that buyers (consumers, demanders) will buy at a given price. Looking at it another way, it is the maximum amount that a person is willing to pay for some amount of a good.Where does the demand curve come from? It comes from individual preference and utility. An “individual demand curve” is how much a person will pay for a certain amount. This is calculated based upon the idea of “declining marginal utility,” which is another way of saying that the more we have of a certain thing, the less we value getting an additional unit of that good. For example, when you are hungry, you may
place a lot of value on the first slice of pizza because you get a lot of utility (happiness) out of that first slice. The second slice gives you more happiness, but not as much as the first, and so on.When you have had 3 slices, you place very little value on the 4th slice.A person is willing to pay up to his marginal utility, but not more (because you will not give away more money than the amount of utility you get from using something).Individual Demand Schedule:Quantity of Pizza ConsumedUtility derived from consuming last slice1$52$43$34$25$16$0Individual Demand Curve:
This tells us that after eating five slices of pizza, a person derives no marginal utility from consuming the sixth slice. It is entirely possible that the demand curve can go negative, although economists never really examine this. However, just think about it:let's say you have eaten six slices, and are very full. Eating another slice may cause you to get an upset stomach, or may make you throw up your food. Both of these are things that people do not want to happen under normal circumstances. In this case, theseventh slice of pizza is no longer a "good," but it is a "bad": consuming it will actually decrease the total amount of happiness of the individual. A rational person would certainly not eat a seventh slice.The above figure is the demand curve for an individual. Usually, a market consists of more than one individual, so if we want to find out what the demand curve looks like for a market in its entirety, we simply add together all individual demand curves.What do we mean by "add together"? Well, we can construct a demand schedule for everybody in the market added together. Looking at the demand schedule, we have it written in the form "How much utility do I get from each slice?" We can reverse this, however, and say "At a certain price, how many slices would I buy? If the price of a slice is $2.50, the person described by the demand schedule would buy three slices. They would not buy the fourth slice, because this slice only gives the $2 of utility, but they would pay $2.50 for it. That means that this person would be voluntarily making himself poorer by buying a fourth slice of pizza, and this would violate our assumption about rational utility maximization. As I have said before, in real life thereare cases where people do not make the proper decision, but we have to assume that people usually intend to make a utility-maximizing decision. If we don't make that assumption, there are basically no rules for examining human behavior. We are left
You've reached the end of your free preview.
Want to read all 17 pages?
- Supply And Demand, First Law of Demand, Demand Side