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ECN 104
Vikraman Baskaran

Week 2 Lecture Notes ECMA04 2012 21 In order to figure out how we choose the best point on the PPF we have to know what consumers want to consumeIn a decentralized economy consumers have a lot to say in determining what is producedWe begin by defining consumer demand as what consumers WANT to buy given certain economic conditionsQuantity of X demanded Deconomic variables X We call D the demand function or sometimes just demand X Given the values of the economic variables the demand function spits out a number that tells us how much of the good in this case X is demandedWe call that number quantity demandedWhat are those economics variables and how do they work 1 own price PDP0LAW OF DEMAND XXX NOTEDP means the derivative of D with respect to XXX P holding all other variables that affect the Xfunction D constant X2 other prices Peffect of change could go either way YifDP0substitute XYifDP0complement XYNote that this is a definition not an explanation 22 3 incomeIagain effect of change could go either way ifDI0normal good XifDI0inferior good X Note This is again a definition not an explanation 4 etctastes populationusually population increases demandtastes obvious either way 5 quality not part of function issue is how we define a goodSo after all this we have a demand function that looks like this XDP P P P I pop XXYZetcTypically in this course this is too complicated for us to think about so we temporarily hold everything except for P constant and construct a Xsomewhat different demand function XDP XXAnd for reasons that may become clear later we invert this function and write it asPDX X
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