32:17,240 --> 00:32:20,590 Well, the way we do that is we find the tangency 788 00:32:20,590 --> 00:32:24,580 between the new slope of the budget constraint 789 00:32:24,580 --> 00:32:26,560 and the old indifference curve. 790 00:32:26,560 --> 00:32:29,050 And we do that by drawing sort of an imaginary budget 791 00:32:29,050 --> 00:32:30,910 constraint bc prime. 792 00:32:30,910 --> 00:32:33,160 bc prime is a sort of imaginary budget constraint. 793 00:32:33,160 --> 00:32:34,810 It's not a real budget constraint, 794 00:32:34,810 --> 00:32:38,380 but it has the slope of the new budget constraint, 795 00:32:38,380 --> 00:32:41,170 but it's tangent to the old indifference curve. 796 00:32:41,170 --> 00:32:43,750 That's the key thing. bc prime, the imaginary budget 797 00:32:43,750 --> 00:32:47,470 constraint, the dashed line, has the slope of the new budget 798 00:32:47,470 --> 00:32:50,300 constraint, same as the new price ratio. 799 00:32:50,300 --> 00:32:52,180 So the slope is the new price ratio. 800 00:32:52,180 --> 00:32:58,060 The slope is at the new price ratio, 801 00:32:58,060 --> 00:33:01,870 but it's tangent to the old indifference curve. 802 00:33:01,870 --> 00:33:07,010 So bc prime is basically going to the tangent [INAUDIBLE] 803 00:33:07,010 --> 00:33:10,380 indifference curve at point b. 804 00:33:10,380 --> 00:33:14,700 So what we're saying is the substitution effect moves you 805 00:33:14,700 --> 00:33:16,920 from point a to point b. 806 00:33:16,920 --> 00:33:22,260 That is holding utility constant but at these new prices, 807 00:33:22,260 --> 00:33:28,010 you would choose to have fewer cookies and less pizza. 808 00:33:28,010 --> 00:33:31,130 We call this notion compensated demand. 809 00:33:38,020 --> 00:33:39,370 That is, I'm compensating you. 810 00:33:39,370 --> 00:33:41,200 I'm holding utility constant. 811 00:33:41,200 --> 00:33:43,132 I'm saying price of change sucks for you. 812 00:33:43,132 --> 00:33:43,840 You're worse off. 813 00:33:43,840 --> 00:33:45,520 Your opportunity set's restricted. 814 00:33:45,520 --> 00:33:47,780 But I'm going to compensate you by holding 815 00:33:47,780 --> 00:33:49,015 your utility constant. 816 00:33:49,015 --> 00:33:50,620 So call this compensated demand. 817 00:33:50,620 --> 00:33:52,540 Your compensated demand would mean 818 00:33:52,540 --> 00:33:54,220 that when the price goes up, you would 819 00:33:54,220 --> 00:33:56,950 choose to reduce your consumption of cookies 820 00:33:56,950 --> 00:34:01,510 from 6 to 4.89. 821 00:34:01,510 --> 00:34:04,720 Now, here's the key thing about substitution effects-- 822 00:34:04,720 --> 00:34:06,730 we can sign them definitively. 823 00:34:06,730 --> 00:34:09,120 They are always negative. 824 00:34:09,120 --> 00:34:12,250 The substitution effect is always negative. 825 00:34:15,527 --> 00:34:17,110 The income effect could go either way. 826 00:34:17,110 --> 00:34:17,777 We'll show that. 827 00:34:17,777 --> 00:34:20,242 The substitution effect is always negative. 828 00:34:20,242 --> 00:34:21,409 We can see this in two ways. 829 00:34:21,409 --> 00:34:24,110 Graphically, think about it this way-- 830 00:34:24,110 --> 00:34:26,659 you have to be tangent to the same indifference 831 00:34:26,659 --> 00:34:29,960 curve with a higher sloped line, so you 832 00:34:29,960 --> 00:34:31,114 have to move to the left. 833 00:34:31,114 --> 00:34:32,989 If you get a tangent to the same indifference 834 00:34:32,989 --> 00:34:34,230 curve with a line with the higher slope, 835 00:34:34,230 --> 00:34:35,313 it's go to be to the left. 836 00:34:35,313 --> 00:34:37,370 So that's a graphical intuition. 