The Consumer’s Demand Curve
To derive the consumer’s demand curve for a product, we need to ask
what happens when there is a change in the price of that product. As an
example, let us derive Alison’s demand curve for fruit juice. Consider
Equation 6-2 and let X represent juice and Y represent all other products
taken together. In this case, the price of Y is interpreted as the average
price of all other products. What will Alison do if, with all other prices
remaining constant, there is an increase in the price of juice? Alison
cannot avoid suffering some loss in utility—whereas her income is
unchanged, it costs more to buy each juice and the same to buy each unit
of everything else. She might decide to spend less on everything else and
increase her spending on juice in order to hold her juice consumption
constant. But she can do better than that. To see why, notice that when
the price of juice rises, the right side of Equation 6-2 increases. But,
until Alison adjusts consumption, the left side is unchanged. Thus, after
the price changes but before Alison reacts, the following situation exists:
What does Alison do to restore the equality? The hypothesis of
diminishing marginal utility tells us that as she buys fewer bottles of juice,
the marginal utility of juice will rise and thereby increase the ratio on the
left side. Thus, in response to an increase in the price of juice, with all
other prices constant, Alison reduces her consumption of juice until the
MUUofofjuiceY <PricePriceofofjuiceY