The relationbetween the consumers optimal choiceof the quantity of a good and

The relationbetween the consumers optimal choiceof

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The relationbetween the consumer’s optimal choiceof the quantity of a good and its price isvery important and this relation is calledthedemandfunction. Thus, the consumer’s demand function for a good.
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Deriving a Demand Curve from Indifference Curves and Budget Constraints Consider an individual consuming bananas (X1)and mangoes (X2), whose income is M and market prices of X1 and X2are P'1and P '2 respectively. depictsher consumption equilibrium at point C, where she buys X '1 and X '2 quantitiesof bananas and mangoes respectively. In panel (b) of figure 2.14, we plot P '1against X '1 which is the first point on the demand curve for X1.Suppose the price of X1 drops to P1 with P '2 and M remaining constant. Thebudget set in panel (a), expands and new consumption equilibrium is on ahigher indifference curve at point D, where she buys more of bananas ( X X ' 1 1 > ).Thus, demand for bananas increases as its price drops. We plot P1 against X1in panel (b) of figure 2.14 to get the second point on the demand curve for X1 MARKET DEMAND In the last section, we studied the choice problem of the individual consumer and derived the demand curve of the consumer. However, in the market for agood, there are many consumers. It is important to find out the market demand for the good. The market demand for a good at a particular price is the total demand of all consumers taken together. The market demand for a good can be derived from the individual demand curve. ELASTICITY OF DEMAND
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