837 00:34:37,370 --> 00:34:39,650 Mathematically, it's worth writing out the steps, 838 00:34:39,650 --> 00:34:40,517 because it helps. 839 00:34:40,517 --> 00:34:42,350 That's why we teach this, it helps remind us 840 00:34:42,350 --> 00:34:45,530 of our consumer theory. 841 00:34:45,530 --> 00:34:47,780 Step 1, you're at this new tangency. 842 00:34:51,170 --> 00:34:57,530 Step 2, we know that at any such tangency that's optimized, 843 00:34:57,530 --> 00:35:01,280 the marg utility of cookies over the marg utility pizza 844 00:35:01,280 --> 00:35:03,950 equals the price of cookies over the price of pizza. 845 00:35:03,950 --> 00:35:06,450 We know that's true with any tangency, 846 00:35:06,450 --> 00:35:09,560 because that's the optimal choice. 847 00:35:09,560 --> 00:35:14,840 Step 3, we know P c over P p is up. 848 00:35:17,752 --> 00:35:18,460 I just said that. 849 00:35:18,460 --> 00:35:20,470 And this assumption is the price cookies up. 850 00:35:20,470 --> 00:35:22,690 Therefore, that leads to step 4. 851 00:35:22,690 --> 00:35:28,390 Which is that M Uc over M Up must be up, 852 00:35:28,390 --> 00:35:31,130 because it's still equal. 853 00:35:31,130 --> 00:35:34,820 Well, how do you raise the ratio of the marg utility of cookies 854 00:35:34,820 --> 00:35:36,500 to marg utility of pizzas? 855 00:35:36,500 --> 00:35:38,710 How do you accomplish that? 856 00:35:38,710 --> 00:35:40,540 By having fewer cookies and more pizza. 857 00:35:44,050 --> 00:35:46,950 So that means-- that implies-- 858 00:35:46,950 --> 00:35:51,210 that cookies are down and pizzas are up-- 859 00:35:51,210 --> 00:35:53,520 and/or pizzas are up. 860 00:35:53,520 --> 00:35:56,200 How do you get that ratio to be higher? 861 00:35:56,200 --> 00:35:58,650 Well, remember, this is why do this math here. 862 00:35:58,650 --> 00:36:01,620 Remember the key intuition-- more cookies means 863 00:36:01,620 --> 00:36:03,402 lower marg utility of cookies. 864 00:36:03,402 --> 00:36:04,860 The more cookies you have, the less 865 00:36:04,860 --> 00:36:06,270 you care about the next cookie. 866 00:36:06,270 --> 00:36:09,180 So I want the marg utility of cookies to be lower. 867 00:36:09,180 --> 00:36:11,680 If the marg utility of cookies, I'm sorry, to be higher, 868 00:36:11,680 --> 00:36:14,400 I've got to have fewer cookies, or I've 869 00:36:14,400 --> 00:36:18,430 got to have more pizza, or both. 870 00:36:18,430 --> 00:36:21,700 So the substitution effect is always negative. 871 00:36:21,700 --> 00:36:24,560 If I'm going to hold utility constant, 872 00:36:24,560 --> 00:36:27,048 and change prices, and raise the price, 873 00:36:27,048 --> 00:36:28,590 you'll always want less of that goods 874 00:36:28,590 --> 00:36:31,223 on the substitution effect. 875 00:36:31,223 --> 00:36:32,890 Question about the graphics of the math? 876 00:36:36,870 --> 00:36:39,510 Now, let's come to the income effect. 877 00:36:39,510 --> 00:36:45,952 The income effect says, holding prices constant-- 878 00:36:45,952 --> 00:36:47,160 so I shouldn't put this here. 879 00:36:47,160 --> 00:36:48,930 The income effect is this at a constant price. 880 00:36:48,930 --> 00:36:50,030 I should have added that. 881 00:36:50,030 --> 00:36:51,600 So the income effect is the change 882 00:36:51,600 --> 00:36:53,940 in quantity demanded as income changes 883 00:36:53,940 --> 00:36:56,480 holding prices constant. 884 00:36:56,480 --> 00:36:57,890 So now we're saying-- 885 00:36:57,890 --> 00:37:02,530 the income effect is saying, look, the price changed. 886 00:37:02,530 --> 00:37:06,280 So therefore I shifted my consumption away from cookies. 887 00:37:06,280 --> 00:37:09,070 But the other thing that happened is I got poorer. 