To illustrate the derivation of demand curves, we use the numerical
example shown in Figure 6A-7. The consumer is assumed to have an
after-tax money income of $4000 per month. This level of money income
is plotted on the vertical axis, showing that if the consumer consumes no
gasoline, he can consume $4000 worth of other goods each month. When
gasoline costs $1.50 per litre, the consumer could buy a maximum of 2667
litres per month. This set of choices gives rise to the innermost budget
line. Given the consumer’s preferences, utility is maximized at point
consuming 600 litres of gasoline and $3100 worth of other products.
Next, let the price of gasoline fall to $1.00 per litre. Now the maximum
possible consumption of gasoline is 4000 litres per month, giving rise to
the middle budget line in the figure. The consumer’s utility is maximized,
as always, at the point where the new budget line is tangent to an
indifference curve. At this point, B, the consumer is consuming 1200 litres
of gasoline per month and spending $2800 on all other goods. Finally, let
the price fall to 50 cents per litre. The consumer can now buy a maximum
of 8000 litres per month, giving rise to the outermost of the three budget
lines. The consumer maximizes utility by consuming 2200 litres of
gasoline per month and spending $2900 on other products.
If we let the price vary over all possible amounts, we will trace out a
complete price-consumption line, as shown in Figure 6A-7. The points
derived in the preceding paragraph are merely three points on this line.
We have now derived all that we need to plot the consumer’s demand
curve for gasoline, now that we know how much the consumer will