Principles of Microeconomics / Unit 5 MIC 0417 worked example, 60 to 90 seconds
Deriving Three Points of a Demand Curve
The idea
To derive a consumer's demand curve for a good, hold income and the other price fixed, then repeat the best-bundle method at each of three prices for the good. At each price, recompute marginal utility per dollar, spend the budget by the rule, and record the quantity of the good bought. The three pairs of price and quantity are three points on the demand curve, and the quantity should fall as the price rises.
In practice
Worked example: a budget of twelve dollars, drinks at two dollars with marginal utilities of twelve, ten, eight, six, four and two, and snacks with marginal utilities of thirty, eighteen, nine and six. At six dollars a snack the rule buys one snack and three drinks. At three dollars it buys two snacks and three drinks. At two dollars it buys three snacks and three drinks. The points are six dollars and one, three dollars and two, two dollars and three: a downward-sloping demand curve.
Where people slip
Change only the one price. Changing income or the other price between points would shift the curve rather than move along it, and the three points would not lie on one demand curve. Also, quantities are whole units here, so a point may be a tie broken by whichever purchase the budget can still afford.
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