[User] Please transcribe this text

[Assistant] So you kind of have to say, look, here's a transaction to make both parties better off. The person who gets the kidney gets to stay alive, and they are willing to pay a huge amount for that.


[User] Please transcribe this text

[Assistant] The person who sells the kidney in most probability is fine, because almost all of us can make it through life fine with one kidney, and can get a life changing amount of money that could allow them to pursue their dreams in various ways. Okay?


[User] Please transcribe this text

[Assistant] So that's the standard argument would be yeaah. You should be able to sell your kidneys on eBay. Okay. So the question is why not?


[User] Please transcribe this text

[Assistant] Why would we want to stop this transaction? What are the counter arguments to that? Let's raise our hand, raise, yeaah.


[User] Please transcribe this text

[Assistant] So the first type of problem comes out of the category we call market failures.


[User] Please transcribe this text

[Assistant] Market failures are reasons why the market doesn't work in the wonderful way economists like to think it should.


[User] Please transcribe this text

[Assistant] So for example, this answer puts up that could be the problem of, uhm, fraud.


[User] Please transcribe this text

[Assistant] Okay, people might not be able to tell if they're getting a legit kidney or not. Okay, there could be the example of imperfect information.


[User] Please transcribe this text

[Assistant] Do you know what the odds are that you can spend the rest of your life with only one kidney? I don't either.


[User] Please transcribe this text

[Assistant] Okay, we ought to know that before we start selling our kidneys. Okay, there could be imperfect information.


[User] Please transcribe this text

[Assistant] Which is, we would end up with a world where only rich people would get kidneys.


[User] Please transcribe this text

[Assistant] Okay, currently there's a bunch of voluntary donors and people who are in accidents who have kidneys left over. Okay.


[User] Please transcribe this text

[Assistant] And those go to a people on the basis of where they are on a waiting list. It's actually a prioritized waiting list. It's kind of a cool... One of my colleagues, Nikhil Agarwal,


[User] Please transcribe this text

[Assistant] If you think about, I'll talk a lot this semester about the imperialistic view of economics, all the cool things we can study.


[User] Please transcribe this text

[Assistant] So he actually uses economic models to study the optimal way to allocate organs.


[User] Please transcribe this text

[Assistant] To individuals. Right now it's just done based on a waiting list.


[User] Please transcribe this text

[Assistant] But, but it may be that someone further down the waiting list needs it more than someone higher up the waiting list because they're more critical or whatever. So there's various...


[User] Please transcribe this text

[Assistant] Which we can just call so behavioral failure, behavioral, just call behavioral economics for want of a better term. Which is essentially,


[User] Please transcribe this text

[Assistant] People don't always make decisions in the perfectly rational, logical way we will model them as doing so this semester.


[User] Please transcribe this text

[Assistant] People make mistakes. That's a word we hate using in economics. We hate saying mistakes. Ooh, boo, mistakes. Nobody makes mistakes. We're all perfectly little economic beings, but we know that's not true. Increasingly,


[User] Please transcribe this text

[Assistant] Over the past several decades, economists have started incorporating insights from psychology into our models.


[User] Please transcribe this text

[Assistant] To not just say people make mistakes, that's a lackadaisical, but to rigorously model the nature of those mistakes and understand how mistakes can actually happen due to various cognitive biases and other things.


[User] Please transcribe this text

[Assistant] In this world, you can imagine people could make mistakes. They could be, they could not really sit down and quite understand what they're doing.


[User] Please transcribe this text

[Assistant] And they could have stolen their kidney when it's really not in their own long-term interest. Yeah.


[User] Please transcribe this text

[Assistant] But once you choose this, say, well, wait a second, maybe they're not evaluating the trade-offs correctly. Even if there's no fraud, even if there's perfect information, they may not know how to process that information correctly.


[User] Please transcribe this text

[Assistant] Okay, but that is not standard economics. That's not what we'll spend a lot of time on this semester, but it's obviously realistic. Okay? So those are a bunch of good comments, great comments. And that, yeah.


[User] Please transcribe this text

[Assistant] Okay, we'll come back, that's a great, come back, then we'll talk about the shape of demand curves. If you want to return to that question in a few lectures, but that doesn't actually cause a problem. It's just, that's more of a positive thing about why the price is so high. But it's not a normative issue about whether you should allow it or not. Okay?


[User] Please transcribe this text

[Assistant] So basically, these are exactly, this isn't, to me honestly, I spend my life thinking a lot about these things. I think these are really interesting issues.


[User] Please transcribe this text

[Assistant] But you can't get to the norm of issues without the positive analysis. You need to do the positive analysis to understand the economic framework.


[User] Please transcribe this text

[Assistant] The bottom line, you know, I said I'll teach this course with a policy bent, but you have to recognize that economics at its core is a right-wing science. Economics at its core is all about how the market knows best, okay, and that basically governments only mess things up.


[User] Please transcribe this text

[Assistant] That's sort of the basic, a lot of what we'll learn this semester. As semester goes on, we'll talk about what's wrong with that view.


[User] Please transcribe this text

[Assistant] And how governments can improve things. Indeed, I teach a whole course about the proper role of government in the economy. But the standard of economics is the market knows best. Okay? And that leads us to the last thing I want to talk about, which is basically


[User] Please transcribe this text

[Assistant] How freely should an economy function? Let's step back to the giant picture. Let's step back from a market for roses to the entire economy. How freely should a market, should an economy function? We have what's known as a capitalistic economy. In a capitalistic economy, firms and individuals decide what to produce and consume, maybe subject to some rules of the road set by the government.


[User] Please transcribe this text

[Assistant] There's some minimal rules of the road to try to avoid fraud or misinformation, but otherwise we let the dice roll.


[User] Please transcribe this text

[Assistant] Firms and consumers decide sort of what to, uh, what to do. Now this has led to tremendous growth. Okay? America was not a wealthy nation. Was not a very wealthy nation 100 years ago, 150 years ago.


[User] Please transcribe this text

[Assistant] Led to tremendous growth where we are now still the most powerful and wealthiest nation in the world. Okay? Largely driven by the capitalist nature of our economy. On the other hand, we are a nation with tremendous inequality. We are by far the most unequal major nation in the world.


[User] Please transcribe this text

[Assistant] Okay, the top 1% of Americans has a much higher share of our income than in any other large country in the world, any other large developed country in the world. The bottom 99% has less of our income corresponding to anywhere else. So it's led to major inequality.


[User] Please transcribe this text

[Assistant] And it's led to other problems. It turns out that the government can't appropriately set the rules of the road to avoid things like fraud, as we saw with Enron, if you remember back to that, or a lot of what happened during the financial meltdown. It turns out it's hard to get people perfect information, etc.


[User] Please transcribe this text

[Assistant] So we've seen the problems, we've grown very wealthy as a nation, we've introduced a whole set of problems through this system. Now the other extreme is what's called the command economy.


[User] Please transcribe this text

[Assistant] Rather than a capitalist economy, it's what's called a command economy. Okay?


[User] Please transcribe this text

[Assistant] In this case, the government makes all the production and consumption decisions.


[User] Please transcribe this text

[Assistant] The government doesn't just set the rules of the road, the government owns the road. The government says we're going to produce this many cars this year.


[User] Please transcribe this text

[Assistant] Okay, and people can get them in some way, it could be a lottery, it could be waiting in line, however we decide to allocate them. We're not gonna let the market allocate them, we the government will allocate them. Okay, how many get produced, and who gets them? Okay, and this was the model of the Soviet Union that I grew up with. Okay, this was the pre-1989 Soviet Union.


[User] Please transcribe this text

[Assistant] Okay, the government decided how many shirts, cars, TVs, every, I mean it's sort of bizarre to think about literally everything. The government decided how much to produce.


[User] Please transcribe this text

[Assistant] And by and large, the government decided who got it, partly through corruption, that is the party, the party members, party leaders got it first, and often just through waiting in line for the remaining application. Now in theory, this ensured equity by making sure that everybody had shot a thing. In practice, it didn't work well at all.


[User] Please transcribe this text

[Assistant] And actually was what dragged down the collapse of the old Soviet economy. Was that the command model simply doesn't work. Partly there's just too many opportunities for corruption. When the government controls everything, that means there's no checks and balances.


[User] Please transcribe this text

[Assistant] Is basically the notion that the capitalist economy will manage to distribute things roughly in proportion to what people want.


[User] Please transcribe this text

[Assistant] Okay, and that's where p- folks wanna be. They- folks who want a certain kind of car are gonna wanna get to that kind of car. And if the government has it wrong, they're gonna get upset and it's gonna lead to a less functional economy. Okay? So basically, uhm, Adam Smith's view


[User] Please transcribe this text

[Assistant] Is that the invisible hand view is that consumers and firms serving their own best interests will do what is best for society.


