Demand

Summary and Introduction to Demand

In microeconomics, demand refers to the buying behavior of a household. What does this mean? Basically, microeconomists want to try to explain three things:

1. Why people buy what they buy
2. How much they're willing to pay
3. How much they want to buy

Instead of looking at all consumers in the world, however, they try and model how smaller units function: instead of asking, "How does the American market function?" they ask, "What will one household do?" Each household, or small-scale decision-making unit, is affected by different factors when making choices about what to buy and how much to buy. For instance, if one household lives in Florida and another lives in Michigan, they might have different preferences for clothing, since the climates are so different. Consumer preferences weigh heavily in a household's buying decisions. Another factor that affects such decisions is income: a millionaire and an average citizen will have very different purchasing choices, since they have different budgets to work on. All buyers will try to maximize their utility, that is, make themselves as happy as possible, by spending what money they have in the best way possible. By considering both their preferences and their budget, they ensure that they end up with the best combination of goods possible. Because the household is such a small unit, no household has a significant impact on the market, and so the actions of any single household is its best effort to react to the market price and the goods available.

In this unit on demand, we will learn how to work with graphical and mathematical models for demand, we will observe how changes in price or income can affect demand, we will see how consumers make choices under uncertainty, and we will apply that knowledge to calculate the optimal purchases an individual consumer can make, given their income and the prices of goods.