888 00:37:09,070 --> 00:37:10,570 Maybe I'd say you didn't get poorer, 889 00:37:10,570 --> 00:37:12,237 your parents didn't send you less money, 890 00:37:12,237 --> 00:37:14,760 but remember your opportunity set restricted. 891 00:37:14,760 --> 00:37:20,158 You effectively are poorer because this price went up. 892 00:37:20,158 --> 00:37:21,200 How do we represent that? 893 00:37:21,200 --> 00:37:25,160 Well, we can exactly represent that by the shift from bc 894 00:37:25,160 --> 00:37:32,590 prime to bc2 Because bc prime and bc2 have the same slope. 895 00:37:32,590 --> 00:37:35,256 That shift is just the income effect. 896 00:37:35,256 --> 00:37:37,650 So that's holding the prices constant. 897 00:37:37,650 --> 00:37:42,380 The price ratio for bc prime and bc2 is the same. 898 00:37:42,380 --> 00:37:45,870 But you're now effectively poorer, 899 00:37:45,870 --> 00:37:49,170 because at the same income you can afford fewer cookies. 900 00:37:49,170 --> 00:37:50,820 So you're effectively poorer. 901 00:37:50,820 --> 00:37:53,440 So now your income's effectively fallen. 902 00:37:53,440 --> 00:37:55,060 And at that new budget constraint 903 00:37:55,060 --> 00:37:57,870 with that new lower effective income and higher price ratio, 904 00:37:57,870 --> 00:38:00,290 you choose point c. 905 00:38:00,290 --> 00:38:03,340 So we go from a to c, just like I told you before, 906 00:38:03,340 --> 00:38:05,550 but we actually get there in two steps. 907 00:38:05,550 --> 00:38:08,130 One step is sort of the relative change 908 00:38:08,130 --> 00:38:09,505 in prices caused you to say, ooh, 909 00:38:09,505 --> 00:38:11,287 I want to get away from cookies. 910 00:38:11,287 --> 00:38:13,620 The other say, I'm poorer, so I want less of everything, 911 00:38:13,620 --> 00:38:16,460 including cookies. 912 00:38:16,460 --> 00:38:18,650 So one is the price effect, one's the income effect. 913 00:38:18,650 --> 00:38:21,110 And these two effects matter. 914 00:38:21,110 --> 00:38:24,610 Now, in this case, they don't matter, 915 00:38:24,610 --> 00:38:26,290 because they work together. 916 00:38:26,290 --> 00:38:30,610 In this case, you might say, well, look, why do I care? 917 00:38:30,610 --> 00:38:33,090 The bottom line is, the number of cookies fell by 2. 918 00:38:33,090 --> 00:38:35,660 Substitution effect work together, why do I care? 919 00:38:35,660 --> 00:38:42,040 Well, you might care, because if the good is inferior, then 920 00:38:42,040 --> 00:38:45,740 the income and substitution effect work against each other. 921 00:38:45,740 --> 00:38:49,600 If the good is inferior, then the income substitution effects 922 00:38:49,600 --> 00:38:51,910 work against each other rather than with each other. 923 00:38:51,910 --> 00:38:53,410 To see this, let's go to figure 4-6. 924 00:38:55,567 --> 00:38:57,525 Now, we're going to totally change our example. 925 00:39:00,530 --> 00:39:03,710 Now, we're going to be choosing between steak and potatoes. 926 00:39:03,710 --> 00:39:06,320 Totally different example-- steak and potatoes. 927 00:39:06,320 --> 00:39:08,570 You start a budge constraint bc1. 928 00:39:08,570 --> 00:39:11,460 Potatoes are $1, and steak is $5. 929 00:39:11,460 --> 00:39:13,882 So in our new example-- 930 00:39:13,882 --> 00:39:14,840 I'll put this up here-- 931 00:39:17,660 --> 00:39:23,180 we've got the price of steak is $5, the price of potatoes 932 00:39:23,180 --> 00:39:27,620 is $1, and your income is $25. 933 00:39:27,620 --> 00:39:30,020 That's our new example. 934 00:39:30,020 --> 00:39:32,122 In that case, you will choose-- 935 00:39:32,122 --> 00:39:33,830 and this is a different utility function. 936 00:39:33,830 --> 00:39:35,493 This is a totally new example. 