[User] Please transcribe this text

[Assistant] Okay, so the fundamental core of the capitalistic view is the consumers and firms serving their own best interests will do what ends up being best for society. And that's essentially the model we'll learn to start in this course. Yeah.


[User] Please transcribe this text

[Assistant] For now, we're going to find best for society as the most stuff gets produced and consumed.


[User] Please transcribe this text

[Assistant] Okay, that's how we're going to find it. Obviously you've raised a set of issues about what about pollution, what about health, et cetera. We're going to come to those. But for the first two thirds of the course.


[User] Please transcribe this text

[Assistant] Best for society means what we're gonna call maximum surplus, which is the most stuff gets produced that people value. Okay?


[User] Please transcribe this text

[Assistant] So that's, that's how we're gonna do it. And in his view, the visual hand does that. And by and large, by and large, it's a very helpful framework to turn to. Okay? However, it leads to outcomes that are, can lead to outcomes that are not very fair. So the way we're gonna proceed in this course,


[User] Please transcribe this text

[Assistant] Is we're gonna start by talking about how Adam's Fist magic works. How does the magic happen?


[User] Please transcribe this text

[Assistant] How does individuals and firms acting their own self-interest, without caring about anybody else, end up yielding the largest possible, the largest possible productive economy? Okay, how does that happen? Okay, and we're gonna talk about that. We'll start with demand.


[User] Please transcribe this text

[Assistant] Which is how do consumers decide what they want, given their resources. We'll talk about the principle of utility maximization.


[User] Please transcribe this text

[Assistant] The idea that I have utility function, that I can mathematically write down what I want. I'll have a budget constraint, which is the resource I have, and then we'll do constrained optimization. We'll say, give them what I want, and the resource I have, what decisions do I make? Boom, we get the demand curve. Then we'll turn to supply, and we'll talk about how do firms decide what to produce?


[User] Please transcribe this text

[Assistant] That's much more complicated, because firms have to decide what inputs to use and what outputs to produce.


[User] Please transcribe this text

[Assistant] And we'll talk about how firms operate, can operate in very different markets. There's a competitive market that Smith envisioned, but that doesn't always work. Sometimes we get monopoly markets.


[User] Please transcribe this text

[Assistant] Okay, where one firm dominates, and you can actually end up with outcomes which aren't the best possible outcome, even with the invisible hand. Okay, so we'll talk about different kinds of markets. Then we'll put it together to get market equilibrium, and talk about sort of Smith's principles. And then from there, we'll talk about how it breaks down in reality. Different changes in reality. How there are various market failures that can get in the way. Why we have to care about equity, and what implications that has. About behavioral economics. About a set of other factors.


[User] Please transcribe this text

[Assistant] Okay, so that's basically how we're going to proceed, uh, this semester.


[User] Please transcribe this text

[Assistant] As I said, the lectures are important but the recitations are as well.


[User] Please transcribe this text

[Assistant] Once we're sort of in steady state, the recitation will be about half.


[User] Please transcribe this text

[Assistant] Uh, working half new material and half working through problems to help you prepare for the next problem set. So where the problem sets are going to work is the problem set that's assigned will cover material that's taught


[User] Please transcribe this text

[Assistant] Which will help, which you should understand because it will cover things we've taught in class. And help prepare you for the problem set. And we'll do that every week. That about half the sections. The other half of the section will be new material. Okay? This Friday, the section on Friday is all new material.


[User] Please transcribe this text

[Assistant] We're doing Friday is cover the mathematics. I don't like doing math. I always get it wrong. Okay. So I leave math for the TAs who are smarter than I am. Okay.


[User] Please transcribe this text

[Assistant] So this Friday, we're doing the mathematics of supply and demand and how you take the intuition here.


[User] Please transcribe this text

[Assistant] And the simple graphics can actually turn it into mathematical representations, which is what you need for the problem set.


[User] Please transcribe this text

[Assistant] That this Friday, then we'll come back on Monday and start talking about, uh, what's underneath the demand curve. Alright, any other questions? Okay, I'll see you on Monday.


[User] Please transcribe this text

[Assistant] Listen jackass, I get threats like this twice a week. Why don't you grow a pair and tell me what you want?


[User] Please transcribe this text

[Assistant] Enough! We have to leave. Now!


[User] Please transcribe this text

[Assistant] I am sleepy, I'm so sleepy. I want to sleep more.


[User] Please transcribe this text

[Assistant] I am sleepy, I'm so sleepy. I want to sleep more.


[User] Please transcribe this text

[Assistant] Alright guys, so in this module, we're going to learn all about how to build your very own RESTful API.


[User] Please transcribe this text

[Assistant] Now in previous modules, we've seen and used APIs that other people have created and we've also started to build up our server to allow get requests and post requests. But in this module, we're going to do it from beginning to end and we're going to build our very own complete RESTful API.


[User] Please transcribe this text

[Assistant] Now the first question you might have is what exactly does REST mean and what does it mean to make an API REST full, right? Well, REST is not lazing on the couch and watching Netflix, but it actually stands for Representational State Transfer.


[User] Please transcribe this text

[Assistant] Which is quite a mouthful, but in order to understand it, we have to backtrace a little bit and we have to go back to that classic architecture that we've already looked at, which is the client.


[User] Please transcribe this text

[Assistant] And server architecture and this is the architecture that the entire internet is pretty much built on. So let's just review it quickly. So the client makes a request to the server. So what exactly is the client? Well, if we were in a restaurant, the client would be, well, the client who's paying for the meal.


[User] Please transcribe this text

[Assistant] So when our client makes a request, say, I'd like a pizza, please, then the server has to check to see if this is something that the restaurant can fulfill. And if so, he will smile graciously at you and fulfill that request.


[User] Please transcribe this text

[Assistant] But if the client requested something that they didn't have, for example, a sausage and it's not on the menu, then the server would give you a error code.


[User] Please transcribe this text

[Assistant] A classic one, of course, being 404, which is resource doesn't exist. We don't stock sausages.


[User] Please transcribe this text

[Assistant] Now when the client makes that request to the server, classically on the internet, this is done through a HTTP request, hypertext transfer protocol request.


[User] Please transcribe this text

[Assistant] And the analogy for this is, it's kind of like the language that you're using to make the request. Say you're saying, I want a pizza, right? And if you're in France, you would have to say that in French. Although I'm not sure what you're doing eating pizzas in France. But the server would be able to understand your request and give you back the correct result.


[User] Please transcribe this text

[Assistant] Now the thing you have to remember is that HTTP, this hypertext transfer protocol, is not the only language that servers can speak, right? Another one that you might have heard of is, for example, the FTP request, which is the file transfer protocol request.


[User] Please transcribe this text

[Assistant] So if you use the wrong language, you might not get back the result that you're looking for. So for example, if a server speaks French in France and you try to speak to him in Italian, that probably won't work. So we have to make sure we've got the right language for making our request.


[User] Please transcribe this text

[Assistant] Now at this point, some students might say, well, what about that other thing, that HTTPS request? What does that S stand for and is it a different language? Well, HTTPS stands for HTTP secure request. So remember that all your requests,


[User] Please transcribe this text

[Assistant] Because somebody might hijack that along the way and that's not very secure. So we can also use cryptography and encrypt our requests. So if anybody does intercept the request, they won't be able to know what it says.


[User] Please transcribe this text

[Assistant] Now this is kind of equivalent to having like a secret code language. For example, if both you and your waiter speak Klingon, then you could communicate securely.


[User] Please transcribe this text

[Assistant] What you're saying other than yourself and your waiter. Now let's say that the client has successfully made the request to the server.


[User] Please transcribe this text

[Assistant] And this is something that the server can server up, so it sees it as a valid request instead of a 404. Then in this case, the server should respond with the results of what it is that you requested.


[User] Please transcribe this text

[Assistant] So in the restaurant, that might be your pizza.


[User] Please transcribe this text

[Assistant] But on the internet, that might be the webpage, HTML or resources such as images or data.


[User] Please transcribe this text

[Assistant] Now in order to give us that result, the server might do one of two things. It might do some computation, run some code to work out the result that you need. For example, if our server was a simple, uh, calculator web application,


[User] Please transcribe this text

[Assistant] Or the server might need to communicate with our database in order to grab the relevant pieces of data that the client requested.


[User] Please transcribe this text

[Assistant] So depending on what kind of request that the client made, what kind of resource they wanted, the server might do one or both of these things. So we've seen that the client has to talk to the server using an HTTP request, a specific language that the server can understand.


[User] Please transcribe this text

[Assistant] But also, there's only a certain amount of things that the server can do, right? Say at a restaurant, you would have a menu of items that this particular restaurant would serve. And it's exactly the same on the internet.


[User] Please transcribe this text

[Assistant] The server will have a whole bunch of APIs, which are services that it can expose for clients to be able to tap into.


[User] Please transcribe this text

[Assistant] And so we're building an API. We're kind of like building the menu of things that our server can respond to when a client makes a request. So now that we understand all three components, what does it mean to make our API restful?


