Tutorial Home Utility, Substitution and Demand

 

7: Conclusion

We have considered how one consumer's demand for a good is affected by price. From assumptions about utility (which do not explicitly mention price) we have derived a demand curve for a single individual and shown an inverse relation between price and demand. The slope is negative because as a good becomes more expensive, the individual is more likely to find alternative things to do with their money.

The demand curves considered in microeconomic theory are not demand curves of a single consumer but of all those in a market. To derive the latter from the former, the only additional assumption we need is that any one personís decision whether or not to buy has no immediate effect on anyone elseís decision. This assumption is false in the context of, say, an auction, where whether a bidder buys at a particular price depends on the choices of the other bidders. It can, however, be plausibly applied to the selling of mass-produced products such as savoury snacks.

If other individuals' purchasing decisions obey the assumptions that we have used, then they will also be negatively sloped. The sum of a huge number of negatively sloped curves is itself a negatively sloped curve. An effect of summing together a huge number of such curves is that the little discontinuities caused by the particular cicrumstances of a decision (for example, the fact that I can only buy an integer number of packets of crisps) are negligible, so the curve becomes (for the purposes of analysis) totally smooth.

This shows that utility and demand curves are not conflicting or disjointed perspectives on consumer choice, but are strongly linked. We have seen that the maximisation of expected utility is a foundational principle from which the idea of a demand curve emerges as the end result of a chain of logical and mathematical argument.

To acknowledge that microeconomics is not as simple as this essay presents, I shall now consider a critique of the idea of individual utility maximisation.

INDEX | 1 2 3 4 5 6 7 8 9 | NEXT