937 00:39:35,493 --> 00:39:37,910 I'm not going expect you to understand the underlying math 938 00:39:37,910 --> 00:39:38,410 here. 939 00:39:38,410 --> 00:39:41,480 I'm just showing an example of something that might be true. 940 00:39:41,480 --> 00:39:43,010 So you choose point a. 941 00:39:43,010 --> 00:39:47,500 You choose 7 and 1/2 potatoes and 3 and 1/2 steaks 942 00:39:47,500 --> 00:39:49,660 given those prices. 943 00:39:49,660 --> 00:39:52,690 Now, we're going to say, what happens 944 00:39:52,690 --> 00:39:58,120 if the price of potatoes goes from $1 to $3? 945 00:39:58,120 --> 00:40:01,270 The price of potatoes goes up. 946 00:40:01,270 --> 00:40:04,100 Well, two things happen-- 947 00:40:04,100 --> 00:40:07,720 first of all, the change in compensated demand 948 00:40:07,720 --> 00:40:10,397 moves you from point a to point b. 949 00:40:10,397 --> 00:40:11,230 How do we know that? 950 00:40:11,230 --> 00:40:13,600 Because you draw a new imaginary budget constraint 951 00:40:13,600 --> 00:40:15,940 that has the new price ratio, but it's 952 00:40:15,940 --> 00:40:18,000 tangent to the old indifference curve. 953 00:40:18,000 --> 00:40:19,840 So you're point a to point b. 954 00:40:19,840 --> 00:40:22,450 So the substitution effect lowers your demand 955 00:40:22,450 --> 00:40:27,050 for potatoes from 7 and 1/2 to 4. 956 00:40:27,050 --> 00:40:32,610 But the income effect raises your demand for potatoes. 957 00:40:32,610 --> 00:40:38,598 Now, the income effect means you actually move back from 4 to 5. 958 00:40:38,598 --> 00:40:40,390 On net, you're still having fewer potatoes, 959 00:40:40,390 --> 00:40:42,460 but the substitution effects went opposite ways. 960 00:40:42,460 --> 00:40:43,030 Why? 961 00:40:43,030 --> 00:40:44,860 Why did the income effect cause you 962 00:40:44,860 --> 00:40:46,350 to want to have more potatoes? 963 00:40:46,350 --> 00:40:48,100 The substitution, you wanted have to less. 964 00:40:48,100 --> 00:40:48,761 Yeah? 965 00:40:48,761 --> 00:40:52,342 AUDIENCE: Because the price of potatoes went up [INAUDIBLE].. 966 00:40:52,342 --> 00:40:53,300 JONATHAN GRUBER: Close. 967 00:40:53,300 --> 00:40:54,470 Price of potatoes went up. 968 00:40:54,470 --> 00:40:55,730 So you're effectively what? 969 00:40:55,730 --> 00:40:57,643 Poorer, right? 970 00:40:57,643 --> 00:41:00,185 And when you're poorer, how does that affect your consumption 971 00:41:00,185 --> 00:41:01,220 of inferior goods? 972 00:41:03,880 --> 00:41:05,340 You want more of them. 973 00:41:05,340 --> 00:41:07,330 So price of potatoes went up. 974 00:41:07,330 --> 00:41:09,490 So effectively you're poorer. 975 00:41:09,490 --> 00:41:12,070 Now, when you're poorer, in our previous example with cookies 976 00:41:12,070 --> 00:41:13,903 you wanted fewer cookies than a normal good. 977 00:41:13,903 --> 00:41:16,430 But potatoes are an inferior good. 978 00:41:16,430 --> 00:41:18,410 So as you're poorer, you want more of them. 979 00:41:18,410 --> 00:41:20,260 The income effect goes the opposite way 980 00:41:20,260 --> 00:41:22,210 of the substitution effect. 981 00:41:22,210 --> 00:41:24,120 That's where this starts to get interesting. 982 00:41:24,120 --> 00:41:25,400 If the income effect always goes the same way 983 00:41:25,400 --> 00:41:27,942 as substitution effect, this is sort of just a purely useless 984 00:41:27,942 --> 00:41:29,020 theoretical exercise. 985 00:41:29,020 --> 00:41:31,645 It gets interesting when income effect goes the opposite way 986 00:41:31,645 --> 00:41:32,770 of the substitution effect. 987 00:41:32,770 --> 00:41:32,980 Yeah? 988 00:41:32,980 --> 00:41:34,415 AUDIENCE: Isn't it like the [INAUDIBLE]?? 989 00:41:34,415 --> 00:41:34,810 JONATHAN GRUBER: Hold on. 990 00:41:34,810 --> 00:41:35,560 I'm getting there. 