Christopher Makler
Stanford University Department of Economics
Econ 51: Lecture 1
Part 1: Course Overview
Part 2: Review of Econ 50
Who is the Econ 51 teaching team?
What is this course about?
When will we study each topic?
Why is this class important?
How do we all succeed?
Good 1 - Good 2 Space
Budget Sets
Indifference Curves
Optimal Choice
Demand
Director of Undergraduate Studies
wolak@stanford.edu
Undergraduate Student Service Officer
jdemar@stanford.edu
Econ Department Peer Advising
VPTL Peer Tutoring
Efficiency and Equity
Time
Information
Weeks 1-2
Unit I: Exchange Optimization
Tuesday 10/19
Midterm (closed-book exam, in class)
Weeks 5-7
Unit III: Game Theory
Weeks 8-10
Unit IV: Asymmetric Information and Mechanism Design
Friday 12/10
Final Exam
Weeks 3-4
Unit II: Efficiency and Equity
Sunday 10/4-Monday 10/5
Checkpoint 1 (open-book exam, on your time)
Monday 11/1-Tuesday 11/2
Checkpoint 2
No phones.
No tablets (except to take notes on with a stylus).
No laptops.
I'm not a monster. There will be a break in the middle of each class to connect with your digital world.
This course is not graded on a curve.
If everyone gets an A, everyone gets an A; if everyone gets a B, everyone gets a B.
Reading quizzes: 10% of your grade. One for each lecture; lowest 5 dropped.
Problem sets: 25% of your grade. One for each lecture; lowest 5 dropped.
Checkpoints: 15% of your grade. Higher score = 10% of grade, lower score = 5%.
Midterm/final: 50% of your grade. Higher score = 30% of grade, lower score = 20%.
All content is posted/linked within Canvas.
Each lecture has its own module with everything you need to know about that lecture.
Please use Ed Discussions to ask questions (not email).
Please upload your homework to Gradescope by 8am the morning after it's due.
Two "Goods" : Good 1 and Good 2
1
2
Definition Review:
Indifference Curves
Preferred/Dispreferred Sets
Marginal Rate of Substitution
3
4
Indifference curve is
steeper than the budget line
Indifference curve is
flatter than the budget line
Moving to the right
along the budget line
would increase utility
Moving to the left
along the budget line
would increase utility
More willing to give up good 2
than the market requires
Less willing to give up good 2
than the market requires
POINT A
POINT B
5
IF...
THEN...
The consumer's utility function is "well behaved" -- smooth, strictly convex, and strictly monotonic
The indifference curves do not cross the axes
The budget line is a simple straight line
The optimal consumption bundle will be characterized by two equations:
More generally: the optimal bundle may be found using the Lagrange method
6
Otherwise, the optimal bundle may lie at a corner,
a kink in the indifference curve, or a kink in the budget line.
No matter what, you can use the "gravitational pull" argument!
(Gross) demand functions are mathematical expressions
of endogenous choices as a function of exogenous variables (prices, income).
8
For a Cobb-Douglas utility function of the form
The demand functions will be
That is, the consumer will spend fraction \(a/(a+b)\) of their income on good 1, and fraction \(b/(a+b)\) of their income on good 2.
This shortcut is very much worth memorizing! We'll use it a lot in the next few weeks in place of going through the whole optimization process.
9
1. Weighted average of some common
"one-good" utility function \(v(x)\):
2. "Quasilinear": one good enters linearly
(in this case \(x_2\)), another nonlinearly:
3. Perfect complements:
not used as often, but helpful
Cobb-Douglas (decreasing MRS)
Weak Substitutes (decreasing MRS)
Perfect Substitutes (constant MRS)
Concave (increasing MRS)
Be sure you're signed up for a section.
Do the reading and the quiz -- due at 10:45am on Thursday!
Look over the summary notes for this class.