[User] Please transcribe this text

[Assistant] Well, REST is essentially just an architectural style.


[User] Please transcribe this text

[Assistant] So just as you have different buildings that have different architectural styles, for example, the Baroque architectural style with the nice arches or other buildings might be built in the Gothic architectural style with flying buttresses and these imposing beams.


[User] Please transcribe this text

[Assistant] And my favorite, the neoclassical have these incredibly geometric


[User] Please transcribe this text

[Assistant] So these are architectural styles for designing buildings. Well, REST is an architectural style for designing APIs and it's definitely not the only architectural style. So the other really, really popular one before REST became the dominant style was Soap.


[User] Please transcribe this text

[Assistant] And there's also GraphQL or Falcore and there's a lot of other architectural styles.


[User] Please transcribe this text

[Assistant] But the gold standard for web APIs is REST. So that's what we're going to be looking at. And REST actually came about really quite recently as a part of this guy's PhD. This is Roy Fielding.


[User] Please transcribe this text

[Assistant] And he did his PhD in the University of California.


[User] Please transcribe this text

[Assistant] And as a part of his doctorate, he researched and came up with this architectural style that we now call REST. And it proposes a set of rules that web developers could follow when they're building their APIs.


[User] Please transcribe this text

[Assistant] And he came up with this idea that all websites across the web would use the same structure for building their APIs.


[User] Please transcribe this text

[Assistant] I mean, imagine if you had a whole street and all their buildings had the same layout. For example, the toilets for men and women are always on the same floors in the same position, then you would never get into a situation where you're trying to find the toilet. So my personal struggles aside, essentially in his PhD he proposed,


[User] Please transcribe this text

[Assistant] The internet could do the same. If every web API was built using the same common guiding principles, then it would be so easy for everybody to work together and be able to use different APIs quickly, easily, and efficiently.


[User] Please transcribe this text

[Assistant] Pretty neat for a PhD project, right? There's definitely some PhD projects that are a lot worse, like the guy who had to look into the propulsion parameters of penguin poop. But maybe if you really like penguins, that's okay.


[User] Please transcribe this text

[Assistant] So how exactly do we make our API restful? Well, there's a lot of rules that an API has to follow to be restful.


[User] Please transcribe this text

[Assistant] And just as you have rules that you might follow at your workplace or your school, you might have a uniform, no shorts, no singlets, don't smoke in the building.


[User] Please transcribe this text

[Assistant] Uhm, you will also have a whole bunch of rules for making an API restful. But the two most important ones are using the HTTP request verbs. So using that HTTP request language.


[User] Please transcribe this text

[Assistant] And these two things are probably the most important parts of making your API restful. And we're going to look at each of them in detail. So first, what exactly are the HTTP verbs? Well, you've already seen some of them. First is get, then there's post, put,


[User] Please transcribe this text

[Assistant] Patch, patch came relatively recently in 2010 and it was added to the HTTP request language essentially very recently, but it's kind of a neat twist on how we update data and we're going to look at that in a little bit as well.


[User] Please transcribe this text

[Assistant] And finally, you've got delete. So these are the five HTTP verbs that you should be using in order to make your API restful. And you might realize that they have a lot of similarities to something that we covered previously in the database module.


[User] Please transcribe this text

[Assistant] Which is when we looked into crud, right? Create, read, update, and delete.


[User] Please transcribe this text

[Assistant] So we're going to look at our REST HTTP request verbs alongside our database CRUD function.


[User] Please transcribe this text

[Assistant] And we're going to see how each of these verbs work in practice.


[User] Please transcribe this text

[Assistant] So now that we've looked at the HTTP request verbs and we can see how they're used, the next thing to talk about is the specific pattern of routes and endpoints that you have to use in order to make your API restful.


[User] Please transcribe this text

[Assistant] So just as when you go on a safari, there are different routes that you would use to reach say the elephant area or the camels or the hippos. In our server, we can specify specific routes or URLs in order to access certain resources. So you might have, you know, www.google.com slash elephants.


[User] Please transcribe this text

[Assistant] Then that would bring up all of the elephants and slash camels would be for the camels and hippos. So these are routes and we've already used routes before in our server code. But in order for our API to be restful, we have to have a specific pattern of endpoints and routes. So for example,


[User] Please transcribe this text

[Assistant] If our API was the Wikipedia API, right? And in our database, we had a whole bunch of articles. Now the route for forward slash articles applies to all of the articles. Now, if we created a route,


[User] Please transcribe this text

[Assistant] Articles, then when a client makes a get request to forward slash articles, it should fetch all of the articles.


[User] Please transcribe this text

[Assistant] And when they make a post request to the forward slash articles route, then it should create a single new article and add it to our database of articles.


[User] Please transcribe this text

[Assistant] And when we make a delete request to slash articles,


[User] Please transcribe this text

[Assistant] Then it would delete all the articles in our database.


[User] Please transcribe this text

[Assistant] But restful routing also has rules for individual resources. So within all of the articles, we will have specific articles, right? Say we had an article on Jack Bauer, then if the client was targeting slash articles slash Jack Bauer,


[User] Please transcribe this text

[Assistant] Then if they made a GET request, that would fetch the specific article on Jack Bauer from our database.


[User] Please transcribe this text

[Assistant] And you can also use put and patch to update that specific article.


[User] Please transcribe this text

[Assistant] Now, a little bit later on, when we create all of these routes using the HTTP verbs, it's going to be a lot more clear how each of these works. But for now, I just want you to get an overview of what RESTful routing actually looks like before we get started.


[User] Please transcribe this text

[Assistant] And the pattern of routes that make your API restful. The next step is to get started and actually build our very own API.


[User] Please transcribe this text

[Assistant] Well, I heard that your dreams came true. Guess you gave things I didn't give to you. Oh, friend.


[User] Please transcribe this text

[Assistant] Alright, let's get started. Uhm, today we are going to, uh, complete our discussion of consumer choice by actually coming back and deriving the demand curve that we started this semester with. Actually showing you how


[User] Please transcribe this text

[Assistant] From the limited set of tools we've given you, we can actually derive the underlying demand curves that we see in this class.


[User] Please transcribe this text

[Assistant] I'm gonna spend the rest of the lecture then talking about the elasticity of demand, what determines the shape of that demand curve.


[User] Please transcribe this text

[Assistant] I'll talk about how changes in income affect demand.


[User] Please transcribe this text

[Assistant] And then we'll come and we'll come back and talk about the effects of a price change. And we'll talk about sort of the theoretical concepts underneath how you analyze a change in price in an economics model. So let's start with deriving demand curves.


[User] Please transcribe this text

[Assistant] So basically we're now going to talk about how do you derive from the tools we've learned so far, the relationship between price and quantity demanded.


[User] Please transcribe this text

[Assistant] The downward sloping relationship between price and quantity of demand that we showed you in the very first lecture.


[User] Please transcribe this text

[Assistant] So let's, to do so, let's return to our example from last time.


[User] Please transcribe this text

[Assistant] Remember the example from last time? His utility function was of the form u equals p times c. Okay? Your parents had given you an income of $72. With which you could buy pizza and cookies. Pizza at a price


[User] Please transcribe this text

[Assistant] Obviously, this part is non-controversial. There's a price for pizza in the market, there's a price for cookies in the market. There's an income, there's an amount of money your parents give you. That's non-controversial.


[User] Please transcribe this text

[Assistant] And this is just a sensible assumption of what someone's preferences might look like. All I'm saying is with these four things, we are done. With these four things, we can now derive a demand curve. And how's that?


[User] Please transcribe this text

[Assistant] Let's start by looking at it graphically in figure 4-1. Okay? Figure 4-1 on the left hand side is exactly the kind of indifference curve analysis that we did last time. So we start with budget constraint BC-1. Okay?


[User] Please transcribe this text

[Assistant] That is something where you can either get up to 12 cookies and no pizza, or up to 6 pizzas and no cookies. Okay?


[User] Please transcribe this text

[Assistant] And we know, from analysis last time, given this, we showed you last time, and you went home and practiced, and we're so excited you told your mom and everything, we told you how you could show that you'd want, that you'd want six cookies and three slices of pizza at a point like point A. Okay, we showed that last time.


[User] Please transcribe this text

[Assistant] Now we also talked about what happens when the price changes. So for example, imagine that the price of cookies rises to nine dollars.


[User] Please transcribe this text

[Assistant] Okay, well we know the price of cookies rise to nine dollars, it's that you could still on your budget afford six pizzas.


[User] Please transcribe this text

[Assistant] So the y intercept does not change, but the x intercept changes.


[User] Please transcribe this text

[Assistant] Now, you can only afford eight cookies. So you move to BC2 sub 2.


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[Assistant] Used to be able to, used to be able to afford 12 cookies, not going to afford 8 cookies.


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[Assistant] And most importantly, the slope of the budget strain has steeped.


