52
Income Elasticity of Demand (ex1,m)
ex1 ,m 0
ex1 ,m < 0
good 1 is normal
good 1 is inferior
If good 1 is normal, then if
ex1 ,m > 1
ex1 ,m 1
good 1 is a luxury
good 1 is a necessity
Cross-price Elasticity of Demand (ex1,p2)
ex1 , p > 0
ex1 , p < 0
2
2

Perfect Competition, Profit Maximization, Input Demand and
Output Supply
A firms output is determined by the amount of inputs it chooses to
employ
the relationship between inputs and outputs is summarized by the
production function
q = f(L,K)
Thus, a fi

II. THEORY OF THE FIRM COST FUNCTIONS
Objective: To show how the production function can be used to derive the
costs incurred by the firms in its production activities.
A. Definitions of Costs.
It is important to differentiate between accounting cost and

II.
THEORY OF THE FIRM PRODUCTION FUNCTIONS
Objective: To examine the behavior of a typical firm in terms of its decisionmaking with respect to a firms principal activity PRODUCTION.
A. Definitions
Firm:
A technical unit in which goods are produced.
Entre

20
Examples of Utility Functions
Cobb-Douglas Utility
U ( x1 , x2 ) =x1 x2
for x1 > 0, x2 > 0
where and are positive constants
The relative sizes of and indicate the relative importance of the goods
The indifference curves will be downward sloping and str

1
I.
Theory of Consumer Behavior
A. Objective
The theory of consumer behavior provides the basic model that economists use
to explain how an individual consumer chooses his consumption bundle.
Provides the theoretical foundation for the derivation of an i