NOTES ON CONSUMER THEORY AND DEMAND, CONT.
III. The demand schedule
Note something very important.
As the price of either good 1 or good 2 changes ceteris
paribus, the consumer's budget line will rotate.
And if his income increases/decreases, his
budget line will shift out/in in a parallel fashion.
As a result, the market basket that the individual
wishes to purchase will change.
That is, the quantities of the two goods that he
going any further, let's be sure we're on the same page in regards to what the
word "demand" means.
The expression "quantity of good i demanded by the consumer" refers to
the quantity of that good that the consumer wishes to purchase given prices and his income.
for good i shows how the quantity of good i that he demands
changes as the price of good i changes ceteris paribus.
Let's "derive" a subject consumer's demand schedule for good 1 using one of the graphs
Suppose initially a price for good 1,
a price for good 2, and an income for our subject.
Denote the initial values of these three variables p1, p2, and Y respectively.
Let AB be his budget
line under those conditions.
Suppose initially he wishes to purchase the market basket denoted
Thus, at those prices and with that income the quantity of good 1 demanded by our subject is
Q1 units and the quantity of good 2 demanded is Q2 units.
Now, suppose that the price of good 1 falls ceteris paribus, i.e. the price of good 1 goes
down but the price of good 2 and the consumer's income stays the same.
Then his budget line is
Well, the market basket x is now below his budget line.
That tells us that if he continues to
buy market basket x he won't be spending his entire income.
Because the price of good 1 is
lower, he can buy more goods with the same income. And therefore we say that
his real income
So, for this reason, because his real income has increased,
he would be
inclined to buy a different market basket, a market basket on his new budget line, AC.
words, the change in the price of good 1 would lead to a change in the quantity of good 1 (and
possibly good 2) demanded because that decrease in price increases the consumer's real
However, when the price of good 1 falls ceteris paribus, the consumer does not have to give up
as much good 2 in order to increase his consumption of good 1.
Let's think about that using a
Say initially the price of good 1 is $ 8 and the price of
good 2 is $ 6.
order to purchase say, 3 more units of good 1 the consumer would have to stop purchasing 4
units of good 2 ( $ 8 X 3 = $24, $ 6 X 4 = $24 ).
Well, suppose the price of good 1 drops to $ 6.
Then in order to increase his consumption of good 1 by 3 units, the consumer would now only