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[Assistant] Remember, what is the slope of the budget constraint? It's the slope of the budget constraint. The slope is minus P, uh, C over PP. That's the slope. And that's steepened because the price of cookies has risen.


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[Assistant] So you now have a steeper budget straight. The slope used to be minus a half. Now it's minus three quarters.


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[Assistant] So now, that's gone from minus a half to minus three quarters. With this new higher price for pizza. Uh, higher price of cookies, I'm sorry. The price of cookies goes to nine dollars. That budget constraint has steeped. Okay?


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[Assistant] What does this do to demand for cookies? Well, we find the highest tangency of your indifference curves with this new budget constraint, and you could solve mathematically to show that that will occur at point B.


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[Assistant] Where you will choose to continue to have three slices of pizza, but to only have four cookies.


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[Assistant] That is what happens if you take this, you do constrained optimization, if you change this price to nine.


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[Assistant] Reoptimized, the way we showed you last time, you'd end up finding that you would want, uhm, you would want, uh,


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[Assistant] Uh, four, uh, three slices of pizza and four cookies at point B. Okay? Now, what if instead the price of cookies fell to four dollars? So cookies got cheaper.


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[Assistant] Well in that case now, you could still only afford 6 slices of pizza. So the y-intercept once again doesn't change. But the x-intercept now moves out to 18. Because now you can afford 18 cookies. So your new budget constraint is flatter. It's bc sub 3.


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[Assistant] It's a flatter, outermost budget constraint. Your opportunity set is much larger, because cookies are cheaper.


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[Assistant] You're gonna save money from your parents, but it can buy more stuff. You're gonna buy more cookies. So your opportunity set is larger. So you now can re-optimize.


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[Assistant] With a now flatter budget constraint, the slope instead of being a half has now fallen to a third.


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[Assistant] Okay, the price of cookies over the, but the price of cookies is $4, the price of cookies over the price of pizza is now a third. So in absolute value, the slope is lower.


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[Assistant] So you can now, and we say that if you take the same utility function and optimize at the new price,


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[Assistant] We simply did by redoing the optimization I did last time. By taking this utility function.


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[Assistant] Maximizing it, subject to a budget constraint dictated by these parameters. All I did was change this parameter twice. Once I may change it up, once I change it down. Okay, questions about that? Well, you've now derived the domain curve. Oh yeah, I'm sorry, question.


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[Assistant] No, your fundamental, your indifference curves are determined by utility function. Your indifference curves do not change. It changes which indifference curve you end up choosing.


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[Assistant] Because the tangency point changes. But the only way to change the difference curve would be to change the utility function. The difference curves purely come from this part of it.


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[Assistant] So difference curves come from here, budget constraint comes from these three pieces. Okay? Yeaah.


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[Assistant] But no, in difference curves you can't really add up, because remember, utils are not a thing. So you can't add up in difference curves.


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[Assistant] Between price and quantity. Well I just showed you the relationship between price and quantity.


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[Assistant] When the price goes down, quantity of cookies goes down, goes up. When the price goes up, quantity of cookies goes down.


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[Assistant] We'll just shift over to the right hand side of figure 4-1, there's a demand curve. I just graph these three points. I just graph for each of the different price of cookies I gave you, how many cookies are demanded.


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[Assistant] Okay, well at a price of cookies of six, our initial price, jeez this is really small, uh, six cookies was, were demanded. Okay, when the price of cookies goes up to eight, I'm sorry, when it goes up to nine, only four cookies are demanded. When the price of cookies falls to four, point C, then nine cookies are demanded. So literally we've just arrived at an anchor.


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[Assistant] Starting with these primitives, your tastes, your preferences?


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[Assistant] And your budget constraint, we've derived a domain curve. And that's it. That's where domain curve comes from. Okay.


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[Assistant] And that is, uhm, that's essentially, uh, what is underneath the demand curve. What's underneath the demand curve is the fact that as the reason demand curves slope down, okay, is that as the price goes up, you want less of the good.


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[Assistant] Because with a given utility function, that price goes up, you want less of the good, and that's why demand curve slopes down. Okay? So we've just derived that. Okay, questions about that? Yeah.


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[Assistant] So since you asked me, I'll answer it. No, it is not always true. In fact, that is a feature of this particular utility function I've chosen. This particular utility function I've chosen


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[Assistant] Gives the feature that the demand for a good is a function only of your income and that goods price, not of the other goods price. That's a feature of this, that's why we like this utility function. Okay, it has that nice feature. In general, that's not true.


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[Assistant] In general, when the price of one good changes, it will affect the demand for all goods, not just that good itself.


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[Assistant] So the more general utility function, that would not be true. With this utility function, it gives what's called the flat price consumption curve.


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[Assistant] Okay, not a term you need to know, but just if you want to be more technical. Which is basically, with this utility function, demand for any good is a function only of its own price in your income.


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[Assistant] Therefore, when other prices change, it doesn't affect the demand for that good. But that is not generally true. In general, when you change the price of one good, demand for all goods changes. Okay? Questions about that? Okay, yeaah. Oh, it wouldn't matter what number I'd chosen.


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[Assistant] But the bottom line is the number, as the price of cookies changes, the number of pizza slices would never change.


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[Assistant] This trade-off with modeling. I've chosen a simplified utility function with this nice feature that's almost certainly not true.


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[Assistant] Okay, but we once again allow, it allowed us to derive very sensible domain curve without introducing other complications. Okay. Now.


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[Assistant] What determines this demand curve's particular shape?


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[Assistant] What determines the shape of this demand curve? And that leads us to the second topic I want to cover today, which is the elasticity of demand.


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[Assistant] It's a percentage change in quantity for a percentage change in price.


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[Assistant] So for example, if quantity falls by 2% for every 1% increase in price, that's the elasticity of demand of negative 2. The elasticity of demand, as long as demand curves are downward sloping, is less than 0. Because the price goes up, quantity falls.


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[Assistant] Okay, so elasticity of demand is less than zero. Okay, uh, and less, I'm sorry, less than or equal to zero. Less than or equal to zero. Yeah.


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[Assistant] If we did it in calculus, it would be infinitesimal epsilon change, so it wouldn't matter if it was new or old quality. When you do it discreetly, use the old quantity. Okay, so I should say Q0 and P0.


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[Assistant] Once again, if you did this in calculus, which is the way we're sort of thinking about it and underlying intuition, it's an epsilon change, so q0 and p0 are epsilon. It doesn't really matter. But if you do it discreetly, you'd want to use q0 and p0. Okay? These are great questions. Keep them coming. Okay. Now.


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[Assistant] Whenever we think of constants like elasticity, it's always useful to think about the extremes. So what are the extremes of this measure? One extreme would be if the elasticity's demand was zero. We would call that perfectly inelastic.


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[Assistant] Demand will be epsilon equals zero. Now extremes never exist in the real world. Okay, but we can, but there are cases that come very close.


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[Assistant] So can someone, without flipping the page of the handout, don't do it, cause it's only before flipping the page of the handout, give me an example of a good that might have perfectly in a, very, very, very inelastic demand. Where no matter the price, you'd still want the same quantity. Yeah.


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[Assistant] Water, something that's essential to life like water, what else? Yea, in the way back.


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[Assistant] Sewage removal is interesting, although not quite because we see a lot of variation around the world in sewage removal. But, something like that. Basic essentials of life. Insulin is a classic example we use. Indeed, that's the example I do use.


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[Assistant] Uh, in the next, I guess I didn't list it on here, so you could have turned the page. Uh, we think about perfectly in the last demand, someone once again for those of you who don't


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[Assistant] Insulin is a medicine you need to take to help you control your blood sugar. Without it, you die.


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[Assistant] So you'd think that's pretty, you know, last-demand. Like I wanna live, so I'm gonna wanna have my insulin. And if the price goes up, I'm not gonna say no, I'll just die. Okay? You're gonna wanna still have the insulin.


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[Assistant] So we think in that case, quantity would be fixed at some q.


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[Assistant] Which is the insulin you need to live, and it wouldn't really matter what the price is. So elasticity would be zero. You have a perfectly inelastic curve. Quantity would not change with price.


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[Assistant] Okay? Basically, that would happen when there is no plausible substitute.


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[Assistant] Okay, the reason water's not as good as insulin is because I can drink something else. And sewage removal I can.


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[Assistant] When there's no plausible substitute, it may be perfectly inelastic. Likewise, we consider, yeaah.


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[Assistant] Uhm, so that would be, so that would be perfectly inelastic. We can also do the other extreme perfectly elastic. So what's an example? Perfectly elastic demand.


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[Assistant] Perfectly elastic demand is that, uh, perfectly elastic demand is that epsilon equals negative infinity. Okay? So what, what, what would cause perfectly inelastic demand? Let's, people raise their hand and, and tell me. Perfectly, perfectly elastic, uh, perfectly elastic demand, I'm sorry. What would cause perfectly elastic demand? What would cause it? I should try to spread it around a little bit. Yeah.


