Christopher Makler
Stanford University Department of Economics
Econ 50: Lecture 11
Let's address the elephant in the room...
Production functions for with intermediate goods
Part 1:
General Theory
Part 2:
Functional Forms and Behavior
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BL1
We will be solving for the optimal bundle
as a function of income and prices:
The solutions to this problem will be called the demand functions. We have to think about how the optimal bundle will change when \(p_1,p_2,m\) change.
BL2
Plug tangency condition back into constraint:
Tangency Condition: \(MRS = p_1/p_2\)
OPTIMAL BUNDLE
DEMAND FUNCTIONS
(optimization)
(comparative statics)
...its own price changes?
Movement along the demand curve
...the price of another good changes?
Complements
Substitutes
Independent Goods
How does the quantity demanded of a good change when...
...income changes?
Normal goods
Inferior goods
Giffen goods
(possible) shift of the demand curve
(next week)
...its own price changes?
Movement along the demand curve
How does the quantity demanded of a good change when...
The demand curve for a good
shows the quantity demanded of that good
as a function of its own price
holding all other factors constant
(ceteris paribus)
DEMAND CURVE FOR GOOD 1
"Good 1 - Good 2 Space"
"Quantity-Price Space for Good 1"
Quantity of Good 1 \((x_1)\)
Price of Good 1 \((p_1)\)
All demand curves must be in this region
Quantity bought at each price if you spent all your money on good 1
(on PowerPoint)
pollev.com/chrismakler