demand curve

# demand curve - x drops again to \$0.50 the individual moves...

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7d. Demand Curve The demand curve gives the relationship between the price of good X (P x ) and the quantity of good X (Q x ) consumed at each price, holding other variables constant. In this section, we will show how an individual’s demand curve can be derived from the indifference curves (ICs) and budget constraints (BCs). Figure 7.d.1 shows an individual’s budget constraints (BCs) and corresponding indifference curves (ICs). Here, X is a normal good. Assume the price of Y (P y ) is \$1, the slope of BC is then equal to the price of X (P x ), since slope (BC) = P x /P y = P x /1 = P x . On BC 1 , the slope, or P x is \$2, so the individual maximizes his utility by consuming at point A, where BC 1 is tangent to IC 1 , at a quantity of X (Qx 1 ) equal to 20 units. As P x drops to \$1, the individual moves to BC 2 (slope = 1) and maximizes his utility by consuming at B, where BC 2 is tangent to IC 2 , and 50 units of X is consumed. As P

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Unformatted text preview: x drops again to \$0.50, the individual moves to BC 3 (slope = 0.5) and can now maximize his utility by consuming at C, with Qx 3 = 65. Figure 7.d.1 gives the quantities of X consumed as the price of X changes, holding other variables, such as P Y , Income, constant. Taking these pairs (P x , Q x ), we can derive the individual’s demand curve for X. Figure 7.d.2 has the vertical axis showing the price of X and the same X-axis as Figure 7.d.1. From Fig.7.d.1, we can see that at P x = \$2, 20 units of X is consumed, which is shown as point A’ on Fig.7.d.2. At P x = \$1, Q x = 50, which is shown as point B’. Point C’ shows that at P x = \$0.5, Q x = 65. Connecting points A’, B’, and C’, we get an approximation of the individual’s demand curve showing the relationships between P x and Q x , ceteris paribus....
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demand curve - x drops again to \$0.50 the individual moves...

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