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[Assistant] That's interesting. I mean, it wouldn't, that's not, I'm gonna come to that, but that wouldn't, that's something where demand would be less elastic, but not perfectly, not close to perfectly elastic because,


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[Assistant] Basically, well, let me ask the question this way. What would drive a good to very, very elastic demand in general? Yeah.


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[Assistant] There is no sub, I am insulted that you would suggest that the great spork, you need two different things to replace a spork.


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[Assistant] I'm just joking. No, what else? What else? What is something that's really good subsuits? Yeah.


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[Assistant] Yeah, something which is an off-brand medication or like, I like to think of like a fast food.


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[Assistant] Okay, like, like, like, fast food burgers have pretty good subs with fast food pizza.


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[Assistant] Okay, uh, basically, it's, once again, it's hard to think of an extreme example. Nothing's ever perfectly elastic. But things which have very good substitutes. Okay, typically this works when we think across brands. Okay, think about different brands of gum. Geez, I mean, who the hell cares? Or different brands of fast food, yeah.


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[Assistant] That's a separate issue. Let's come back. That's sort of a separate, that's like a kink, a weird, kinked budget constraint. That's not really about substitution.


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[Assistant] Because if it's perfectly elastic, like if one pack of gum, I don't know what these stupid gum thing orbits in ellipse or whatever,


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[Assistant] If they charge like a penny more than someone else, no one would buy them, they'd go out of business. Okay, that's the idea here. And that's why the price can't change. The price is fixed, so if anyone deviates from that price, boom, they either lose the market or get the whole market, yeaah.


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[Assistant] There's not really, I mean, you could say the demand for cash in general might be fairly elastic because you have credit cards and things like that. That's an interesting idea. Yeah.


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[Assistant] So basically, when you have perfectly elastic demand, you end up with sort of this constant price and quantity, and quantity changes, but price doesn't change. Okay? So that's kind of the extremes.


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[Assistant] Uhm, now, uhm, uh, in, uhm, so in general, we have goods that are more and less elastic. Okay, in general, we end up within this range. We're perfectly elastic and perfectly inelastic. The bottom line is, here's the intuition I want you to have. What determines elasticity is substitutability.


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[Assistant] The more substitutable goods are, the more elastically demanded they are. Okay? So now, now I want to go on to another topic, which is related, which is, we talked in our example about what happened when I changed prices. What about when I change income?


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[Assistant] So the third topic I want to talk about is what happens when income shifts. And how does that affect demand curves? When income shifts, how does that affect demand curves?


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[Assistant] Okay. Well, we can do the same exercise we did before. We did an exercise before where we said, well, let's just use the tools we used before to solve for your new choices at different prices. Let's just solve for your choice at different incomes. So let's go to figure 4-4. Okay. Figure 4-4. Once again, we start with BC1. Same parameters as before. Same setup as before. Okay. We choose point A. Now let's say I raise your income.


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[Assistant] From 72 dollars to 96 dollars. You've done well, your parents have given you more money.


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[Assistant] $96. Well, in that case, you will choose to have both more pizza and more cookies. Given this utility function, you will choose the point, you will choose point B.


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[Assistant] Okay, so as your income goes up, you'll choose more of both. As your income goes down, you'll choose less of both.


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[Assistant] Okay, so now, once again, you'll notice this, well let me come to that. So basically, what that says is I can trace out the relationship.


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[Assistant] Between how your income changes and how your demand for cookies change, I can then graph that on the next graph and generate what's called the Engel Curve.


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[Assistant] The angle curve is the relationship between income and quantity demanded. And we'll come back to why this matters. Okay?


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[Assistant] The L-curve is a relation of an income and quantity of a minute. Now here the L-curve is linear. Once again, that's just a feature of this utility function. In general, it doesn't have to be linear.


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[Assistant] But here the angle curve is linear, that's just because of the way we struck this utility function. Okay? And the slope of the angle curve,


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[Assistant] Now, let me just say, uhm, let me just say one comment here about this, because there's sort of a big cheat.


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[Assistant] That, uh, I'm doing here with all this that I need you guys to be aware of.


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[Assistant] Which is, which is constant elasticity versus linear curves. We know a constant elasticity curve will not be linear.


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[Assistant] Okay, if it's linear, it's not constant elasticity because if it's linear, the elasticity will change along the curve.


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[Assistant] Okay, so the demand curve I just wrote, I drew in figure 4-1.


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[Assistant] That was a constant elasticity demand curve. That's why it was curved.


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[Assistant] This angle curve I drew here would not be constant elasticity because it's linear. You could, you can calculate for yourself that the percentage change, the income elasticity will shift as you go along this curve. And you can show that, you can show yourself that.


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[Assistant] What we're gonna do in this class is we're gonna draw linear constant elasticity curves. Which is, of course, technically wrong.


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[Assistant] Just think of them as blown up versions of a large demand curve. Everything is locally linear. Right? Once again, for an epsilon change, everything is linear. So, the truth is, we'll cheat a little bit.


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[Assistant] So, so that's kind of how we're gonna, that's sort of a cheat we're gonna do constantly through this course.


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[Assistant] And we'll be very clear if, if, if we make clear any problems or anything, if we need you to, to, to, uh, to deviate from that. Okay? Now, what we have here, in addition to a linear angle curve, is we have an upward sloping angle curve, or a positive income elasticity.


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[Assistant] Goods where the more money you have, the more of them you want, we call normal goods. Okay, cause that's sorta normal. However,


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[Assistant] It is also true that a number of goods in the world actually have gamma less than zero. And we call those inferior goods.


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[Assistant] Why would a good be inferior? Why when your income goes up? Yeah.


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[Assistant] I wouldn't think of them as inferior, either of them as inferior, relative to maybe inferior. But obviously when your income goes up, you're not going to suddenly, you know, you're going to want more of both.


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[Assistant] Okay, so the bottom line is that inferior goods, you're actually getting to, it's a bit subtly about different goods of the same kind. Let's think about classes of goods rather than brands of goods.


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[Assistant] Once you get across brands, you're right. Those are my class of goods. Watches, luxury watches in general are clearly not inferior. Fast food may be inferior.


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[Assistant] Literally, richer people may eat probably less fast food than poorer people. Okay, yeaah.


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[Assistant] I think not, because the bottom line is rich guys are gonna have, are much more likely to have two refrigerators than one.


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[Assistant] But I think fast food's a great example. The class example we use is potatoes.


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[Assistant] Okay, we're like, in the old days, like before fast food, like that was the cheap, filling, shitty tasting food stuff that guys sort of ate all the time. And now, like when they have money, they say, I'm gonna move on to steak. And they eat less potatoes.


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[Assistant] Okay, so something where essentially you'd rather shift to something else you have more money is inferior. Okay?


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[Assistant] Now moreover, within that, within normal, we're gonna draw a distinction between what we call luxuries.


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[Assistant] So we're gonna say, essentially the question is, proportional to your budget, what happens if your income goes up? In other words, do you spend more and more, they're both normal goods. The richer you are, the more you buy of it.


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[Assistant] But a luxury good is you spend even larger share of your, of your budget on that good as you get richer. So that'd be luxury, like watches, boats, maybe refrigerators, uh, et cetera.


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[Assistant] Things where the richer you get, the more of your budget you spend on it. In theory, uhm, uh, necessities are things like food where clearly rich people spend more on food than poor people.


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[Assistant] But they spend a smaller share of their budget on food than poor people.


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[Assistant] Okay, so it goes up, but doesn't go up proportionally with your income. It goes up less proportionally with your income. Yeah.


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[Assistant] Then let's, let's think of, you know, jewelry is a clinical example here and sort of, you know, food is a canonical example here.


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[Assistant] You know, there's a huge industry in estimating these elasticities of demand, so I'm sure there's an answer to that, I don't have it off the top of my head. Alright? So that's, so that's basically


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[Assistant] So now I've given you the underlying tools of consumer demand theory.


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[Assistant] I've told you how to decide what quantity a consumer wants. I've told you how you can use that to derive a demand curve.


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[Assistant] I've explained the shape of the demand curve. I then talked about what happens as your income changes and talked about the shape of income, uh, of the income elasticity. Now I'm going to put this together to come back to revisit something you think you already know the answer to, which is what happens when a price changes. The effects of price change.


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[Assistant] Now you might say, well that's sort of silly. We already did that once this lecture. We already did when we derived the demands curve. Effects of price change.


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[Assistant] When we derived the demand curve, we did some price changes, right? I showed you what happened as the price of cookies changed. But in fact, we cheated a little bit and went, we didn't cheat.


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[Assistant] We gave you sort of the bottom line, but didn't get into the elements of why that, of why people react the way they do to price changes. Now we're getting to some sort of deep theory.


