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Utility, Substitution and Demand

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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 person's decision whether or not to buy has no immediate effect
on anyone else's 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.

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