991 00:41:35,560 --> 00:41:36,450 I'm getting there. 992 00:41:36,450 --> 00:41:38,020 OK. 993 00:41:38,020 --> 00:41:39,180 Yeah? 994 00:41:39,180 --> 00:41:40,792 AUDIENCE: [INAUDIBLE]. 995 00:41:40,792 --> 00:41:43,250 JONATHAN GRUBER: Utility-- well different utility functions 996 00:41:43,250 --> 00:41:45,485 will give you-- 997 00:41:45,485 --> 00:41:47,360 you have to have a different utility function 998 00:41:47,360 --> 00:41:48,490 to get the good to be inferior. 999 00:41:48,490 --> 00:41:50,630 So you utility of steak and potatoes is not going to square 1000 00:41:50,630 --> 00:41:51,230 root of-- 1001 00:41:51,230 --> 00:41:53,828 you won't get inferiority with square root of p times s. 1002 00:41:53,828 --> 00:41:55,370 So it's a different utility function, 1003 00:41:55,370 --> 00:41:56,430 and I mentioned that I think. 1004 00:41:56,430 --> 00:41:57,290 It's a different utility function. 1005 00:41:57,290 --> 00:41:57,880 Yeah? 1006 00:41:57,880 --> 00:41:59,810 AUDIENCE: It's the different functions 1007 00:41:59,810 --> 00:42:03,298 that makes potatoes be an inferior good mathematically. 1008 00:42:03,298 --> 00:42:04,340 JONATHAN GRUBER: Exactly. 1009 00:42:04,340 --> 00:42:06,080 So basically, your intuition-- 1010 00:42:06,080 --> 00:42:07,230 I give you intuition why they're inferior. 1011 00:42:07,230 --> 00:42:09,110 But, mathematically, it would occur because we'd 1012 00:42:09,110 --> 00:42:09,860 have a utility function. 1013 00:42:09,860 --> 00:42:11,220 The utility function would generate 1014 00:42:11,220 --> 00:42:13,723 an inferior would be a different looking utility function. 1015 00:42:13,723 --> 00:42:16,597 AUDIENCE: [INAUDIBLE]. 1016 00:42:16,597 --> 00:42:18,430 JONATHAN GRUBER: Not off the top of my head. 1017 00:42:18,430 --> 00:42:21,730 But we'll do it in section. 1018 00:42:21,730 --> 00:42:22,948 So the bottom line is-- yeah? 1019 00:42:22,948 --> 00:42:24,990 AUDIENCE: When you're setting that price of steak 1020 00:42:24,990 --> 00:42:27,110 and potatoes, is it that they both provide 1021 00:42:27,110 --> 00:42:28,810 similar nutritional value? 1022 00:42:28,810 --> 00:42:30,437 So one potato does not necessarily 1023 00:42:30,437 --> 00:42:31,270 equate to one steak. 1024 00:42:31,270 --> 00:42:34,540 But the price that are setting, $5 worth of steak 1025 00:42:34,540 --> 00:42:36,960 is equivalent, in terms of my health, 1026 00:42:36,960 --> 00:42:38,397 and will fill me up as much as-- 1027 00:42:38,397 --> 00:42:39,730 JONATHAN GRUBER: No, no, no, no. 1028 00:42:39,730 --> 00:42:40,690 I'm not saying that at all. 1029 00:42:40,690 --> 00:42:42,190 I'm not writing down a health function. 1030 00:42:42,190 --> 00:42:43,220 I didn't write it down. 1031 00:42:43,220 --> 00:42:44,345 This is a utility function. 1032 00:42:44,345 --> 00:42:46,930 So it's about filling up, it's about taste. 1033 00:42:46,930 --> 00:42:49,418 Steak may leave me hungrier, but it's way better. 1034 00:42:49,418 --> 00:42:50,710 So it's about what fills me up. 1035 00:42:50,710 --> 00:42:53,200 Literally, all I'm saying is, given my utility function-- 1036 00:42:53,200 --> 00:42:56,260 and I don't have the utility function written down-- 1037 00:42:56,260 --> 00:42:59,555 I was choosing a balance of mostly potatoes and some steak. 1038 00:42:59,555 --> 00:43:01,180 Now that the price of potatoes goes up, 1039 00:43:01,180 --> 00:43:03,148 I end up wanting fewer potatoes, but not 1040 00:43:03,148 --> 00:43:05,440 as few as you might think from the substitution effect, 1041 00:43:05,440 --> 00:43:07,160 because potatoes are inferior. 