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[Assistant] Okay, now I'm gonna talk to you about something, it's deeply theoretical in the sense that, in some sense if all you care about is what happens in the real world,


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[Assistant] They just care about, when a price change happens, how does quantity change? I'm gonna give you some theoretical concepts, which are gonna become very powerful later on in the course. Which are important to understand now. Which is, how is the underlying decision calculus changed by a price, uh, change when the price changes? And the way we're gonna do that, is that we're gonna decompose your response to a price change into two effects. The substitution effect,


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[Assistant] We're gonna separate your response into two effects. The separation is gonna become very important later on. The substitution effect we're gonna define, we're gonna define the substitution effect as the change in the quantity of a good.


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[Assistant] But holding utility constant at some fixed level u bar. The change in quantities price changes.


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[Assistant] So it's the elasticity of demand, but at a constant level of utility. The income effect.


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[Assistant] Okay, the change in quantity, uhm, as the income changes. Okay?


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[Assistant] Uh, and this is actually multi, technically it's multiplied by the initial level of income. We'll learn about this in section. But that's technically how the income effect is defined. And you'll come into section about why that is. But we're gonna decompose.


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[Assistant] This, so let me, that's sort of confusing, so let me start graphically to understand it.


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[Assistant] So let's go to figure four or five. One of the more complicated figures.


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[Assistant] Okay, we start at budget constraint one. Same parameters as always.


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[Assistant] All the math here, all this graphical stuff follows from the math using that utility function and these prices of income. Same as before. So we start as before at point A. Your tangency is


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[Assistant] The best package you can have given the utility function is six cookies and three slices of pizza. Okay?


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[Assistant] Now let's change, now let's imagine the price of cookies rises to nine dollars. The price of cookies in our example,


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[Assistant] Price of cookies goes from $6 to $9. Okay, that's the example we're going to analyze.


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[Assistant] Now we know from before that will ultimately move you from six cookies to four cookies while holding pizzas constant at three. So we know you'll end up, you'll end up at point C. We did that before. But actually two things are happening to get you there. The first thing that's happening is the substitution effect. Which is the change in prices with utility constant.


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[Assistant] And how do we measure that? We want to ask, given that the price changed,


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[Assistant] But the utility's constant, how, what's the new quantity you choose? What does utility constant mean in this graph? What does it mean to know utility constant? Get some other folks involved here. What does it mean? Yeaah. Same indifference curve. So what we want to do is ask, given the new prices, but the old indifference curve, what quantity would you choose? Well, the way we do that is we find the tangency between the new slope,


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[Assistant] And we do that by drawing sort of an imaginary budget constraint, BC Prime.


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[Assistant] BC Prime is a sort of imaginary budget constraint. It's not a real budget constraint. But it has the slope of the new budget constraint. But it's tangent to the old indifference curve.


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[Assistant] That's the key thing. BC Prime, the imaginary budget constraint, the dashed line.


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[Assistant] Has the slope of the new budget strain, same as the new price ratio.


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[Assistant] So the slope is the new price ratio. The slope is, uhm, the slope is now, uh, is at the new price ratio. But, it's tangent to the old indifference curve. So BC'


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[Assistant] So what we're saying is the substitution effect moves you from point A to point B. That is holding utility constant, but at these new prices, you would choose to have fewer cookies and less pizza. Okay. We call this notion compensated demand.


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[Assistant] That is I'm compensating you, I'm holding your utility constant. I'm saying price of change sucks for you, you're worse off, your opportunity set's restricted. But I'm gonna compensate you by holding your utility constant.


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[Assistant] It's called compensated demand. Your compensated demand would mean that when the price goes up, you would choose to reduce your consumption of cookies from 6 to 4.89. Okay? Now, here's the key thing about substitution effects.


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[Assistant] We can sign them definitively. They are always negative. The substitution effect is always negative. Okay?


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[Assistant] Subject is always negative. The income effect could go other way. We'll show that. Subject is always negative. Okay? We can see this in two ways. Graphically, think about it this way. You have to be tangent to the same indifference curve with a higher sloped line. So you have to move to the left.


[User] Please transcribe this text

[Assistant] Right, if you can change to the same indifference curve with a line with a higher slope, it's gotta be to the left. So that's the graphical intuition.


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[Assistant] Mathematically, it's worth writing out the steps, because it helps us, that's why we teach it helps remind us of our consumer theory. Okay? Step one, you're at this new tangency.


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[Assistant] That's optimized. The marginal utility of cookies over the marginal utility of pizza equals the price of cookies over the price of pizza. We know that's true at any tangency. Okay, because that's the optimal choice. Step three. We know PC over PP is up.


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[Assistant] Okay, that's, I just said that in this assumption, so the price of cookies is up. Therefore, that leads to step four, which is that muc over mup must be up. Because it's still equal. Well, how do you raise the ratio of the marginal utility of cookies to marginal utility of pizzas? How do you accomplish that? By having fewer cookies and more pizza. The way you get, so that means, that implies,


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[Assistant] That cookies are up, uhm, sorry, cookies are down and pizzas are up. And or pizzas are up. Okay? How do you get that ratio to be higher?


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[Assistant] Well remember, this is why I do this math here. Remember the key intuition. More cookies means lower marginal utility of cookies. The more cookies you have, the less you care about the next cookie. So I want the marginal utility of cookies to be lower. If I want the marginal utility of cookies, I'm sorry to be higher. I've gotta have fewer cookies. Or I've gotta have more pizza. Or both. Okay? So the substitution effect is always negative. If I'm gonna hold utility constant and change prices,


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[Assistant] And raise a price, you'll always want less of that good from the substitution effect. Okay? Question about the graphics of the math.


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[Assistant] So I should have put this here. The income effect is this is at a constant price. Should have add that. Think of effect is the change in quantity demanded as income changes holding price is constant. So now we're saying the income effect is saying, look, the price changed.


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[Assistant] So therefore I shifted my consumption towards away from cookies. But the other thing that happened is I got poorer.


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[Assistant] They might say you didn't get poor, your parents didn't send you less money, but remember your opportunities set restricted. You effectively are poorer because this price went up.


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[Assistant] How do we represent that? Well, we can exactly represent that by the shift from BC Prime to BC2. Because BC Prime and BC2 have the same slope. That shift is just the income effect.


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[Assistant] Because you, at the same income you can afford fewer cookies. So you're effectively poorer. So now your income's effectively fallen.


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[Assistant] The relative change in prices cause you to say, ooh, I want to get away from cookies. The others say, I'm poorer, so I want less of everything, including cookies. Okay? So one is the price effect, one is the income effect.


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[Assistant] And it matters, these two effects matter. Now in this case, they don't matter, because they work together. In this case, you might say, well look, why do I care? You know, why do I, the bottom line is number of cookies fell by two. Substitution and effect work together, why do I care?


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[Assistant] Well you might care because if the income effect is, because if the good is inferior, then the income and substitution effect work against each other. If the good is inferior,


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[Assistant] Then, the income solution effects work against each other rather than with each other. To see this, let's go to figure 4-6.


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[Assistant] Potatoes are a dollar, and steak is five dollars. So our new example, in our new example, I'll put this up here.


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[Assistant] You will choose, and this is a different utility function, this is a totally new example.


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[Assistant] I'm not gonna, you know, I'm not expecting you to understand the underlying math here. I'm just showing you an example of something that might be true. Okay? So you choose point A. You choose seven and a half potatoes and three and a half steaks. Okay? Given those, given those prices.


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[Assistant] The change in compensated demand moves you from point A to point B.


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[Assistant] How do we know that? Because we draw a new imaginary budget constraint that has the new price ratio, but is tangent to the old indifference curve. It's your point A to point B.


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[Assistant] So the substitution effect lowers your demand for potatoes from seven and a half to four.


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[Assistant] But the income effect raises your demand for potatoes.


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[Assistant] Now the income effect means you actually move back from 4 to 5.


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[Assistant] On net, you're still having fewer potatoes, but the substitution effects went opposite ways. Why? Why do the income effect cause you to want to have more potatoes? Substitution effect, you want to have less. Yeaah.


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[Assistant] Uh, Chloe, price payers went up, so are you, you're effectively what, poorer? Right?


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[Assistant] And when you're poor, how does that affect your consumption of inferior goods?


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[Assistant] You want more of them, right? So price paid has went up. So effectively you're poorer.


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[Assistant] Now when you're poor, in our previous example with cookies, you want a fewer cookies than a normal good. But potatoes are an inferior good. So as you're poor, you want more of them. Zingham effect goes the opposite way of the substitution effect. That's where this starts to get interesting.


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[Assistant] The ego effect always goes the same way as substitution effect. This is sort of just a purely useless theoretical exercise.


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[Assistant] It gets interesting. We think of effect goes the opposite way of the substitution effect. Yeah.


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[Assistant] Utility, uh, well different utility functions will give you, uh, different


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[Assistant] You have to have a different utility function to get the good to be inferior. So utility of a steak and potato is not going to be square root of, you won't get inferiority with square root of.


