Demand Functions:
We know the derived demand functions corresponding to the Cobb-Douglas utility function. This is a well-behaved function in many respects, but it is in fact “badly behaved” in others. For example, the demand for a good i is only a function of its own price (pi) and not of prices of other goods. This is a special feature of the Cobb-Douglas, and should not be assumed to hold in general. We started by looking at market equilibria by assuming a general demand functionof the following type,
Q = D(p, ps, pc, Y, a)
where ps is the price of substitute goods, pc the price of complementary goods, and a is the joint effect of all other factors which influence the position of the demand function, apart from the own price, income and prices of “nearby” goods. We also talked about comparative static effects as adjustment of aggregate supply and demand from one equilibrium to another, we now look at comparative static effects at the individual level.
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