1042 00:43:07,160 --> 00:43:07,660 Yeah? 1043 00:43:07,660 --> 00:43:13,492 AUDIENCE: [INAUDIBLE] the price is more constant [INAUDIBLE]?? 1044 00:43:13,492 --> 00:43:14,630 JONATHAN GRUBER: No, no. 1045 00:43:14,630 --> 00:43:16,460 What I'm saying-- the income effect 1046 00:43:16,460 --> 00:43:17,843 is holding the price constant. 1047 00:43:17,843 --> 00:43:19,010 What happens to your demand? 1048 00:43:19,010 --> 00:43:20,510 So holding the price constant-- what 1049 00:43:20,510 --> 00:43:23,720 I mean by that is moving from bc prime to bc2 1050 00:43:23,720 --> 00:43:26,030 is the income effect, holding your price constant. 1051 00:43:26,030 --> 00:43:28,320 So the price change is reflecting the substitution 1052 00:43:28,320 --> 00:43:28,820 effect. 1053 00:43:28,820 --> 00:43:31,992 That's reflected in moving for bc1 to bc prime. 1054 00:43:31,992 --> 00:43:33,950 The income effect is holding the price constant 1055 00:43:33,950 --> 00:43:36,408 that is, given that same slope of that imaginary new budget 1056 00:43:36,408 --> 00:43:38,460 constraint, you're now poorer. 1057 00:43:38,460 --> 00:43:39,080 So that's why. 1058 00:43:39,080 --> 00:43:41,690 So once again, it's a hard thing to wrap your mind around. 1059 00:43:41,690 --> 00:43:42,410 It's theoretical. 1060 00:43:42,410 --> 00:43:45,530 But the notion is when a price changes two things happen-- 1061 00:43:45,530 --> 00:43:49,130 it changes the relative desirability of two goods, 1062 00:43:49,130 --> 00:43:51,330 and it changes your income-- 1063 00:43:51,330 --> 00:43:53,900 your effective income, your opportunity set. 1064 00:43:53,900 --> 00:43:56,090 Two things are happening. 1065 00:43:56,090 --> 00:43:57,870 Yeah? 1066 00:43:57,870 --> 00:44:00,180 AUDIENCE: First, when the price first changes, 1067 00:44:00,180 --> 00:44:02,030 you needed a substitute, so you keep-- 1068 00:44:02,030 --> 00:44:03,030 JONATHAN GRUBER: Oh, no. 1069 00:44:03,030 --> 00:44:04,200 They both happened at the same time. 1070 00:44:04,200 --> 00:44:04,890 Let's be clear. 1071 00:44:04,890 --> 00:44:06,120 This isn't sequential. 1072 00:44:06,120 --> 00:44:07,630 This happening in real time. 1073 00:44:07,630 --> 00:44:08,620 It's not like you said the price went up, 1074 00:44:08,620 --> 00:44:09,690 I'm going to compute my, you know-- 1075 00:44:09,690 --> 00:44:11,160 it's happening in real time. 1076 00:44:11,160 --> 00:44:13,560 It's just we're decomposing into two effects. 1077 00:44:13,560 --> 00:44:15,690 And the reason we're doing that is 1078 00:44:15,690 --> 00:44:18,120 because once goods are inferior, this decomposition 1079 00:44:18,120 --> 00:44:20,070 becomes interesting. 1080 00:44:20,070 --> 00:44:24,148 So I like to think about this in sort of a simple table 1081 00:44:24,148 --> 00:44:25,940 to help remind you how to think about this. 1082 00:44:25,940 --> 00:44:27,300 So let's think about a simple table. 1083 00:44:27,300 --> 00:44:28,550 Here we have the price change. 1084 00:44:32,000 --> 00:44:39,490 so the price can go up or the price can go down. 1085 00:44:39,490 --> 00:44:40,780 Up and down. 1086 00:44:40,780 --> 00:44:43,930 Here we have the substitution effect, 1087 00:44:43,930 --> 00:44:47,230 here we have the income effect, and here, we have the total. 1088 00:44:49,920 --> 00:44:52,020 Well, in the case of a normal good-- 1089 00:44:55,550 --> 00:44:56,490 if a good is normal-- 1090 00:44:59,510 --> 00:45:04,120 then we know the substitution effect when the price goes up 1091 00:45:04,120 --> 00:45:06,750 leads you to want less of a good. 1092 00:45:06,750 --> 00:45:10,390 The income effect also leads you want less of a good. 1093 00:45:10,390 --> 00:45:13,410 So you definitely want less of the good. 1094 00:45:13,410 --> 00:45:14,530 These are all equals. 