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[Assistant] P times S. So it's a different utility function. I mentioned that, I think. It's a different utility function. Yeaah.


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[Assistant] So basically, your intuition, I gave you intuition rather than fear, but mathematically it would occur because we'd have utility function. Utility function would generate and fear it could be a different looking utility function.


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[Assistant] Not on top of my head, but we'll, we'll, we'll do it in section. Okay. So the bottom line is, yeah.


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[Assistant] I'm not saying that at all. I'm not writing down a health function. I didn't write it down. It's a utility function. It's about filling up. It's about taste. Steak may be leaving me hungrier, but it's way better.


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[Assistant] So it's not about what fills me up. Literally all I'm saying is, given my utility function, I don't have the utility function written down, but given my utility function,


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[Assistant] I was choosing a balance of most of potatoes and some steak.


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[Assistant] Now the price of potatoes goes up, I, I, I end up wanting fewer potatoes, but not as few as you might think from the substitution effect because potatoes are inferior. Yeaah.


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[Assistant] What I'm saying, the income effect is holding the price constant. What happens to your man? So holding the price constant, what we mean by that is moving from BC Prime to BC2.


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[Assistant] Is the income effect. Holding your price constant. So the price change is reflecting the substitution effect. That's reflected in moving from BC1 to BC prime.


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[Assistant] The income effect is, holding the price constant that is given that same slope of that imaginary new budget constraint, you're now poorer. So that's why, so,


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[Assistant] It's, it's once again, it's a hard thing to wrap your mind around. It's theoretical. But the notion is when a price changes, two things happen.


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[Assistant] It changes the relative desirability of two goods. And it changes your income. Your effective income. Your opportunity set. Two things are happening. Okay? Yeaah.


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[Assistant] It's just, we're decomposing into two effects. And the reason is, the reason we're doing that is because once goods are inferior, this decomposition becomes interesting.


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[Assistant] Okay, so let's think about, I like to think about this as sort of a simple, a simple table to help sort of remind you how to think about this. So let's think of a simple table. Here we have the price change.


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[Assistant] Then we know the substitution effect, when the price goes up, leads you to want less of a good. The income effect also leads you to want less of a good. So you definitely want less of a good. These are all equals, you know, there's always corn and paper. Okay?


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[Assistant] Likewise, when the price falls, the substitution effect makes you want more of the good. When the price falls, you're effectively richer. So the income effect makes you want more of the good. So you clearly want more of the good. Okay, that's the easy case. The more interesting case is what if it's an inferior good?


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[Assistant] Now, if the price goes up, the substitution effect is the same. Substitution effect is always negative. Higher price means you substitute away from the good. But the income effect is now positive. So the net is unclear.


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[Assistant] Likewise, if the price goes down, price goes down,


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[Assistant] The substance effect is always positive. You always want more of the good if the price goes down. But the income effect is now you want less of the good. Why? Because you're richer.


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[Assistant] If the price of a good falls, you're richer. Richer means you want less of that inferior good. So the net effect is unclear. So the interesting case becomes inferior goods. Okay? Questions about the table.


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[Assistant] So this raises the question, are there goods? What does this imply?


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[Assistant] Yes, you could get an upward sloping demand curve. You could actually, theoretically, get an upward sloping demand curve. And we call this a Giffengut.


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[Assistant] Is a good where you get an upward sloping demand curve where actually the inferior income effect is so large it dominates the substitution effect. And you actually get an upward sloping demand curve that a higher price leads, uh, people who want more of the good.


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[Assistant] Now, in fact, this is named after Giffen, some guy Giffen, I guess. It probably was a guy, cause it's old.


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[Assistant] Okay, uhm, uh, but in fact it's convenient because it's close to the word griffin, and griffins are imaginary, and so are giffins. Okay?


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[Assistant] It's actually hard to find examples in reality of given goods. Okay? It's actually pretty hard to find examples in reality. Okay?


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[Assistant] That was run, which is sort of the first convincing evidence that in some situations, GIF and goods could exist. So they ran the following experiment. They were in a study in China, where uhm,


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[Assistant] Very, very poor households. They face, all households, most households in China are poor. But they survive in the super poor versus moderately poor households. Okay? And they basically gave them coupons, which lowered the price of rice, which was their staple good. Okay, they basically, they eat rice, and that's sort of their basic good they eat. And they basically lowered the price of rice.


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[Assistant] What they found is that for families that weren't super poor, they found a typical downward sloping demand curve. Giving the coupon off rice meant they bought more rice.


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[Assistant] Giving them a discount on the price of rice actually caused them to have less rice.


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[Assistant] Because they were, they were, it was, because literally that's all they ever ate with rice.


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[Assistant] So by definition, they could have had more, because they didn't eat anything else. Now that you're essentially saying, look, you used to eat all rice, you spent your whole budget on rice, now I've basically given you extra money. Because all that rice you used to eat, you can now have cheaper. Are you going to spend that to buy more rice? No, you're going to buy something else. And that's the gif in good.


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[Assistant] So you think, if you think about sort of a corner solution when people are buying all of a good that's inferior.


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[Assistant] By definition, if you give them more money, they're gonna move on to another good. Or there's at least a possibility. And that's a given good example. But we have to search pretty darn hard.


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[Assistant] Typically in demand context, we think that demand curves are downward sloping. However, when we get to other contexts, we're gonna find it's more normal to find that these income and substitution effects fight against each other and lead to strange-shaped curves, and we'll come back to that later in the course. Okay? Uhm, okay, I'll see y'all Wednesday.


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[Assistant] It's called GR27, not... Just be careful. In the wrong hands, this could- Don't worry.


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[Assistant] Thank you. I'll remember this.


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[Assistant] On my desk, in my office, I keep a small clay pot that I made in college. It's Raku, which is a kind of pottery that began in Japan centuries ago as a way of making bowls for the Japanese tea ceremony. This one is more than 400 years old.


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[Assistant] Each one was pinched or carved out of a ball of clay.


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[Assistant] And it was the imperfections that people cherished.


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[Assistant] Everyday pots like this cup take eight to ten hours to fire. I just took this out of the kiln last week and the kiln itself takes another


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[Assistant] You do it outside and you take the kiln up to temperature in 15 minutes. It goes to 1500 degrees.


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[Assistant] I would come home with my clothes reeking of wood smoke.


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[Assistant] I love raccoon because it allows me to play with the elements. I can shape a pot out of clay.


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[Assistant] And choose a glaze, but then I have to let it go to the fire and the smoke. And what's wonderful is the surprises that happen, like this crackle pattern because it's really stressful on these pots, they go from 1500 degrees


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[Assistant] To room temperature in the space of just a minute.


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[Assistant] Raku is a wonderful metaphor for the process of creativity. I find in so many things that tension between what I can control


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[Assistant] And what I have to let go happens all the time. Whether I'm creating a new radio show or just at home negotiating with my teenage sons.


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[Assistant] When I sat down to write a book about creativity, I realized that the steps were reversed. I had to let go at the very beginning.


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[Assistant] Creativity grows out of everyday experiences more often than you might think, including letting go.


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[Assistant] The best way to learn about anything is through stories. And so I want to tell you a story about work and play


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[Assistant] In order for our own creativity to flourish.


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[Assistant] The first embrace is something that we think, oh this is very easy, but it's actually getting harder. And that's...


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[Assistant] The filmmaker Meera Nair speaks about growing up in a small town in India.


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[Assistant] Its name is Boubenessoir, and here's a picture of one of the temples in her town.


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[Assistant] And it led her, as she said, down this path to become an award-winning filmmaker.


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[Assistant] The novelist Richard Ford speaks about


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[Assistant] A childhood challenge that continues to be something he wrestles with today. He's severely dyslexic.


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[Assistant] He had to embrace this challenge, and I use that word intentionally. He didn't have to overcome dyslexia. He had to learn from it. He had to learn to hear the music in language.


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[Assistant] He talks about how as a young artist, he thought he was a painter.


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[Assistant] By the Spanish painter Diego Velasquez.


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[Assistant] It's from 1656, and it's called Las Meninas. And it's the picture of a little princess and her ladies-in-waiting. And if you look over that little blonde princess's shoulder, you'll see a mirror.


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[Assistant] And reflected in it are her parents, the king and queen of Spain, who would be standing where you might stand to look at the picture.


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[Assistant] He went and saw this painting by a guy who'd been dead for 300 years and realized, I can't do that.


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[Assistant] He moved to New York City and he put together a list of verbs to roll, to crease, to fold. More than a hundred of them. And as he said, he just started playing around. He did these things to all kinds of material. He would take a huge sheet of lead and roll it up and unroll it. He would do the same thing to rubber.


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[Assistant] And when he got to the direction to lift, he created this, which is in the Museum of Modern Art.


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[Assistant] That led him to the work that he's known for today. Huge.


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[Assistant] Curves of steel that require our time and motion to experience.


