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In microeconomics, demand refers to the buying behavior of one or more households. What does this mean? Basically, microeconomists want to try to explain three things:
- Why people buy what they buy
- How much they're willing to pay
- How much they want to buy
Instead of looking at all consumers in the world, however, economists try and model how smaller units operate. That is, instead of asking, "How does the American market work?" they ask, "What will one household do?" Each household is affected by different factors when making choices about what to buy, and how much. For instance, a household in Florida will have different preferences for clothing from a household in Michigan, since the climates are so different. Consumer preferences weigh heavily in a household's buying decisions.
Another factor that affects buying decisions is income. A millionaire and a minimum-wage worker will make very different purchasing choices, since they have different budgets to work with. 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 most satisfying 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 represent its best effort to react to the market price and the goods available.
Our discussion of demand will involve both graphical and mathematical models of 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.