1095 00:45:14,530 --> 00:45:15,990 There's always corner cases. 1096 00:45:18,720 --> 00:45:21,540 Likewise, when the price falls, the substitution effect 1097 00:45:21,540 --> 00:45:23,550 makes you want more of the good. 1098 00:45:23,550 --> 00:45:26,352 When the price falls, you're effectively richer. 1099 00:45:26,352 --> 00:45:28,560 So the income effect makes you want more of the good. 1100 00:45:28,560 --> 00:45:31,130 So you clearly want more of the good. 1101 00:45:31,130 --> 00:45:33,200 That's the easy case. 1102 00:45:33,200 --> 00:45:35,870 The more interesting case is, what if it's an inferior good? 1103 00:45:42,060 --> 00:45:46,140 Now, if the price goes up, the substitution effect 1104 00:45:46,140 --> 00:45:46,670 is the same. 1105 00:45:46,670 --> 00:45:49,050 Substitution effect is always negative. 1106 00:45:49,050 --> 00:45:51,480 Higher price means you substitute away from the good. 1107 00:45:51,480 --> 00:45:55,600 But the income effect is now positive. 1108 00:45:55,600 --> 00:45:59,340 So the net is unclear. 1109 00:45:59,340 --> 00:46:04,308 Likewise, if the price goes down, 1110 00:46:04,308 --> 00:46:06,100 the substitution effect is always positive. 1111 00:46:06,100 --> 00:46:08,140 You always want more of the good if the price goes down. 1112 00:46:08,140 --> 00:46:10,520 But the income effect is now you want less of the good. 1113 00:46:10,520 --> 00:46:11,020 Why? 1114 00:46:11,020 --> 00:46:12,580 Because you're richer. 1115 00:46:12,580 --> 00:46:14,620 If the price of a good falls, you're richer. 1116 00:46:14,620 --> 00:46:17,030 Richer means you want less of that inferior good. 1117 00:46:17,030 --> 00:46:20,050 So the net effect is unclear. 1118 00:46:20,050 --> 00:46:22,210 So the interesting case becomes inferior goods. 1119 00:46:25,280 --> 00:46:29,450 Questions about the table? 1120 00:46:29,450 --> 00:46:33,760 So this raises the question, are there goods-- 1121 00:46:33,760 --> 00:46:35,320 what does this imply? 1122 00:46:35,320 --> 00:46:39,430 If the income effect dominated the substitution effect, 1123 00:46:39,430 --> 00:46:40,940 you could get what? 1124 00:46:40,940 --> 00:46:41,563 Yeah? 1125 00:46:41,563 --> 00:46:43,480 AUDIENCE: The higher prices, the more you buy. 1126 00:46:43,480 --> 00:46:44,355 JONATHAN GRUBER: Yes. 1127 00:46:44,355 --> 00:46:47,570 You could get an upward-sloping demand curve. 1128 00:46:47,570 --> 00:46:49,580 You could actually, theoretically, 1129 00:46:49,580 --> 00:46:51,350 get an upward-sloping demand curve. 1130 00:46:51,350 --> 00:46:54,530 And we call this a Giffen good. 1131 00:46:58,660 --> 00:47:01,960 A Giffen good is a good where you get an upward-sloping 1132 00:47:01,960 --> 00:47:04,840 demand curve, where actually the inferior income effect is 1133 00:47:04,840 --> 00:47:07,582 so large it dominates the substitution effect, 1134 00:47:07,582 --> 00:47:09,790 and you actually get an upward-sloping demand curve-- 1135 00:47:09,790 --> 00:47:13,330 that a higher price leads people to want more of the good. 1136 00:47:13,330 --> 00:47:17,110 Now, in fact, this is named after some guy, Giffen, 1137 00:47:17,110 --> 00:47:17,850 I guess. 1138 00:47:17,850 --> 00:47:21,018 And it probably was a guy, because it's old. 1139 00:47:21,018 --> 00:47:22,810 But, in fact, it's convenient, because it's 1140 00:47:22,810 --> 00:47:23,890 close to where gryphon. 1141 00:47:23,890 --> 00:47:27,640 And gryphons are imaginary, and so are Giffens. 1142 00:47:27,640 --> 00:47:29,500 It's actually hard to find examples 1143 00:47:29,500 --> 00:47:32,380 in reality of Giffen goods. 