{"id":905,"date":"2016-12-27T22:54:32","date_gmt":"2016-12-28T03:54:32","guid":{"rendered":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/?post_type=chapter&p=905"},"modified":"2017-03-19T23:13:05","modified_gmt":"2017-03-20T03:13:05","slug":"6-4-building-demand","status":"publish","type":"chapter","link":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/chapter\/6-4-building-demand\/","title":{"raw":"6.4 Building Demand","rendered":"6.4 Building Demand"},"content":{"raw":"
\r\n
\r\n

Learning Objectives<\/h3>\r\n
By the end of this section, you will be able to:<\/div>\r\n
\r\n
    \r\n \t
  • Understand how the demand curve and consumer theory are linked<\/li>\r\n<\/ul>\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n

    The Foundations of Demand Curves<\/h1>\r\nChanges in the price of a good cause the budget constraint to shift, and new indifference curves to form. In this way, the logical foundations of demand curves\u2014which show a connection between prices and quantity demanded\u2014are based on the underlying idea of individuals seeking utility. Figure 6.4a shows a budget constraint with a choice between housing and \u201ceverything else.\u201d (Putting \u201ceverything else\u201d on the vertical axis can be a useful approach in some cases, especially when the focus of the analysis is on one particular good.) The preferred choice on the original budget constraint that provides the highest possible utility is labelled M0. The other three budget constraints represent successively higher prices for housing of P1, P2, and P3. As the budget constraint continues to rotate inwards, the utility-maximizing choices are labelled M1, M2, and M3, and the quantity demanded of housing falls from Q0\u00a0to Q1\u00a0to Q2\u00a0to Q3. Note that indifference curves have not been represented to keep the graph easy to follow.\u00a0M0,\u00a0M1, M2, and M3\u00a0represent the points where IC0, IC1, IC2, and IC3\u00a0are tangent to the changing budget lines.\r\n\r\n[caption id=\"attachment_1206\" align=\"aligncenter\" width=\"313\"]\"\" Figure 6.4a[\/caption]\r\n\r\nSo, as the price of housing rises, the budget constraint shifts to the left, and the quantity consumed of housing falls,\u00a0ceteris paribus<\/em>\u00a0(meaning, with all other things being the same). This relationship \u2013 the price of housing rising while the quantity of housing demanded falls \u2013 is graphed on the demand curve. Indeed, the vertical dashed lines stretching between the top and bottom\u00a0show that the quantity of housing demanded at each point is the same in both (a) and (b). The shape of a demand curve is ultimately determined by the underlying choices made to maximize utility subject to a budget constraint. While economists may not be able to measure utility, they can certainly measure price and quantity demanded.\r\n

    Conclusion<\/h2>\r\nIn chapter 6, we explored the inner workings of the demand curve and showed how consumers strive to maximize their utility given their budget constraints. This analysis shows us how to determine whether a good is normal or inferior, and whether two goods are substitutes or compliments. Next, we will examine the back-end of the supply curve with an in-depth analysis of producer theory.","rendered":"
    \n
    \n

    Learning Objectives<\/h3>\n
    By the end of this section, you will be able to:<\/div>\n
    \n
      \n
    • Understand how the demand curve and consumer theory are linked<\/li>\n<\/ul>\n<\/div>\n<\/div>\n<\/div>\n

      The Foundations of Demand Curves<\/h1>\n

      Changes in the price of a good cause the budget constraint to shift, and new indifference curves to form. In this way, the logical foundations of demand curves\u2014which show a connection between prices and quantity demanded\u2014are based on the underlying idea of individuals seeking utility. Figure 6.4a shows a budget constraint with a choice between housing and \u201ceverything else.\u201d (Putting \u201ceverything else\u201d on the vertical axis can be a useful approach in some cases, especially when the focus of the analysis is on one particular good.) The preferred choice on the original budget constraint that provides the highest possible utility is labelled M0. The other three budget constraints represent successively higher prices for housing of P1, P2, and P3. As the budget constraint continues to rotate inwards, the utility-maximizing choices are labelled M1, M2, and M3, and the quantity demanded of housing falls from Q0\u00a0to Q1\u00a0to Q2\u00a0to Q3. Note that indifference curves have not been represented to keep the graph easy to follow.\u00a0M0,\u00a0M1, M2, and M3\u00a0represent the points where IC0, IC1, IC2, and IC3\u00a0are tangent to the changing budget lines.<\/p>\n

      \"\"
      Figure 6.4a<\/figcaption><\/figure>\n

      So, as the price of housing rises, the budget constraint shifts to the left, and the quantity consumed of housing falls,\u00a0ceteris paribus<\/em>\u00a0(meaning, with all other things being the same). This relationship \u2013 the price of housing rising while the quantity of housing demanded falls \u2013 is graphed on the demand curve. Indeed, the vertical dashed lines stretching between the top and bottom\u00a0show that the quantity of housing demanded at each point is the same in both (a) and (b). The shape of a demand curve is ultimately determined by the underlying choices made to maximize utility subject to a budget constraint. While economists may not be able to measure utility, they can certainly measure price and quantity demanded.<\/p>\n

      Conclusion<\/h2>\n

      In chapter 6, we explored the inner workings of the demand curve and showed how consumers strive to maximize their utility given their budget constraints. This analysis shows us how to determine whether a good is normal or inferior, and whether two goods are substitutes or compliments. Next, we will examine the back-end of the supply curve with an in-depth analysis of producer theory.<\/p>\n","protected":false},"author":58,"menu_order":5,"comment_status":"closed","ping_status":"closed","template":"","meta":{"pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-905","chapter","type-chapter","status-publish","hentry"],"part":32,"_links":{"self":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/905","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/users\/58"}],"replies":[{"embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/comments?post=905"}],"version-history":[{"count":6,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/905\/revisions"}],"predecessor-version":[{"id":1770,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/905\/revisions\/1770"}],"part":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/parts\/32"}],"metadata":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapters\/905\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/media?parent=905"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/pressbooks\/v2\/chapter-type?post=905"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/contributor?post=905"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/pressbooks.bccampus.ca\/uvicecon103\/wp-json\/wp\/v2\/license?post=905"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}