Consumers in the Marketplace

In Chapter 1, we told a simple but powerful story about demand, summarized in a single phrase: When the price goes up, the quantity demanded goes down.In Chapter 3, we told a far more sophisticated story about demand: When the price goes up, the budget line pivots inward and the consumer moves from one tangency to another.Our next task is to understand how these stories fit together. Do they always make the same predictions? If so, why? If not, which should we believe?This chapter tackles those questions. We use the indifference curves and budget lines of Chapter 3 to reach a deeper understanding of the law of demand from Chapter 1. Along the way, we’ll learn a lot about how consumers respond to changing market conditions. It turns out that income changes are a little easier to analyze than price changes, so we start by studying income changes in Section 4.1. In Sections 4.2 and 4.3, we turn to the effects of price changes. Finally, in Section 4.4, we talk about some numerical measures of all these effects.