1144 00:47:32,380 --> 00:47:35,890 It's actually pretty hard to find examples from reality. 1145 00:47:35,890 --> 00:47:40,663 But there was one interesting experiment that was run, 1146 00:47:40,663 --> 00:47:42,580 which is sort of the first convincing evidence 1147 00:47:42,580 --> 00:47:45,250 that in some situations Giffen goods could exist. 1148 00:47:45,250 --> 00:47:47,410 So I ran the follow experiment. 1149 00:47:47,410 --> 00:47:53,630 They run a study in China, where very, very poor households-- 1150 00:47:53,630 --> 00:47:55,090 most households in China are poor, 1151 00:47:55,090 --> 00:47:57,298 but they divided it into super poor versus moderately 1152 00:47:57,298 --> 00:47:59,380 poor households. 1153 00:47:59,380 --> 00:48:01,930 And they basically gave them coupons 1154 00:48:01,930 --> 00:48:06,070 which lowered the price of rice, which was their staple good. 1155 00:48:06,070 --> 00:48:09,190 Basically, they eat rice, and that's sort of their basic good 1156 00:48:09,190 --> 00:48:10,150 they eat. 1157 00:48:10,150 --> 00:48:13,250 And they basically lowered the price of rice. 1158 00:48:13,250 --> 00:48:15,770 What they found is that for families 1159 00:48:15,770 --> 00:48:18,020 that weren't super poor, they found 1160 00:48:18,020 --> 00:48:20,210 a typical downward-sloping demand curve. 1161 00:48:20,210 --> 00:48:23,090 Giving them the coupon off rice meant they bought more rice. 1162 00:48:23,090 --> 00:48:25,070 But for the very, very poor families, 1163 00:48:25,070 --> 00:48:27,613 they actually did find an upward-sloping demand curve. 1164 00:48:27,613 --> 00:48:29,780 Giving them a discount on the price of rice actually 1165 00:48:29,780 --> 00:48:32,170 caused them to have less rice. 1166 00:48:32,170 --> 00:48:36,822 Because, literally, that's all they ever ate, was rice. 1167 00:48:36,822 --> 00:48:39,030 So by definition they could've had more, because they 1168 00:48:39,030 --> 00:48:40,320 didn't eat anything else. 1169 00:48:40,320 --> 00:48:41,490 Now that you're essentially saying, 1170 00:48:41,490 --> 00:48:43,710 look, you used to eat all rice, you'd spend your whole budget 1171 00:48:43,710 --> 00:48:45,752 right, now I've basically giving you extra money. 1172 00:48:45,752 --> 00:48:48,293 Because all that rice you used eat, you can now have cheaper. 1173 00:48:48,293 --> 00:48:50,120 Are going to spend that to buy more rice? 1174 00:48:50,120 --> 00:48:52,150 No, you're buy something else. 1175 00:48:52,150 --> 00:48:53,572 And that's a Giffen good. 1176 00:48:53,572 --> 00:48:55,530 So if you think about sort of a corner solution 1177 00:48:55,530 --> 00:48:58,070 where people are buying all the good that's inferior, then 1178 00:48:58,070 --> 00:48:59,820 by definition if you give them more money, 1179 00:48:59,820 --> 00:49:01,350 they're going to move on to another good. 1180 00:49:01,350 --> 00:49:02,800 Or there's at least a possibility. 1181 00:49:02,800 --> 00:49:04,260 And that's the Giffen good example. 1182 00:49:04,260 --> 00:49:06,570 But we have to search pretty darn hard. 1183 00:49:06,570 --> 00:49:08,550 Typically in the demand context, we 1184 00:49:08,550 --> 00:49:11,070 think that demand curves are downward-sloping. 1185 00:49:11,070 --> 00:49:13,497 However, when we get to other contexts, 1186 00:49:13,497 --> 00:49:15,330 we're going to find it's more normal to find 1187 00:49:15,330 --> 00:49:16,360 that these income and substitution 1188 00:49:16,360 --> 00:49:17,950 effects fight against each other and lead 1189 00:49:17,950 --> 00:49:18,992 to strange-shaped curves. 1190 00:49:18,992 --> 00:49:22,590 And we'll come back to that later in the course. 1191 00:49:22,590 --> 00:49:25,160 OK, I'll see you all Wednesday.