The Demand Curve and its Meaning

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Table of Contents

Introduction
The demand curve downward sloping
Conclusion
Works cited

Introduction

The constituents of demand dictate that an increase in the price of a product will decrease the demand for the product, thus resulting in two foreseeable outcomes. Either the price of the product will fall in order to create demand for the increased supply or the supply will the restricted in order to maintain the price level. However, the presence of substitutes in the market, along with the general economic conditions determines the course of action (Schwartz, 335).

The demand curve downward sloping

The individual’s marginal utility curve may also be viewed as a marginal willingness-to-pay curve. The consumer’s marginal willingness-to-pay curve denotes the monetary valuation placed by the consumer on the marginal utility derived from consuming additional products. This marginal willingness-to-pay curve, which reflects the consumer’s marginal utility curve, is in effect the consumer’s downward-sloping demand curve for a normal good.

Marginal utility diminishes as the consumer continues, consuming a fifth bottle yields no extra utility so the marginal utility of the fifth bottle is zero. This example illustrates the reasonable proposition that as more and more units of a good are consumed in a given time period, the extra utility derived from the consumption of additional units eventually falls. This is called the hypothesis of diminishing marginal utility. It seems reasonable to regard this hypothesis as a valid generalization about consumer behavior: the more an individual consumes a good, the less utility he or she is likely to derive from the consumption of an additional unit of it.

It is not possible to measure utility directly, as it is a subjective concept. An indirect measure of a consumer’s utility may, however, be found in his or her willingness to pay for a good. Since, in this example, the first bottle of cola gives a high level of utility, the individual is willing to pay a high price. As the second bottle yields a lower marginal utility, he or she is willing to pay a lower price for it.

The price paid is a reflection of the marginal utility derived from the consumption of the third bottle of cola. This price may also be viewed as a measure of the sacrifice in terms of the utility forms of the alternative goods forgone by purchasing the third bottle of cola. This means that in order to maximize utility with a given level of income, the consumer must constantly compare the marginal utilities derived from the purchase of alternative goods and services.

Assume that the individual is rational and so wishes to maximize total utility subject to the size of his or her income. The consumer will be maximizing total utility when his or her income has been allocated in such a way that the utility to be derived from the consumption of one extra penny’s worth of X is equal to the utility to be derived from the consumption of one extra penny’s worth of Y. Only when this is true will it not is possible to increase total utility by switching expenditure from one good to the other. The condition for consumer equilibrium can be written as follows:

Where MU_x and MU_r are the marginal utilities of X and Y respectively and P_x and P_r are the prices (in pence) of X and Y respectively. In order to derive the individual’s demand curve for good X, consider what happens to this condition when the price of X falls. It must be true that:

The consumer can now increase his or her total utility by consuming more units of good X. This will have the effect of decreasing the marginal utility of X and the consumer will continue increasing his or her expenditure on X until the equality is restored. We now have the result we have been seeking; that a fall in the price of goodwill, ceteris paribus, gives rise to an increase in a consumer’s demand for it – that is to say, the demand curve slopes downwards from left to right (Altman, 126)

By the term market, the classical and the neoclassical economists indicated perfect competition. By the classical and the neoclassical theories, especially neoclassical theories level of competition has been mentioned as the yardstick of efficiency in the market. The presence of numerous buyers and sellers along with identical and perfectly homogeneous commodities, perfect flow of information and freedom to enter or exit the market creates the condition under which none of the agents can enjoy any type of market power. In the normative sense of economics perfect competition is the best situation as the welfare of both the firm and producer are maximized (Wilkinson, 253).

Human beings make decisions that are rational and consistent. Humans make decisions thought out and weighed against alternatives. The decisions made by individuals are more likely to be replicated if; at any other time they are faced with similar situations of choice. There are Neo ways of defining rationality of actions in standard economic theory. Rationality can be seen as the internal consistency of choices. Rationality can also be seen in terms of the maximization of self-interest. Consistency and rationality in most cases relate in a binary manner. However, it is not always true that the internal consistency of choice in itself is a sufficient condition of rationality. For instance, always opting for things that do not foster the needs and wants of the self does not portray rationality (Schwartz, 8). On this basis, consistency in itself cannot be an adequate measure of rationality. On the other hand, rational behavior is related to self-interest. There is external communication between the choice people make and self-interest. The main drawback of this line of argument is that it presumes self-interest to be so powerful as to exclude all other influences.

Conclusion

The individual who markdowns utilities exponentially if faced with the same information and same choice, would make a similar decision prospectively, as he would when the moment for the choice actually arrives. Contrastingly someone with time conflicting hyperbolic discounting will prospectively wish that he will take far-sighted decisions in the future. However, when the time for the decision arrives he will go against earlier wishes pursuing instant gratification instead of long-run benefits (Diamond, 17). Human beings tend to behave in an intertemporal consistent fashion. Most big-time decisions such as savings labor supply, health and diet, educational investments, and crime and drug abuse have benefits and costs occurring at different points in time. Issues of self-control are critical in these instances.

Works cited

Altman, Morris. Handbook of Contemporary Behavioral Economics: Foundations and Developments. New York: Sharpe, 2006.

Diamond, Peter. Behavioral Economics and its Applications. London: Princeton University Press, 2007.

Mathew, Rabin. Advances in Behavioral Economics. London: Princeton University Press, 2003.

Schwartz, Hugh. A Guide to Behavioral Economics. New York: Higher Education Publications.

Wilkinson, Nick. An Introduction to Behavioral Economics: A Guide for Students. Los Angeles: Palgrave Macmillan, 2007.

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The Demand Curve and its Meaning

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