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[Assistant] In sculpture, Richard Serra is able to do what he couldn't do in painting. He makes us the subject of his art.


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[Assistant] So experience and challenge and limitations are all things we need to embrace for creativity to flourish. There's a fourth embrace.


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[Assistant] And it's the hardest. It's the embrace of loss. The oldest and most constant of human experiences. In order to create, we have to stand in that space between what we see in the world and what we hope for. Looking squarely at rejection, at heartbreak, at war, at death. That's a tough space to stand in.


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[Assistant] Educator Parker Palmer calls it the tragic gap.


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[Assistant] Tragic not because it's sad, but because it's inevitable.


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[Assistant] And my friend Dick Nodell likes to say, you can hold that tension like a violin string and make something beautiful.


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[Assistant] That tension resonates in the work of the photographer Joel Myrowitz, who at the beginning of his career was known for his street photography, for capturing a moment on the street, and also for his beautiful photographs of landscapes, of Tuscany, of Cape Cod, of light.


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[Assistant] Joel is a New Yorker and his studio for many years was in Chelsea.


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[Assistant] On 9-11, Joel wasn't in New York. He was out of town, but he raced back to the city and raced down to the site of the destruction.


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[Assistant] He did. He pulled in every favor he could and got a pass into the World Trade Center site where he photographed for nine months almost every day.


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[Assistant] Looking at these photographs today brings back the smell of smoke that lingered on my clothes when I went home to my family at night. My office was just a few blocks away.


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[Assistant] And we wondered, was it difficult for Joel Marowitz to make such beauty out of such devastation?


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[Assistant] You have to take a picture. That sense of urgency, of the need to get to work is so powerful in Joel's story.


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[Assistant] The first time I told these stories, a man in the audience raised his hand and said, all these artists talk about their work, not their art.


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[Assistant] Which has got me thinking about my work and where the creativity is there, and I'm not an artist.


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[Assistant] Image of a Japanese tea bowl. This one is at the Freer Gallery in Washington, D.C.


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[Assistant] But as you can also see, this one did break at some point in its hundred years.


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[Assistant] This bowl is more beautiful now, having been broken than it was when it was first made.


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[Assistant] And we can look at those cracks because they tell the story that we all live of the cycle of creation and destruction, of control and letting go.


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[Assistant] Uh, yeaah, sure. Oh, there are some heavy box- No, no!


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[Assistant] Woah! Come on, Spider-Man! I thought this was a chase!


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[Assistant] How do you like my new suit? Dashing. Where'd you get it? It's an exclusive club.


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[Assistant] Love seeing you two together again. You always were my favorites.


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[Assistant] I heard they'll let you up if you claim special circumstances. A health emergency might do it.


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[Assistant] Definitely stay away from a receptionist. Been coughing up a storm.


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[Assistant] Why isn't Osborn down here? This sort of thing never happens to him.


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[Assistant] I know a few sable agents who would love to meet you.


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[Assistant] I did it. Norman's clearing out, and the elevator's unlocked. Time to head upstairs.


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[Assistant] This must be from when Harry left for Europe last year.


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[Assistant] Harry's last day. I know he left last summer, but was it July or August?


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[Assistant] What? This can't be for Harry, can it?


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[Assistant] Harry's journal. His last entry is marked July 18. That must be the code to that room.


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[Assistant] Pete, Norman's cure is ready. He's headed to the lab it's at now. Can you follow?


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[Assistant] Okay, then stay ready. I've almost got the location. Wow. Norman wins the fancy map contest. Looks like the Upper West Side.


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[Assistant] Looks like Norman's tracking Dr. Michael's movements. This shows all of Oscorp's properties. Sable troop deployments. They're stationed all over the city. I bet I can find the Devil's Breath lab with this.


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[Assistant] It must be an Oscorp property with a ton of sable protection, frequented by Dr. Michaels.


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[Assistant] I knew it. 10th and Cathedral, Oscorp's records department. Perfect place to hide a secret biotech facility. GR-27 Martin Lee incident.


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[Assistant] Pete, I've got the lab location. And a lot more. How far away are you?


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[Assistant] Let Miles and me look after Feast. You, you find Norman. You find the cure.


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[Assistant] A lot of people when I first published a booklet called Career Anchors said, you know, why, why use such a


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[Assistant] Uh, limiting term, that's such a negative term. Shouldn't, shouldn't, uh, something be more developmental, positive.


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[Assistant] So I think I need to tell you a little bit of the research story that goes behind this set of concepts where the top part of this handout gives you all the findings and conclusions.


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[Assistant] And was involved in the repatriation of prisoners of war from the, uh, communist prison camps.


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[Assistant] You may recall, although most of you are probably way too young,


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[Assistant] Because prisoners had been alleged to have collaborated with the enemy, taken over some concepts of communism and so on.


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[Assistant] And in the 50s, we were all bent out of shape about this, you know, inconceivable that a good, solid American soldier


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[Assistant] So it must have been hypnosis, brainwashing, drugs, whatever.


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[Assistant] Gave them tests and briefings, see whether they needed any help.


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[Assistant] And in that process, I learned a great deal being a social psychologist.


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[Assistant] And had to do something about the business world. I didn't quite know how everything I knew about indoctrination had anything to do with management. So I thought about it, but in the fifties, some of you may recall, we also had a whole bunch of books called The Organization Man, The Man in the Grey Flannel Suit,


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[Assistant] All of these books had the message, companies are indoctrinating people.


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[Assistant] So that was a natural research area for me. I'm gonna find out how this process works.


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[Assistant] How do companies actually indoctrinate people in the company values? Well, being a good researcher, how do you do that?


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[Assistant] A sample group that you're going to study and you get a control group and try to organize it as a nice experiment.


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[Assistant] And so I decided to take a group of Sloan alumni, at that time they were all men, this was 1960, 61, 62, study them intensively while they're in their two year program, and then follow them into their jobs a year or two after they graduate.


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[Assistant] Uhm, ended up with a sample of 45 people about whom I knew a great deal.


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[Assistant] Most of them wanted to be CEOs eventually. They realized that, you know, that's a long climb.


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[Assistant] But you're in business school at that time actually it was the management school and


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[Assistant] I decide to study the attitudes and values of the bosses and peers


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[Assistant] Of each alumnus who went into a company. Very elaborate research.


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[Assistant] To see whether the attitudes and values would shift toward those of the company. So a year out, I had all this data on 45 people, excuse me, and found that the data were all over the map.


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[Assistant] There were a lot of people who left their first job within six months. So where do they fit in?


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[Assistant] And there were some people who actually, whose attitudes went opposite to the company attitudes and values. So from a research point of view, the data were a complete mess.


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[Assistant] And so what to do? Well, put it aside, do my teaching, do other research.


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[Assistant] Five years out, I decided maybe I should check to see what's going on.


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[Assistant] So I gave the attitude value questionnaires to the whole sample again, and this time used for the corporate sample.


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[Assistant] What our senior executives and Sloan fellows were saying in terms of their attitudes to see whether the, the young folks coming out of school five years out resembled the old executives who represented the organizational culture. And once again, the data were all over the map. I could not correlate anything with anything. So I gave up.


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[Assistant] We're now talking about 1973-74.


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[Assistant] And today, which is 10, 12 years out. And so I got their life stories.


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[Assistant] The way the interview was organized and I mentioned the detail because you will want to do this type of interview at some point.


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[Assistant] With yourself or with a colleague or with a spouse, you say, what did you do? Like, why did you decide to come to Sloan?


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[Assistant] And then ask the question, why did you decide to do that?


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[Assistant] So what you want is the resume in terms of activities.


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[Assistant] A process of funneling from a very broad set of alternatives that they had.


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[Assistant] Through each job and experience they had to a narrower view, narrower in what way, narrower in terms of what I'm good at,


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[Assistant] Narrow in terms of what my motives really are, what do I really want to be, and narrower in terms of my values. Values come into the play that one guy went to work for a food company, uh, was in their research division, and


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[Assistant] We found that one of the products they were about to launch


[User] Please transcribe this text

[Assistant] Had some possible, possible carcinogenic effects.


[User] Please transcribe this text

[Assistant] He was excited to have discovered this, went to his boss and the boss said,


[User] Please transcribe this text

[Assistant] Well, that effect is very small, you know. We've got this product going almost into the pipeline, so let's just forget about your research. At that moment, he discovered he had values. He didn't know that he would be outraged.


[User] Please transcribe this text

[Assistant] You know, I don't want any old job. I want a job where my values fit with what I'm doing. So I got these 44 stories and it turns out they're not all over the map. They tended to cluster.


[User] Please transcribe this text

[Assistant] So what I want to describe to you and have you begin to really start looking inside yourself is when you look at these eight categories, I imagine they all look like, yeah, I want every one of those. They all make sense. But what I'm going to try to display to you is how different these eight types really are.


[User] Please transcribe this text

[Assistant] And through that process make you more conscious of what the entrepreneurial type